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Monday 30 September 2013

Government Shutdown Gap

It seems likely that deadlock over the budget negotiations will trigger a partial shutdown of the US government tonight for the first time in 17 years. Equities have responded with a big gap down overnight and ES is trading at 1671 as I write. Looking at the ES 60min chart this looks like a breakaway gap under the support trendline of a pattern that could be read either as a falling wedge or a sloping H&S. The target for either would be in the 1640-5 area. There is some positive RSI divergence here and we may see a retest of broken support in the 1681-3 area. That would look very shortable. If this is a breakaway gap it shouldn't be filled until the downside move has finished. ES 60min chart:
On the SPX 60min chart the setup could also be read as either a falling wedge or an H&S. The distinction is more important here as the H&S target is in the 1660 area and the falling wedge target is in the 1650 area. The falling wedge target is a better fit with ES, but for reasons I'll show shortly I'm currently favoring the H&S setup and the 1660 target. SPX 60min chart:
On the SPX daily chart the low on Friday was a test of the daily middle bollinger band and with the gap below it the next targets are the 100 DMA at 1659 and the daily lower bollinger band at 1635. I would note that the lower band is currently rising rapidly. I would also add that the rising support trendline from the November low at 1343 is now in the 1655-60 area, putting a very powerful support trendline just under the 1660 area, very close to the SPX H&S target and 100 DMA. SPX daily chart:
On the SPX weekly chart I would note that the weekly lower bollinger band, which has held both lows so far this year, is now at 1660.53, adding a further support level to the 160 SPX target. That's not to say that SPX won't go lower, but it is to say that the support levels that have held the two declines so far this year are now in the 1660 area, so I'll be looking for reversal there unless SPX breaks through it. SPX weekly chart:
On other markets CL has broken down again and the possible double-bottom setup I was looking at on Friday is gone. I have next strong support in the 100.80 area at the intersection of rising support from the 2013 low and a possible H&S neckline. On a clear break below that I have a double-top target in the 96.5 area. CL daily chart:
I drew in a possible falling megaphone on the GC chart after the last high and on Friday GC tested the upper trendline and reversed back down there on negative RSI divergence. On a clear break below short term rising support in the 1328 area I'll be looking for a test of the last low in the 1290 area and would note that falling megaphone support is now under 1250. GC 60min chart:
I'll be posting ZB and GBPUSD charts after the open. I would be surprised to see the opening gap filled today but we may well see a retest bounce, most likely peaking in the 1680-3 area. Unless equities surprise me by breaking back over broken support there, I'll be looking for a move down to test support in the 1660 SPX area.

Friday 27 September 2013

Knife Fight at Support - Day 3

First let me express some sympathy for those who bought the close yesterday in the expectation that the falling wedge on SPX had broken up and retested and that yesterday's strong close was a break up. I did say yesterday morning that the falling wedge on SPX wasn't of high quality. However the falling wedge on ES is a decent quality pattern and that broke up at the close yesterday. As long as support holds this morning, with ES having currently made marginal new lows for the week, there is a strongly bullish setup here with the broken falling wedge and possible double-bottom targeting the 1710.5 area on a break over 1696.5.

