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Monday, 16 September 2013

The Yellen Daily BB Punch

The big news over the weekend was that the (relatively) hawkish candidate for Fed Chairman Larry Summers withdrew as a candidate after it became clear that Summers faced strong opposition from numerous Democrats in the Senate and on the Senate Banking Committee. The favored candidate is now the (relatively) doveish Janet Yellen. As overnight markets opened on Sunday night the US dollar fell hard, US treasuries rallied strongly, and ES (Dec contract) gapped up hard to peak at 1703.75 before retracing a bit in overnight action that so far looks a lot like a bull flag.

It is therefore almost certain that SPX will gap well above the daily upper bollinger band at the open. The upper band closed last week at 1692.45, the 20 DMA is now rising slightly so it may end the day as high as 1696/7, well below the 1706.5 (equivalent from ES Dec) that it is trading at right now. I have noticed in the past that when SPX is trading over the daily upper bollinger band, the upper band will act as support and is normally hit at some point during each trading day that SPX is trading over it. No guarantees, but that suggests a significant retracement is likely at some point in the day. SPX daily chart:
There are two main options here in my view. The first, and my preferred option, is that we are starting a big move up into next year. If that is the case we should see the SPX weekly upper bollinger band, currently at 1715, act as good closing resistance, we would soon see a retracement to test (most likely) the daily middle bollinger band (also the 20 DMA), currently at 1656, while the middle bollinger band turns upward, and then we would see the uptrend resume.

The second option is that we would see a punch through the weekly upper bollinger band to retest the broken rising megaphone resistance that you can see above on the daily chart, currently in the 1720-5 area. That might then well be the second high of a double-top with the recent low as the valley low between the peaks, and a target in the 1530 area on a break below 1627.47. SPX weekly chart:
Why would a break up through the weekly upper bollinger band look bearish? Well punches above the weekly upper BB are a rare event and I compiled some stats on these last time this happened in May, pointing out that historically these were usually part of a topping process. The May high was the following week. I've updated the stats to include that figure and the updated stats from the start of 1995 (back a further three years) for these are as follows:

When weekly RSI over 70
  • Q3 Start 1998 - At the 1998 interim top made the following week
  • Q1 Start 2004 - Rose another 40 points into the Q1 high over the next few weeks
  • Q2 Start 2010 - Immediately preceded spring 2010 high made next two weeks
  • Q2 May 2013 - Immediately preceded spring 2013 high made the following week
When weekly RSI Under 70 - 
  • Q3 Start 1999 - At the 1999 summer high made over the next week
  • Q2 Start 2000 - At the 2000 bull market high
  • Q4 Start 2004 - Rose another 50 points into a resistance area not exceeded until Q3 2005
  • Q2 Start 2007 - Continued up 80 points into early Q3 first high 2007 bull market double top
There are other instances earlier that weren't part of topping processes, but in the last fifteen years at least these have been a very bearish signal. I would also mention that for a genuine punch SPX has to close the week significantly above the weekly upper bollinger band. 

On the SPX 60min chart I would say that I have no rising support trendline worth the mention since the low so far, and my decent resistance trendline in the 1697 SPX area currently looks unlikely to survive the open. This is bullish as I see this lack of clear trendlines most often near the start of a strong trend. SPX 60min chart:
The last SPX chart for today is the SPX weekly chart from 2009 against the NYMO. I generally follow the daily but a friend of mine posted a look at this over the weekend and the track record of seeing divergences on the weekly NYMO at significant highs and lows is stronger than I expected, and I'll be adding this chart to my main daily NYMO chart that I look at for trend reversals. That friend is Alphahorn who runs an excellent subscription service using a mix of momentum and reversal indicators and EW with a model portfolio up 53% so far this year, against 31% in 2012 and 75% in 2011. Very impressive work from one of my favorite chartists. SPX vs NYMO weekly chart
Last chart for today is the ES (Dec) chart where I have a possible rising channel, though my confidence that it will last long is low. short term I'm looking for a retracement into the ES 1690-2 area to test the SPX upper bollinger band from above. Much lower than that and I would be taking this channel more seriously. The 50 hour MA is now at 1686. ES 60min chart:
I won't post any charts for other markets today as I'm out of time. In brief bonds have rallied strongly and the prospects look impressively bullish there. I'll be adding on dips. USD dropped hard on the news that Janet Yellen is likely to be the next guardian of the currency and I'll be having a close look at that today. Oil is dropping on the news that military intervention now seems unlikely and I would mention again the possibility that I was looking at last week that we may be seeing a major trend reversal on progress on oil here. Today on SPX may turn into a gap and go day to break the August high and test weekly upper bollinger band resistance. 

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