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Friday, 25 May 2012

Corrective So Far

I mentioned a couple of days ago that I was looking for a slow rally with deep retracements to signal that the rally is a corrective bounce, and that's certainly what we're seeing so far. The rally is on, and ES has put in both a higher low and high now, but neither was much higher than the previous one. That said we still have a possible W bottom in play and ES is struggling to get over the pattern neckline and hold it at the moment. I have rising support from the last low at 1318 ES and we'll see if that holds today. You can see from the chart that the current move has more than a passing resemblance to a rising wedge at the moment. We'll see how that develops:
On the SPX 60min chart the neckline has not yet broken on this possible W bottom of course. This is a promising setup for a short term low though there are some strong resistance levels in the 1340 and 1357 areas that would be obvious points for any rally to fail before reaching the W bottom target:
I've been mentioning the middle bollinger band on the daily chart (the 20 DMA) as an obvious rally target. I've also mentioned that this is dropping rapidly and it is now at 1351.77. If SPX keeps chopping around for another three days then this would be close to the strong resistance level in the 1340 SPX area:
Looking at the AAPL chart, yesterday's strong setup looks less encouraging this morning. The IHS neckline was tested, but only for a marginal new high on negative RSI divergence. The setup remains bullish as long as AAPL stays over the right shoulder low at 552.58, but any lower than that and I would be wondering about a bearish overthrow on this falling wedge. These are bullish patterns generally, but they do break down 31% of the time of course:
Looking at the Vix chart, there's strong support that would probably need to be gapped under for equities to rally much further. Vix tested the middle bollinger band two days ago and has been holding the IHS neckline as support during this retracement so far. That might well continue to hold:
I thought that I should have a look at GDX today, as the setup there is looking interesting. I'd been posting the H&S there as it developed over the year or so until it broke a few weeks ago. I gave the pattern target at 31-2 and marked a support level at 39 on the chart. We're seeing a bounce from the first test of that 39 level so far, and I'm wondering about a possible test of the broken H&S neckline in the 47.50 area here:
Looking more closely at the GDX chart, you can see that declining resistance from late February has broken up, and that an IHS formed at the low which is now playing out. The target is 48.70 with strong resistance at 47.50 and the 48.40 areas. In the event that the pattern makes target then the next resistance level above is in the 50.80 area:
To close today I have the USD chart. Obviously I've been following this for months and the IHS finished forming the other day. It has since broken up, and while it looks very overbought short term, this is obviously a strongly bullish setup for the next few months with the IHS target at 90.50:
I'm very cautiously bullish today as long as ES can stay above rising support in the 1318 area (and rising). If that breaks we might see another deep retracement. My view is that we are most likely currently in a relief rally with more downside likely after this peters out.

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