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Wednesday, 15 October 2014

To Bounce or Not to Bounce?

Yesterday bounced hard, then retraced all of that bounce to make a marginal new low, and closed slightly up. The bounce has established the 200 DMA as resistance and was the fifth day out of the last six that SPX has closed well under the daily lower band. The lower band closed at 1883 yesterday and could close as low as 1865-70 today. SPX daily chart:
So where does this leave the bounce I was looking at yesterday morning? Well a bounce here is counter-trend and inherently risky, but the technical setup development was decent yesterday with the falling wedge breaking up, and then forming a nice looking possible double bottom that targets the ideal rally target area that I was looking at yesterday morning.

At the time of writing however, ES is some 22 points below the close yesterday and that's not so bullish. If ES can recover to yesterday's low area then this bounce setup still has a decent shot, but if not then this setup may just be steamrollered by the greater trend downwards. Furthermore if we should now see a break under falling wedge support then I may get a new bear pattern target looking for the low 1700s. I'll be watching that carefully today. SPX 1min chart:
USD has reversed to test 85, and is most likely rolling over here. I am looking for a reversal pattern and if USD was to attempt a retest of the highs then that would make the second high of a double top targeting the 83.15 area on a break below 85. USD daily chart:
I'm showing the TNX chart today to emphasize the inflection point on bonds here. As with TLT TNX is in a channel and has reached a level where it can either reverse or break out. If TNX should break down from this channel then the target would be the double top target area 19 to 19.5. As the downtrend on equities is unlikely to be making a significant low here,we may see these channels break on the flight to safety trade.  TNX 60min chart:
I said before regularly that when a trend begins a channel is often formed quickly which then evolves into a wedge or megaphone. That may have happened on CL here with the initial falling channel evolving into a falling megaphone. If so then that megaphone has two options here. The first (70%ish odds) is that CL is making a bullish underthrow before breaking up. The second (30%ish odds) is that CL is breaking down with a target in the 62 area. I should mention that this isn't the only setup on CL targeting the 60s and while I'm finding targets there a little hard to take seriously still, they are an option here. CL could go either way at this inflection point. CL daily chart:
The overall trend is down here and all longs are risky. We could see the bounce I am looking for into the low 1920s on SPX but the setup may obviously fail. If it does play out the main opportunity in my view would be to identify the target area for the rally and short it hard there. We'll see how that goes, but if we see a very hard gap down below yesterday's close that is not filled quickly then this long setup will be in serious trouble. If the bounce setup fails then we should just continue downwards today.

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