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Monday, 14 April 2014

Weekly Middle Band Punches

Friday's close saw a punch below the weekly middle bollinger band, and that was a bearish candle, as I mentioned it would be on Friday morning. SPX weekly chart:
Generally speaking I would take the target from a punch below the weekly middle band like this one to be either the weekly lower band or a major weekly MA (50, 100 or 200), if there was one of those above the lower band which there isn't currently. 

I've had a look back through these historically, and have looked at examples where the punch has come after a touch of the weekly upper band, and found 45 examples going back to the start of 1980, of which 4 out of 5 went on to hit the weekly lower band or a major MA in the subsequent weeks. Of these:
  • 34 went on to hit the lower band
  • 4 hit a major MA and reversed back up there
  • 7 reversed back up to the upper band
I also had a look at the weeks after those bollinger band punches and of those 45, 19 rallied the following week, and 5 of those were among the 7 examples that returned to the upper band. 

Takeaways here are that SPX is 80% likely to hit the weekly lower band in coming weeks, and that there is a slightly under 50% chance of seeing a positive week this week. There is a 20% chance that SPX will return directly to the weekly upper band but this is helped a lot by a cluster of these in the 1986-91 period. If I had taken my sample for the last twenty years only, then the only time this happened out of 22 examples going back to 1994 was in August 2013. 

On the SPX daily chart the open and close on Friday were both under the daily lower band. The overnight action on ES is strongly suggesting that a rally has started and the rally targets on the daily chart are the 50 DMA, currently at 1843 and declining slowly, and the middle band, currently at 1861 and declining rapidly. SPX daily chart:
On the SPX 60min chart Friday morning's falling wedge evolved into a falling channel, and the obvious next move is a rally to channel resistance, currently in the 1855 area but declining rapidly. We could well see a rally into the 1830-50 SPX area here. There is no current negative 60min RSI 14 divergence, which suggests that we could see a lower low before that rally, but there is already some negative 60min RSI 5 and 15min RSI 14 divergence, and that may well be enough. SPX 60min chart:
Holiday weeks tend to lean bullish and the 60min chart here is arguing for a strong bounce. I'm going to be treating the 50 DMA at 1843 as my main rally target and would also note that the 50 hour MA is currently very close to falling channel resistance. That rally may or may not last until the end of the week and the historical odds very strongly favor a test of the weekly lower bollinger band, currently at 1771, before any retest of the 1897 high. 

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