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Thursday, 13 June 2013

Snakes and Ladders

ES tried and failed to break back and hold above the 50 hour MA near the open yesterday and it was all downhill from there. The IHS patterns have obviously failed to complete and SPX is now close to another test of broadening wedge support. I think that wedge is going to break and this therefore looks like a formality, but it's an important formality and more bullish scenarios are still on the table until we see the wedge broken. Here's the chart I posted on twitter yesterday night with the updated wedge. SPX 60min chart:
On the SPX daily chart the close was just above the daily lower bollinger band. That is some support here and most of the time any further moves down without retracements would be incremental moves of five to ten points per day. As you can see looking back to 2011 on the chart below however, that isn't always the case. SPX daily chart:
I don't think we have seen a bull market high here and I'm not expecting that before the end of the year at the earliest, but I have talked about the likelihood that we would see the 200 DMA tested this year more than once. To illustrate the likelihood of that with another support level, I have looked at hits of the weekly lower bollinger band since 1980. That's currently at 1480 (and rising) and the last time that the weekly lower bollinger band was not either exactly hit or penetrated in a full calendar year was in 1997. That year, 1993 and 1988 all came close enough to the lower BB that I would count them as technical hits, 1989 was a near miss, and only in 1995 of the full thirty three completed calendar years since the start of 1980 was there a year where the low was only as low as the weekly middle bollinger band, now at 1577. If the broadening wedge breaks on SPX then there is therefore every reason historically to expect that we will see a sharp further decline. SPX weekly chart:
Until the wedge is broken there are still some bullish options however. ES tested the low overnight and that leaves a possibility that ES has formed a double-bottom rather than an IHS and may now rally to test the current highs. I don't think that's at all likely, but if ES can break back over the 50 hour MA in the 1620 area I'll start taking this possibility more seriously. ES 60min chart:
On other markets I have remarkably similar setups here on USD and CL, though on different scales and at different stages. Both involve a pair of double-tops, nested like russian matryoshka dolls, and on USD the smaller double-top has now broken down with a target in the 78.3 area. There is some channel support in the 80.2 area on the way, and on a conviction break below 78.60 the larger double-top target is in the 72.8 area. I need hardly add that the overall uptrend on USD is now in very serious doubt. USD daily chart:
There is a similar setup on CL, but at an early stage where CL has not yet started sliding down the technical snakes. A break below rising support in the 95 area should deliver a test of the 94 area. A break below 94 triggers the first double-top target in the 91.5 area. A break below 91 triggers the larger double-top target in the 86 area. A hit of 86 would be a lower low confirming that the overall trend is still down. As yet though CL has not broken below 95 so this is a potential bearish setup like the one I posted on USD a couple of weeks ago, and which has since started breaking down. CL 60min chart:
The key resistance level this morning is the 50 hour MA on ES in the 1620 area, and the key support level today is broadening wedge support on SPX in the 1605 area. I'm expecting a downward resolution here but I could be mistaken. A close today below broadening wedge support would look very bearish.

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