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Tuesday, 15 May 2012

Possible Bounce Setup

SPX made a lower low yesterday and finally tested the 1340 support level. There has been no conviction break as yet. While that remains the case, and with the proviso that I'm expecting more downside and any bounce here will therefore be counter-trend, I'm thinking we may well see a relief bounce here. On the ES 15min chart the falling wedge I posted yesterday has broken up, with the low yesterday slightly below the wedge support level that I gave yesterday morning. With the decline yesterday afternoon a promising W bottom setup has also formed. On the next move over 1345 the pattern target is 1357.25, and we may well see that today or tomorrow, though the chances of seeing that will drop significantly if ES breaks below rising support at 1338 this morning:
What I'm looking at on the SPX 60min chart is the possibility that, having already formed an H&S with an upsloping neckline, we may now see a second H&S form with a horizontal neckline at 1340 SPX. This is obviously speculative, but I've seen this happen before at major support/resistance levels, with the summer 2010 IHS being a classic example. If this does happen then we would no see a multi-day bounce with the ideal SPX target for the top of the right shoulder in the 1370-80 area:
There are some other reasons to think that we might see a bounce here. Various international indices have reached major support levels, the German DAX included, but one of the most compelling is the Spanish stock market, which has stalled at trendline support just under the 2009 low. This is an obvious area for a relief rally, though I wouldn't expect it to last long:
We may not see a bounce, and if SPX breaks below 1340 with conviction, or Vix closes over 22, then we may proceed directly towards the next downside targets. I'm not seeing much of a case for a bounce on EURUSD here, though USD itself is testing the March high and that might provide some short term resistance. The next main target on USD is the IHS neckline in the 81.5 area of course:
I've been posting a lot of bearish charts in recent days, and that's because there are many topping patterns on multiple indices across the world warning that a major top may already be in, and possibly that it is a very major top. These won't necessarily play out, but the initial assumption has to be at least that this is an area to be very cautious on the long side in case there is a general meltdown. I'll post some more today and the first is the now fully formed slightly downsloping H&S that has formed on RUT after the rising wedge from the October low broke down:
The next is the double-top that has formed on Dow since the rising wedge from the October low broke down:
I don't often post charts for individual stocks but I have a very nice long term chart on JPM that I'd like to share. You can see that JPM reversed exactly at declining resistance from 2000 on this monthly (LOG scale) chart, and that a double top may be forming with a target in the (cough) 8 area on a break below the October low at 27.47. There is some long term trendline support in the 16 area that might hold on the way there however. Will this play out? Who knows? I wouldn't be keen to buy this current dip on JPM though.
For today there is a nice bottoming setup on ES that suggests that we might see a multi-day relief rally. This would be counter-trend and the chances of failure are therefore higher than normal, as both bull and bear setups fail much more often when they are counter-trend. The last W or double-bottom setup on SPX a couple of weeks ago obviously failed to make target so this is worth treating with some caution.

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