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Tuesday, 22 May 2012

Rally at Support

ES broke up through my short term declining resistance trendline at 1300 yesterday and we're seeing the rally from support that I was talking about. Where to now is the question? The first level of resistance is now just above, and that is at declining channel resistance in the 1323 SPX area. Second resistance is at a retest of broken support at 1340. Third resistance is at a test of broken support at 1357. A break above 1357 might well mean that this pullback is over but I'm thinking that seems unlikely at the moment. Here's the setup on the SPX 60min chart:
Looking at the SPX daily chart it's worth noting that the middle bollinger band is at 1362. By the time we reached 1357 that would most likely also be in that area and would strengthen resistance there. As I said, a break above that would look distinctly bullish:
Looking at RUT, there are two obvious targets / resistance levels there, and they are the October high at 769.46, and a retest of the broken H&S neckline at 780. A break above 780 wouldn't invalidate this H&S, but it would weaken it:
I don't often post individual stocks here, but AAPL is well worth keeping an eye on for this bounce. A strong support trendline has developed on AAPL, and while strong resistance trendlines are common in a decline, strong support trendlines in a decline are much rarer and usually signal that a pattern is forming. That pattern would most likely be an (ultimately bullish) falling wedge and wedge resistance is in the 572 area and that is the most likely level for AAPL to reverse back down. Only two two touches on this resistance trendline so far though so this won't confirm as a falling wedge unless we see a reversal there:
On Vix we saw a close back within the daily bollinger bands yesterday and that has triggered a Vix Buy (equities) Signal. That signal would confirm on a lower Vix close today. Personally I don't rate these signals at all but I know a lot of others follow them. Of more interest is the middle bollinger band in the 19.5 area, which is the obvious target if this rally doesn't fail at first resistance on equities today:
I'm going to close with a close look at USD and EURUSD today, as I think they are very key to what happens in the next few weeks and months. I posted the large IHS on USD last week after it completed forming, and we are seeing a pullback from the first test of the IHS neckline, which is natural and strong resistance:
Is there a mirror for this pattern on EURUSD? Yes there is, though it isn't quite as clear. It could be read as a horizontal neckline H&S which has just finished forming, but I would prefer to interpret this as an upsloping neckline H&S that has already broken down and retested, as I think that's a better fit technically. The H&S target is in the 1.11 area that way, and the current decline is within a declining channel with resistance and support at just under 132 and 120 respectively. The next obvious move is a move under 120 to channel support:
There are a number of reasons that I prefer the upsloping H&S, including the shoulder heights and overall symmetry. Another reason though comes from the longer term weekly chart, where I have a strong seven year support trendline that will hit the 110-111 area this summer. That is the natural level for EURUSD to hit and find support, if it's going to survive 2012, and is a perfect hit with the H&S as I have interpreted it:
The fundamentals for EURUSD here stink, and I'm expecting to see a hit of 111 in the next few months. The question really is what happens there. Time will tell as always.

For today I'm thinking we may well see this rally fail at first resistance today. A break over 1323 SPX would open up a test of 1340, and a break over 1340 would open up a test of 1357. I'm not expecting 1357 SPX to be breached on this rally and if it is breached with confidence then that would look distinctly and unexpectedly bullish. It's worth mentioning that EURUSD is still failing at 1.2813 resistance and is now doing so on 60min RSI negative divergence. A failure for EURUSD here and now would support failure on equities here and now as well.

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