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Monday, 30 April 2012

April Ends

Today is the last day of April and with it ends the annual 6 month sweet spot for equities. That doesn't mean an imminent interim top is in the offing, but it's worth noting that late April and May are periods where such interim tops are often seen. As to the strength of this 6 months up and 6 months sideways to down pattern, it's impressively strong. I posted some stats a few weeks ago showing that $10,000 invested in the Dow since 1950 November through April only would be worth some $800,000 now, and that further $10,000 invested in the Dow since 1950 May through October only would be worth some $9,500 now. That is a very strong pattern. This is an election year though and that would moderate the effect somewhat I think.

Overnight futures are weak and I'm wondering about that retest of broken resistance on ES and NQ. NQ looks particularly interesting as it's possible that there is an IHS forming there, and NQ could retest broken resistance in the 2700 area forming a right shoulder to the pattern. I've had a few comments that we may see a bigger reversal here, and that's possible, but the bigger picture for me is the broken-up double-bottoms on various indices, and the broadening descending wedge that has broken up on NQ. These are high probability patterns and unless we see real signs of weakness here my presumption is that we will see a retest of the highs at least on SPX and NDX:
On SPX the double-bottom neckline is at 1392.76 and a break much below that would weaken this pattern. I have rising support from last week's low at 1386 SPX now and I'm regarding that as the level that should not be breached. If it is breached then it's worth noting that we have a possible broadening formation forming on SPX that I've marked on the chart, and the next in-pattern target would be a retest of last week's lows around 1358:
On the SPX daily chart I have the upper bollinger band at 1420 as resistance, and the middle bollinger band is at 1386.96, which reinforces my rising support trendline just below, and underlines how important it is that this area holds for the bull side today:
Vix dropped well below middle bollinger band support at 17.75 area last week and I'm looking for a test of the lower bollinger band in the 14.75 area soon. I've mentioned before that gaps on the daily Vix don't tend to stay open long, and last week's Vix decline has not closed the remaining open gap just over 15.50. I'm expecting that to fill this week:
Last chart for today is USD, where the support trendline since March that I was looking at late last week has broken. That clears a path for USD to test rising channel support just over 78, and that is where I am expecting this retracement period since January to end. The retracement has been painfully slow, but that's good, as that looks corrective and backs up my bigger picture USD bull scenario:
We may see a significant drop today with the rising support break on NQ and a possible retest of last week's bull pattern breaks on SPX and NQ. First support on ES is 1388-90 and if that breaks then 1386-7 SPX needs to hold. The retest target and support on NQ are in the 2700 area.

Friday, 27 April 2012

Buy The Dips IMO

The key resistance trendlines were tested and broken yesterday, and the setup this morning looks clearly bullish.  We might see a pullback to retest broken resistance in trading hours, but on ES and NQ those retests have already happened overnight. On NQ the break up from the broadening descending wedge has been very classical with a break, the retest and move up. The pattern target is at the 2012 highs in the 2792 area and Bulkowski gives these an average 79% probability of making that target area:
On the SPX 60min double-bottom resistance was broken with some confidence yesterday and the target is in the 1427 area. Bulkowski gives these a 66% chance of making target. I have some trendline resistance at 1408 that I'm watching:
On the RUT a similar double-bottom has also broken up. It's worth mentioning here that this has the look of a part-formed H&S overall on the YTD chart and the ideal right shoulder high would be at 833 resistance. The double-bottom target is at 849, slightly over the 2012 high:
Last chart of the day is CL, where oil is finally close to a test of channel resistance on the declining channel I've been posting the last few weeks. I'm leaning bearish overall on balance but the channel may be a bull flag, and a break up might therefore potentially be very bullish:
On equities the setup is unambiguously bullish after yesterday, and we should be back on buying the dips for the moment. The bullish setup would be weakened by a break back down through the resistance that broke yesterday with confidence, but even then we have an underlying strong setup of higher lows and highs now. I have short term trendline rising support on SPX in the 1380 area this morning  and a break below there would make me wonder about possible failure here. Until then we are most likely looking at the last impulse wave up in the sequence since the October low, and the next tests are at the current 2012 highs and the 1442 SPX pivot not far above.