It should be borne in mind though that if the gap fills, and I gave that target at 1683.75 on the basis of the ES Dec contract, (but I've been given 1682.5 and 1681 as alternate gap fill targets on the basis that the gap was established in the ES September contract,) and falling wedge support (currently at 1679) breaks, then the falling wedge break up was a bearish overthrow and the downside target would be in the 1640-5 area, somewhat below the H&S target in the 1649 area. Either way ES is at an important inflection point that should set direction for the next few days. ES 60min chart:
On the SPX 15min chart I have shown the falling wedge in close-up so you can see how weak the upper trendline is. However you can also see that there is a very nicely formed megaphone or broadening bottom (direction neutral despite the name). The next target within the megaphone is to pattern resistance in the 1715 SPX area. The megaphone support trendline is a match with the falling wedge support trendline on ES so a break below one should be a break on both, and all the more bearish for that. SPX 15min chart:
On the SPX daily chart I would note that the support levels at the 50 DMA and middle bollinger band (20 DMA) are now at 1680 and 1682 respectively so there is potential support there on a break downwards, though given the pattern setup I wouldn't expect that to hold. SPX daily chart:
On COMPQ the second high of a very nice looking possible double-top has now been made. Something to watch if ES and SPX break down. COMPQ 15min chart:
There's some talk that bonds may reverse back down here but I think we're just seeing consolidation. My M top target on the TNX chart is in the 24 area and I'm not seeing much reason to think that won't be made. TNX daily chart:
Oil is still at a major inflection point on my WTIC weekly chart. Much lower starts to look very bearish, a new high from here looks very bullish. Right here is just oil kicking around waiting for an indicative move either way. WTIC weekly chart:
The precious metals complex is also still at a major inflection point. GDX is currently at 25 and I have a target in the 40 area on my bull scenario and a target at 15 on my bear scenario. If an IHS is forming on GDX (similar setups also on gold and silver) then I'd expect it to turn back up here and then break the declining channel to confirm. A move much below 25 would suggest new and possibly much lower lows. GDX weekly chart:
ES/SPX support may or may not hold today, but just above major support with the odds evenly balanced between bulls and bears only delivers one decent swing risk/reward trade, and obviously that would be a long trade with a stop below support. As it is I would say the bulls currently have the edge in terms of the pattern setup here as long as we don't see a strong support break before the open, which might well then be a breakaway gap through support. Unless we see that I'm leaning towards seeing at least a fill of the opening gap today.

Thursday 26 September 2013

Knife Fight at Support

I posted charts on twitter yesterday afternoon showing a possible bull scenario and path back to retest the highs. As we have seen no key support break since those are still very much in play here. The SPX 5min chart I posted below shows the possible double-bottom forming and the megaphone resistance trendline that would be the obvious target on a strong bounce here. If we then saw a break up from the megaphone that should deliver a test of the highs. SPX 5min chart:
I have also drawn in that scenario on my SPX 60min chart this morning, and also added the possible falling wedge that everyone else is looking at, but I don't rate highly unless we get a better third touch on the resistance trendline. Still in play though, and unless the bears manage to fill the gap and break trendline support immediately below, we are going to see a strong bounce soon. SPX 60min chart:
On the daily chart I haven't much to add to what I said yesterday except to note that SPX has now put in five straight daily red candles. This is a record in the last twelve months, equaled only by a decline in December that on the sixth day put in a very marginal lower low and then spiked up hard to close considerably higher. Worth a mention here. SPX daily chart:
Strong support just under the H&S neckline was tested extensively yesterday but held so far. Bears need to break below it. Bulls need to break above the 50 hour MA, now at 1691, and hold above it. ES 60min chart:
COMPQ broke rising wedge support yesterday and seems to be forming a triangle. COMPQ 15min chart:
An IHS has formed and broken up on GC. The neckline was retested overnight and the target is in the 1355 area. Bulls need to develop that into a higher high to change the trend. GC 60min chart:
On CL the possible IHS I was looking at yesterday morning failed at gap resistance. This may have evolved into a double-bottom now but obviously there is strong resistance at yesterday's high, which is the double-bottom trigger level. If it can break above the target is in the 105.7 area. CL 60min chart:
Apologies for the late post today. Something unexpected came up this morning. Statistically and in pattern terms I am leaning towards the bull case this morning, though I am prepared to be surprised and impressed if the bears manage to break through the strong support that they failed to break yesterday.

