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Sunday, 8 June 2014

Weekly Upper Band Punches

At the close on Friday there was a clear punch over the weekly upper bollinger band. These are rare, and even rarer when the weekly RSI 14 is over 70, and this is only the tenth such punch in the last twenty years. I've had a look at the previous nine to see what they can tell us about what to expect next.

My first observation would be that only three of those were at a short term high, though another five topped out within 2% of the punch level, before making a retracement that went at least back below the punch level and ranged in size from 3% to 21%. The exception was in June 1997 which went into an eight day upper band ride that ran up 80 points before retracing 70 points. This is a fairly bearish history, with one strong exception.

My second observation would be that though the following day was mixed, there was only one instance where the next day close was more than 4 points higher. The following week also averaged flat to down.

To see anything else really useful from the results here though I would divide the punches into two group, the first in the relatively high-friendly March through August period, and the second in the relatively high unfriendly September through February period. This leaves four previous instances in the first group which were:

  1. 1998 July - At the 1998 summer high, next decline 21%
  2. 1997 June - Rose 10% into July first high double top
  3. 2013 May - Rose 1.5% into spring high made following week, then decline 7.5%
  4. 2010 April - Rose 2% into spring high made next three weeks, then decline 17.1%
That last group gives us a reasonable feel for the odds here in my view. 75% we make a significant high shortly followed by a substantial retracement that should at least deliver a retest of 1850 and might go a lot lower. The other 25% is that we see an unexpected breakout here that would at least break 2000 SPX and might go considerably higher. Even that outlier June 1997 high however moved up to make the first high of a double top, leading to a 13.5% retrace in October 1997 that retraced 4% below the weekly punch level, and so regardless of what happens here history suggests strongly that we are likely to see a decent retrace (average 15%) decline starting sometime in the next four months. 

So what is the immediate setup here? Well I'm favoring an imminent high followed by a strong retracement, and my main reason for favoring that here is the primary rising channel from the October 2011 low. SPX tested channel resistance again on Friday, and break up through resistance on such a channel would be rare here, though not unknown. Of these nine previous instances only two hit a strong established primary trendline in the next few days, and both of those reversed there. The first hit of channel resistance at 1850 was firmly rejected into the 1737 low. We'll see now whether this hit at 1950 will do better. SPX weekly chart:
From that 1737 low after the primary rising channel was established at 1850, a rising wedge has formed and broke up on Thursday. That could well be a bearish overthrow indicating that this rising wedge will now break down, as 70% of these patterns do, and there would be decent odds of that if SPX can break back below broken wedge resistance in the very near future. Alternatively this rising wedge could be evolving into a rising channel, and I already have a candidate rising channel resistance trendline in the 2000 area. The last option is that this rising wedge is breaking up with a target in the 2110 area, though that looks overambitious with the weekly upper band already looking stretched. My main options would be one of the first two options, though I'd note that the possible channel resistance trendline is rising and might be at (say) 2030 by the time it was hit. SPX daily chart:
I mention 2030 because there is also a smaller rising wedge from the 1862 low, and that broke up on Friday. That again might well be a bearish overthrow as these are not uncommon on these patterns that break down 70% of the time. I also have an established possible rising channel resistance trendline, currently in the 1965 area, and this wedge could of course be breaking up with a target in the 2030 area. SPX 15min chart:
What do other indices say here? Well RUT has now gone far enough to make an acceptable right shoulder on the large H&S that may be forming there, though it is still somewhat short of the current 1090 area double-bottom target. The chart that looks most interesting here however is the NDX chart where the rising wedge that broke up a few days ago appears to have evolved into as rising channel with channel resistance hit at the high on Friday. The latest move has also established a smaller rising wedge within that channel that also hit resistance at the high on Friday and this overall setup looks likely and ready to break down. NDX 60min chart:
That setup on NDX is strongly backed up by the AAPL daily chart, where AAPL has tested the rising channel resistance that I gave as the obvious next target a month ago, and that has not yet broken. The clear rising wedge for the current move up from channel support is suggesting that it won't. AAPL daily chart:
There are no certainties in market forecasting, but all the patterns that I have shown on the five charts above lean immediately bearish here. The punch above the weekly upper band at the close on Friday leans bearish too. The odds favor that a short term high was either made on Friday or will be made not much higher on Monday or Tuesday next week, and if we see a strong rejection then the average decline from the tops made after the four spring/summer weekly upper band punches I listed above was 15%.

If this goes the other way, and we see a break up across multiple indices through these and other impressive resistance levels, then the chances are that would run up a while further. I'd be surprised in that case not to see a test of 2000 SPX and would have my eye on that 2030 rising wedge target. Even in this case however, the odds would favor that break up being part of the topping process for a significant high not much higher than that.

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