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Wednesday, 24 July 2013

Bear Goggles

I don't know whether there's an equivalent term in the US, but in the UK the term beer goggles describes the process whereby drinking a sufficiently large amount of alcohol can magically transform otherwise uninteresting members of the opposite sex into interesting and highly attractive people. The effect is temporary, but can be very strong.

Yesterday I suffered from a related condition called bear goggles. This is the process whereby a support break suggesting a seemingly imminent strong decline can transform otherwise uninteresting trade setups into compelling and highly lucrative investment opportunities. The effect is also temporary and sadly does not extend to these trades being profitable. I had a good day overall but it should have been a really very good day had I not fallen into the bear goggles trap of ignoring the well signaled intraday long setup on ES because the main decline must surely be imminent.That I consequently became irritated and went flat early to also miss the well signaled pre-close decline was a reminder that trading should always be done coolly and objectively.

In part this is because I have one day of trading left before I go on holiday and having been lovingly tracing the setups for a retracement from here for a couple of weeks now, it's increasingly likely both that this retracement may well  happen, and that when it does, it may well happen while I'm away in the land the internet forgot. That's life.

On to the markets where there were some very significant breaks down yesterday. NYA and INDU are still hanging tough, though also showing the very strong negative 60min RSI divergence that can be seen across all the main US equity indices. RUT, NDX, COMPQ and WLSH had already broken down from their patterns from the June low of course, and both TRAN and SPXEW also broke down from their rising wedges yesterday.

What of SPX? Well the low just before the close was an almost perfect touch of rising wedge support from the June low, and if we now see that rising wedge break, the retracement I've been looking for should be in progress. Short term however SPX could obviously bounce at wedge support and wedge resistance is now in the 1710-5 area. As I showed yesterday the ideal target on SPX would be somewhere in the 1645-55 area, and I mentioned a possible path via an H&S forming at a candidate neckline in the 1672 area. SPX 60min chart:
When we see that break on SPX, possibly the best looking short setup on the equity indices will be on TRAN, where the obvious target is at 61.8% fib retracement of the move up from the June low rather than the 38.2% fib retracement moves that seem likely on SPX and WLSH. TRAN 60min chart:
On other markets my GC (gold futures) short setup broke up yesterday, and that was bullish. This trade was a decent winner for me in any case as I shorted down to 1328.1, exited at the clear short term low there and then waited for another short entry that never came, but I was disappointed that a setup with a possible 180 handle drop melted away. I have one remaining short term bearish option on gold and that is the equivalent declining channel on the RTH (real trading hours) $GOLD chart. If that breaks up then the next obvious target would be the 150 DMA, currently in the 1500 area. I'm watching this carefully but in the meantime would note the increasing negative divergence on the GC 60min RSI. This could still break either way. Gold daily chart from 2008:
I've been watching the rallies on GBPUSD and EURUSD carefully and there is currently no real sign of those topping out. That being the case there is a possibility on the USD chart that I should raise, and that is the possibility that USD is forming a broadening formation on which the next trendline target would be below 80, with the strong support levels below at 81/2 and 78.6 to 80. I have current rising channel support in the 79.3 area, and if that was to break, then there is a possible double-top in play with a target in the 72.14 area on a conviction break below 78.60. I'm hoping that USD may hold the 81/2 level, but if not the uptrend from the 2011 low is in at least some doubt. USD daily chart:
I'm very keen on the long bonds swing trade here, but bonds have been meeting resistance and showing some weakness there. Rising support from the low on ZB broke overnight and I have a broadening ascending wedge from the low on TLT. That's a bearish pattern of course, and if we see it break down we could see the TLT lows retested. As long as 105/6 area support holds on TLT I would still lean bullish overall here, but if that should break I then have a pattern target in the 97 area. I don't often talk about fundamentals, but I should mention that there is a clear inverse correlation between QE and bond prices, so decreased talk of tapering is bearish for bonds. TLT 60min chart:
AAPL earnings were announced last night, and weren't good, but that was expected. AAPL rose in the after-market and as long as we don't see a sharp decline begin to take out the current lows, the bottoming setup on AAPL is still intact. On a clear break above 463 that has a target in the 540/50 area. AAPL 60min chart:
ES is trying to recover above the 50 hour MA as I write, and has closed an hour above it. If it can hold above the 50 hour MA then the short term initiative is back with the bulls, and I should mention the potential bounce targets from the SPX hit of wedge support yesterday afternoon. On the SPX 60min chart wedge resistance is now in the 1710-5 area as I mentioned, and the other key resistance level to consider is the weekly upper bollinger band, now at 1706 but possibly as high as 1711 by the close on Friday. Closes much above that are rare so that is a solid resistance level, albeit one that can rise at 10-15 points per week in a strong uptrend.

While I'm showing the SPX weekly chart I'd like to mention again that my lower target for the next major high, and potential bull market top, is now in the 1740-50 area at a possible channel trendline that will cross another major possible channel trendline in that area in a few weeks. There are also strong resistance levels on Dow and TRAN that should fit with that area so as and when we get close to there I will be watching for a possible major reversal. If we see that then I would expect that to be followed by the test of the SPX 200 DMA that we didn't see at the June low. SPX weekly chart:
I will be around some of the time today but after that I'll be on holiday until the end of next week. I will be posting some charts on twitter while I am away and a post or two if I can. Normal service will resume Monday 5th August.

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