Thursday, 26 April 2012

Decision Time

There have been two main schools of thought on the bull side over the last few weeks, and the first expected that this retracement would be shortish, and would be followed by a wave 5 move to take equities to new highs and an interim top before a much bigger summer retracement. The second have been expecting a much bigger retracement now, probably taking us through May and slightly beyond, before a big renewed push up in the summer. We are most likely at the point of decision between those two scenarios now. A break up should deliver the first scenario and a break down may well deliver the second. I should stress that I've not entirely discounted alternative bear scenarios, but unless we see a clear topping pattern followed through to below the 1292 SPX October high, it's not worth spending much time on these IMO.

As I suggested was likely yesterday morning, SPX pushed up to test the highlighted strong resistance area and the last bounce high, and has reversed there so far. A break over 1396 will trigger a double bottom (and arguably IHS) target over the last high and the obvious next target not far above there is the 1442 pivot level. Short term there is significant negative divergence on the 15min RSI and that is a strong signal for reversal UNLESS we have started a new impulse wave up. If we see weakness today I'm seeing strong support in the 1377 area, and a move below there would weaken the bullish scenario here:
The picture isn't mirrored on the NQ 60min, but the technical setup there gives similar upside targets. On NQ the double-bottom target I gave yesterday was made and declining resistance has been tested overnight. That trendline is the upper trendline of a (69%) bullish broadening descending wedge with a target at the 2012 high. There is clear negative divergence on the 60min RSI and we should see reversal here unless, as with SPX, we have started another impulse wave up. For this reason, as with SPX, a resistance break here would be a very strong bullish signal and should be respected:
The picture on equities looks so clear here that there's really little else to add. For the remainder of the post I'll therefore have a look at where we are on USD and Gold. GBPUSD has been trashing my rising wedge resistance trendline overnight so USD may well see further weakness short term. On the overall USD chart that I've been posting since January, we are approaching a test of rising support from the March low, and if that breaks then my bigger picture retracement target just over 78 will be within easy reach. I need hardly say that the move on USD since January looks corrective and has formed a bull flag, and after USD reaches my retracement target I'm expecting a strong move up to complete the large IHS that has been forming:
I posted a gold chart in early February speculating about a possible IHS that may be forming there to take gold to new highs. Since then gold has retraced to test my primary support target at rising support from the 2008 low. If we see further weakness then I have marked further support levels on the chart, and looking at the GDX chart particularly, there is certainly an argument that we may see that weakness. However gold may be making a very significant low here, and if we see gold break back over the 150 DMA at 1684 with any confidence, then I'll be leaning strongly bullish on gold and PMs. We shall see:
A short post again today, but the equity picture looks very clear, and to be honest I'm not feeling 100% at the moment, which is why I was very quiet yesterday. I'm watching overhead resistance today on NQ particularly, but also SPX. I'm leaning towards seeing some weakness today regardless of whether we are going to see a break upwards on the bigger picture, and if we see that weakness, I would see a conviction break below 1377 SPX as a strong signal that the Monday lows may well be retested shortly. The picture on bonds is unclear, but as ever I'll be leaning short on bonds if equities break up, and long if equities break down.

Wednesday, 25 April 2012

Double Bottoms and Fed

SPX respected resistance at 1375 yesterday, and the bear case was looking ok until the AAPL earnings after hours, which has triggered a potentially very bullish setup. On the SPX 15min it looks as though SPX may gap over declining resistance in the 1380 area at the open, and may then retest the strong resistance area in the 1390-6 area that  highlighted after the first decline. If it should break over that, a double-bottom target at 1427 would be triggered:
The same double-bottom is in play on ES as well, with a target there at 1427.50 on a break over 1390:
Looking at the NQ chart this morning a test of strong resistance looks likely on SPX, though whether it breaks above is another matter. The reason I say that is because there is another smaller double-bottom on NQ that triggered on the AAPL earnings after hours. That double-bottom there targets 2708, slightly below declining resistance from the high, which is now in the 2715 area:
Just a short post today as I got back late yesterday and the setup on equities looks clear. The last chart is GBPUSD where the rising wedge I posted on Monday is still in play, and GBPUSD looks distinctly short term toppy. It's worth noting though that GBPUSD broke slightly over the October high overnight, and that looks bullish after some likely retracement:
Leaning bullish on equities here and watching that resistance zone on SPX and declining resistance on NQ. Fed day today and Bernanke is giving a speech this afternoon so it could be a wild day.

