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Thursday, 31 January 2013

More Bonds Charts

There have been three instances since the start of 2013 where on the SPX 15min chart there have been clear lower highs and lows, delivering a clear retracement or consolidation period. The previous two were both short, lasted less than two days before breaking up, and were in effect bull flags. The third retracement started yesterday. Here's the setup on that chart. I have the obvious initial target for this move in the 1490-4 area, anything lower should deliver a decent retracement lasting considerably longer than the last two:
On the SPX 60min chart there is clear negative RSI divergence which was seen only on the first (deeper) January retracement. This is promising and if SPX can get below 1490 then the obvious targets are then the daily middle bollinger band in the 1470-5 area, which fits with a retest of the broken September high at 1474.5, and the weekly middle bollinger band, currently at 1435, and an obvious fit with a test of rising support from the November low, now hitting the 1440 area. This is the retracement I would like to see here, as the establishment of a strong support trendline and this point would add definition to what has so far been a fairly formless melt upwards:
I won't show the SPX daily chart today but I will show the weekly chart, both to show the bands and also to show that broken and rebroken rising wedge support from the 2011 low is also now in the 1440 area, adding to the natural support there:
If we are to see a deeper retracement here, then a key chart to watch is the RUT 60min chart, as there is a perfect rising channel there, and any move on SPX below 1490 will most likely be confirmed by a break of this RUT rising channel at the same time. Equally a hit of channel support on RUT is an obvious reversal point if this retracement is going to be another shallow pullback:
On the ES 60min chart the RSI 14 has touched 30, and has made a marginally lower low after that on positive RSI divergence. We could well see a bounce here. If we see that bounce I will be looking for the 50 hour MA , now at 1499.25, to hold on an hourly close basis. A close back above 1500 would be a discouraging signal for any sort of decent sized retracement over the next few days. There is a possible H&S forming on ES here though the ideal neckline would be in the 1491 area:
Both EURUSD and CL are looking a bit short term toppy here, but there's not much to add to what I said yesterday so I'm going to follow up yesterday's post on 30yr treasury yields with more bonds charts.

I was showing the possible IHS forming on 30yr treasury yields yesterday and I was asked whether a similar setup is visible on the 10yr treasury yield chart. Definitely. On the monthly chart of TNX from 1980 I have a falling wedge that has been forming since 1993, and wedge resistance there is at 3.65% and falling. The next obvious move is to test that resistance, and there is a possible IHS forming with the neckline at established resistance in the 24 (2.4%) area. The target for that IHS if it forms would be the 34 area, and by the time TNX reaches that level, wedge resistance may well be there too:
Looking at the ten year TNX chart the picture looks a little different. Declining resistance from the 2007 (second of double-top) high is in the 28.5 area and that is worth noting. The possible IHS setup is the same of course. I have added the QE periods to the chart, from the announcement to the end of QE purchases to show what a powerful effect QE has had increasingly bond yields each time. The current QE is open-ended, which is something to think about when looking at this chart:
On TLT I only have data back to 2002, but the next big support level is clearly in the 107 area, and that is obviously also a candidate H&S neckline. If that H&S forms and breaks down, the target would be in the 83.8 area, well below rising support from either 2003 or 2007 in the 90-4 area. If those support trendlines were to break down that would be a strong confirmation signal that the three decade long bull market in bonds has indeed ended:
I was asked yesterday what a bear market in bonds would mean for investors. Just to clarify this it would mean that long dated bonds would face large falls in face value, continuing for most likely at least a decade, and that yields on shorter dated bonds would rise to well above inflation. You will note that the yield on the 10 year treasury went from 16% in 1981 to 1.4% in 2012. I have strong resistance on TNX  in the 7% and 10% areas, and weaker resistance in the 8% area. If we are not to see a full retracement of this bull market then I would be looking for failure at one of those.

Full retracement seems a radical idea, but you should consider that the backdrop to that 1981 high was a long period of governments running large deficits, flooding economies with money at negative real interest rates, and trying out doomed financial experiments to try to avoid taking necessary action to bring economies back into balance. Anything sounding familiar? My favorite stupid economic experiment from the 1970s was prices and incomes policies to restrain inflation. These make a fun read for anyone interested. What's different today? Well governments, companies and households are all carrying a lot more debt, and inflation and unemployment calculations have both been extensively modified to present a less alarming (and most likely less accurate) picture. Otherwise we're just watching a variation on the same theme by the same authors.

