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Monday 10 December 2012


I was looking at Friday morning at the competing patterns on NDX. On the bull side there is a mostly formed IHS that would target new highs in the 2900 area on a break over 2700. This is the Santa Rally pattern if we are to see one. On the bear side there is a now mostly formed H&S that would target the the 2530 area on a clear break below 2625. That's still the case this morning, though the bear scenario has been strengthened considerably since by the strong rejection from the 2660 area on Friday. here's how that looks on the NDX 60min chart:
I also showed the NQ 60min chart on Friday morning, with the note that a break below the rising channel would look bearish. We saw that break and the NQ H&S is now completely formed and testing the H&S neckline, though it hasn't yet broken down:
On the SPX weekly chart the weekly middle bollinger band is still being tested, with the middle BB at 1417.76 at Friday's close, and the close at 1418.07. This isn't inherently bearish, the middle BB was tested for two weeks in the summer before SPX broke above it. Of the fourteen hits of the middle BB from the lower BB in the last seven years, eleven broke above and nine made it to the upper BB. However three reversed there to the lower BB and this is the obviously point of failure if we are to see that. The weekly lower BB is currently at 1364, which fits well with that NDX H&S target:
On other markets the CL chart now leans bearish, as the falling wedge that broke up there has evolved into a declining channel. We might see another bounce here though. Gently rising support from the November low held at the lows last week and is in the 85.80 area this morning. If we see a break below that then the obvious target is a move to channel support and a test of the June low just under 80, but if short term declining resistance in the 86.90 area breaks then we may well see a decent bounce and even possibly a break above the declining channel, which could rescue the bull scenario into the 94.50 area. Unless we see that though I am assuming that the overall trend is still down:
On Friday morning I gave the obvious target on EURUSD as being in the 1.2775-1.2785 range, noting the possible H&S neckline in that area. The low was at 1.2776 (buffs fingernails modestly), and if we see this H&S continue to form the ideal right shoulder high would be at a retest of strong resistance in the 1.30 area. I think this pattern may well form and play out, and wouldn't see any conflict there with the likely overall downtrend on USD, as I'll explain on the chart after this one. Here is the idealized path for this possible H&S to form and play out:
Looking at the DX daily chart there is a larger possible H&S there, and as I have marked on the chart, the ideal right shoulder high for time and symmetry would be in the 82 area in three to four weeks. That would be an excellent fit with this H&S on EURUSD playing out and then reversing near the pattern target. One note for this chart however. I have been assuming that DX is in an overall downtrend because there was clear daily negative RSI divergence preceding a break of the support trendline from the 2011 lows. Together with a new round of QE, which is USD devaluation in intent and (in the past) effect, it seems a reasonable assumption that we are going to see a big decline on USD next year. However it's worth mentioning that there is a possible rising channel support trendline in the 78.90 area (and rising) and if that was tested and held it would make this chart look more bullish on the overall trend:
I haven't been posting the TLT chart much lately, and that's because I haven't been getting much from it in the way of usable trendlines. This often happens in the early stages of pattern development. Today though I can see what may well be a rising wedge forming on TLT, and if the support trendline in the 124.5 area holds, the next obvious target is wedge resistance and filling the large gap above into the 129 area. Well see how that goers today but if this continues to form that would look bearish for equities short term:
I'm increasingly doubtful about seeing a big rally into the New Year from here, but the technical setup is still there if NDX (and AAPL) can find the strength for a big bounce. Neckline support on NDX and NQ is in the 2625 area and on a clear break below we should see the H&S patterns play out. For the short term EURUSD leaning bullish for equities and TLT is leaning bearish for equities so we'll see whether NDX/NQ can hold support today. If we do see NDX/NQ bounce into 2700 that would set up a possible double-top there, so the Santa Rally scenario only becomes high probability on a clear break over 2700.

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