Monday, 23 April 2012

Another Bear Flag

I have to be away all day on Tuesday, so this is just a quick post to cover the action on SPX today. On the 15min chart the bounce was just above the low two weeks ago and is forming a bear flag. There was no negative RSI divergence at the low so I'm not expecting a strong bounce. There should be strong resistance in the 1374 area which 'd expect to hold and declining resistance from the high, currently in the 1382 area, should be very solid resistance tomorrow. I'm not expecting declining resistance to be touched tomorrow but if it is, and then breaks, then that would be a strong signal that the retracement may have ended earlier than I expected:
The other chart I'll post tonight is the 60min SPX chart showing the possible sloping H&S that may have formed there, and the bounce today was at the neckline of that pattern. I'm inclined to take horizontal neckline H&S patterns more seriously than sloping ones, but it's something to bear in mind:
Something to consider looking at these H&S patterns, with the best ones I'm looking at on Dow and SPXEW, is that a neckline is also a strong support level. On a break below the neckline, and neither Dow or SPXEW tested that neckline today, the target is a high probability one, and that would suggest a much deeper retracement than everyone expects. The flipside of that however is that the necklines may hold, in which case SPX may make a fairly marginal new low or test 1340 and finish the retracement there. Worth bearing in mind.

I'm out all day, but will be back doing my morning post as normal on Wednesday morning.

Equities Looking Weak Here

I posted a possible bear flag on the ES 15min on Friday morning. It broke down during the day and has played out to within a couple of points of the flag target overnight. We might see a bounce here with some positive RSI divergence on the oversold 5 & 15min charts. If we see that then I have short term declining resistance in the 1367.50 area and that would be the initial target:
Overall the action on equities looks weak and I'm leaning short unless we can see a strong recovery by the bulls, which initially would involve a break over 1383 ES today. On the SPX 15min chart the recovery from the current retracement low at 1357.38 SPX retraced just over 50% of the drop and is still looking like a bear flag:
On the SPX daily chart the middle bollinger band has been respected on this retracement and you can see that a move back to the lower bollinger band would be very close to a test of the current retracement lows. That would however require a definite break of the rising support trendline from October, which SPX has been trading around on the bounce over the last two weeks, and that break would suggest more downside:
If we do see a more definite break downwards, then that might run a lot further than people are currently expecting, as H&S patterns are forming on some indices. One of the best examples is on the equal-weighted SPX (SPXEW) where a break below the current retracement low at 2016.34 would trigger an H&S target in the 1903 area. That would be well below the October high at 1961.80 and close to the 38.2% retracement of the move since the October low and the 200 DMA, both of which are in the 1920 area. This is something to bear in mind, as after a conviction break of the neckline, these patterns tend to make target or close to target on equities historically:
On the Vix I was saying a few days ago that the next obvious target was a test of the daily middle bollinger band and we saw that on Friday. This is an obvious point to start another move up:
There was an argument for weakness on bonds on Friday morning but ZB has since made a new high. Looking at the TLT chart there's nothing really happening on the bear side unless we see a break below 114.50 area support, and on a break of the current high at 117.60, and it looks as though TLT should gap over that at the open today, then the obvious next target is slightly over 120:
The EURUSD chart is tricky to call at the moment, but is making higher lows and highs short term. The GBPUSD chart has been trending better overall,and there I had a short term rising wedge forming last week within a much larger possible rising wedge. The short term rising wedge has broken down on hitting resistance on the larger wedge, so I'm expecting some weakness here. If we see a move on GBPUSD into the 1.5875 wedge support area then that would most likely break the short term uptrend on EURUSD:
In summary bonds look bullish, USD currency pairs look bearish and equities are looking very weak. Overall that is a weak setup for equities this week, and I'll be leaning short unless the bulls can show some real strength on SPX. There's some Fed activity this week that might move the markets either way including a press conference by Bernanke on Wednesday, and a lot of earnings, including AAPL after the close tomorrow. I'll be doing a short post after the close tonight rather than a full post tomorrow morning as I have to be away all day tomorrow.

