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Tuesday 30 April 2013

SPX Tests The High

We are reaching the end of the usual spring high window. May starts tomorrow and the last three spring highs on SPX were 2nd April in 2012 (failed retest end April), 2nd May in 2011, and 26th April in 2010 (slightly exceeded high ten days previously). SPX is now retesting the mid-April high and if it's going to turn, this is the place. If we see a sustained break over 1600 then SPX will most likely run quite a bit higher over the next few weeks but until we see that I'm leaning short with a target back at the 200 DMA on SPX:

SPX closed a few points below the upper bollinger band on the SPX daily chart yesterday, and the upper bollinger band closed at 1600. SPX is now in the right zone for a very high quality double-top if it reverses now. Middle bollinger band support is now at 1570:
On the SPX 60min chart the test of the current all time high yesterday was made on negative 60min RSI divergence. If we see reversal here then there is a smaller M top with a target in the 1558 area on a break below 1577.5:
There isn't any negative RS! divergence on the ES 60min chart, but rising channel support is in the 1584.5 area and the 50 hour MA is in the 1582 area. On a break below both today the chances of seeing a decent high here will look increasingly good:
Looking over other indices there is still a decent looking double top on NDX, and an H&S is still very much in play on RUT, though for symmetry the right shoulder really needs to turn down very soon:
On Dow the possible H&S is still in play though if we see Dow get any closer to the last high this would be better read as a double-top. Broken rising wedge support is still holding there:
On TRAN the H&S is still very much in play and TRAN has not broken back above broken rising channel support. One thing also worth noting here is that the move from the November low was led by RUT and TRAN, with NDX lagging badly, and that has reversed since mid-March:
CL continued upward yesterday and is showing marked negative RSI divergence on the 60min chart this morning. We may well see some retracement soon:
USD is at a potential inflection point here, and we have a possible change in trend in play there. I have strong support in the 81.8 area with secondary strong support in the 81.5 area. If we see DX break below these then the target is the 80 area and we could be seeing a change in the overall trend there:
Everything is now technically in place for a spring high here. The timing is perfect, we have support breaks and decent reversal patterns on all major US equity indices. Those patterns target the right sort of area for a decent retracement within an overall cyclical bull market, which on SPX is near the 200 DMA (now at 1460). Will we see that retracement now? Probably, and it's worth noting here that on SPX there has been at least a test of the 200 DMA (from above or below) every year since 1980 except 1989, and even in 1989 an attempted test made it most of the way there. For today an encouraging start would be a break below rising channel support on ES in the 1584.5 area and the 200 hour MA in the 1582.5 area.

Monday 29 April 2013


Back before the first world war there was a period when many bars in San Francisco gave away free food to customers. The only catch was that the food was heavily salted, with the intention that the diners would become thirsty and order plenty of drinks to wash the food down. I understand that this may be the origin of the observation that 'there ain't no such thing as a free lunch', sometimes shortened to TANSTAAFL.

Any decent outcome tends to require a risk, and that's particularly true in traded markets. There is never any certain outcome to a trade, the best that can be done is to trade when the odds favor one outcome over another.

Looking at the swing short trade here, the odds look decent and the risk/reward favorable. Taking ES at the current 1582.50, if we do see a decent retracement then the obvious target is some 120 to 130 points lower. If the current candidate double-top isn't going to play out then that should be obvious by the time ES reaches 1602.50, so the risk is 20 or perhaps 30 points depending on the desired stop level.

In terms of whether we are gong to see a decent retracement here, we are coming to the end of the ideal six week period to see that high, and we have seen a high during this period in each of the last three years. There is negative RSI divergence on the daily charts across multiple equity indices, and trendline support breaks and mostly formed reversal patterns on all of those, that need only a strong reversal near here to complete, and a break below the lows made the week before last to confirm.

Will it happen? There's no way to know for sure but the odds favor it in my view.

