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Monday, 15 October 2012

SPX Breaks Rising Channel Support

I won't include the SPX daily chart today as I posted the SPY equivalent yesterday in my weekend post at MarketShadows and you can see that here. What I have to add to that this morning is that I have had a close look at the current bollinger band setup back to the start of 2009, and have come up with the following stats:
  1. 9 instances - Touch and reversal or 2 day base at the lower bollinger band.
  2. 7 instances - A plunge through the lower bollinger band.
  3. 10 instances - Riding the lower bollinger band downwards as we are seeing at the moment. 
Of this last group of 10, which is the group of interest today, and we would now be starting day 4 as the first touch was on Wednesday, the outcomes were as follows:
  1. 2 instances - A low on the third day - short term bullish
  2. 6 instances - A low on the sixth or seventh day 20 to 70 points lower - short term bearish
  3. 2 instances - A low on the tenth day or later over 50 points lower - short term bearish
Despite SPX being rather oversold short term therefore, any bounce may be very short-lived and the double-bottom target in the 1385-90 SPX area should be taken very seriously. If we do see continuation downwards today then the most likely next low would be on Wednesday or Thursday in the 1380-1400 area. 

This is of particular interest because the lower trendline of the rising channel on SPX was broken on Friday, and SPX closed below the late September low at 1430.53, triggering the double-top target in the 1385-90 area. There is also a decent short term declining resistance trendline from the last high which will open in the 1432.5 area and a break above that would considerably improve the odds of a bounce here. There is often a strong bounce and sometimes even a new high after the first break below a channel support trendline on SPX. Here is the channel on the SPX 60min chart:
So far the overnight action on ES looks bullish. There was a strong declining resistance trendline there which has broken up since I capped the chart below. I'm seeing the short term resistance levels at 1434.5 and 1439.25, and on a break above 1439.25 I would have a W bottom target at 1462. Over the last three days we have a marginal new low on positive RSI divergence so far and, if it holds, that is of course a classical bottoming setup:
TRAN has been outperforming SPX in recent days and had a good Friday retesting the last short term high at 5082.39. TRAN needs to break over that with confidence very shortly as until that happens there is a possible double top setup here with a target and trigger level that I've marked on the chart:
TLT broke up from the falling wedge on Friday. We might see a retracement back into the wedge here but I would expect more upside afterwards. That doesn't augur well for equities over the next couple of weeks until this has played out, and I would expect any bounce on equities here to be a rally rather than the start of a large bull run;
EURUSD hasn't quite made the short term double-bottom target at 1.30 so far, but a short term rising channel has formed which may take EURUSD into declining resistance from the high in the 1.303 area. We may well see a test of that soon though I'm not expecting a break above with any confidence as I think there is still some unfinished business on the downside at the main support trendline from the 2012 low, now just over 1.28:
Oil still looks a little lost this morning, and I haven't much to add to the chart I posted on Thursday morning so I'll look at gold instead. I posted a SLV chart yesterday that you can see here showing the possible short term double-top setup there, and there is another on gold, though not as advanced. The target on gold would be the 1675-80 area on a break below 1738.30 and primary support on gold is the 150 DMA, now at 1645.84. If we see that retracement happen then the move back into the 1600s would be a buying opportunity that may well not be repeated for a long time. Supporting these retracements on gold and silver here is that GDX broke short term rising support on Friday, though I haven't time to show that chart today:
Are we going to see a QE bull move? That's harder to call now that the SPX rising channel has broken. The best shot for seeing that now in my view, is that the double-top on SPX plays out to target in a move over the next three or four days to make a decent low there while the equity-bearish bearish setups on precious metals, AAPL, EURUSD and TLT play out. We might see a decent bounce here but this wouldn't be likely to be a low that would lead to a sustained bull run. Short term any bounce today may well fail hard to finish near or below Friday's close. 

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