Wednesday 25 September 2013

Bounce Failure at ES 50 Hour MA

That was a very nice bounce setup coming into yesterday morning, and it improved with the initial spike down as a double-bottom formed on SPX to join the one on ES. Both double-bottoms broke up but soon ran into a wall at the ES 50 hour MA and failed there, which was bearish. Overnight ES bounced again and failed again at the 50 hour MA, currently at 1693, so that is main resistance coming into today and the bulls have nothing unless that can be broken. ES support is gap support in the 1683.75 to 1687.25 range, and if that breaks the H&S target is in the 1649 area. ES 60min chart:
The H&S on ES has a matching pattern on SPX, and I posted this on twitter last night just after the close. On a clear break below the neckline the H&S target is in the 1660 area, which would fill both open gaps below. SPX 60min chart:
With those H&S targets in mind what are the obvious targets below on the longer term SPX charts? On the daily chart the sharp pullback from the daily upper bollinger band would normally be followed by a test of the daily middle BB or a major MA. On that basis the obvious targets and support levels are the 50 DMA at 1679, the middle BB (aka the 20 DMA) at 1676, and the 100 DMA at 1657. Obviously the 100 DMA is the best fit with the H&S targets. SPX daily chart:
The other target to consider here is the weekly chart, where the middle bollinger band is now at 1660, which reinforces the most likely target on a break down here in the 1657-60 area. SPX weekly chart:
Following on from my look at COMPQ yesterday morning, COMPQ tested rising wedge support on the initial spike down, then broke up through declining resistance, and then closed back at rising wedge support. Obviously a break down would look rather bearish and three tests over a short period without an intervening visit to wedge resistance suggests that we may well see this support trendline break soon. Until the trendline breaks we could see a test of the highs but given the overall setup here I'd advise against betting the family farm on that happening. COMPQ 60min chart:
On other markets I posted a chart on twitter yesterday noting that CL had broken declining resistance on 60min RSI divergence. Since then a small IHS has formed and is breaking up with a target in the 104.75 to 105 range to fill the open gap immediately above. CL 60min chart:
I haven't posted much in the way of forex charts recently and that's because there's currently not much to say. A very big move on USD is likely to start in the near future and it's currently very hard to say which way that will break. That is best shown on the GBPUSD weekly chart, where the huge triangle is likely to break up or down in the near future towards a target that on an upside break hasn't been seen since mid-2008, and on a downside break hasn't been seen since the 1980s. I'm watching with interest until we see a clear break one way or the other. GBPUSD weekly chart:
On other markets I posted bullish charts on ZB and SI yesterday and not much has changed from then until this morning. You can see those charts here - ZB (Bonds), SI (Silver).

I'm leaning bearish into today, and on a clear break below the H&S necklines on ES and SPX (and a wedge break on COMPQ), I would be looking for a move to test strong support in the 1655-60 SPX range. The bulls still have a chance to recover the situation today however, and I would note that overnight ES has made two short term higher highs and a higher low, putting ES in a short term uptrend. If bulls can get an hourly close significantly above the 50 hour MA at 1693 then they have a run at 1697, and then a chance to beat the high yesterday at 1701. That wouldn't kill the H&S on ES, which has an ideal right shoulder high target at 1703.5, but it would weaken the overall bearish setup coming into today, and I would also note that the declining resistance trendline that I drew on the ES chart above has broken as I have been writing.

Tuesday 24 September 2013

The Joy of SPX

I'm going to do an all equities edition today, as the most important thing to consider this morning is where equities are going from here. I focus most of my equity index analysis on SPX as it is the largest and deepest of the main equity indices, and trends well, which is my description for something that will generally produce good trendlines, patterns and divergences. However, sometimes SPX is not enough, and I keep an eye on all the major US indices to consider what they are telling me at a point where SPX is at an inflection point. This morning I'm going to have a close look at the broad Nasdaq index COMPQ.

