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Friday, 13 September 2013

A Bollinger Rarity

I'm starting with a detailed analysis of the current rare bollinger band setup this morning, so if your interest in TA is limited then you might want to just skip through to the charts.

I was saying yesterday morning that the daily upper bollinger band could move up five to eight points every day in a strong uptrend, and was slightly taken aback yesterday at the close when I saw that the upper band had fallen from 1688.65 at the close on Wednesday to 1688.20 at the close on Thursday. The reason for that is that the 20 day moving average, which is the daily middle bollinger band, is still flat to slightly declining, and as the upper and lower bands are two standard deviations away from the 20 DMA, then as the 20 DMA declined slightly over the day, so did the upper band.

This is a rarity as I am normally looking at these hits when the 20 DMA is rising, and with the SPX two standard deviations above the 20 DMA at the upper band, either rising at full speed or accelerating fast to that speed. I wondered just how rare that was and found eleven previous instances in the last ten years when the upper band was hit when the 20 DMA was flat or declining, and I noted what had happened at those times. Those previous instances were:
  • 2012 May - Reversed at the hit to the daily lower bollinger band
    • Context - The second high of a double top
  • 2011 June - Punched above upper BB and rose 40 points
    • Context - Making right shoulder high of 2011 bull market top
  • 2008 July - Reversed at the hit to the daily middle bollinger band
    • Context  - Near start of last weak rally before 2008 crash
  • 2008 Feb - Reversed at the hit to the daily lower bollinger band
    • Context - Rally High
  • 2007 Sept - Reversed at the hit to the daily middle bollinger band
    • Context - Start of run to second high of 2007 bull market double top
  • 2006 July - Small punch then reversal to daily lower bollinger band
    • Context - The high between two lows of a double-bottom
  • 2005 Oct - One day reversal then punch through into significant wave up
    • Context - Just after significant low
  • 2005 Sept -  Reversed at the hit to the daily lower bollinger band
    • Context - The second high of a double top
  • 2004 Oct - Punch through into significant wave up
    • Context - Just after significant low
  • 2004 April - Reversed at the hit to the daily lower bollinger band
    • Context - Rally high in strong decline
  • 2003 July - Reversed at the hit to the daily lower bollinger band
    • Context - Middle high in sideways consolidation
This is an interesting group. Of the 11 hits (all full hits rather than near misses), six reversed at the hit, or just after, all the way back to the lower bollinger band, two reversed at the hit to the middle bollinger band, and three punched up through the upper band to force it upwards. Of those last three, two were at the start of significant waves upwards, and the other rose forty points into the right shoulder high of the 2011 bull market top.

However I think this group makes more sense if ordered by month rather than by year. Looked at seasonally April/May are transitional months from the strongest months of the year to the weakest, and September/October are transitional months from the weakest months of the year to the strongest. Both of the punches up through the upper band into strong waves up were in October, and then there was only one other instance, in February during a bear market, before April. From April through September every instance was either topping action or a rally during a retracement phase. Both of the previous September hits were part of moves to make the second high of a double-top, but if that is the case here, then we'll know when the rising support trendline from the 1343 low that held the current retracement lows, and is now in the 1635-40 area, breaks.
    • 2008 Feb - Reversed at the hit to the daily lower bollinger band
      • Context - Rally High
    • 2004 April - Reversed at the hit to the daily lower bollinger band
      • Context - Rally high in strong decline
    • 2012 May - Reversed at the hit to the daily lower bollinger band
      • Context - The second high of a double top
    • 2011 June - Punched above upper BB and rose 40 points
      • Context - Making right shoulder high of 2011 bull market top
    • 2008 July - Reversed at the hit to the daily middle bollinger band
      • Context  - Near start of last weak rally before 2008 crash
    • 2006 July - Small punch then reversal to daily lower bollinger band
      • Context - The high between two lows of a double-bottom
    • 2003 July - Reversed at the hit to the daily lower bollinger band
      • Context - Middle high in sideways consolidation
    • 2005 Sept -  Reversed at the hit to the daily lower bollinger band
        • Context - The second high of a double top
    • 2007 Sept - Reversed at the hit to the daily middle bollinger band
      • Context - Start of run to second high of 2007 bull market double top
    • 2005 Oct - One day reversal then punch through into significant wave up
      • Context - Just after significant low
    • 2004 Oct - Punch through into significant wave up
      • Context - Just after significant low
    What is my point here? Well the SPX daily upper bollinger band is strong resistance here and we should expect a retracement to test at least the middle bollinger band in the near future without going much higher. The second is that we are transitioning into the most bullish period of the year here, and that a key reason I am favoring the bull scenario over a double-top scenario here is because the seasonality favors it, and we also know that even if there is tapering by the Fed, they will still be running QE at many tens of billions of dollar per month into the Spring to Summer period of next year, on the right timescale to hit seasonal weakness again there.

