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Friday, 9 May 2014

Summer is Coming

I was going to entitle this post 'Winter is Coming' as it has a strongly bearish tone and I am something of a GoT fan. However it is early May, and despite the fact that my wife has been pressing me to have the central heating fixed, in theory at least, summer is coming.

In stock market terms though, the six months May through October are the months of winter on the markets. On my Stock Trader's Almanac 2014 statistics are given from 1950-2012 showing that $10,000 invested on SPX in November through April, the best six months of the year, would now be worth $575,846, while the same $10,000 invested on SPX in May through October, the worst six months of the year, would now be worth $15,356. That excludes dealing costs (and interest and taxes) but you get the point I'm sure:
The setup the bulls had into the highs yesterday was just beautiful. The rising channel on the chart I posted yesterday morning held perfectly at the AM high, and the IHS that I missed yesterday morning, but saw soon after the open targeted 1894 SPX for an effective test of the high. That test of the high looked like a done deal unless the rising channel broke, which looked unlikely as long as the IHS target area hadn't been reached. This was a really very strong setup for the bulls to retest the highs and try to break up, and they blew it really badly. SPX 1min chart:
We would often see a strong reaction in the other direction after a failure like this, and if we see that here, we now have a nice looking double top  setup here that would target the 1828 area on a break under Wednesday's low at 1859.

Looking at the 60min chart the larger pattern setup here is that the rising megaphone from the 1814 low broke down earlier this weak, and yesterday's move has now set up a double-top coming out of that break. This is a bearish setup, and as long as yesterday's high holds this invites a move down to the double-top target at 1828. There is some significant support on the way at the late April low at 1850, and rising channel support, currently in the 1840 area. SPX 60min chart:
On the daily chart I would note again the negative divergence on the daily RSI 5.  On a setup like this I'd generally be looking for a hit of the RSI 30 level and that hasn't been hit yet. That won't always happen, but the six previous examples marked on the RSI 5 below from the start of 2013 all made that target. Short term support is at the daily middle band and 50 DMA at 1865/6. The daily lower band at 1827 is a good fit with the double-top target in the 1828 area. SPX daily chart:
NYMO divergences against SPX have been a decent guide to significant highs and lows. There isn't always a divergence, but when there is it's well worth noting. There is a strong negative divergence here. SPX daily vs NYMO chart:
Is the path above now closed? No, though in my view the bulls have a lot to prove if we are to take it now. Their best hope is on the RUT chart which has some possible nested double-bottoms that could push RUT to new highs if the current falling channel can be broken. That is the key target for bulls here, and unless they can do that possible upside looks very limited. RUT 60min chart:
The last chart for today is the GLD 60min chart where the retest of broken triangle resistance is still ongoing and looking good so far. If that holds then we should see a very decent move up on GLD starting soon. GLD 60min chart:
The bottom line here is that we are prime topping season, bulls are repeatedly failing to make new highs, and we have large and technically very decent topping patterns forming across multiple main indices. If bears can break down through 1850 SPX then we may well start a very significant decline that would have an ideal target for me at the retest of the 2007 high on SPX in the 1575 area. Bulls could still turn this round, but until they prove that they aren't dead in the water I'll be favoring the overall bear setup here.

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