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Thursday, 11 September 2014

The Falling Wedge and Middle Band

At the low yesterday SPX was 1.4% off the current all time high at 2011, and we saw the bounce into possible falling wedge resistance that I was talking about as a possibility yesterday morning. That resistance was broken slightly at the close and that leaves two clear options for this falling wedge setup.

The bear option is that the falling wedge now breaks down with a target in the 1950 area. I'll be able to given an exact target once I get a break level. This would take SPX close to key support in the 1945 area. This is the option I was looking at yesterday morning.

The bull option is that the falling wedge breaks up with a target back at the highs. There is another related possibility here, which is that the falling wedge evolves into a falling channel, but in the bigger picture that falling channel would most likely be a bull flag, so I'm including that in the bull option, as the only difference is that we could make a lower low within that bull flag after a test of flag resistance. As I mentioned yesterday, any bear move here needs to stay under the hourly 50 MA, now at 1999.22, so any significant break over that will make the bull breakout option much more likely. SPX 60min chart:
Is there any support for that bull flag option? Yes, as Dow may already have established that falling channel/bull flag after breaking down from the double top yesterday. I see this happen quite a lot, to the extent that I mention in the trading room at least once a week that a double-top that can't break down tends to be a bull flag. This one could be too. INDU 60min chart:
The key dividing line here in my view is on the SPX daily chart, where SPX has tested and pinocchioed the daily middle band in both of the last two trading days, without managing a close below. If SPX can't close below the middle band then we will be making new highs sooner rather than later. If it can close below the daily middle band then the lower band is now at 1954, which is a decent fit with both the 61.8% fib retracement in the 1959 area and the falling wedge target in the 1950 area. SPX daily chart:
So which way is this likely to go? Well I've crunching the numbers on these RSI 5 / NYMO signals back to the start of 2007, and of the 29 signals in that time, 20 made target at the 30 level on the RSI 5, 5 failed to make target (all after retracements considerably larger than this one so far), and the other four were false signals, which failed into higher highs (the 2007 and 2010 spring highs) on increasing negative divergence. This retracement isn't a great fit with those, as the seasonality is different, the current retracement is the smallest of these, though the 2007 false signals only retraced marginally more, and the RSI 5 here has gone lower than the other four, but this could just about be one of those false signals if the daily middle band holds, which it did on all the false signals.

Statistically that only gives the bulls an opening here however. If this does break up then this thirtieth signal would have the smallest retracement of any of these signals going back to the start of 2007, so it would be an extreme outlier. It's possible though, and if SPX can't break below the middle band then that would be the main option here.

If so however the next move up would most likely lead to a much larger retracement starting sometime in the next few weeks.

For today we are likely to start with a large gap down, and there should be at least an attempt to fill that gap. After that we'll see, but it is currently way too early to write off a larger retracement here in my view.

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