Just to be clear, I think there is only one economic path to prosperity for both households and countries, and that is to work hard and innovate, producing more than you spend, and either saving or investing the balance. This seems a self-evident truth, and historical evidence suggesting otherwise is thin on the ground. Anyone suggesting otherwise is a fool or a charlatan in my view, with high intelligence  sober expressions and a sheaf of PhDs not being a barrier to being either of these, and fools and charlatans are clearly running the show in the developed world at the moment. Until that changes, as it did in the US and UK particularly at the end of the 1970s, real economic outcomes are likely to continue to disappoint.

While I've been writing ES has tested support in the 1491 area and I am still seeing clear positive divergence on the 60min RSI. Ideally I would be looking for a bounce into the 1500 area over the next day or so to form the right shoulder on an H&S targeting the 1476 ES area. An hourly close over 1500 would throw any continuing downtrend here into serious doubt.

Wednesday, 30 January 2013

A Look at Bonds

One thing that is characteristic of strong trends is that you can see nice bear setups repeatedly trashed while the index keeps on pushing up. That was the case yesterday when ES pushed back over the 50 hour MA and just kept on going. The 50 HMA is now at 1499 and is now support again. There is a short term double top and negative 60min RSI divergence with a target in the 1499.5 area so I'm expecting to at least see that level tested early today. If we see more downside after that, strong support has now been established at 1491:
EURUSD broke above the 1.35 area resistance level yesterday. Unless we see a strong reversal soon, the obvious main target is in the 1.42 area:
CL pushed up over 97 resistance yesterday and that level is now support. RSI divergence is suggesting some retracement here:
On the bigger picture there is something interesting happening on copper, which is testing the upper trendline on a large symmetrical triangle. if that breaks up that would obviously look bullish for copper, but would also give some extra support to the current bull move on equities:
I posted a very speculative chart on 30yr Treasury Bond Yields (TYX) about three months ago looking at a possible bottoming setup there for the 33yr bear market in bond yields (bull market in bonds). I was speculating that TYX might bounce to the 34.9 area to complete the head on an IHS to take TYX back to main resistance in the 44 area. That's looking good at the moment and TYX closed at 31.68 yesterday. Here's that setup on the TYX monthly chart:
Looking closer at TYX on the daily chart TYX is now in a solid looking uptrend, with decent short and medium term support trendlines, and if TYX is currently in an overall rising channel then we should see the 35 area hit sometime in the March - May period. If TYX is forming an IHS and we see a strong reversal at that level to make the right shoulder that would be a good fit with a strong decline on equities starting in the usual late March to early May period that we've seen in recent years. Food for thought:
While I've been writing the little ES double-top has broken down and made target. That could be it for downside today but the strength of the RSI divergence is suggesting at least another test of the 50 HMA. On the bigger picture, with the weekly upper bollinger band rising at about ten points per week, the high yesterday at 1509 was only three or four points short of the area where I would expect to see the highs this week so in the absence of some retracement first potential upside looks limited.

Tuesday, 29 January 2013

The Case For AAPL

I have been talking every day about AAPL over the last few days and the reason for that is simple. Unless we are going to see a serious technical breakdown on AAPL the most likely place that the current decline would bottom out is at rising channel support on the weekly (LOG) chart, and that was finally tested on Friday. It is holding so far. Will it continue to hold? Hard to say, but the technical setup here certainly looks promising as I'll detail below.

I was saying a couple of weeks ago that there was not yet a clear pattern for the AAPL decline, and that, as I've mentioned before, is often an indication that it is too early in the trend for the pattern to have become clear. Now though it is clear, and it is a bullish falling wedge. If the current low can hold then there is also very encouraging positive RSI divergence on the daily chart. What AAPL needs to do next is break up from this rising wedge, and if we see that happen, then the low should be in:
Looking closer on the 60min chart you can see that there is an open gap into the 515 area that could be filled on a bounce here. If that is filled then we will have a break up from this falling wedge. The upper wedge trendline on this pattern isn't perfect, but it is decent and if you look closely at the chart you will see my notes on the short-lived break above the upper trendline:
Sentiment is now so bearish on AAPL that it seems hard to imagine that this downtrend could be over, but this is obviously often a contrarian indicator. When I started to predict a likely sharp decline on AAPL in early September sentiment on AAPL was possibly even more bullish than it is now bearish, but sentiment was wrong then. It may well be wrong now.

