- WE'RE JUST RANDOM SPECKS OF DUST IN A TORNADO TO THE MARKETS .......
- CHARTISTS MUST PUT ALL BIAS ASIDE AND LET THE CHARTS DO THE TALKING OR WE'LL SEE ONLY WHAT WE WANT TO SEE
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Wednesday, 9 September 2020

First Retracement Target Hit

 In my last post a week ago I was remarking at how very stretched SPX was and how near it should be to a mean reversion move, and the mean reversion high was then made within a few minutes of my publishing that post. The minimum target for that mean reversion move, last reached after the June high, is a backtest of the 45dma, and that target was reached at the low yesterday. That may of course be the low for this retracement, and I'll be looking at the setup for that today.

SPX daily vs 45dma chart:

Now a majority of mean reversion moves extend past the 45dma, and many of those reach the larger mean reversion target at the 200dma, which closed yesterday in the 3094 area. There is a setup for getting there and if that target is to be reached, then I'd be looking for resistance at the daily middle band, currently in the 3432 area.

SPX daily chart:


There isn't a clear overall pattern for this retracement and that is a possible argument for going lower. There is a termination falling wedge at the end of the move but that might just be the end of wave A, with a possible C wave down still to come. There is however a decent quality nested double bottoms setup that may deliver a retest of last week's highs, and the smaller double bottom has broken up today with alternate targets at either 3420 or 3430. With the daily middle band now just above 3430, that is a very attractive short term target. On a subsequent sustained break over larger double bottom resistance at 3455, the double bottom target would come close to a retest of last week's highs.

SPX 5min chart:

On the SPX hourly chart there are two things of interest here. The first is the decent quality H&S that broke down yesterday with a target in the 3110 area. At this point there are two main options, either that SPX continues down towards that target, or that the H&S fails on a move back over the right shoulder high at 3455, in which case I'd be looking for a retest of last week's high. The second is the hourly RSI 14 buy signal that fixed this morning, boosting the case for that rejection back into the high.

SPX 60min chart:

So what happens if SPX retests the high, bearing in mind that over 60% of SPX highs and lows involve some kind of retest. Well last week I was looking at the huge long term resistance trendline that SPX was spiking over then, and noted that if that break over resistance was to fail, what I'd want to see would be a fast and hard rejection, which we then saw immediately afterwards. If that high was now to be retested I'd be therefore leaning strongly towards that being the second high of a double top, which of course would have a target fairly close to the 200dma. SPX weekly chart:

Overall this all looks like topping action for last week's high, and often topping action involves a high retest, which may be next. On the bigger picture I was looking back at highs which were even more stretched that the June and August highs this year and the only two I located quickly, so there may be another on closer inspection, were the slightly more stretched highs in June 2009 just after the bear market low, and the 2000 bull market high. Last week's high may be a very significant high and I'll be watching any high retest with that in mind.

Wednesday, 2 September 2020

Nosebleed Highs

 The high earlier this year was at the main resistance trendline on SPX, starting at the low in March 2009, support at the low in 2010, broken as support in 2011 and then backtested as resistance then and several times since. The high yesterday was just shy of a full test and that has broken on the move up today, with visible breaks on both the weekly and monthly charts. That may just be a bearish overthrow on the bigger picture but it is still a huge break.

In the short term SPX is now about 8% over the 45dma, approaching the 8.7% over the 45dma reached at the June high, which was the most extreme high on SPX relative to the 45dma since 2013, though there may possibly have been more extreme highs before that I haven't identified yet. This is a very extreme level and a retracement to the mean high must be close, and could be forming now.

SPX daily vs 45dma:

I was watching another much shorter term trendline on SPX for the move up from the March low. That is overthrowing slightly as I write and unless SPX retraces a bit before the RTH close the RSI 14 divergence on the SPX hourly chart may be lost.

SPX 60min:

On the SPX monthly chart there is now a clear break over the main SPX resistance trendline. If that is a bearish overthrow a clear and strong rejection would be best in the very near future.

SPX monthly:

On the SPX weekly chart there is also now a clear break over the main SPX resistance trendline. If that is a bearish overthrow a clear and strong rejection would also be best in the very near future.

SPX weekly:

The main driver of this move is of course NDX with the SPX equal weight chart finally managing just to retest the June high at the highs today. The Russell 2000 has also barely participated in the rally over the last couple of weeks.

NDX is on a massive tear, on a monthly upper band where the monthly upper band has acted as support since the start of July. Until there is a significant high on NDX, SPX might continue to be dragged up with it.

