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Wednesday, 21 May 2014

Significant Bull Fail

I was saying yesterday morning that the bears needed a fast and hard rejection at the SPX 50 hour MA, and that's exactly what we saw. That was a serious bull fail, but they could still repair the damage by breaking back over the 50 hour MA with confidence, and that closed at 1883.30 yesterday. SPX 60min chart:
On the daily chart SPX broke back down below the middle band, which was bearish. The last two times that there was a candle setup like the last two days (first day break through band with confidence, second day strong rejection and break back through the middle band with confidence), the rejection followed through hard on the third day in the direction of the rejection. That leans bearish today and the bears have another shot at breaking support in the 1850-60 zone at double top support at 1859, rising support from 1737 in the 1855 area, and the late April low at 1850. SPX daily chart:
Which way is this likely to break? Well I was already leaning towards the bear side and yesterday's bull fail has only increased that bearish lean. I was saying in early May that the 1891 high seemed unlikely to be the second high of a double top because there was no negative divergence on the NYMO, and I'd generally expect to see that at a significant high. That's no longer the case since the 1902 high and NYMO looks ready to drop here. SPX vs NYMO daily chart:
One thing I hear quite a lot is that if a topping setup is obvious then it will usually fail. I've charted a lot of bull markets including every bull market on SPX since 1923, and that rule would have disqualified most major highs since the index was formed. The view is very mistaken. Some setups like the one we see below have failed to deliver a serious reversal, but most delivered in spades. This is a simply beautiful technical setup from the 2011 low and this reversal setup means that SPX has topped or is likely to in the very near future, and the chances are that this setup will deliver a strong reversal to at least rising channel support in the early 1700s. SPX weekly chart:
The other thing I hear is that the Fed will never allow a significant reversal. I recall having similar conversations with traders in early 2011 when I suggested that exiting longs as QE2 ended would most likely be a smart move. That view was wrong then, and with QE3 winding down rapidly here, most likely wrong again now. The obvious reversal setups that I have shown on SPX are also forming on most other US indices and the very nicely formed example below is son Dow, which like SPX has a big reversal setup targeting a retest of broken resistance at the 2007 high, which I was saying a year ago was the obvious target for any big retracement. INDU weekly chart:
I've mentioned that the daily candle setup for the last two days strongly suggests bearish follow through today. I'd add to that the 60%+ bearish stats for today historically, and that Master The Gap likes the odds of a gap fill today. I'm leaning strongly towards some bearish follow through today and that could extend to a break down through major uptrend support in the 1850-60 area. If we see that, I'd strongly advise against buying that dip.

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