Looking at the COMPQ daily chart back to the low last November, the post FOMC high on COMPQ made a fourth touch on a now very strong rising channel resistance trendline. I posted this after the 3694 high in the expectation that the next target would be at channel support, but COMPQ reversed earlier than  expected to touch the upper channel trendline a second time. A direct break up from a channel like this are rare, so COMPQ makes a higher high from here then it will most likely be marginal, and the next obvious major target is at rising channel support, currently in the 3500-50 area. As with the SPX daily the RSI 5 is what I mainly use to identify important reversal areas, and there is currently no negative divergence there, suggesting that we may well see a higher high or at least a test of the highs before the move towards channel support. COMPQ daily chart:
Looking at the COMPQ 15min chart we can see that it touched rising wedge support from the late August low at the low yesterday, and bounced to test declining resistance from the high at the high yesterday. COMPQ will break out one way or the other today as the two lines will meet this afternoon, and the direction of the break will most likely tell us (or confirm) a bounce or further break downwards on SPX. COMPQ 15min chart:
I'm leaning towards seeing a bounce on COMPQ here, partly because of the decent bounce setup on SPX/ES, but also because of the open targets above on AAPL, with an IHS target in the 505-10 area, and a large double-bottom target in the 540 area. Here is the setup on my main AAPL (60min) chart, and this is a very strong bullish reversal setup that I have been tracing out all year. I'm expecting both upside targets on AAPL to be made, and that may well give COMPQ a boost here. AAPL 60min chart:
What does COMPQ tell us about SPX? Firstly it tells us that the perfect retest of broken rising megaphone support at the FOMC high was most likely because we are still making a top from that pattern, and that SPX is currently most likely making a high for a large retracement that may be the largest we have seen so far this year. I'll also mention that in the event of a breakdown today that the 50 DMA is at 1679 and the 20 DMA (middle BB) is at 1674. SPX daily chart:
On the SPX 60min chart we can see that a possible H&S is almost formed, and that on a break down SPX would have a target back in the early 1660s, filling both remaining gaps below. On a strong bounce here the obvious target would be a test of broken rising channel support, which would now effectively be at a test of the post FOMC high. SPX 60min chart:
Lastly on ES I would add a third possible option. Any strong bounce today would be on the basis of a double-bottom that has formed on ES with a target in the 1707 area on a break over 1698.25. The third option I have added is that an H&S may be forming on ES with a target equivalent to the SPX H&S, and that if we were to see a strong reversal close to 1707, that would be an option to consider. ES 60min chart
My preferred option here is for a retest of the post-FOMC highs, and early indications on ES are that we may well at least get that strong bounce today and tomorrow. I'll be posting some charts for bonds, gold, CL etc on twitter after the RTH open.

Monday 23 September 2013


ES hit my targets on Friday but didn't reverse there, closing very well below both the daily and weekly upper bollinger bands. I was asked why I am expecting at least a test of the highs before a larger reversal and the main reason is that there was no NYMO or daily RSI 5 divergence at the current high. We don't always get either of course, but we do much more often than not, as you can see from the 7 month chart below showing the trend reversals over that period. SPX vs NYMO daily chart:
Having said that the post FOMC high was at a bearish scenario target I had previously given at the retest of broken rising megaphone support. There is a very significant danger that the second high of a significant double-top has already been made, so while I'm still leaning towards seeing at least a retest of the highs from here, that should be borne in mind. Obvious support on the daily chart is at the 50 DMA in the 1679 area and the 20 DMA (the middle bollinger band) in the 1672 area. SPX daily chart:
On the SPX 60min chart you can see that the support trendline I was expecting to hold on Friday was broken, and there are three unfilled gaps below. I wouldn't be at all surprised to see the first gap filled today, filling the second would raise a serious question in my mind about the chances of a new high here in the near future, and if the third is filled that would be at a test of the middle bollinger band. If we see a close much below the daily middle BB that would be very bearish. SPX 60min chart:
I mentioned the possibility that an IHS was forming on AAPL over the weekend this morning, and AAPL almost reached the ideal right shoulder low on Friday. This ship seems to have cast off already with AAPL as high as 490 in the premarket. The IHS target is in the 505 - 510 area and there is still an open higher degree double-bottom target in the 540 area of course. AAPL 60min chart:
CL made a lower low since Friday morning and that has reconfirmed the current sequence of lower highs and lows since the 112 high. I'd expect a bounce sometime soon but there's no RSI divergence as yet. CL 60min chart:
I have written extensively about a likely rally on bonds over the last couple of months, without much actually happening so far apart from the decline on bonds slowing and then stalling altogether. On TNX I have yields topping out but the topping pattern could either be a double-top or an H&S forming. If it is an H&S then there is one last spike up coming soon with a target in the 29.2 area before a decline into the 24 area. If the pattern is a a double top the target would be the same and that decline should start shortly. TNX 60min chart:
The Stock trader's Almanac blog has this week as bearish historically, with Dow down 18 of the last 23. My friend Alphahorn posted a publicly viewable post over the weekend looking at where the market is now and the short term options ahead. If you're interested in the take of a guy who has a model portfolio up 55% in 2013 so far then I suggest that you take a look at that here. I have mixed feelings about direction today after the support breaks on Friday. I think that the gap will probably fill, but am leaning towards at least some more downside after that.

