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Tuesday, 5 June 2012

200 DMA Analysis

Some of you may have been wondering why I have been so interested in the SPX 200 DMA as we have traded in this area, and also why I have remained interested even after support there has clearly broken. Moving averages aren't trendlines however, and a break of a moving average doesn't perform in the same way as a break of a trendline. I've done a chart looking at the SPX and the 200 DMA over the last four years to illustrate this.

Since the start of 2009 the 200 DMA on SPX has been hit from above or below fifteen times. Ten of those times were tests, and five were breaks with conviction. Of the five breaks, only the break on the move up from the 2009 low happened without at least one clear test of the 200 DMA before the break, though the test in 2010 was the flash crash of course, which wasn't a normal test. Of the ten tests, six were clear short-term breaks of the trendline, and in those cases the test didn't generally move more than twenty to thirty points below the 200 DMA and the 200 DMA was recovered within a week. On the five breaks with conviction the 200 DMA was not more than tested again before there was a definite change in trend.

The SPX 200 DMA is therefore a key bull/bear dividing line here. Statistically I would normally expect this first move below to be a test, and if that is the case then 1250-60 support should hold for now, and we should move back over the 200 DMA, currently at 1285, by the end of the week. If the 1250-60 support area fails then we should be looking at a break with conviction, in which case I would expect the 200 DMA area to hold as resistance until the current downtrend has ended and a new move up has begun. I am therefore watching very carefully here to see whether we are looking at a conviction break or a test of the 200 DMA, and that's not decided either way yet:
I was watching my support trendline on the SPX 60min chart yesterday and it was pinocchioed slightly before the afternoon bounce. That is ambiguous and the trendline may not hold. I have support for today at yesterday's low, immediate resistance in the 1280 area, and declining resistance in the 1310 area:
Vix closed back within the daily bollinger bands yesterday, triggering a Vix Buy (equities) Signal. That needs to be confirmed by a lower close on Vix today. I don't regard these signals highly, but I have noticed in the past that seeing one of these after a series of failures can lead to better performance, and there have been three Vix Buy Signals in the last two months that have not confirmed. Worth bearing in mind today though I don't think these are worth much without other confirmation such as reversal patterns on equities:
Of the smaller reversal patterns from the recent highs, almost all have made target on Dow, SPX, NDX. Only RUT has an active pattern that has not reached the target in the 720 area, and it came close with a hit of 729.75 intraday yesterday. That might not reach target but it is a perfectly formed pattern and I'd be happier about any reversal in this area if it makes target first:
The longer term reversal patterns are still forming of course, and would mostly still require large declines to complete and test their necklines. A good example is on SPXEW, where there is a beautiful potential double-top that I've posted before. A further drop of 5% would break rising channel support from the 2009 low, but a further 10% drop from there would be required to trigger the double-top to signal a full retrace of the move up from the 2009 low. Interesting, but not yet much more than lines on a chart at this stage. What is of more interest on this chart at the moment is that the weekly 13/34 EMAs are close to crossing. This is a key bull/bear market indicator and is well worth watching:
I posted a WTIC chart a few days ago with the observation that a break below rising support from the 2009 low would invite a test of the possible double-top neckline at 76.71. We've since seen that break so I think a test of 76.71 is increasingly likely. On a break below I would be looking for a test of long term support in the 40 area, but that would only really make sense in the case of a general meltdown on commodities and equities:
There is a degree of positive correlation between gold/silver and equities, though to a large degree that has been driven by QE simultaneously inflating equities and undermining confidence in fiat money. In the absence of any QE at the moment that correlation may not hold. However it is interesting that there are some signs that we may be seeing a low on gold and silver.

The signs of a low are stronger on gold at the moment, with a confirmed short term double bottom on gold with an upside target in the 1675 area, for a test of the key resistance level at the 150 DMA. On a break above that I have declining resistance in the 1720 area, and a possible much larger double-bottom valley high at 1792.70 that would target new highs on a break over 1800 area resistance:
The setup is weaker on silver, but there is very clear support in the 26.15 to 26.30 area, and that has held over the last three weeks. I have a rough declining channel on silver that points much lower on a break below 26, but if it holds I have next resistance at the 50 DMA in the 30 area, and declining resistance from the high in the 33.5 area. I've noted on the chart that if 26 support holds this may be a continuation descending triangle indicating to new highs, and there's a similar setup on gold, though the resistance trendline is lower quality on gold:

For today on equities the 1280 SPX area is immediate resistance, and unless we see a conviction break over that the action on ES from yesterday's low currently looks like a bear flag.

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