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Thursday 7 June 2012


I was looking yesterday for a reversal of whatever degree at my unconfirmed falling wedge upper trendline on SPX to confirm it, and we got that before it broke up. I'm expecting more upside, and will be watching the 1335 area carefully to see whether an IHS forms there. If it does then the rally will most likely be longer and go higher than I would expect otherwise:
I thought I'd have a look today at the bounces from the 200 DMA tests in 2010 and 2011 to see what we might expect this year. H&S patterns formed at the spring highs in 2010, 2011 and 2012, with the one that formed in 2010 being the smallest. The 2010 200 DMA test was the flash crash, which went 30 points below the 200 DMA, closed the day above, and retested it the next day. The 108 point rally from the low took only four days from trough to peak, and failed at the 50 DMA:
In 2011 the H&S was much larger, and the double 200 DMA test from the high completed the head. The 200 DMA tests were precise, and the 98 point rally from the second test took nine days trough to peak to make the right shoulder on the pattern, and then failed slightly above the top of the left shoulder:
What should we take away from this? The rally may well be fast and may well look impulsive. The slowest rally option might well be to form an IHS at the potential 1335 SPX neckline, in which case we might well see a move back into the 1400 area to form the second high of a double-top. If we don't form an IHS, the most likely target is the cluster of the April low at 1357, the 100 DMA at 1357, the 50 DMA at 1360, and the upper bollinger band at 1362. The last three targets are all declining of course. The rally reached the middle bollinger band (20 DMA) yesterday, and we may see some retracement there. Off the 11 hits of the middle bollinger band since the October low however, seven went through it to hit either the far bollinger band, the 100 DMA or the 200 DMA:
Vix broke back down through the middle bollinger band yesterday and is close to a test of the IHS neckline. If we see a close much below that I'll be inclined to write off the IHS and would be looking for a hit of the lower bollinger band in the 19 area:
EURUSD rallied strongly yesterday and is close to a test of broken support at the January low in the 1.2625 area. I'm seeing marked negative divergence on the 60min RSI and I'm wondering whether we'll see an IHS form with 1.2625 as the pattern neckline:
Points to note today. It would be reasonable from the 2010 and 2011 analogs to expect 100 point area rally, and the most likely area to see a high would therefore be in the 1355-65 resistance area. The rally may well be fast and look impulsive. If an IHS forms at the 1335 area neckline then the rally may well go higher. We have two big potential market moving events today and they are the morning jobs numbers and Bernanke who is speaking at 10am EST I think, and who will be carefully watched for any hint that he might be considering QE3.

We Bernanke be considering QE3? Well the last jobs numbers were poor, the economy is at risk of slipping back into recession, and Europe is already there it seems, with a serious risk of the Euro blowing up over the summer of course. What might restrain here is that whatever he does here won't affect the Euro crisis much, and he might want to wait until afterwards to use a weapon that might otherwise be wasted. Against that I was interested to see Chart of the Day post a chart of the correlation between the SPX and Obama's chances of getting reelected. The correlation is strong, and Bernanke's chances of remaining in post are considerably reduced if Obama loses, so he has some incentive to try to keep the markets up until the election. Here's the chart and if you click on that chart it will launch the full article:
Would Fed intervention make much difference to the real economy? History suggests not. The chart below tracks employment after every recession since WWII, and the last two recessions, where the Fed has 'helped' with low interest rates and easy money, stand out clearly from the rest as underperformers, with the sorriest example being the current period. We know QE3 can boost asset prices though, even if the example of Japan suggests that the power to do that is also limited. If you click on the chart it will launch the full article:

Ernest Benn: "Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly, and applying the wrong remedy."
Judge Gideon J. Tucker, 1866:"No man's life, liberty or property are safe while the Legislature is in session."

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