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Thursday 8 November 2012

Major Inflection Point

Yesterday was one of those unusual days which saw a 2SD (standard deviation) move on SPX, with a drop from the daily middle bollinger band to a close on the lower bollinger band. In the absence of a major shock, being at the lower bollinger band limits the strength of a further move down, so a move like yesterday's today is most unlikely. If we see more downside there is further major support just below at the 200 DMA at 1380. On a bounce the middle bollinger band is at 1428, and there may be some resistance at the broken 100 DMA in the 1402 area.

More importantly though SPX finally hit the major support levels I have been talking about at rising support from the October 2011 low, and yesterday's low was a test of that support, which is holding so far. This level is a major inflection point. Until it breaks it is only a long entry level of course, as short entries at hits of major support levels are statistically a really bad idea, but if we should see a break below, then that opens up what is potentially a lot of further downside:
Looking at the SPX weekly chart that updated from the one I posted on Monday, we have obviously now hit rising wedge support from that October 2011 low, and I'm now treating this rising wedge as confirmed. If we see a strong reversal back up here, that means that I'm expecting further upside to be capped at the upper trendline in the 1500 area, or slightly above for an overthrow. This is a 69% bearish pattern.

What I noted on Monday from this chart, and I'll mention again now, is that the weekly close here is VERY important. A close significantly below the weekly middle bollinger band at 1410 would be very bearish as of the last ten similar breaks, eight then followed through to the lower bollinger band, currently at 1343. if we were to see that then sufficient technical damage would have been done that a full retracement of the move from the June low would at least be on the table as an option, though we do not have most of the usual confirmation signals of a major top at 1474. That doesn't preclude a major top there, but it makes it much less likely. You can see the past RSI 14 signals at the top of the chart below:
On ES the major support level at 1388 was pinocchioed at the low yesterday and has been tested again twice overnight. As long as this holds on an hourly close basis I will be working on the assumption that it will continue to hold. This level is a possible H&S neckline of course and if we were to see a right shoulder form then a bounce would ideally peak in the 1416.5 resistance area within the current ES declining channel. On a break above that declining channel I would be thinking that a significant swing low had been made here, and I have sketched what I see as the highest probability paths from here on the chart below. If this H&S forms and breaks down the target would be in the 1305 to 1315 area:
I did mention yesterday morning that the rectangle bottom on Dow was a 55% bearish pattern and it broke down hard. The target is in the 12780 area but with only a 50% chance of making that target. As I also mentioned, these are much better performers on a break upwards:
NDX bottomed just short of declining channel support which I have in the 2590 area today. We may see a test of that rising support today but if we do, that may well deliver the positive 60min RSI divergence that would make that a very nice looking long entry:
No look at NDX here is complete without a look at AAPL, and that is looking worrying here. The declining channel broke down yesterday and a steeper short term declining channel has been established. AAPL closed slightly under the strong 560-5 support zone yesterday and a drop significantly further would invite a test of the next big support level in the 515-25 area. At the moment this area is still a possible H&S neckline but much below and that wouldn't be the case anymore. The next big support level is another potential H&S neckline, but less promising for a decent H&S to form there for a number of reasons:
I am hoping everyone caught my comment about the importance of 87.5 area support on CL holding yesterday morning as we plunged to a new low straight shortly after it broke. That new low was marginal, and still on positive RSI divergence, and we have a larger candidate double-bottom established now that would target strong 94 area resistance on a break over 89.2. CL is again looking like a very interesting long play this morning:
The IHS scenario on GC that I was sketching out on Tuesday morning is still looking good. If this continues to form I would expect a right shoulder low somewhere around 1700 taking another day or two to bottom out. RSI divergences have been very good performers on this retracement so far and ideally we would see that divergence from oversold again here. Just a note here though about the strong positive correlation between equities and precious metals over short and medium term periods. If we see SPX break key support here then we could well also see the nice long setups on gold on multiple timeframes fall apart:
SPX is testing a major inflection point and if we are to see a bull run into the end of the year, this is the place that should start. On a break below such a bull run will look much less likely and on a move much below 1380 SPX, very unlikely IMO. Until we see that support break though this area is a long entry area. If we do see a swing low here that process may take another couple of days but tomorrow's close is very important. For the bulls that close needs to be near or above 1410 SPX to prevent the setup on the weekly BBs and MACD looking very bearish.

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