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Friday, 10 May 2013

Diamonds Are Bearish

SPX fell away from the daily upper bollinger band yesterday, so this period of rising up just underneath the upper band has finished. What next? Of the three previous similar instances on the chart below (highlighted blue) two led to periods of sideways consolidation lasting several days, and the third led to a sharp retracement into the daily middle bollinger band, now in the 1587 area:
In terms of trendline support on the 60min chart, there are two levels of channel support. the first is in the 1610 area, and main channel support is in the 1565 area. However we have not yet seen a touch of main channel resistance, and I am not expecting a test of main channel support until channel resistance has first been tested. There was some negative 60min RSI divergence at the high yesterday:
Negative RSI divergence has been building for a week on the ES 60min RSI, and a diamond top has now developed over the last two days. These break down 69% of the time and the target would be in the right area to hit rising support from the last low, now in the 1610.25 area. At least a test of that trendline therefore now looks likely:
CL is heading for a test of rising support overnight, and that's now in the 93 area. I've been saying for a few days that the level of the current CL high is an important inflection point and I'll illustrate that this morning with the USO daily chart, where you can see that level is the resistance trendline on a year old triangle. The triangle has already broken down once and recovered back into triangle resistance, the direction of any second break now in either direction should be respected. I've marked the targets and important levels for a breakout in either direction on the chart:
I posted the GBPUSD chart a couple of days ago forecasting a return to rising channel support, and we may well see that test today. That again is a very important inflection point on something I am using here as an inverted proxy for USD. If we see a bounce there then the current upward trend will continue but if GBPUSD breaks below rising channel support then I would interpret this rising channel as a a bear flag on the bigger picture. That bearish break on GBPUSD would have an obvious target at long term support in the 1.38 to 1.42 area, so that would look very bullish for USD and very bearish for GBPUSD, EURUSD and most other currencies against USD. This is one to be watched carefully:
I can't see any reason to think that we might be seeing a significant high on equities here, and won't be thinking in terms of any significant high until we see at least a channel resistance hit on SPX and/or (more importantly) a break below rising channel support from the November low. However I am still bearing the obvious negative divergence on the SPX weekly RSI in mind and I am concerned that the bullish setup on TLT pointing back to a test of the 2012 highs is still intact. I am surprised that TLT has not broken down further this week. I am also somewhat concerned that USD, oil and bonds are all simultaneously at significant inflection points here.
Diamond tops break down 69% of the time, though that obviously means that they break up 31% of the time. In the overall context I'm expecting a test of short term rising support on ES in the next day or two, and that's currently at 1610.25. We'll see what happens there but if that breaks, and then short term rising support on SPX in the 1610 area breaks, then we may well see a retest of SPX broken resistance from last week in the 1597-1600 area. Below 1597 there is strong support at the daily middle bollinger band, now at 1587.


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