On ES a promising looking short term H&S has now mostly formed and requires a reversal soon to complete forming. A possible rising channel was established at Friday's low but if ES can get back near Friday's lows then the channel will be broken. Channel support is in the 1578.25 area, and the 50 hour MA is in the 1579 area:
A small H&S is also part-formed on the SPX 15min chart. The target is in the 1562 area on a break below Friday's lows:
On the SPX 60min chart the high last week was high enough to count as the second high of a double top, but SPX could yet go a bit high and exceed the current 1597.35 first high by a few points. If we see SPX over 1603 then I'll be increasingly doubtful about this setup:
On the daily chart SPX has tested the upper bollinger band on Thursday and pulled well back on Friday, which is promising. The upper band closed at 1597 on Friday and middle bollinger band support is in the 1568 area:
On CL there was a retracement on Friday that found support in the 92 area which may now be strong support again. CL may just continue up from here to the next significant resistance level in the 95 area, or it could make the second high of a double-top and retrace into rising support from the low in the 90.5 area:
EURUSD is still a tough read here, but if GBPUSD can be used as a proxy for the anti-USD trade, then a retracement looks likely here with a hit of trendline resistance on negative RSI divergence:
One reason I haven't mentioned for leaning bearish on equities here is the setup on bonds, but that again is worth a look. On TLT a falling wedge has broken up with a target back at the 2012 highs, and TLT has been consolidating as equities have bounced over the last few days. If we see a strong reversal on equities here we should also see TLT make that target during the the equities retracement:
I'm leaning short here until we see some significant evidence that these topping setups on SPX, Dow, TRAN and RUT are failing.

Friday 26 April 2013

If Not Now, When?

As we've been coming up to the ideal period to make a spring high, loosely from the last week of March to the first week of May, I have been carefully tracing through the options for such a high, watching support trendlines break, the first false alarm retracement at the 2007 high, and the formation of topping patterns from the current 1597 high.

I mentioned at the time that the 2007 high was broken that we were now out of established resistance levels on SPX but we aren't yet out of resistance trendlines of course, and the current high is a precise hit of the biggest (and lowest) of those resistance trendlines, which is at rising resistance from the 2000 high through the 2007 high, as shown on the chart below. What I have also noted on the chart is the MACD histogram, which has been declining since January, and you can see the same sort of preparatory decline before the 2011 and 2012 spring highs:
Could this be a bull market top? Possibly yes, as there is obvious serious resistance here and there is also some negative divergence on the weekly RSI, though due to the scale that's not visible on the chart above. If it is a bull market top we would see confirmation over the summer from a cross of the weekly 13 and 34 EMAs, but until we see that this is just a possibility to bear in mind.

On the SPX daily chart the upper bollinger band was tested yesterday, and if we're going to see a big reversal then this is the obvious place to see it, either at the high yesterday or at a closer test of the current high today or on Monday. The upper bollinger band closed at 1595.75 yesterday:
There's currently no negative divergence on the SPX 60min RSI, though there is divergence on the SPX 15min RSI. If we are to see reversal here then first support is rising support from the low last week and that's now in the 1582 area. I won't show the SPX 60min chart today but a high here would in my view be a double-top rather than an H&S. Here's the SPX 15min chart:
Other indices are looking promising for reversal here. I've been ignoring NDX as the setups have been less clear but there are now decent candidate double-tops on NDX and COMPQ. Dow is crawling up broken rising wedge support and the part-formed H&S there is still very much in play. The H&S target on Dow would be at or very close to rising support from the November low in the 14050 area:
The H&S forming on TRAN is still very much in play with a target in the 5450 area and the likely failure area at broken channel support in the area of yesterday's high:
With the caveat that a larger rising channel may have formed (another possible one of those on COMPQ), the H&S forming on RUT is still very much in play, with the obvious failure level slightly above yesterday's high at declining resistance from the highs. The target would be at or near rising support from the October 2011 low in the 830 area. In the event that we are looking at a bull market top here, and I would stress that I'm not looking for that at this stage, then that support trendline on RUT would break:
Looking at the ES chart there is still negative 60min RSI divergence at the high yesterday. I prefer that the valley low for divergence stays above RSI 50, but in practical terms it's still acceptable over RSI 40 so this is still in play. The key support levels for today are the 50 hour MA in the 1577.5 area, being tested at the moment, and the intersection of a possible H&S neckline and rising support from last week's low in the 1571 area. Last week's low was nicely signaled and confirmed with RSI divergence, a falling wedge from the high, and a strong resistance trendline that broke up. The setup for reversal back down here is not as good as that yet, but that's often the case:
EURUSD is doing nothing worth the mention so I will skip that chart again today. CL made the bottoming pattern targets yesterday and is showing negative divergence at the current high. I'm looking for some retracement here and rising support from the low is in the 90 area:
The arguments for a spring high here in summary?