    If I am right to favor the bull scenario then we should shortly see a retracement into the daily middle bollinger band in the 1655 area, very possibly at a retest of broken falling megaphone resistance, before turning back up again for a move up that will last until at least next Spring, and for which I have a pattern target in the 1965 SPX area. If I am mistaken then we will find out shortly after the daily middle bollinger band is tested as the rising support trendline from 1343,  now in the 1635-40 area, would have to break to reach the lower bollinger band, now at 1622. SPX daily chart:
    On the SPX 60min chart I have the broken falling megaphone resistance trendline currently in the 1656-8 area and we might well see that retested with the move to the daily middle bollinger band, so that would make two decent support levels in the mid-1650s. SPX 60min chart:
    There is a third decent support level in the 1650s however and that is the weekly middle-bollinger band, which has been a key support level in 2013 so far, and is currently at 1652.63. I'm expecting these three levels in the mid-1650s to hold for the next retracement. SPX weekly chart:
    On other markets EURUSD and USD are still in an inflection point area which could go either way though I'm still leaning bearish EURUSD and bullish USD, but without huge conviction. Bonds had a good day and I though I'd show my main TNX daily chart today, which looks really very promising for a reversal here into a strong bonds rally. With ZB now also having established a 60min higher low and high this looks increasingly likely. TNX daily chart:
    CL tried to break up from the bear flag yesterday and then broke down overnight. No doubt it will be twitching with every bit of Syria news today. I've updated my main WTIC daily chart below to show the strong case for a strong reversal back down on oil here unless th bulls can follow through and break well above the last 112 area high. As I show on the chart, a break back down has a likely target in the early 90s and might go a lot lower than that. WTIC daily chart:
    Looking at my main gold daily chart the rally high was at an established resistance level and slightly under the very important (on gold historically) 150 DMA. The rising channel from the low has broken as I noted yesterday and gold is headed for a test of very important support in the 1300 area. A strong reversal back up from there leaves the bullish IHS scenario in place. A strong break below 1300 will have me looking for a retest of the lows. Gold daily chart:
    As I'm writing ES is trying to break back above the 50 hour moving average. If we see a clear break back above then I'd be looking for a new rally high, followed most likely by a reversal back into the 1650s, and perhaps below. If ES can't break back above I'll be looking for a likely low in the 1674-7 (Sept contract) area today followed by a test of the current highs and failure there into the 1650s. If ES breaks below the 1670s with any conviction then I'd expect to see that 1650s test shortly afterwards without any intervening test of the highs.

    Today is Friday the 13th, so if you are superstitious you should take note of that. I will be switching to using the ES December contract on Monday morning.

    Finally today I'd like to mention that a reader this week suggested that I had 'strong convictions, lightly held', after I switched back to a bull scenario on the break back over 1670 SPX. I would refute this strongly and say that I try not to have any convictions at all in my market analysis. Convictions are for voters (or criminals), faith is for church, relative probabilities and key levels are the tools of the technical analyst. Only price action counts, convictions have no place in objective market analysis in my view.  Everyone have a great weekend :-)

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