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Friday, 15 August 2014

Never Play Chicken With Trains

SPX had a strong day yesterday and broke back over broken wedge support and the daily middle band, closing at the 50 DMA. SPX has now made the 1955-8 target area that I gave on Monday morning. The daily RSI 5 closed yesterday at 67.96, close to the 70 target, and likely to make that target in the next couple of days. There is a possible reversal area there but I wouldn't depend on that. The last four instances of this buy signal all topped out with the RSI 5 over 80. SPX daily chart vs NYMO and RSI 5:
So what now? Well there are a lot of IHS patterns that have formed here and only the RUT IHS hasn't yet broken up. I'm posting that and five that have broken up this morning to show why I'm not expecting SPX to fail at the 50 DMA, and that I am expecting at least a strong attempt to retest the highs.

The first IHS is the one on SPX. I've redrawn this as a slightly upsloping IHS with a target in the 1987 area, in effect a retest of the highs. I have drawn in the short term channel support trendline which is above the broken neckline. SPX 60min chart:
The second IHS is the one on the Dow, which has broken up with a target in the 16,925 area. That doesn't get Dow back close to the highs and I'll be keeping an eye on the resistance level at 16,975 for possible failure there. Dow 60min chart:
The third IHS is the one on NDX, which has broken up with a target at the current all time highs. This is the closest to target of any of these. NDX 60min chart:
I'm including NYA as the fourth IHS because, as the index including all NYSE stocks, it is a very broad index. The IHS on NYA has broken up with a target in the 10975 area, again somewhat short of new highs. NYA 60min chart:
The fifth IHS is the one on TRAN which started to break up yesterday afternoon with a target back at the highs. TRAN 60min chart:
The sixth IHS is the one on RUT, and that is the only one that has not broken up yet. I am expecting that it will though, as RUT tested and broke possible (wedge turns) channel resistance yesterday. RUT has obviously been the weakest index for some months now. RUT 60min chart:
Why am I showing all these patterns this morning? Just because when you see a series of strong bottoming patterns like this, you have to assume that there is more upside coming. We could see a reversal shortly, a retracement of some kind is arguably overdue, but if so it's unlikely to be anything more than a larger dip to buy, and at this stage it is a reasonable assumption that SPX is going to retest the highs in coming weeks. Anyone shorting this move is likely to regret it in my view.

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