On the SPX daily chart the RSI 14 is now in significantly overbought territory, and we are now entering my ideal high area (for my bearish double-top scenario) in the 1500-20 range. If we were to see a top form in this range we would ideally see a short term high about here, make a sharp retracement, and then make a slightly higher high on negative RSI divergence. Daily middle bollinger band support is now in the 1470 area and that would be an obvious target. Support at the broken resistance level around the September high is also in the 1470-5 range so that would be both the obvious target and a very possible low area if we see a retracement starting here:
Will we see that retracement? Well the strong negative divergence on the SPX 60min RSI looks promising and there is a possible double-top setup here. On a break below 1490 the initial target would be in the 1480 area. On a break much lower rising support from the November low could be hit in the 1440-5 area, and that would most likely fit with a test of the lower bollinger band on the daily chart:
On ES I have sketched in a possible broadening wedge forming if we do see a retracement here. Again there is negative RSI divergence and a possible double-top setup. in addition the 50 hour moving average, support on uptrends, has now been convincingly broken for the first time since the last retracement. I have possible trendline support in the 1480-1 area and that is also the target area for the possible double-top. If a retracement has now begun, then I'll be looking for resistance today near the 50 HMA in the 1496 area:
Any retracement on equities here may well have support from both EURUSD and CL. On EURUSD I have sketched in a possible rising wedge from the 2012 low, and there is clear negative RSI divergence from overbought on the daily chart. Given that EURUSD is also testing a major resistance level and possible IHS neckline here we may well see a sharp retracement from this area. As I have mentioned before, the obvious target for that retracement would be in the 1.26 to 1.27 area. On the overall USD picture here I also noted yesterday that EURUSD has been swimming against the tide since the start of the year, with most other currencies falling sharply against USD over the same period:
CL is consolidating in the 95 to 97 range, and that's not inherently bearish yet. However there is again clear negative RSI divergence on the daily chart and a possible double-top in play. On a break below 95 the double-top target is in the 93 area:
I've said before that an uptrend is defined in large part by retracements, as these establish support trendlines and the lower part of any patterns. Retracements have been rare and short on the current uptrend, and that is making it difficult to judge how far this might go. There is a very good chance that a retracement on ES and SPX is finally starting and obviously I would very much like to see that happen here to give some better definition to this uptrend. I'm leaning short today. Go bears! :-)

Monday, 28 January 2013

AAPL Tests Primary Support

SPX closed at the upper weekly bollinger band on Friday for the fourth week running. This can last a while, but it's worth noting that at this stage we are unlikely to see big moves above the upper band and that band is only rising about ten points per week. Short term upside is therefore limited and any further moves up under the band before we see a significant retracement are likely to be slow:
I've been looking again at the SPX 60min chart and there could be a broadening ascending wedge forming from the November low. It would need a decline into wedge support and reversal back up to confirm though really. In the short term it's worth noting that there is some negative divergence on the 60min RSI and a possible short term M top forming with a target in the 1481 area on a break below 1492:
AAPL tested channel support at 435 on Friday. This is my primary support trendline for AAPL and a break below would be a big technical break. It is a very steep trendline however, with the first touch in 2003 at 6.25, and a break below would signal most likely only that AAPL has moved into a new phase that won't include huge moves upward. On that break below however, the next obvious target is strong support around the 360 area:
I have posted two scenarios on EURUSD over the last couple of weeks and we have now reached the point of decision where EURUSD should go one way or the other. On the bull side I was looking at the sloping IHS with a target in the 1.42 area last week and that is a nice technical fit with a move to test declining resistance from the 2008 high. On the (short term only) bear side we could see an alternate IHS form with a horizontal neckline in the 134.8 area, and that was tested at the high last week. If that forms we would now see a right shoulder retracement lasting months with an ideal right shoulder low in the 126-7 area
Is it possible that we could see a big reversal like that on EURUSD? I think so yes, though technically I prefer the other scenario. EURUSD has been strong in recent months, but since the end of 2012 it has been plowing a lonely furrow of strength against USD. That has a big impact on USD, as EURUSD is 57.6% of the basket of currencies that make up the USD valuation, but elsewhere USD has been looking impressively strong.

