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Friday, 11 May 2012

More Bearish Charts

Well I said yesterday morning that the key to the day on SPX was the 1365.74 level, and the HOD was 1365.88. A marginally higher high but nothing worth writing home about. Declining resistance was pinocchioed but held on the SPX 15min chart, and unless that can be broken today in the 1360-1 area the bulls have nothing:
If declining resistance on the 15min SPX chart can be broken, there is still very strong resistance at the broken H&S neckline in the 1365-7 area (rising trendline) as you can see on the 60min chart. I was asked yesterday whether a break back over there would negate this H&S setup and the answer is no, but it does open up the possibility of a larger bounce:
I mentioned yesterday that the 1365.74 area was a potential IHS neckline and after the reversal there a possible IHS is forming. The setup looks prettier on RUT, so here it is on the IWM 15min chart, where you can also see that declining resistance from the high has broken there. I've sketched out the highest probability paths there but the meat is that a 15min candle close over 79.60 delivers an IHS target at 81.2:
I'm not writing off the bulls here, there's definitely the potential for a bounce, and the positive divergence I was pointing out on EURUSD yesterday has been increasing. If EURUSD can lift itself up off the mat temporarily then declining resistance from the last high is just over 1.30 and there's a possibility we might see another test of the H&S neckline in the 1.307 area. That wouldn't be usual at this stage though:
I'll close with more big picture bearish charts today just to underline the significance of a failure to hold 1340 on SPX, and why a dip below there would be very dangerous to buy. First my updated MSWORLD (world ex USA index) showing the declining channel and part formed H&S there suggesting apocalypse soon if we should see a break below 1350:
Are there any other charts to back up that apocalypse scenario? Quite a few actually, but possibly the most thought-provoking one is the long term TYX 30yr treasury bond yields chart, where the next downside target on my 27 year declining channel is under 20 (2%)That looks very ambitious but is backed up by a descending triangle that's worth examining from 2009-12. On that pattern the spike up this year was a retest of broken triangle support, and the pattern target is in the 20 area as well. What could cause such a dramatic collapse in long term bond yields? Well the obvious cause would be a major flight from risk assets. Something to think about:
There's no reassurance from commodity prices here as CCI just broke the October low. As yet commodities are still in a downtrend from early 2011, so to the extent that they are a lead indicator they are pointing down:
Last chart of the day is the Vix, where the IHS that has formed since the falling wedge from last year's highs broke up doesn't look encouraging for equity bulls here. The target would be in the 28.5 area on a conviction break over 21.60 and the falling wedge target is of course a full retracement to the highs last year. This setup might not deliver, but it is reason for caution on the long side here:
I think a larger bounce than we've seen so far is a real possibility, but the bulls have to clear 1361 then 1366 on SPX to get it. Until then strong support is at 1340 SPX, and a vast abyss of downside may be under there, so on a break below 1340 SPX I wouldn't be looking for any longer term buying opportunities for a while.

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