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Monday, 1 July 2013

Fibonacci Triangles

I wrote two posts over the weekend in my Brave New World series. There will be at least two more in the series but they're very time-consuming to write so it might be a few weeks before the next one, which will most likely be looking at the big picture on bonds. The links to the series so far are below:

  1. Secular Cycles (SPX - conventional view)
  2. Secular and Primary Cycles (SPX - alternative view)
  3. The Rising Wedge Target at 1965 SPX
The second in the series is a little dense and math based, but involves some interesting (to me at least) work that I've been doing on fibonacci retracements in combination with trendlines and patterns. At the risk of boring anyone not particularly interested in math today I'm going to introduce what I think is an entirely new technical analysis pattern that I'm working on as it has some relevance to what we're looking at this morning on SPX. 

I'll post two CRB charts first as I was having a close look at this broad-based commodity index over the weekend. On the conventional view I would say that CRB is currently in a broadening descending wedge after completing an almost exact 61.8% fib retracement of the decline from the high in 2008. The wedge resistance trendline is also the declining resistance trendline from the 2008 high, and until CRB can break over that key resistance trendline it's hard to be upbeat about commodities here.  I would add that the next target with the broadening descending wedge is the 220 area, not far above the 2009 low in the 200 area. CRB weekly chart 1:
I am assuming the pattern I am introducing today is new as I haven't found any example of this published anywhere on the web so far. If anyone has seen this anywhere else please say as I would be very interested to see that. The pattern is something I would call a Fibonacci Triangle, and this is a contracting consolidation triangle where the trendlines are defined by fibonacci retracements rather than lining up on a linear chart. 

On the CRB chart below you can see one of these Fibonacci Triangles, which has formed with the first rise 2009-11 being an almost exact 61.8% retracement of the 2008/9 decline. The next decline in 2011/2 was then an almost exact 61.8% retracement of that 2009-11 rise. The next rise from 2012 passed the 50% fib but failed before reaching the 61.8% fib retracement at declining resistance from the 2008 high. That looks bearish and I would view a subsequent move below the last strong fib low at 266.78 as a downward breakout from this fib triangle. I haven't developed any stats for this pattern yet but I'm watching to see how this setup on CRB resolves with considerable interest. CRB weekly chart 2:
Why is this relevant today? Because there is another fib triangle on SPX here. The decline from the high has bottomed out (so far) at an fairly exact 38.2% retracement of the broadening ascending wedge move from the November low as you can see on the SPX 60min chart below. I would add a note here that I am seeing the two key resistance levels above at broken broadening ascending wedge support (1622 area) and declining resistance from the May high (1642 area). SPX 60min chart:
The next move after the current 1560 SPX low was an almost exact 61.8% fib retracement of the decline from the high into the 1560 SPX low. SPX 15min chart. There is now also a possible double-top formed at the Thursday and Friday highs that would target the 1582 area, with 1582 being the 61.8% fib retrace of the bounce from 1560 SPX into last Thursday's high. SPX 15min chart:
I have some points to make with these last two charts. The first is that a break above last Thursday's high would be a bullish break out of this fib triangle on SPX. The second is that if we see weakness today the obvious target is in the 1582 area. The third point is that if we see a clear break below 1582 then that would look bearish and suggest a test of the 1560 low, which might well then break and open up the very attractive cluster of targets and support levels in the 1500-15 area. I think that there's a good technical case that the retracement low is already in, but I would love to see that move to test the 1500-15 area (SPX 200 DMA at 1510 among other targets), as it would be a wonderful long entry level. In the short term I would mention that the SPX daily lower bollinger band closed on Friday at ........ 1582. SPX daily chart:
I'm running out of time today so I'm not going to post any futures charts, and will just give a quick description of what I am seeing there. On ES there is also a possible double-top forming but most of the losses late Friday have been recovered. Short term resistance is clearly at 1610, and short term support is equally clearly at 1605. ES should break out one way or the other soon. CL retraced to retest broken resistance in the 96.2 area on Friday and appears to be on the way back to a new high in this solid looking current uptrend. USD and bonds are consolidating within their respective upward and downward trends. 

My last chart today is the gold chart where I want to look at the 1160 area target that I gave early last week, and which was almost hit at the 1179 low on Friday. This target is actually the 1155-60 area, as that is both a well established support/resistance level, and the 61.8% fib retracement of the bull move from 2009-11 is at 1155. If gold bulls still have a shot, then their best shot for a retracement low preceding a big new bull move is at that support level. It is also a likely level to see a strong bounce of course. If that breaks then I have some support in the 1100 area, but the last of the really good support levels for a continuing overall uptrend on gold will have been broken. There are other fib levels of course but the 38.2%, 50% and 61.8% levels are the strongest fib levels so a move beyond the 61.8% fib retracement level is a bad sign for gold bugs. We'll see how that goes but I'll be looking for reversal signals there. Gold daily chart:
As ever, if ES can hold above the 50 hour MA then the default bias needs to be bullish. If ES can break back below with any confidence then the double-top target on SPX is the 1582 area on a clear break below Friday's low at 1601 SPX. At the moment the retracement action since the high on Thursday looks like a bull flag and with ES over the 50 hour MA so I am leaning cautiously bullish at the moment. 

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