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Tuesday 22 October 2013

Bear Case Almost Dead

There has been a lot of talk in recent days about how the bear case is dead, and how equities will rise considerably further from here, and how this bull market can go on for years longer. I think that talk has a decent technical foundation, and am planning a post once 1750 SPX is decisively broken talking about the technical case for seeing SPX reach the 1950 area next Spring, and the 2450 area sometime in 2016/7. Until that time however ......

I take the view that it's best not to count your chickens before they hatch and there remains a large technical obstacle between where SPX is trading now and the scenario that I have sketched out above. That resistance, for this week at least, is the convergence of three very significant resistance levels in the 1755 SPX area, and as such a convergence is also a very attractive target, I am wondering whether we will see that level tested before seeing the retracement that I am expecting to start sometime this week.

The first two of those resistance levels are on the SPX monthly chart below. The first and strongest level is the four touch resistance trendline from 2008 through the highs in 2010, 2011, and June 2013. Arguably that trendline is being tested now, but there's enough play in that line to allow a test of 1755. The second level is the monthly upper bollinger band, now at 1754.24. The third is the weekly upper bollinger band, now at 1756.16.

I think that strong five year resistance trendline is most likely going to break, but until it does the technical bear case is not yet dead, and I would note that as well as both the trendline setup and the weekly RSI looking similar to the setups at the 2011 top, there is now visible negative divergence on the monthly RSI. SPX monthly chart:
SPX closed back at the daily upper bollinger band yesterday and it would be rare to see a closing break above that here. I would expect the upper band to be at most at 1752 by the close and would not expect a close above there.. What I would add though is that there have been four punches well above the daily upper BB in the last year, and when SPX closed back inside the upper band in all four cases that marked a short term high. On three out of those four occasions the next move tested the daily lower BB, and in the fourth case SPX consolidated in a bull flag for a week before the next leg up began. SPX daily chart:
On other markets TLT is still testing the neckline of the large IHS I have been watching form there. I'm expecting this to break up but this will be a more attractive long after a strong close over 107. TLT daily chart:
I was saying last week that if oil broke back below 100 then I have a double top target in the 92.5 area, close to rising channel support in the 91.5 to 92 area. That's very much the case here, and CL is bouncing this morning, so I'm looking for a decent short entry there. Here is the bigger picture setup on the WTIC daily chart:
USD has finally touched support on the rising channel that I have been posting over the last few months. If the USD uptrend is to continue, this is the likely reversal area, and it is holding so far. There isn't much indication of reversal on the USD chart, but the GBPUSD chart I posted yesterday looks very promising for reversal. USD daily chart:
I was showing the bullish break on the GL:D chart yesterday, and the GDX chart also looks very promising, with a double-bottom target in the 40.5 area on a clear break over 31.35. First however falling channel resistance in the 27.5 area will need to break. As and when we see that GDX will be a very attractive looking long. GDX weekly chart:
AAPL closed back over 521 yesterday and is close to making the double-bottom target in the 540 area that I have been watching over the last few months. Once that target has been made I would mention that I have a higher target at rising channel resistance, currently in the 565 area. AAPL 60min chart:
I'm expecting a decent retracement to start soon, and am encouraged to see that rising support from 1740 on ES broke overnight. However ES then tested the 50 hour MA four times in five hours, and it held. That support is now in the 1737.50 area, and until we see an hourly close below that, there's not much to see on the bear side. In effect however that gives us a range between 1737.5 and 1749 that is narrowing rapidly and very likely to break out in the next day or two. The direction of that break, for a number of reasons, is likely to be down. I'll be trying to catch the low on the subsequent retracement to add heavily to my longs.

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