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Tuesday, 18 September 2012

Deja Vu So Far

I was reading a writeup from a fairly well known analyst yesterday stating confidently that QE announcements are followed by bull runs of 10% to 15% in the following four to six weeks. He shall remain nameless, but the evidence doesn't really back up that view. It's true that when QE1 was announced in November 2008 there was a rally from the 800 area to the January high at 943.85 but there's a very good argument that was coincidental, as SPX was already rallying from a very oversold short term double bottom at 741.02 into the January 2009 high before the final bear market decline into the March 2009 low. The picture from the announcement of QE2 looked rather different.

When QE2 was announced on 3rd November 2010 SPX had already been rallying hard for a couple of months. SPX broke well above the daily upper bollinger band into a high within a couple of days which was then followed by a sharp retracement into the end of November. It was four weeks from the announcement before that high was tested again and six weeks after the announcement SPX was only 2% or so higher than that post-announcement high. Here's the QE2 period chart on the daily with bollinger bands:
4th November 2010 was a Thursday, like the QE3 announcement on 13th September this year, and on the Friday 5th November 2010 morning I wrote that the technical bear case had now been largely demolished, but that I was expecting strong resistance and a very possible short term high at channel resistance on SPX and ES, which were both slightly overshot before that high was in fact made shortly afterwards. You can see that post from 5th November 2010 here. This may all be sounding very familiar, as it should, as the sequence of events over the last few days has so far been almost identical. That doesn't mean that the rest of this analog will play out as well, but the similarities so far are very striking.

On the daily chart SPX closed back within the daily bollinger bands yesterday. Generally speaking I would expect SPX to remain within the bollinger bands for a while now, though we would sometimes see SPX ride up the underside of the upper band for a while. If we see further retracement then I have the middle bollinger band in the 1422 area and rising channel support in the 1400 area. It's worth noting that the main channel support that I was watching at the QE2 announcement was broken on the retracement afterwards, and if we see that happen again then channel support would most likely be broken in the 1410-20 area and there is still very firm support in the 1400 area:
On ES the raggedy little upsloping H&S that I was looking at yesterday morning has broken down and retested, and the target there is in the 1440 area. I have short term rising support on ES in the 1446 area today:
I was looking at the Transports index yesterday, and I was planning to write about the Dow Theory divergence today, and whether that still means anything with the Fed supporting equities with QE. I won't have room for that today but I'll still show the large symmetrical triangle on TRAN in an overall setup that is strongly suggestive of more retracement here:
Looking at other markets my friend chewtonic showed me a nice looking falling wedge on TLT on twitter this morning. The lower trendline isn't as nice on Stockcharts for some reason but it still looks valid. The setup on the daily chart is strongly suggesting a test in the 115 area, but the positive divergence on the 60min RSI is already delivering a bounce at wedge support. Within this falling wedge we could see a bounce on TLT into the 123-5 area (strong resistance 123.5 to 124 area of course), followed by that move to test the 115 area, and that would fit with an extended retracement on equities here. We shall see. Here is chewtonic's chart and he posts on twitter at @chewtonic:
There was a significant decline on oil yesterday and I'll show that on the USO daily chart today. Oil still has a cautiously bearish looking chart and you can see that it patterns well and that the high probability patterns on it generally make target. Wedges are not high probability patterns, but the setup is still bearish on balance, and on a break below the strong support /resistance area at 35 (about 94 on CL), I'd expect to see a significant follow through to the downside:
EURUSD had a nice bounce yesterday, to a very marginal new high, on strongly negative 60min RSI divergence. Overnight that short-term double-top has almost played out to target and I have short term rising support in the 1.302 area and a significant support level at 1.30. On breaks below I'd be looking for a retest of the broken rising wedge resistance trendline and the June high in the 1.28 area:
I've been up to eight charts per post again in recent days as there have been so many interesting charts to show. I should be back to the usual five or six tomorrow but for my eighth chart today I'd like to show the very thought-provoking SPX monthly (LOG) chart since 1980. You can see that on this chart the 1980-2000 secular bull market resolves into a single rising channel, and that the action since has formed a huge (direction neutral) right-angled and descending broadening formation. Now I don't tend to trust these huge patterns for targets, and in the event that this pattern broke down I think I can confidently rule out the possibility that SPX would reach the pattern target at -220ish, but the pattern is suggesting that we are likely see a test of the 2000 high at 1553 and/or the 2007 high at 1576, and that if we see that test, we may well then also see a very major top there. On a break up the pattern target would be in the 2450 area and that would then be at least worth bearing in mind. What USD might be trading at by that stage is anybody's guess of course:
We haven't yet reached the point of decision to see whether the retracement from Friday's high will develop into the sort of multi-week retracement that we saw after the post QE2 announcement spike up. I'm seeing that point of decision at short term rising support on ES at 1446 and the equivalent rising support trendline on SPX just over 1450. If those break and we see an hourly close below them then I'll be looking for continuation into a test of 1440 SPX broken resistance, and on a break below that, into the top of the descending triangle in the 1420 SPX area. As I mentioned, the post QE2 announcement retracement broke my channel support then,and if we see that happen here I'd be looking at strong 1400 area support which I'd really be expecting to hold.

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