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Monday, 24 March 2014

A Modest Proposal

SPX gapped up hard over 1874/5 resistance on Friday morning, and if that had held then that would have been a very bullish breakaway gap. Instead SPX made a very marginal new high before failing hard and filling the gap, and that was not at all bullish. If bears can follow through this week then there will be a very real possibility that the Spring high was made on Friday slightly earlier than usual.

To follow through the bears must break back below the 50 hour MA, currently at 1866, and the daily middle bollinger band, currently at 1861, and rising channel support, currently in the 1659 area. If they can do that then there is now a perfect double-top that would target the 1794/5 area on a break below the last low at 1839.57. That would be an almost perfect 61.8% fib retracement of the move up from the 1737 low, but there is also a much larger double-top in play that would target the 1592 area on a break below the 1737 low, and I'll be looking at that possibility today.

For now on the daily chart SPX is still holding above the middle bollinger band in the 1861 area, and if SPX breaks back below that then the obvious next targets would be the lower band, currently at 1837, and the 50 DMA, currently at 1832. Worth noting on this chart is that main primary rising channel support is now in the 1780 area. SPX daily chart:
On the SPX 60min chart bulls really need to perform here to stay within the current rising channel. On a break below there is now a perfect double-top targeting 1795 on a break below 1839.57. If SPX was to overshoot and break the primary rising channel support trendline in the 1780 area then there is also a larger double-top in play targeting the 1592 area on a break below 1737. That would be very close to a 38.2% fib retracement of the move up from the October 2011 low at 1074. SPX 60min chart:
Is there any support for this overall setup on other US indices? Yes, particularly on Dow where there is a very similar setup, though where SPX has made a series of marginal new highs since the late December high, Dow has made a series of three marginal lower highs. Again I'll be watching the current rising channel for a break. Dow 60min chart:
How would this fit in to my longer term view on SPX? Not badly at actually. My charts would look at bit neater if my 1965 wedge target was to be hit before the next big retracement, but could equally be hit afterwards, and I have a larger scenario that I showed in passing in one of my Brave New World posts last summer, and that I'll talk about more now.

The secular bear market pattern on SPX that formed between the high in 2000 and the break up over secular bear market resistance in early 2013 was a right-angled and descending broadening formation, or BFRAD for short. I've had very good results from these patterns in the past and the technical target for this pattern is in the 2450-2500 range on SPX. My thoughts last summer were that we would see a sharp move up to make my wedge target, and then a sharp retracement to retest broken BFRAD resistance in the 1550-1600 area, and then we would see a new wave up to make the BFRAD target in the 2450-2500 area and complete a five wave sequence up from the March 2009 low.

That we now have a topping pattern part formed on SPX that would target that ideal BFRAD retest area is most definitely something to bear in mind if short term rising channel support on SPX and Dow should be broken here. SPX monthly chart:
For now we are at a very important inflection point. Bulls need to run SPX up to new highs and away from support, and bears need to break that support. A strong showing from either side could set the direction for the next few weeks.

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