  • A big resistance trendline reached on SPX
  • Negative divergence on the daily RSIs across multiple indices
  • A retracement on SPX here would generally reach the 200 DMA area, slightly below the candidate double-top target
  • Coming to the end of the ideal topping time period
  • Support trendlines have broken across multiple indices
  • Reversal patterns are forming across multiple indices
The arguments against a spring high here in summary:
  • Having formed a clear left shoulder, I would have preferred an H&S to form on SPX here
  • The Fed is still printing $85bn per month with no date announced for an end to that
Mainly this comes down to whether the Fed printing money can override the normal technical rhythms of the market. I think not, as we've seen no real evidence of that over the last few years, though it's worth noting that the 2010 spring high came at the end of QE1 and the 2011 spring high (and cyclical bull market top) came two months before the end of QE2. We shall see. If SPX continues straight up here then that I will start taking this theory more seriously, with the note that as and when QE infinity comes to an end, as it is likely to sometime in the next few months, I would expect to see a major high at or shortly before the Fed stops printing. If the market is that heavily reliant on Fed printing then when that printing ends a lot of air should come out. 

If we do see a spring high here then I would expect the retracement to last weeks and the obvious target is the 200 DMA on SPX, which closed yesterday at 1456. 

Thursday 25 April 2013

ES Breaks Back Over 1580

There are a lot of nice looking H&S patterns forming across the US equity indices, including on SPX, but one thing that has made me doubtful about the H&S on SPX particularly continuing to form is the confident break above the daily middle bollinger band on Tuesday. Usually, though not always, a break like this will deliver a test of the upper bollinger band if there is not a major moving average (50, 100 or 200 DMA) on the way, which in this case there isn't. That upper bollinger band is now at 1593.50, and I'd generally count anything within six points or so of that as a hit, so we may well see that target area made today. Here's how that looks on the SPX daily chart:
ES has broken back over 1580 overnight so the negative RSI divergence on the 60min chart should now be disregarded. The falling wedge target is a retest of the highs and that's what I'm expecting to see now:
How will this affect the H&S patterns forming on SPX, Dow, TRAN and RUT? Well obviously it would kill the H&S on SPX, leaving the remaining topping pattern option as the second high of a double-top:
On Dow the obvious failure level is right here from a trendline perspective, but we could see SPX test the highs without killing the H&S pattern as Dow has been underperforming SPX in recent days:
TRAN like Dow could go higher without killing the H&S, though as with Dow a strong push would put us in double-top territory:
RUT is the most bullish looking chart for me, as though a nice looking H&S is forming there as well, we also have a tentative rising channel from November established at last week's low. RUT is in a significant resistance area here:
I'm not going to post a EURUSD chart today as there's little to say really. This is a significant inflection point and I'm waiting for a decent break either way. I'm leaning somewhat short until we see a break up. On CL we needed a similar break and got it yesterday with a strong move up that broke declining resistance from the last high. The upside target is in the 92.7 area:
Are these reversal patterns for a spring high going to deliver? I think so. An opportunity to top out came and went yesterday but there are decent odds that SPX will fail at the retest. At the least as a short entry the daily upper bollinger band has appeal and after three clear breaks above the daily upper bollinger band since November without a strong retracement a fourth would be less usual. There are many that say that there can be no substantial retracements while QE is ongoing and we are about to see that put to the test.

Wednesday 24 April 2013

Wednesday Musings

ES made good progress yesterday and made and exceeded my first upside target.We have now reached a level where we may see a big reversal to complete the possible H&S forming on the SPX chart. Will we see that reversal? I don't know yet, but we are starting to see a significant reversal signaled by strong negative divergence on the 60min RSI. If rising support from the last low breaks, and that's now in the 1555 ES area, then I'll be looking for a retest of last week's low to complete that H&S:
On the SPX 60min chart this could still go either way, and I have marked in a possible reversal here for the H&S option, and the retest of the highs for the double-top option. The key support levels on SPX are rising support from last week's low in the 1562.5 area, rising support from November in the 1540-5 area, and last week's low at 1536.03
SPX broke well above the daily middle bollinger band yesterday and I would normally expect to see the upper bollinger band tested after a move of this size above the middle band. The upper bollinger band is now at 1592:
CL has broken slightly above the possible bottoming pattern, which could be read as either a double-bottom or an IHS. I'm doubtful now about either of these playing out unless we see CL break back above declining resistance, now in the 91 area:
EURUSD is trading sideways and there's not much to show there. Instead I'll show the DX daily chart, which needs a break to new highs soon to eliminate the possibility that a significant double top is being made:
My last two charts today are two thought-provoking charts of SPX I've been looking at this morning. The first is the SPX weekly chart showing, among other things, the RSI setups for the last two bull market tops. The first thing to note from there is that there has not been a move under the 70 level from overbought that has recovered back to 70 in the last eight years without first testing the 40-50 area on RSI, which is the usual level low area on a significant retracement within a cyclical bull market. Obviously it goes lower in a cyclical bear market. The second thing to note is that while the negative current RSI divergence is small compared to the two bull market highs on this chart, there is noticeable negative RSI divergence. That is suggesting at least a possibility that we are looking at a cyclical bull market high here, though I'm doubtful about that for other reasons:
The second chart to close with today is a chart of SPX since 1980 with the 30yr treasuries market in the background. I have drawn trendlines through the major highs and lows on SPX over the last few years and the effect is striking to say the least. SPX has potentially very significant trendline resistance here:
These are just musings of course but the setup is interesting. Short term today I am looking for significant retracement on ES. Trendline support is currently at 1562.5 SPX and 1556 ES. If those trendlines hold then the path is open to test the highs, if they break then this rally high is most likely in and I'll be looking for a test of last week's lows. Credible reports that the White House had been bombed and Obama was injured in the blast was worth only a fifteen point drop yesterday, we may need Ben Bernanke to stub his toe to fall more than that today :-)

