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Friday 23 August 2013

Rally Setup Forming

SPX made a short term higher high yesterday just above the possible IHS neckline that I have been watching and if we are to see this rally play out then we will either retrace to form the right shoulder of an IHS today or just break up on an already valid double bottom setup. The target in both cases would be the 1680 area, with declining resistance from the high currently in the 1683 area. This is obviously a counter-trend play, but the technical setup is excellent and I think we have a high chance of seeing this play out. SPX 60min chart:
SPX broke away from the lower bollinger band yesterday and closed close to the 50 day MA. That is a standard target for a move away from a band and this rally could fail there. If SPX can break above the 50 DMA (currently) at 1659 then the next target would be the daily middle bollinger band, currently at 1682 and a very good fit with my rally scenario above.

I'm showing a different SPX daily chart today as this one has my current bear scenario marked up on it. In this scenario the rising wedge that broke up early this year evolved into a rising channel, which is now reversing back towards channel support, currently in the 1520 area. I haven't been using this as a primary scenario, mainly because the May SPX high fell slightly short of the ideal channel target, but in practice trendlines can often be a little rough, and it should be borne in mind. If we were to break below rising support from 1343, currently in the 1615-20 area, this would become a primary scenario, backed up of course by the strong negative RSI divergence on the SPX weekly chart. SPX daily chart:
Is there anything that backs up this much more bearish scenario? Yes, and that is the pattern structure that we have seen since the 1560 low. The 1709 high fell short of establishing any sort of easily identifiable resistance trendline for a new pattern from the 1560 low, and fell within the normal range for the second high for a double-top from the move from 1343. There is also the matter of the support trendline for the broadening ascending wedge from 1343. That was initial resistance after the 1560 low, which isn't that unusual, but what was more unusual was the way that it was the support that SPX tested and then gapped below last Friday. That is suggesting that the immediate pattern on SPX at the time of that break was still that broadening wedge, and if so then everything we have seen since the first breakdown below wedge support in May has been a topping pattern. Food for thought. SPX daily chart:
TRAN broke up from the possible bear flag yesterday, which was bullish, but I won't show that chart today. On other markets the CL bounce is stronger than I was expecting and I don't have any particularly interesting short term trendlines or patterns to show there so I'll show instead the updated version of a WTIC (CL in real trading hours) chart I posted a few weeks ago. This is a large triangle scenario predicting a very big move in either direction. WTIC has broken up from the triangle but these patterns are prone to false breaks. The current CL bounce was at broken triangle resistance and if CL breaks back into the triangle the next target at triangle support would be close to the 96 double-top target that I was looking at yesterday on the CL chart. If CL were to break that level the triangle target would be at long term support in the 45 area which would be interesting. WTIC weekly chart:
ZB is trying to get up from the floor with limited success so far. If it can break over the double-bottom trigger level at 131'14 I would expect a strong rally, which would fit best with a rally on equities at the same time. ZB 240min chart:
GBPUSD rallied a little overnight at news that UK GDP had been revised upwards and then immediately retraced that move and more. Rising wedge support is now in the 1.536 area. GBPUSD 60min chart:
GLD is trading in a small rising channel and finding resistance at 133.46. The next obvious move in the channel is up towards 137.5, but strongly negative 60min RSI divergence is suggesting that the channel may well break soon. GLD 60min channel:
I really like the setup for a bounce into the 1680 SPX area here, and I think that will most likely play out. I'd expect a reversal there but a break above declining resistance there would be a bullish break suggesting resumption of the bullish trend. There are two options for the path to 1680. On the first SPX makes a clear break above 1660 towards 1680 as a double-bottom target. On the second SPX retraces here to an ideal right shoulder low in the 1646/7 area, and then the IHS plays out towards the 1680 target. I'm rooting for the IHS scenario. ES has been holding the 1657/8 area overnight and while that continues to be the case there is a decent case for that right shoulder retracement today. The ES 50 hour MA has turned up and is now at 1647.

I'll be trying to get out a weekend post on bonds tomorrow but may not have time. If not that is coming as my next weekend post soon.

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