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Friday, 19 April 2013

Right Shoulder, Take 2

In some ways there's really not a lot to add today to what I was saying yesterday morning. Obviously we saw new retracement lows yesterday rather than the bounce I was expecting, but that has only strengthened the case for a bounce here. This is the second and last take for this scenario however, if we see much further downside then I will be looking considerably lower as I will explain.

Short term, if we are to see a bounce here, the key resistance levels on ES are the 50 hour MA at 1545 (holding as resistance overnight so far), and declining resistance in the 1553 area. If ES can get over those then the primary target is the 1570/1 area for the ideal right shoulder high. The secondary target is a retest of the highs to form the second high of a double top, but only if the 1570 area breaks with confidence:
On the SPX daily chart the lower bollinger band closed yesterday at 1536.03, and the low of the day was 1536.03. SPX closed back at the 50 DMA. This really is a natural level to see a bounce:
It is the SPX 60min chart that is worth the closest look this morning however, and there are several points to note on this today. The first note is that the low yesterday was an exact touch of rising support from the November low. I wasn't watching this particularly as it hadn't been touched in 2013 so far, but again this is a natural bounce level, and a decent support trendline there has now been established. The second note is that the low yesterday was a decent completion of the head on the possible H&S that is forming on SPX here. The third note is that this is not the only possible H&S neckline on this chart, as there is also one at 1485. If we see a break down from support here, I'll be looking at that level as the next major support level:
Running through the other indices they are variations on the same sort of theme. The lower lows yesterday have strengthened the scenario for an H&S forming on Dow, and as with SPX positive RSI divergence on the 60min chart is marked:
The H&S scenario has also been strengthened by the lower low on RUT, though there is also a clear double-top scenario there. If we see a clear break below 894 then the double-top target is in the 866 area:
We may be about to see a right shoulder bounce on TRAN, but as with RUT the is also a more immediately bearish scenario there as the H&S may already be complete. If so then on a clear break below the neckline the target is in the 5425 area:
On CL the double-bottom scenario I've been looking at for the last couple of days is coming along nicely. On a conviction break above 89 the target is in the 92.5 area, with strong resistance in the 92 to 92.3 area:
I've been expressing strong doubts about any bull case on EURUSD here, and partly that's because the fundamentals for EURUSD in the wake of the Cyprus debacle stink. Partly that's also because the Europeans are clearly keen to see the Euro go lower. The remainder of my doubts come from the USD chart, which I am seeing as in an overall strong uptrend and testing decent support at the intersection of the 50 DMA, the last big low, and possible rising channel support. The current retracement also looks like a bull flag. There is a bear scenario here however and if we should see 81.8 area support broken with conviction the double-top target will be the 79.9 area. Until we see that happen though I'll be leaning bullish on USD:
The job of an analyst, as I see it at least, is to trace out the highest probability paths for future moves. I've been forecasting a high in this time area for several months now and that high would usually, though not necessarily always, take the form of a double-top or H&S. If we are to see the sort of retracement that I am expecting to see over the next few weeks, then we should see a bounce here. If support here breaks then I'll be looking at the possible H&S neckline at 1485 as a serious option, but that's not been my first option because an H&S forming at that neckline would have a target retracement not far above the November low. That's a much larger retracement than I'm currently expecting.

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