Friday 20 September 2013

Friday Triple Witching

First today a great quote taken from one of my morning pre-market destinations at the Stock Market Almanac Blog, where they warn that the stats lean bearish today:

We go to the movies to be entertained, not to see rape, ransacking, pillage and looting. We can get all of that from the stock market. - Kennedy Gammage of The Richland Report

I'm leaning bearish with them today and would point out first that with the close yesterday at 1722.3, and with the weekly upper bollinger band on SPX at 1725.5, there is little room for upside today unless we are going to see a weekly close punch above the band, something which is both rare and usually a sign of an imminent top. Most of the available trading room today is below. SPX weekly chart:
Is there a chance that we may see a significant top here? Yes though I don't think it is in yet if so. I mentioned yesterday that the post FOMC high on Wednesday was a perfect retest broken megaphone support from last November and as long as that area hold we may still be in a (double) topping process for that pattern. I would see any move below the 1709.67 high as a warning signal that a top might be in. Until that time I'm expecting at minimum a marginal new high. SPX daily chart:
On ES that strong support level is at 1704, and is strengthened by also being the weekly R2 pivot. I have ES in a rough rising channel from the lows and the next obvious target is channel support, currently at 1706. I'm therefore seeing the 1704-7 as an ideal low range today. ES 60min chart:
Not much to see on the CL chart today so I'll just mention that CL reversed strongly yesterday from 109, failing to make a higher high over 109.17, but hasn't yet broken the last low at 104.95 either. The next natural target is under there to confirm that the current cycle of lower lows and highs is unbroken.

The USD low yesterday was at 80. 80 is a significant support area in its own right, so the spread from 80, through channel support 79.3 to 79.5, to the possible double-top trigger level at 78.6 is the key support area for an ongoing bull market in USD. When double-tops fail they generally fail just after the trigger level breaks, so I would broaden that area slightly to 78.5 to 80. A break below would put USD firmly back into bear market territory. USD daily chart:
ZB is pulling back from the double-bottom trigger level and has a clear declining resistance trendline. I have a couple of possible trendline targets that I have marked on the chart and will be watching ZB carefully for signs of the next low. If I don't catch that I'll go long on a break above the short term declining resistance trendline looking for a rally to 136. ZB 60min chart:
The last chart of the day is SLV, where I am watching with great interest to see whether silver can break over current falling megaphone resistance. If it can then the possible IHS targeting the 30 area is in play and the bear market on precious metals may well be over. Either way a break up from the megaphone should yield some impressive opportunities on the long side in SLV and in the related setups on gold and GDX. SLV 60min chart:
I would be very surprised to see a close over 1730 today, as that would be the second punch over the weekly upper bollinger band this year. The last one was the week before the May high and I only have eight of these in the last fifteen years. If we see that it would be strong warning signal that a significant top should be close. Ideally for me the day should be dominated by a retracement into 1704-7 on ES (1710-3 SPX) followed by a bounce which shouldn't close higher than 1727 SPX.