I watch five main currency pairs for USD on a regular basis and they are EURUSD (57.6%), JPYUSD (13.6%), GBPUSD (11.9%), CADUSD (9.1%), and AUDUSD (not in USD basket). Since the end of 2012 all of the other four have fallen significantly against USD to the extent that even though EURUSD has gained significantly over this period, USD is flat. I don't know what this is telling us overall, but I do know that the Yen (JPYUSD) is in very serious trouble, and may fall a long way below current levels, and the next largest component GBPUSD has also been showing a lot of weakness in recent weeks, to the extent that last week GBPUSD broke below the trigger level on a double-top indicating back to the 1.536 level, effectively a test of the summer 2012 lows. If this pattern is going to fail then the likely place is right here, just below broken pattern support, but if it continues down below 1.57, the chances are that those lows will be tested in the next few weeks. If we see a big reversal on EURUSD here as well we could therefore see a very impressive rally on USD over the next few weeks. Here's that setup on the GBPUSD daily chart:
For today on ES I have some weak trendline support and the 50 hour MA in the 1493.5 ES area. Secondary support is at 1490.75 at Friday's low. If we see a break below Friday's low the next obvious support is in the 1486.5 area. I have some trendline resistance in the 1501.5 area.

Friday, 25 January 2013

AAPL Near Primary Support

AAPL blew straight through the support trendline from early 2009 at the open yesterday and is now very close to testing weekly (LOG) rising channel support from 2003. This is AAPL's primary support trendline and a break below it would be a major technical break. Now that AAPL is close to that line I am refining the target to 440 plus or minus 5. If we see this trendline break I then have the next major support level around 360 and it's worth mentioning here that a percentage decline of that magnitude (to 360) from the 2012 high would be in line with the declines in both 2006 and 2008:
ES is still making higher highs and lows, and the 50 hour moving average is primary support. That's now in the 1488.5 area and if we should see a break below yesterday's low at 1486.25 this chart would start to look interesting on the short side:
On the SPX weekly chart I have upper bollinger band resistance in the 1501.5 area. I'm not expecting a close much above that today. This is the fourth week of SPX pushing up under the weekly upper bollinger band, and in terms of past moves on the 7 year chart below, a median move like this would run six to eight weeks before reversing to test the middle BB. This move is therefore not extended in historical terms, though everything is now overbought on the daily RSIs of course:
I've looked often at the possible rising wedge / double top setup on the SPX and Dow charts, and I've been sounding increasingly doubtful about these as this bull run on equities has continued, even though we are now in my ideal target zone for both for the second high. Why is that? Simply because of the nature of the move up this month. I expressed doubts about these setups in December because the weekly RSIs are not at a level where any normal major top signal could be seen, and that was a strike against this setup from the beginning.

