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Friday, 21 June 2013

Just the Fibs Ma'am

I have to be out for a few hours before the markets open tomorrow so I'm writing this post after the Thursday close and might add a couple of comments at the bottom when I return 90 minutes or so before the market opens on Friday.

Obviously the broadening ascending wedge on SPX broke today, and as I hoped it might, it broke with an opening gap through wedge support, which is the strongest way to break a pattern trendline. That broken trendline should be good resistance on any counter-trend bounce that we might see here. SPX then tested the 1598 low, bounced a little and then broke down through it. That was also a very significant support break, as I explained in my last post.

I'm not expecting any serious low to be in today, so I am looking in this post at the key levels to watch on the way down, and to highlight the two key areas that I am seeing as a strong candidate for a retracement low.

First the SPX weekly chart, where the low today was 2 points above the weekly middle bollinger band. A week ago I gave this as my absolute minimum target for a retracement this year on the basis that the only year since 1980 that had not made it almost to the weekly lower bollinger band was 1995. That target has now been hit but we should go lower. The weekly lower bollinger band is in the 1490 area, at almost exactly the same level as rising support trendline from the October 2011 bear market low. SPX weekly chart:
On the daily chart the low today was a very strong punch through the daily lower bollinger band, which means that we may see a counter-trend rally very soon. I'll get to that later but for now I have isolated the four important support areas that are the potential downside targets on this retracement. They are as follows:
  1. Broken rising wedge resistance in the 1550-60 area. This seems too high but is also the 38.2% fib retracement of the move up from the November 2012 low, and this broadening ascending wedge was the pattern created in that move. 
  2. Established support and the possible large H&S neckline in the 1535-40 area. This is a strong support level and we might get a strong bounce there, but I'm not expecting to see a return to the November lows, which would be the H&S target. The technical target for the wedge is of course the November low, before someone points that out, but having looked at many wedges of similar scale over comparable timeframes over the last sixty years on SPX, I can state with confidence that it is a rarity for these to make target, and possibly unprecedented without negative divergence on the weekly RSI.
  3. The 200 DMA, now in the 1505 area and rising. This is a good fit with the 50% fib retracement in the 1515 area. 
  4. Bottom line support is at the weekly lower bollinger band and, if lower, the rising support trendline from the October 2011 low, though I am not expecting SPX to test that. 
The top fib targets are obviously the 1555 area and the 1515 area, and of those two targets I favor the lower as it is a better historical fit in terms of the 200 DMA and the weekly lower bollinger band. SPX daily chart:
Here is the updated SPX 60min chart showing the broken broadening ascending wedge with the gap through the wedge support trendline and the fib retracement levels. You can also see that the 60min RSI is very oversold here and that supports the possibility that we may see a decent counter-trend rally soon. SPX 60min chart:
Lastly the SPX 15min chart, with a closeup of why and how we might see a bounce here. Divergences on the 15min RSI have been a decent guide during this retracement, as they generally are during retracement periods, and the positive divergence here is impressive. I have sketched out a possible path to retest broken broadening wedge support in the 1615 area and that that is the highest I would expect any counter-trend rally to go. That would also be a 50% fib retracement of the post FOMC plunge as I've marked on the chart. SPX 15min chart: 
I posted a TLT chart in March with what I thought was the highest probability path over the following year. Here's the current updated version with the text from a couple of weeks ago. The falling wedge has now clearly broken down and the obvious next target is in the strong 104.9 - 106.2 support area that is also a possible H&S neckline. We may well see a bounce there, though I should mention that the wedge target is in the 97.5 area is that strong support level should be broken. TLT daily chart:
Last chart for today is my updated main daily silver chart. I last posted this in April after the break below the 26 support level and haven't changed anything on the chart since then. As you can see silver has now reached the falling wedge target at 20 and tested today the strong support in the 19.5 area that I mentioned then. If that breaks, and it might well, then I have the next big level in the 16.25 area. Silver daily chart:
PRE-MARKET NOTES: After a decent bounce overnight the prospects for rallying back above 1600 SPX look ok. I should mention ES resistance at the 50 hour MA is now in the 1607 area and declining fast, and I wouldn't expect any rally here to recover above that for more than a few hours. If we see the opening gap fill and a short term double bottom form then the target would be in the 1617 ES area (approx 1623 SPX), though as I said, I wouldn't usually expect to see a break back above broken wedge support here, and that's in the 1615-7 SPX area. 

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