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Tuesday 29 May 2012

First Resistance

We have a promising setup for a decent bounce on SPX but it has been failing at the first decent resistance so far. It may not get any higher, but I think it's too early to write it off altogether yet. We also have a possible triangle forming on SPX and if we don't see a break up today, then rising support from the low and triangle support is just over 1300:
An obvious target for any rally here, as I've mentioned frequently, is the middle bollinger band on the daily chart or the 20DMA. That's now at 1347.50 and we might see a test of that in the 1340 area on Thursday or Friday:
I've mentioned before that the development of a strong support trendline in a downtrend or of a strong resistance trendline in an uptrend is generally a signal that a channel or pattern is forming. We have such a support trendline on ES at the moment and I have drawn in a (currently wildly speculative) potential channel resistance trendline in the event that this rally gets any further and that a channel is developing. Obviously if the developing pattern were something else such as a wedge this potential target and resistance would be elsewhere:
There are good reasons to think that this rally may get no further. I posted the Vix chart the other day showing that the pullback there is holding the IHS neckline and that is decent support:
On the Russell 2000 support at the October high was broken a few days ago and that has since been acting as resistance. As with SPX a possible double or W bottom has formed but this rally may get no further than this resistance level. If it doesn't, then RUT is obviously forming a bear flag:
On the potentially bullish side there are a couple of things to consider today. The first is that there is now some positive divergence on the EURUSD daily RSI. That doesn't mean a lot but would start to look promising if EURUSD were to rally over the current possible double-bottom neckline at 1.2625:
I posted a longer term TLT chart the other day showing that TLT had hit five year rising channel resistance on this latest move up. That's holding so far and it's possible that we may have seen the TLT high on this move. I doubt that but if that were so then the outlook for equities would look a lot more bullish:
The potentially bullish pattern that catches my eye though is the falling wedge on AAPL. This has attempted to break wedge resistance once and has fallen back. A more definite move that cleared the last high at 576.50 would look bullish. I've highlighted the strong support zone that has held in recent days. A move below would target wedge support in the 510 area and a break below that support would target 390. In that case this failed break up from the wedge would have been a bearish wedge overthrow but there's no reason to think that is likely as yet:
The bottom line here is that the Euro crisis is far from resolved, seasonality favors the bears, and the overall technical picture on equities looks potentially dire. The rally off SPX support so far looks corrective and we may well just be seeing equity indices form bear flags here. This rally might have some more legs, but if so, then I'll be looking for decent entries to re-short from. It would be nice to see a decent short term support trendline form but the rally so far has been too weak to do that.

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