Tuesday 23 April 2013

Topping Options

ES made decent progress yesterday and has established a decent rising support trendline. There was some negative RSI divergence at the high yesterday but after some retracement that high has now been broken with some confidence. The next decent resistance is in the 1570/1 area:
There is the look of a rising wedge to the current move on the SPX 15min chart, and that would look stronger if we were to see a test and reversal back up off wedge support in the 1555-8 area today. The IHS target is in the 1574 area:
On the 60min chart, as I have said before, the obvious targets for this move are either to make a right shoulder high of an H&S in the 1574 area, or the second high of a double-top at a retest of the highs. If we are seeing a right shoulder form I would expect that to most likely take another two or three days at least for symmetry:
The close yesterday on the SPX daily chart was back at the daily middle bollinger band. A daily close back well above this would suggest a test of the upper bollinger band, now in the 1590 area:
CL has been testing the trigger level on the possible double-bottom there. A decent break above has a target in the 92.3 to 92.5 area:
On EURUSD the possible H&S I pointed out yesterday is now fully formed and targeting the current lows on a break down. This isn't a great quality pattern though and I'm concerned that I may be projecting my strong expectation that EURUSD should fall here onto the chart:
As I've mentioned before I think we are in final weeks of a topping process for the usual spring high, and am looking for either an H&S or double-top to form here as the reversal pattern we would normally expect to see here for that. Is that guaranteed? No, but the odds are good in my view. I'll be doing an analysis of the key support levels on the way back down for tomorrow's post.

Monday 22 April 2013

A Modest Proposal

There was a cliffhanger close on Friday, with ES having tested but not broken over declining resistance from the high. Overnight ES has broken over that and I am expecting to see some follow through to the upside. as I mentioned on Friday Morning, this could be viewed as a falling wedge and in that case the technical target is a test of the highs, but wedges aren't good at making the full target, and there is strong resistance in the 1570/1 area:
Now that we have seen this break up on ES I will run through what I am seeing as an attractive scenario for what happens over the next few weeks as we see the usual strong retracement from the usual spring high. On SPX, as I have mentioned before, these highs generally take the form of an H&S or a double-top. I'm leaning towards an H&S at the moment, and as I was mentioning last week, the ideal right shoulder high would be in the 1574 area. The downside target for either an H&S or a double-top would be in the 1477 area:
One reason that I'm favoring the H&S scenario here is that there is also a clear short term IHS on the SPX 15min chart, and the target for that is in the 1574 area, at the ideal height for a right shoulder high. Declining channel resistance in the 1560 is resistance on the way there:
If this scenario plays out then the H&S or double-top target would be in the 1477 area, which would then have me looking at two levels near 1450 as the ideal retracement low area. The higher of those levels is the important 200 DMA, now at 1452. The lower of those is rising support from the October 2011 bear market low, and if we see a test of that trendline then we may well be looking at a part-formed rising wedge for this cyclical bull market, which would give us a decent upside target range for the next move up after the retracement:
Will we see this play out over the next few weeks? There's only one way to find that out for sure and that's to wait and see, but it hangs together well over multiple timeframes and I like it as a scenario.

On other markets TLT is testing the recent highs. The overall setup here strongly suggests a test of the 2012 highs:
CL is still forming a possible double-top targeting the 92.3 to 92.5 area on a conviction break over 89:
I've mentioned a few times that I'm doubtful about much more upside on EURUSD from here. Short term a bearish looking downsloping H&S is forming targeting a retest of the current lows and there is firm resistance in the 1.313 area:
For today I think we may well see the current opening gap fill and I'm expecting more upside after that.