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Monday, 7 October 2013

Recency Bias

I lost four twitter followers over the weekend and I suspect that was because I posted the SPX 1min chart below after the close on Friday with the comment that it was very possible that SPX would gap down at the open today from the clear 70% rising wedge that had formed on Thursday and Friday. After two days of bullish action, and with many bulls declaring victory on twitter, I dare say my comment seemed improbable but patterns like these will generally deliver. If analysis by extrapolation worked then the best times to buy would be when bulls are most confident and the best time to sell would be when bears are most confident. In practice though the exact opposite is generally the case.   SPX 1min chart:
ES gapped down strongly at the globex open last night and fell further to a low of 1666.50, with a weak rally to 1670.25 at the time of writing. If this persists into the open this will be one of the largest opening gaps down so far in 2013. I've been talking about a support cluster in the 1660 SPX area, but now that the SPX daily lower bollinger band has risen to close at 1668 on Friday, I should also mention that there is a support cluster on ES that is in the 1660 ES area, but that support would obviously be in the 1666 area on SPX. That support cluster is composed of the ES daily lower bollinger band, the 100 DMA, and trendline support from the low lat November. That is some decent support and if the 1660 ES area is tested today it is very possible that it will hold. ES daily chart:
Looking at the SPX daily chart it is clear that the 50 DMA was support Wednesday through Friday last week. That closed in the 1680 area on Friday and if we see a gap below that this morning then that may well be a breakaway gap that wouldn't generally fill until the low for this move has been made. SPX daily chart:
So what is the outlook for SPX this week? Well the falling wedge from the high that I was looking at on Friday morning broke up on Friday afternoon and that break held into the close. After a break like this there are three main options. The first option is that the market will spike upwards strongly from the break, but looking at the globex action it seems that we can rule that out. The second option is that SPX/ES is now in a bottoming process. If we see new lows then I've pointed out the strong support in the 1660-8 SPX range, and I'd expect to make a low in that area before a strong move up. I have outlined a double-bottom and downsloping IHS option on the chart and the ideal right shoulder low on the IHS option would be in the 1675 area. The third option, as these wedges break down 30% of the time, is that the break on Friday was a bearish overthrow before a resolution downwards with a target in the 1600 area. If we see the 1660-8 support zone and falling wedge support (currently in that zone) broken then I will be considering that option very seriously, but not until then. SPX 60min chart:
I was unexpectedly out for much of the morning so that's all I have time for today. I'll just mention that today is a bearish day historically for equities and that with USD close to major support, The USD daily chart is showing positive divergence just as the GBPUSD daily chart is showing strong negative divergence. We may well see a significant USD low made in the next few days.

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