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Tuesday, 12 June 2012

Finely Balanced

That was an ugly bearish engulfing daily candlestick on SPX yesterday, and everyone seems to be bearish today. They may be right, but we aren't out of bullish options yet until we see a conviction break below the 1290 area. At the moment I am seeing this as finely balanced with good technical arguments for a move in either direction. I'll lay out what I see as the highest probability paths in each direction.

I'm showing the bearish engulfing candlestick on SPY below, as for some reason the SPX datafeed is innacurate, and therefore candles and gaps are much less accurate on SPX. I've corresponded with stockcharts about this before and they tell me it is a problem with the main datafeed from S&P and there's nothing they can do. The middle bollinger band held on the close, more or less, and we might bounce directly from here. This is the first bull option and my least favored option as it just seems a long shot on the overall setup:
The second bullish option is the one I posted on twitter intraday yesterday as broken rising support from the low was being retested. You can see that here. That option is actually still the main bullish option that I posted last Wednesday morning, though it has been developing in an unexpected way. On this scenario we are developing the right shoulder on an IHS with the IHS neckline at 1335 SPX, and the target at 1405 SPX. The key to this scenario is that the 1290 SPX support zone would need to hold, with the SPX 200 DMA at 1289, and the October high and mid-May low (also the left shoulder low) at 1292. That level is main support here in my view and a break below with any confidence would suggest at least a retest of the June lows. 
Supporting the bullish scenarios is the bullish falling wedge that developed from the highs and broke up last week. I would normally expect to see more upside from one of these and a retest of broken wedge resistance would also be in the 1290 support area:
The first bearish option is just a conviction break of the 1290 support area. I wouldn't have a pattern target for this option, but I'd put first main support at the June lows, second main support in the 1220 area, and third and most important support at rising channel support from 2009 in the 1180 area. That's on a standard chart of course. There are quite a few people putting this in the 1250-60 SPX area but that is on a log scale chart. 

The second bearish option, as yesterday's low was close to Friday's low on both ES and SPX, is that a reversal H&S is forming at the 1300ish ES and 1307ish SPX levels. If this continues to form then we would see a bounce today into (ideally) the 1320-5 ES / 1325-30 SPX area and then return to the neckline to complete the H&S, which would have a target at the June lows. If that H&S were to form the chances of holding the 1290 SPX support area would obviously be much reduced. Here's the setup on ES:
What is Vix telling us here? Yesterday's open was well below the IHS neckline support level, so I'm inclined to write off that pattern now even though Vix closed well above it. The opening low yesterday was at the lower bollinger band and the close was just above the middle bollinger band. That's not telling us a lot on the daily chart:
The Vix 60min chart looks more interesting however. There is a possible rising channel from the lows with rising support just above 18. There's also a possible H&S forming with the head completed yesterday and an ideal right shoulder high target in the 25 area. If this forms the key support level to watch is still rising support just above 18. A break below would look bearish for Vix and bullish for equities. If that level holds then the overall lean on Vix is bullish and therefore bearish for equities:
Looking at EURUSD the setup still looks like a bear flag, but bear flag support held (just) yesterday, and we might therefore still see some upside here. If that is broken then first support is at the recent lows and the bear flag technical target is in the 1.166 area if that is broken with confidence:
ZB recovered back above the broken support trendline yesterday, though this isn't unusual after a first break and the support break still looks bearish. What is looking more bullish however is the (79% bullish) broadening descending wedge that has formed from the high. A break above wedge resistance indicates back to the highs for what might then be a double-top. In the overall context this wedge might also be a bull flag though, and on a break over the recent highs the technical target for that would be in the 167 area:
The key things to watch today are 1290 support if we see a test. That is key support and may well hold. If so it would look bullish. On the upside a rally into the 1325-30 area and failure there would look bearish. There are good technical arguments for seeing a bullish outcome here but overall I'm leaning somewhat towards the bear side as the short term outlook for the Euro looks grim. We might see an extended battle around 1290 to see whether support holds and there is obviously a huge wild card at the end of this week in the shape of the Greek election. If the anti-Euro parties win there then we might see Greece leave the Euro shortly which would most likely send the Euro down hard.

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