What could have strengthened this setup considerably would have been rising wedges forming on SPX and Dow from the November lows, but we haven't seen that.  What we are seeing is moves up that at this stage have no well defined support trendlines or overall pattern. What this generally means is that it is too early in the trend for these to be clear, and that is not bearish at all. If these rising wedges / double-tops are to play out, I would expect to see a major high on SPX in the 1500-20 area. If we don't see that then the obvious target area is a test of the 2007 highs and if we are to see the next bull market top develop with the sort of weekly RSI signal that you can see on the chart above at the 2007 and 2011 highs, possibly considerably higher than the 2007 high. Here's the updated rising wedge setup on the Dow daily chart and you can see that the daily RSI 14 has now just edged into overbought territory:
NDX is the weakest index here, obviously because of AAPL. There is a possible rising wedge developing there from the November low but in the absence of supporting patterns on Dow, SPX, RUT and TRAN my confidence in this isn't high. A move to test wedge support would strengthen this setup considerably though.
EURUSD has broken up from the triangle I was looking at yesterday and is on the way to test the next major level at 1.35. On a break above I have the next trendline resistance in the 1.38 area. I'll be looking  more at this next week as EURUSD is giving a very misleading impression here that USD is weakening fast, whereas in fact USD has been strengthening against Yen, GBP, AUD and CAD. The uptrend on EURUSD still looks good here though:
The last two chart today are updates on plays that I have posted before. The first is Yen (JPYUSD). Since I posted this very bearish chart in late November at the 126 level Yen has been collapsing against USD. it is now very oversold on the weekly RSI and there is serious talk of a bounce here. If we see that the bounce would target resistance in the 114.5 to 116 area and should be sold down to the H&S target and decent support in the 105 area. Longer term I think we may well see Yen make the wedge target in the 80 area:
The last chart is the very nice looking long setup on KOL, still at a very attractive buy level. If you're looking for something to buy that's beaten down and offering a very nice looking bullish reversal setup, this is a decent looking play:
For today I'm looking for a higher high on ES over 1498 in the pre-market, followed by weakness into obvious support near the 50 hour moving average in the 1488.5 area, followed by strength. A break below 1486 would be a break of the current sequence of higher highs and lows and would suggest a test of support in the 1475 ES area.

Thursday, 24 January 2013

In Praise of AAPL

AAPL beat on profits but disappointed on revenues last night. There was a big reaction and I read of AAPL trading as low as 461 in the after market last night. It may have gone lower. Some of this seems likely to persist into trading hours so we may shortly see the test of the main rising support trendline from early 2009. Will it hold? Depending on what happens on the daily RSI today that currently looks promising for a reversal at this support trendline:
If that trendline should break I have next support on AAPL not far below at rising channel support from 2003 on the weekly (LOG) chart in the 445 area. That's very approximate, plus or minus ten given the scale of the chart. A break below there would look very bearish:
All steep rising support trendlines break eventually, and these are both steep trendlines that have carried AAPL a long way. A break below them might just be a signal that AAPL is finishing a high growth phase and moving towards being a lower margin company with limited growth prospects. One way or another that is likely to happen, as AAPL is huge enough already that growth prospects must be somewhat limited, and faces increasing competition in most markets. On the other hand AAPL products are still superb, their prospects for making very good money in their markets in the future look good, and they are on a forward P/E of just 9, which is modest unless earnings are going to fall a lot from here. I think AAPL will most likely hold one or the other of these trendlines this time. We shall see.

There was a nice double-top that formed on the ES 60min yesterday, and that broke down overnight. As I have mentioned before however, when these patterns fail it tends to be just below the pattern trigger level, and ES reversed back up strongly there. I have strong support in the 1484-5 area, and if we see a break below there we may well then see follow-through to retest the 1475 level. I have a possible channel support trendline there, but it is a poor quality channel so far:
On the SPX 15min chart there is a clearer setup, with yesterday's higher high on negative 15min RSI divergence. If short term rising support in the 1493.5 area breaks then we should see some follow-through, with possible trendline support in the 1480 area fitting well with a target in the 1475 area on ES:
Middle bollinger band support on the SPX daily chart is now in the 1459 area. Statistics still favor SPX touching the middle BB before another touch of the upper BB, now in the 1510 area, though both are rising so fast that this is doubtful as a shorting opportunity. What is worth noting on this chart is that rising wedge resistance on SPX is also now in the 1510 area, and I wouldn't expect that trendline to be broken if this rising wedge is to play out:
That setup is clearest on the Dow chart, with wedge resistance there now in the 13950 area. If we are seeing a broken rising wedge and double-top setup then the second high would also ideally be not much more than 2% higher than the first, and that target is in the same area. I can't say I have any great confidence that this classic reversal setup will play out, but it is a classic reversal setup, so I'm following it:
EURUSD is consolidating in a sort of triangle. The obvious next move is up in my view, but there is a possible double-top setup that would trigger on a break below 1.325:
Mainly I'll be watching the SPX 15min chart this morning. If we see that short term support trendline break downwards I would expect some follow through. Nothing to get particularly excited about here on the short side unless we see that happen though.

