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Wednesday, 3 December 2014

It Can Always Be Different This Time (But Usually Isn't)

I wasn't looking for the strong rally yesterday but I had mentioned in my posts on both Monday and Tuesday the possibility that the current high might be retested to make the second high of a double top, and that is what we should be looking at here. A lot of people were assuming that the retrace was complete yesterday evening but it's too early to say that, and the historical odds are still stacked against that outcome here.

The reason for that is in part the SPX daily sell signal that triggered on Monday, which has an impressive track record, but is even more so on the historical performance after the break of the five  20+ day runs above the 5 DMA since 1961, and after a close look this morning the stats for these are below:

  • 1979 - Marginal higher high on 2nd day after break, then 4 days tight range, then two day decline 4.1% (high to low)
  • 1986 - Low made day after close below 5DMA - 2.5% decline high to low
  • 1991 - Marginal higher high on 2nd day after break, another marginal higher high on 6th day after the break, then two day decline 2.25% high to low
  • 1996-1 - 3 day 3.8% decline high to low after break, then retest marginal lower high on 6th day after break, then lower low. Decline 5.5% high to low
  • 1996-2 - 10 day 6% high to low decline after break, then retest marginal lower high 18th day after break then 3.9% decline into marginal higher low at end December

In summary the stats for these previous examples tell us that the smallest retracement (high to low) after the break was 2.25%, and the largest was 6%. The current retracement is only half of the smallest previous example at 1.13%, They also tell us that when the high was retested after the first move down on these five examples, two failed at marginal lower highs, two more failed at marginal higher highs, and in only one case (after a 2.5% retracement), did the uptrend resume.  Were any of these in December? Yes, the largest and longest retracement from these five examples was in December.

The short term pattern setup here is also (cautiously) bearish. After the break up yesterday morning the rally formed a rising wedge which broke down near the close. I'd be looking for a retest of yesterday afternoon's high and perhaps a move to test 2070, where I have possible bull flag channel resistance. If SPX goes higher then I'd be looking for a fail slightly above or below the current all time high. SPX 5min:
One thing that has caught my eye at the current retrace low is the bounce off broken megaphone resistance on the daily chart. I don't think that level is of great significance but it's definitely interesting that it bounced there. If we do see a resumption of the uptrend I'll be looking at that more closely. SPX daily chart:
Could the retracement low be in? Yes. The odds favor a retest and fail here but price can always go the other way. At the moment though there is nothing to suggest that the retracement low has been made. Important levels to watch today are the ES weekly pivot at 2067.60, and the SPX 50 hour MA at 2064. A conviction break back below 2064 should mean that the next leg down has started.

I've been neglecting other markets in recent days. I'll be posting updates on USD, EURUSD, gold, silver and bonds either in my post tomorrow morning or on twitter by the end of tomorrow.

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