Thursday 19 September 2013

Swimming in Dove Guano

The FOMC bombshell wasn't a complete surprise yesterday. I did mention in the morning that the Fed's capability or courage to tighten policy was mainly theoretical, and it's still mainly theoretical this morning. Of course the Fed have to walk a fine line between blowing up an asset bubble, and depressing the economy by removing the highly addictive stimulants that may be all that is maintaining the appearance of continuing economic vigor. The US is fortunate to have such a dedicated and highly qualified team operating the printing presses day and night, 365 days per year, and seemingly prepared to do so for the rest of time, or until the value of the US Dollar falls to zero, whichever comes sooner:
After the FOMC spike up to new highs yesterday I am still leaning bullish, though I would point out that the SPX high yesterday was exactly at the retest of broken rising megaphone support that I was looking at on Monday as part of my bear scenario. If that holds then we could still see the double-top play out. Other things to note are the punch over the daily upper bollinger band after FOMC yesterday. I would expect the upper band to close in the 1722-5 area today so unless SPX is going to stay above the band, upside today looks limited. SPX daily chart:
On the chart above I have a rising channel drawn in from the 1343 low, which is where I would expect to see a major pattern develop from on my bullish scenario into 1965. The upper trendline is currently theoretical, but there are two strong internal trendlines that support this channel. The next internal resistance trendline would be in the 1760 area and theoretical main channel resistance is currently in the 1790-1800 area. Of the three options for a major trending pattern (wedge, channel or megaphone) a rising wedge looks unlikely, so I have drawn in a possible option for a rising megaphone as well as the more likely channel on the chart above.

On this weekly chart I would also note that the close yesterday was within a point of the weekly upper bollinger band. This is strong resistance and a weekly close or punch over it is a strong signal that a significant high is close. In a strong trend this can rise by up to ten points per week but no faster, so the prospects for a very fast move up from here are slim, and if we see that punch over this upper band we should start looking hard for the next top. SPX weekly chart:
On the SPX 60min chart I have a possible rising channel in play from the 1560 low and possible channel resistance would be in the 1750-60 area. I have a shorter term channel from 1640 that would require a little higher than yesterday's high before a retracement into rising channel support in the 1710-15 area. SPX 60min chart:
USD was hammered by the FOMC announcement yesterday and fell considerably. I've posted my main USD chart before, and I have primary support in the 79.3 to 79.5 area, and then last ditch support and the trigger level for a possible game changer double-top at 78.60. The bull market on USD from 2011 isn't over until we see those break, but obviously it is in serious and increasing doubt. USD daily chart:
ZB broke up on the FOMC announcement and is now testing the double-bottom trigger level that will target the 136 area if ZB can break above it. ZB is retracing from some trendline resistance and I have marked two possible trendline targets on the chart. ZB 60min chart:
GC spiked up on the FOMC announcement to exactly test declining channel resistance, and retraced there, but then returned to break up from the channel on the next hourly candle. I'm treating this break up as cautiously bullish, though GC is finding some resistance for the moment at the retest of broken rising channel support. GC 60min chart:
I gave two bottoming options for CL yesterday morning after the break up from the falling wedge, and CL went on to complete the IHS option, which played out to the 108.2 target in the afternoon. This again is cautiously bullish, but CL needs to break over the last high at 109.17 to break the current series of lower highs and lows. CL 60min chart:
As SPX closed at the weekly upper band yesterday I'm expecting to see more of a two way market until the next short term high is made. For the next short term high on SPX, which we may well see in the next couple of trading days, I'll be looking out for a sharp retracement and then a marginal new high to establish negative divergence on the SPX 60min RSI 14 and the SPX daily RSI 5. The opening gap up will most likely be filled today.