Wednesday, 23 January 2013

Food for Thought

Waiting for the retracement within the rising channel on SPX has been a bore. The strong resistance trendline has been holding well and it seemed just a matter of time until we saw at least some retracement. However SPX broke above rising channel resistance yesterday and while it may fall back inside today, that opens up potentially considerably more upside before a retracement:
What other resistance do we have? Well a key resistance level on SPX is the weekly upper bollinger band. We are now in the third week of moving up under that resistance and it is now in the 1500 area. We may well now see a touch or close around that level this week. As an aside it's worth having a close look at this chart to see how long SPX can crawl up under the weekly upper BB without testing the weekly middle BB (now at 1433). I counted one instance on this chart where that lasted 21 weeks from the first touch of the upper band. Food for thought:
The SPX rising channel wasn't the only pattern in play here, though it was most definitely the most promising for a decent retracement anytime soon. There is also a perfect rising channel on RUT that I'll be keeping a closer eye on now. That has plenty of upside room here and it's worth noting that every retracement or consolidation in the last two months has been signaled with negative 60min RSI divergence, of which there is currently no sign on either the RUT or SPX charts:
I was chatting to a trader friend in September talking about the impact on the wider equity markets of the sharp fall on AAPL that I was expecting. When we saw that fall it did indeed help shake the markets. What seems strange now though is that, though NDX is underperforming, SPX has been flying up without any support from AAPL. AAPL hasn't been moving much recently and I'm still looking for a hit of resistance in the 518 area before a final low (probably) in the 465-70 area. I understand AAPL earnings are out today and we could see a break up earlier than I expected if they surprise to the upside. The positive RSI divergence on the daily chart is promising for a low already being in, though from a technical perspective I have been expecting a hit of the main support trendline, and we haven't seen that yet. That doesn't always happen though:
I was talking about a possible EURUSD target in the 1.42 area last week and the chart below shows that scenario, with a downsloping IHS that has broken up with a target in the 1.42 area, which is a good fit with a test of declining resistance from the 2008 high, now in the 1.425 area. I think we may well see this play out:
I can see no signal here for a retracement in the near future on SPX. As long as that remains the case we are running the standard bull run program of an early dip that should be bought followed by strength for the rest of the day. Key support is now at yesterday's low at 1475 ES, and if we see an early dip into the 1480-3 ES area then that would look like a decent long entry level for today. If we see a move below 1475 ES then that would signal that we are in a retracement or consolidation phase that would most likely last at least a couple of days.

Tuesday, 22 January 2013

Ho Hum

The bears have a shot at at least some downside this morning though there hasn't been any real selling so far this year. However the rising channel on SPX is holding, and the second touch of channel resistance on Thursday was retested on Friday on negative 60min RSI divergence. There's been some weakness overnight and if there is a break below 1470 then I have a small M top target in the 1457 area with some possible trendline support in the 1467 area. Here's how that looks on the ES 60min chart:
On the SPX 60min chart there is a small short term rising channel and a break below 1470 ES should break that channel. while the overall rising channel holds upside looks limited, though we can of course just continue to trickle up under channel resistance:
SPX daily bollinger band resistance has now hit 1500, but that isn't a target this week unless the rising channel on the SPX 60min chart breaks up. The daily middle BB is now at 1453. As an aside I've been looking on this chart at the longest period since July 2011 that SPX has trickled up under the daily upper bollinger band without testing the middle bollinger band. The longest periods on this chart were about a month before that test, and we're three weeks into this move since the first touch of the upper BB so I would expect that test in the next few days:
EURUSD is looking promising for some retracement here. There is a possible double-top at 1.34 with a target in the 1.311 area on a break below 1.325. I also have trendline support on EURUSD in the 1.311 area so this is a promising setup:
CL has broken above clear trendline resistance. If there was a rising wedge here on CL that would look bearish but there isn't. Trendline support is now in the 93.4 area and strong resistance turned support is in the 94.8 area:
As long as rising channel resistance holds on SPX I am favoring some retracement on SPX soon to at least test the middle bollinger band on the daily chart. There is a promising setup for that this morning which may well deliver if we see ES break below 1470. These trickle up moves can last a while though and I would see the retracement setup today as promising rather than probable. We shall see.