Friday, 20 April 2012

April Opex Friday

The possible bear flag on the SPX 15min broke down yesterday, but without much conviction, and with a decent recovery late in the day. There was no positive divergence on the 15min RSI, but if the rally sees the RSI move over the 50 line today then I would stop looking for that divergence as we don't always see it. As with the last move up, no clear trendline formed so it's hard to see any trendline resistance below the 1388 area:
On ES a rising channel or bear flag has formed since the low, and as long as this holds it looks bullish. On a break below soon it would look distinctly bearish. A bear flag ideally shouldn't retrace much more than half of the flagpole, so a move over the current overnight high at 1380.75 would weaken the bear flag scenario. Rising channel support is in the 1373.5 area and there is also still strong support in the 1371.50 area:
Short term I'm leaning bullish, though in the bigger picture these deep overlapping retracements look like part of an overall corrective move which is suggesting new retracement lows after the end of this corrective rally. That isn't the only possible interpretation however, and as I was skimming through various index charts this morning I was struck by a possible IHS forming on the Nasdaq Composite chart below. A rising channel was also established at the low there yesterday. The IHS neckline is at a very clear resistance level and a break over 3060 on COMPQ would look very bullish:
Short term bonds look bearish and EURUSD looks bullish, which is supportive of some equity upside today. On ZB the rising channel broke the other day and since then a bearish broadening ascending wedge has formed, On a break below wedge support at 141'23 the wedge targets the last short term low at 141'03. on a break below 141'03 a double-top target is triggered slightly below the strong support level (and possible H&S neckline) at 140:
I was looking at the falling wedge on EURUSD yesterday, and EURUSD has now broken up from that with conviction. The wedge target is at 1.3365, and a rising channel has also been tentatively established with resistance currently in the 1.3242 area. A rally here on EURUSD obviously fits with my bigger picture USD chart that I've been posting regularly:
Last chart of the day is silver, where I have mixed feelings about the direction for PMs overall. Short term however there is now strong support at 31.20 on an hourly close basis, and a poor quality triangle has formed at the current lows. Declining resistance is in the 31.90 area and a break above would target the strong resistance area at 33 to 33.30. A break above 33.30 would trigger a double-bottom target in the 35.50 area:
The technical picture on equities looks somewhat ambiguous this morning, but has me leaning bullish as long as channel support holds on ES. The stats for today are very bullish with Stock Trader's Almanac saying that Dow has closed up 12 of the last 15 April Opex Fridays.

Thursday, 19 April 2012

Retracement Flags

I have slightly mixed feelings this morning, there is definitely a path for equities to move upwards today and ES particularly has very well defined support in the 1377.5 - 1379 area. If that holds today then we may see a push higher that I would be expecting to find resistance in the 1398-1400 SPX area, at the channel resistance on my SPX 15min chart that I posted yesterday morning. That said there is a very bearish look to the overnight action and I'll mainly be looking at that initially. ES will need to break below 1377.50 to trigger that bearish scenario.

