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Thursday, 30 January 2014

Uncertain Smile

Back on 15th January with SPX at 1839 I wrote a morning post suggesting that the low just made was of poor quality and giving two trendline targets for a better low. We hit the lower trendline of those two yesterday and for the moment at least we now have a rising channel established from the 1646 low. It may be that this channel won't last long, and sometimes they don't, but as long as it survives it is now key support, and that low yesterday may have been the low before a move to the rising wedge target at 1965 begins. What is also worth noting from the daily chart is that we now have possible positive divergence on the daily RSI 5, which delivers the best short term reversal signals on the daily chart. SPX daily chart:
In terms of the weekly chart I noted on 19th November after a strong punch up through the weekly upper bollinger band that there had been three similar instances in the last quarter of the year in the last twenty years, and that two of those were followed shortly afterwards by 4% retracements, and that the third rose 4.3% over the next few weeks before retracing 4.5%. That was at 1798, so the market rose 3% over the next few weeks and as at the low yesterday the retracement from the high stood at 4.3%. In terms of these weekly punch retracements seasonally therefore, the current low is exactly where it should reverse back up, and anything lower would be breaking bearish new ground on these statistics. That isn't to say that yesterday's low must be followed by new highs, but it is to say that a 4%+ retracement was likely in the wake of the bollinger band punch in November, and that all three previous made a retracement of similar size before going on to new highs. SPX has also tested both the SPX weekly middle bollinger band and retested broken wedge resistance on this retracement, and those are strong support. SPX weekly chart:
If we do see a reversal at yesterday's low then there is a possible double-bottom in play on SPX with a target in the 1817 area on a break over 1793.87. On the possible H&S forming the left shoulder high was at 1813, so that would be in the right area for a right shoulder to form, though I would note that the left shoulder took five weeks to form, and that I would expect any right shoulder to take at least two weeks to form. If SPX continued straight up through 1817 I would be looking for new highs on the way to my wedge target at 1965. SPX 60min chart:
The setup looks rather different on ES where I have a falling channel from the highs and a possible double-bottom forming that would target 1840 on a clear break over 1801. I would always favor the SPX chart in the case of a conflict but I am going to be watching falling channel resistance in the 1787 ES area if that is tested today. ES 60min chart:
TNX dropped hard on the taper extension announcement yesterday but is testing decent trendline support so we may see a strong bounce soon. TNX 60min chart:
AAPL made a marginal lower low on positive RSI divergence yesterday and I'm wondering about a bounce here, possible to test broken rising wedge support. AAPL 60min chart:
The extension of the taper yesterday was heavily trailed and was significant, though without a timetable for the winding down of QE3 it's hard to say how significant. One might compare it to a 40 cigarettes a day smoker who cut down to 36 a day in December and extended that reduction down to 31 a day yesterday. Is that progress on the way to a healthier life? Definitely. In the absence of further reductions in the near future would it make much practical difference? No. There is still a vast fortune being pumped into markets every month and we don't have any real idea when that might end. The bulls need to show us that they are still in the game today by breaking clearly back above the daily lower bollinger band, which I am expecting to close today in the 1771-5 area. If they can hold on to their overnight gains, with ES trading at 1784.50 as I write, that would do it.

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