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Monday, 19 January 2015

Sound and Fury

One of the first things that I mentioned on Friday morning was that it was important for bears to deliver a conviction break below the weekly middle band at 2014 to open up the next targets below. With the open at 1992 that didn't look that hard but the close at 2019 failed to deliver that important support break. SPX weekly chart:
On the daily chart the candle was a bullish engulfing candlestick, though Bulkowski doesn't rate these particularly highly, noting the high failure rate both the next day and over the next few days. In the context of the recovery over the weekly middle band though, it wasn't a good technical day for the bears.

There's more. I've mentioned before that when a rising wedge breaks down, the usual target of a full retracement only generally happens in the case of a substantial trend reversal. In the case of an ongoing bull trend the main targets are instead the 38.2%, 50% or 61.8% fib retracements, with the occasional 23.6%, and these are areas to look for signs of lows and combinations of these with other big support levels.

In this case we saw a very marginal new low on Friday, at the daily lower band and the 38.2% fib retracement, with a strong rejection at that marginal new low. It isn't pretty but there is also clear positive divergence on both the daily RSI 5 and NYMO, which on a strong enough further move up would trigger a daily RSI5/NYMO buy signal. SPX daily chart:
Are we going to see that strong further move up? Well there has't been much sign of that move since the globex open on Sunday but there are certainly reasons to think that there may be from a look at the 60min chart. The first thing I would note there is that I have now confidently identified the pattern for the decline from the high, and that pattern is a 68% bullish falling wedge, though I would note that stat also means that these wedges break down 32% of the time. The next obvious target within that wedge is wedge resistance in the 2041 area, and the wedge is mature enough that a break out from the wedge could be expected at any time.

Backing up the obvious next target is the W or double bottom that has now formed at the current lows. On a sustained break over 2021.35 this pattern would have a target in the 2054.58 area, and if that target was made then that would obviously be a break up from the falling wedge. SPX 60min chart:
Taken together what we saw on Friday was a combination of several things that I generally look for at a significant low, and that at least has to be taken seriously, even if I am highly sceptical about a substantial bull move starting from here.

Why am I sceptical? Well no-we one can know the future, and we could of course see a big break up, but the rising megaphone (called an ascending broadening wedge by Bulkowki) from 2011 (first chart in this post) is a 73% bearish pattern, and exactly the same applies in terms of targets after a break down from these patterns as I was saying above about rising wedges, so I'd expect a break down, then a retrace to the 38.2%, 50% or 61.8% fib retracement targets, with a possible fail in the 23.6% area. As the last hit of a megaphone trendline was the resistance trendline, the obvious next target is therefore wedge support, currently in the 1865 area. That is the obvious target for this retracement.

On the upside megaphone resistance, currently in the 2120 area, looks very solid. By itself it is a rarity to see a trendline like that break up, but this resistance trendline, shown on the monthly chart, goes right back to the 2009 low, having acted as support from the 2009 low to the 2011 high, and strong resistance since the 2011 low. I am very sceptical about seeing this solid and long term trendline break up, particularly with the increasing negative divergence on the monthly RSI 5 and 14 and the MACD threatening to cross bearishly for the first time since 2012. A break down through support would seem more likely. SPX monthly chart:
So what's the takeaway here? Well the immediate setup is bullish and the odds I gave for the four main scenarios here that I gave on twitter on Friday night were as follows:

20% - An immediate hard fail either without a break above double bottom resistance or shortly after that break. These fails are fairly common after bullish engulfing daily candles. A break down from the falling wedge would then target the 1880 area, which would be a good fit with the obvious retracement target at at megaphone support in the 1865 area.

40% - A break up to test any or all of falling wedge resistance in the 2041 area, the 50 DMA at 2046, the daily middle band at 2049 and of course the double top target at 2054.58. A break over falling wedge resistance can still just be a bearish overthrow under 2064.43, and on this option there is a hard fail under there at one of these resistance levels. A break down from the falling wedge would then target the 1880 area, which would be a good fit with the obvious retracement target at at megaphone support in the 1865 area.

20% - A daily close much over the middle band at 2049 or any break over the last breakout high at 2064.43 should deliver a retest of the current all time highs and possibly a marginal new all time high. There would then be a fail for there with a new slightly higher double top with a target that is again a decent fit with the obvious retracement target at megaphone support in the 1865 area.

20% - Divided between two options for a new bullish wave up, with half to a break over strong trendline and weekly upper band resistance in the 2120 area, and half to a slow crawl up under strong trendline resistance to a fail later in the year. The odds for this last option would be lower except for the reality that it has been a bad mistake to underestimate the bullish options in recent years. There is also the ECB meeting on Thursday, where it seems they may have found a way to do QE on a substantial scale without the Germans being on the hook in the event of further sovereign defaults in the Euro zone.

The strongest way to break up from the short term setup would be to gap over double bottom resistance and to push up strongly from there, That's not a guarantee of new highs of course though, as shown by the IHS that broke up in that way less than two weeks ago to make the 2064.43 high and failed either to make the full IHS target at 2069, or to hold the break over the IHS neckline more than a couple of days.

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