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Thursday 11 December 2014

Bears Can Occasionally Deliver

It was refreshing to see the bears deliver a decent decline yesterday, with a clear fail at the retest of the daily middle band. SPX is now into the higher part of my target zone and there is now a very nice falling channel from the highs that should define the retracement. as and when this channel breaks up, this retracement should be over or ending. SPX 60min chart:
Now that the downtrend is more than just the bare minimum I would like to talk about the two main target zones here. I have two target areas within my target range, though I'll expand that range slightly from 1995-2033 to 1990-2033.

The first range is around 2019. That is the retest of the September high, the double top target from the current highs, with the 50 day EMA now at 2020. I'm expecting a test of this area and it may hold. If so we may see a retracement low this morning, which would be within the Tuesday to Thursday bottoming window I gave on Tuesday morning.

The second range is 1990-5, with the 50 DMA at 1998, the Japanese QE announcement gap at 1994.65, and the weekly middle band at 1992. SPX daily chart:
Could SPX go lower than 1990? Well it's possible, and the outlier decline of the post 5 DMA run retracements did manage just under 6% on the eleventh day (currently starting day nine today) after the run broke. That was also near the start of December. That would target the 1955 area but I'd be very surprised to see that here. We are later in December now and I don't think the bears have that kind of time. If we did see a move like that here I'd expect a low intra-week next week that would most likely start and end the week over 1995. SPX weekly chart:
I haven't posted a TLT chart in a while and with the current rally there it's time to review my last forecast in July, which has performed decently. The obvious next step is to retest the October high and at that retest there is a major inflection point. What I am expecting to happen is a reversal that would then wipe out all gains on bonds in 2014 to test support on a large double top that on a break down would then target a full retracement of all gains on bonds since the 2009 low.

Obviously that's not the received wisdom here, as that is broadly bullish on bonds, but it would be a good fit with my longer term charts, and the same crowd of pundits that are mostly bullish on bonds now, were almost unanimously strongly bearish on bonds a year ago when I was forecasting a big move up on bonds. My experience is that fundamental analysis doesn't yield much on bonds as the moves are mainly technical. We'll see. TLT daily chart - updated July 28 forecast:
I've been asked repeatedly why I think this is just a retracement before higher highs.  The main reason is the historical stats after similar major 5 DMA runs in the past. There have been five of these since the start of 1962 and while the retracements varied in size, they were all retracement of less than 6% before new highs were made. I can't check on examples before 1962 but the only other example of which I am aware was in 1928, and I don't need a chart to tell me that the retracement there was followed by higher highs as well. As far as I am aware there has never been one of these rare setups that was not followed by higher highs soon after, and I'm assuming that the same will hold true here. I'd add that December is historically the most consistently bullish month of the year and that major highs made in December are a historical rarity.

Short term I'm looking for at minimum a hit of the 2019/20 level on SPX and we may see a break lower. towards the 1990-5 target area. At the time of writing SPX has rallied just under ten points from the close yesterday and we may see a bit more. The odds favor the opening gap filling later on today and I'd be surprised if the retracement is already over.

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