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Wednesday, 7 March 2012

Retracement Targets

The first thing to say today is that there are some signals here that we may have just put in a very major top, and may now be starting a dramatic fall on equities. There is a potential double-top on SPX targeting the 770 area, a potential H&S forming on EEM that would target a similar scale of decline, a strong Dow Theory divergence that we've been seeing between Dow and TRAN in recent weeks that is characteristic of major market tops and bottoms, and a monster falling wedge on Vix that technically targets the 46 area, though falling wedge targets are missed more often than not. Added to that are the strong negative divergences between SPX and Copper / EEM, and the strongly bullish overall setups on USD and bonds. Levels of bullish sentiment recently are also characteristic of market tops. This is the sort of setup that would make a market crash here obvious in hindsight. :-)

The trouble with this scenario however is that I can't manage to take it seriously after such a strong move up in the last few months, though I'll have another look if SPX gets below the October high at 1292.66, and I would start to consider it more seriously if SPX breached the 200 DMA at 1258.78 with any confidence. I'll try and make time to do a post on that at the weekend, though I'll be seeing that as a mainly academic exercise at the moment.

Obviously we finally saw a retracement yesterday that closed more than 1% down on the day, and that was a refreshing change. There is an argument that the retracement was completed at the low yesterday, but I think that's unlikely and am expecting more downside after a bounce today. On the ES 60min chart I'm seeing the key resistance levels for today in the 1350-2 and 1356-8 areas, and I would be concerned to see a break above declining resistance from the last high which is currently in the 1357.25 area:
The main retracement target on SPX has to be at rising support from the October low and that would be hit in the 1310-20 area. Rising support from the November low was the first target of course, but that was broken yesterday and so is no longer support. A hit of rising support from October would be close to the 38.2% fib retracement from the Dec 19 low, and if that broke the 50% fib retracement would be just below very strong support at the 1292.66 October high:
On the daily chart you can see that SPX found support at the lower bollinger band, and the most obvious BB target for a bounce today would be at the middle bollinger band (20 DMA) in the 1358 SPX area, which fits with declining resistance on the ES chart. NYMO is worth a look here as it is now in an area that typically marks significant lows:
On the Dow vs Tran chart you can see that both Dow and TRAN are still well above their respective five week pattern targets, and I've marked in those target levels on the chart:
Looking more closely at the TRAN chart, which has the highest probability pattern setup of any major equity index here, you can see that very strong support in the 5067 area was broken yesterday and both the H&S and the broadening wedge are suggesting a move into the 4900 area. It's worth noting also that that broken support on TRAN was at the October high, so the primary EW count on most equity indices here has been invalidated on TRAN:
Other charts worth a look today are the Vix chart where Vix closed just under the upper bollinger band yesterday. We might well see a retracement to the middle bollinger band here in the 18.5 area:
The copper chart looks interesting, as short term rising support broke yesterday. On a break below 369 the obvious target would be rising support in the 347-50 area, though the ugly triple-top cum H&S would target the 339 area somewhat below:
I've been considering the USD chart here very carefully after yesterday's break up through declining resistance. My ideal technical retracement target would still be at channel support in the 77.5 area in a month or so, or possibly making a double-bottom in the 78 area at the end of April, but there is a potential W bottom here that is in play. On a close over 80.12 the target for that would be in the 82.25 area and I would need to respect that break up, even if it's messing up my nice clean channel:
Yesterday was a major distribution day and the odds of a green close today after yesterday's trend day are 62% (from Cobra). The obvious bounce targets on SPX today are the 1352 and 1358 areas. A break above to try to fill yesterday's opening gap would look bullish, and if that gap filled I would be inclined to write yesterday off as a one-day wonder.

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