On ES there was a marginally higher high overnight on strongly negative 60min RSI divergence. This is a bear setup and there is a possible double-top in play if ES can break below the valley low at 1377.50 with a target at 1364.75. I will mention again that double-tops, like H&S patterns, only become higher probability setups on a break below the neckline or valley low. Until then both patterns are just promising looking lines on a chart:
There is a possible double-top in play on NQ as well today, though it's messier. NQ has closed an hour above declining channel resistance three times in the last day and each time the break has lasted less than two hours. If NQ can close above the trendline and hold it that would look bullish, but repeated failures are looking increasingly bearish until that happens. If NQ can close an hour under 2702, the double-top target is 2676:
There is a third possible double-top in play today, and that is on EURUSD. EURUSD has been testing the falling wedge trendline hard the last couple of days overnight and broke above overnight. Again that break has failed to hold and on a break below 1.3055 I have a double-top target in the 1.294 area, with wedge support currently in the 1.2975 area:
I've been looking at the bigger picture charts this morning, and all three of SPX, Dow & RUT appear to be forming bear flags. On the SPY (SPX) chart the flag is clear and there is a potential sloping H&S forming as well:
On DIA (Dow) there is a potential H&S in play as well, though it would need to reverse here really to avoid weakening both the possible H&S and the bear flag. One reason for showing the DIA chart today is to show the bigger picture rising wedge that formed and has broken down. That suggests a larger retracement than the one we have seen so far to me:
On IWM (RUT) there is a similar overall rising wedge setup,and also arguably an H&S forming there as well, though on a reversal here it would look too unbalanced for me to consider it seriously. Again a nice looking bear flag:
I'll close with my SPX 15min chart today. The 15min RSI is still on a sell signal from Tuesday, but a possible rising channel was established at the close yesterday, and until that breaks that opens up a possible test of overall rising channel resistance in the 1398-1400 area. Worth noting that there is an overhead gap to be filled there:
Overall I'm leaning bearish for today at the moment, but we'll need to see the support breaks I'm looking for on ES and SPX early I think. In terms of the stats for today the last Thursday was a trend day up, but the previous four Thursdays all closed down. In terms of the very bullish stats for this week that I posted on Tuesday, Thursday is the most bearish day of this week, down 12 times of the last 23, so if the bears are going to get a break this week, today is the most likely day to see that.

Wednesday, 18 April 2012

Flying (from the) PIIGS

The RSI divergences on the SPX 15min chart have been working very well in recent weeks, and that flipped to sell in the closing hours yesterday in the zone of strong resistance marked on the chart. My lean is therefore down today, though I'd normally expect a sideways to down day after a trend day in any case. As with the last signal the divergence is slight though:
On ES, as with SPX, the action in recent days has the strong look of a bear flag. The declining channel I was expecting to break yesterday obviously did break, and ES may find support at the retest of that broken channel resistance trendline in the 1376.50 area today. A break below opens up a possible test of rising support from last week's low in the 1362 area:
NQ rallied into channel resistance yesterday, and pinocchioed it slightly, though it held on an hourly closing basis. An hourly close over that trendline would look bullish, but until we see that there is some support in the 2700 area, stronger support in the 2680 area, and channel support is now in the 2645 area:
EURUSD was showing some negative RSI divergence on the 60min chart yesterday and has retraced since. I'm inclined to ignore the H&S unless we see a break downwards with conviction, but meantime EURUSD is still in a clear downtrend and I have a possible bullish falling wedge forming. It's worth mentioning though that these break down 31% of the time, and the wedge target would be close to the H&S target in the 1.25 area:
I posted the CL chart a few days ago suggesting that the next obvious move on oil would be to declining channel resistance in the 105 to 106 area. Oil is close to channel resistance now within a shorter term rising channel. A break over declining channel resistance would obviously be bullish, but until we see that I'm expecting a hit of channel resistance and then a move to the downside target slightly under 100. The overall setup looks bearish to my eye:
I thought that I'd spend a few minutes today looking at a couple of European markets that haven't had a lot of coverage, and those are the stock markets in Spain and Italy. The Spanish stock market rallied strongly with the rest from the 2009 low, but peaked there and is now close to testing the 2009 low. I've put the German Dax in the background of the 14 year chart to show the strong correlation before the end of 2010, and the massive divergence since:
As you'd expect, the Italian market looks even sicker, as the massive property boom in Spain 2003-7 was not shared in Italy, which has been in relative decline for many years. The 2009 low in Italy was over a third lower than the 2003 low there, and Italy too is in striking range of the 2009 low, and is currently at slightly over 20% of the level it reached at the 2000 high:
There is one powerful thing that leaps from this chart, and that is capital flight. Both countries have governments that are insolvent, and heavily dependent on Euro-area support to avoid bankruptcy. The ECB has demonstrated already in Greece that Euro-area support will wipe out private bondholders in any restructuring to avoid paper losses at the ECB, so there is no refuge in government bonds there for private capital.

