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Friday 4 October 2013

The Bottom Line

After the 1560 low in June I was definitely favoring the scenario that SPX was starting a big new bull leg up, and that was on the basis mainly of the primary rising wedge that broke up earlier this year with a target in the 1965 area.

However as I said at the time , what was important to watch was what SPX did from the 1560 low. On the bull scenario we would see a new primary bull market pattern form, a rising wedge, channel or megaphone. That would be large enough to eliminate the possibility that SPX was in a topping pattern from the rising megaphone from the November low that broke down into that June low at 1560.

Since then SPX recovered over the broken rising megaphone support trendline to make a new high in August, and then after gapping back below that rising megaphone support trendline, from the August low made a high in September that was a very nice retest of that now twice broken rising megaphone support trendline. Looking at the pattern that has formed from the June low at 1560 it is a clear 70% bearish rising wedge, and we now have a candidate double top that targets the 1525 area on a break below 1627.

These rising wedges break up 30% of the time, but given the continuing respect shown to the rising megaphone support trendline and the strong negative divergence on the weekly RSI 14, we should be working on the assumption that a major high is being made, and that this major high may in fact already have been made. If that is the case, and after the current rising wedge breaks down, then the obvious fibonacci targets are the 38.2% retracement in the 1500 area and the 50% retracement in the 1400 area. The point I'm making here is that the bears are firmly in the technical saddle with this setup, and a bullish resolution, which possible, is now the lower probability play. Trade accordingly.

In the short term SPX broke down from the daily middle bollinger band yesterday and closed at the 50 DMA. There is a possible double bottom in place now, and that could be the low for the current move, but the H&S target in the 1660-2 area has not yet been made. The rising wedge support trendline is also in the 1660-2 area, as are the daily lower bollinger band, the 100 DMA, and the weekly middle bollinger band, making that area both a powerfully attractive target area, and a very big support area from which a strong bounce seems likely. SPX daily chart:
On the weekly chart you can see that the weekly middle bollinger band was at 1661.09 at the close last night, and is unlikely to move much today. You can also see from looking closely at the RSI 14 at the top that the current weekly RSI divergence is strikingly similar to that seen at the 2011 cyclical bull market top. SPX weekly chart:
On the SPX 60min chart I have a possible falling wedge forming from the high that needs a hit next in the 1687-90 area to confirm the pattern before (ideally) a move to underthrow wedge support slightly at the 1660-2 target. A couple of other things to note from this chart are that the 61.8% fib retrace of the move up from 1627 is at 1666.50, slightly above the H&S target and support cluster there, and that there is some 60min positive RSI divergence supporting the current possible double bottom. If declining resistance in the 1687-90 area breaks then the double-bottom will become my top scenario and on a break over 1696.55 the double-bottom target would be in the 1723 area. SPX 60min chart:
I haven't got time for much else this morning but I will post the CL chart showing the possible IHS formed there. If CL breaks over 104.45 then the IHS target is in the 107 area, with declining resistance just under 106. CL 60min chart:
I have strong support at 1667 ES this morning at the weekly S2 pivot level. That was broken briefly yesterday but held on three tests overnight. That may well hold into the weekend as I said yesterday morning. I have first resistance above at the ES 50 hour MA at 1676 and the weekly S1 pivot at 1677. Everyone have a great weekend, watch out for a possible strong short covering rally near the close, and remember that political negotiations over the weekend are a huge wild card in the current situation.

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