Also governments throughout the western world are demonstrating a strong and growing willingness to appropriate private capital to support government spending, so private capital is fleeing the weakest countries. This is throwing up some impressive looking bargains for the brave, Spain's telephone utility Telefonica (TEF) is currently yielding over 14% on a P/E of 3.22, but the overall message here is that the markets are expecting these countries to default, and I suspect that the markets are absolutely right in that expectation.

In anticipation of questions about this appropriation of private capital in the western world that I mentioned, I'm referring to ZIRP, which is in effect a massive tax and transfer from savers to borrowers, and growing legislation to force private pension funds to buy government bonds, which is gradually wiping out private pension systems with low yielding assets, as well as stuffing them with doubtful debt that may never be repaid. As governments grow ever more indebted, I'm expecting more of the same, all for the 'greater good' of course.

I'm expecting a sideways to downward day today overall, and if a decline gathers momentum then we might see a retracement of much of yesterday's move. ES and NQ in particular hit key levels at the high yesterday, and if they should have a strong move up today we might see some very bullish looking breaks. Until we see that my overall lean remains bearish and I don't think that the retracement lows have been made yet.

Tuesday, 17 April 2012

Bullish Overnight

I was expecting consolidation yesterday followed by continuation down today, but that's not what the charts are suggesting this morning. Dow closed up yesterday as the stats suggested, but Nasdaq had a strong continuation down day. The support trendline of the NQ declining channel was hit and overnight there was a slightly lower low on positive RSI divergence. This is a bullish setup short term and suggests a move to test channel resistance in the 2725 area, with some shorter term declining resistance in the 2690 area
On SPX there was some choppy sideways consolidation yesterday but there are two reasons to think that the short term direction for today will be up. The first is that a declining channel formed from Thursday's high on SPX, and then broke up yesterday afternoon. SPX slid afterwards but together with the positive divergence on the 15min RSI at the low yesterday, that has a bullish lean to it today:
The second reason to lean bullish today on SPX is on ES, where there was a marginally lower low overnight on strongly positive 60min RSI divergence. That was within an overall W bottom which would target 1391.25 on a break over 1375.25 today. This looks distinctly bullish though the upside target only triggers on a break over 1375.25, and there is obviously declining channel resistance in the 1380 area:
Just to complete the bullish equity setup here ZB has now broken the rising channel and looks ready to retrace. Strong support levels are in the 140 and 139 areas:
I've been saying for weeks that I have serious doubts about the immediate bear scenario on EURUSD as USD has not yet reached my retracement target in the 78 area. I suspect that the EURUSD rally from January has peaked but the strong rejection of the H&S neckline break on EURUSD yesterday doesn't inspire any confidence that the H&S will play out. We'll see how that goes but I have an indicator for weakness that looks better on the GBPUSD chart. Short term on EURUSD it's looking short term toppy with negative 60min RSI divergence. If we see any more upside today the next target would be the last high at 1.3213:
The GBPUSD chart should however give a better indicator of when the USD bullish trade will start to look interesting. That chart has a perfect rising support trendline from the January low, and as and when that breaks it should give a definite signal of USD strength. In the meantime GBPUSD has bounced very strongly from that trendline yesterday:
Overall I'm leaning bullish on the charts today, though we may well see some early weakness, which would look like a dip worth buying. A break below the overnight ES low at 1359.25 would weaken the bullish setup here. I have some stats for Opex week courtesy of the team at Mr Topstep, and they are as follows:

Monday                                                 up 16 / down 7 of the last 23 occasions
Tuesday                                                 up 16 / down 7 of the last 23 occasions
Wednesday                                            up 14 / down 9 of the last 23 occasions
Thursday                                               up 11 / down 12 of the last 23 occasions
Friday                                                    up 14 / down 9 of the last 23 occasions
Monday (after)                                       up 15 / down 8 of the last 23 occasions