NDX monthly:

As I've been writing SPX has continued higher. If this high was to reach the same level of extreme as it did in June that target would be at 3597 today. Stan and I are doing our monthly public Chart Chat on Sunday and if you'd like to attend you can register for that on our September Free Webinars page.

Friday, 28 August 2020

SPX Approaches Main Resistance

 SPX has gone through a lot of trendlines and divergence on this amazing move up, with the last lot breaking on the move over the 3350 area including the negative divergence on the daily RSI.

SPX is very stretched here, has punched 100 handles over the monthly upper band, touched an amazing 7.1% above the 45dma when I last annotated that chart yesterday, and is now close to testing the last and largest resistance trendline on the chart.

That trendline starts at the March 2009 low, held support at the 2010 low, and then was touched as resistance at highs in 2011, 2012, 2014, 2017/8, 2020 and is now close to being tested as resistance again. That trendline hasn't broken as resistance since SPX crossed below it in 2011, and I have it in the 3510-20 area at the moment, though that is an approximation on a trendline that is now more than eleven years old. At the time of writing SPX has reached a new all time high at 3508.07.

Is this trendline going to hold? Well we'll see, this really has been an amazing move, but that really should hold as resistance.

SPX Monthly chart:

That's a decent match with a shorter term trendline on the SPX 15min chart below so we may be seeing that test soon and I'll be watching that with great interest.

SPX 15min chart:

On the bigger picture SPX reached an eye-watering 7.1% above the 45dma. That's only been exceeded once at a high in the last eight years and that was in June this year. A return to the mean move cannot be far away. and might well start at a test of the main resistance trendline now only slightly above.

SPX daily vs 45dma 2017-date:

Just as an aside this last phase up of the move from June has been a very narrow move based on tech and large caps.That's very clear on the hourly SPX equal weighted chart which has not yet retested the June high, and is still a good 10% short of a retest of the all time high.

SPXEW 60min chart:

This is a very important test for SPX, and if resistance holds then the return to the mean retracement should start next week, and SPX may make a major high. If it does hold then I'd note that the obvious next target on the monthly chart would be a return to the rising megaphone pattern support for which that trendline is the resistance trendline. That's currently slightly under 2300 of course.

Everyone have a great weekend :-)

Thursday, 20 August 2020

Degrees Of Separation

 My apologies for my being unusually quiet over the last few days, My wife of 23 years and I are starting the process of getting divorced and I have been distracted by that. It's definitely for the best, and likely this would have started a year ago if she had not been diagnosed with cancer then. She is now clear and largely recovered, and the reality that we really shouldn't still be married to each other any longer has been brought into very sharp focus by COVID-19 and the quarantine this year, as I suspect it has for quite a few couples, so we are starting the process of correcting that. Our children are old enough now, are supportive of the split and it is just one of those things.

On to the markets where SPX has made the new all time high that seemed likely and where stock markets seem very disconnected from the real economy of eye-wateringly high unemployment, social distancing and sagging consumer demand. Is this sustainable? Well as always time will tell but I suspect not. We'll see.

I'm not sure who drew this outstanding cartoon below but many thanks to the artist for expressing the quiet satisfaction that US Main Street must be feeling now about the Nasdaq and the S&P 500 hitting new all time highs : -)

SPX isn't any more stretched than it was at the time of my last post, but it is still very stretched and there is a good argument and setup for thinking that the next retracement to the mean is starting here. The minimum retracement to the mean for me would be a backtest of the 45dma, currently in the 3238 area.

SPX chart vs 45dma:

Would that retracement to the mean move stop at the 45dma? No, historically it would often then continue down to the 200dma, currently in the 3072 area and the obvious next target on a break and conversion of the 45dma to resistance. Decent quality daily RSI 14 and RSI 5 sell signals are now brewing but need more downside to fix.

SPX daily chart:

On the SPX hourly chart an RSI 14 sell signal has now fixed and rising wedge support from the March low has broken. I haven't marked it in but there is a decent quality double top setup that would be targeting the 45dma area on a break down.

SPX 60min chart:

On NDX there is now a really very nice overall rising wedge from the March low and NDX may be topping out for a significant high here. A daily RSI 14 sell signal has already fixed, as well as this hourly RSI 14 sell signal on the chart below and I'm watching that rising wedge support, currently in the 11150 area, for a possible break down. 

NDX 60min chart:

Stan and I are doing our monthly big 5 and sectors free public webinar at theartofchart.net tonight and if you'd likely to attend you can sign up for that on our August Free Webinars page or the direct link that I will be tweeting on my twitter shortly after I publish this post.

Friday, 7 August 2020

Stretched

SPX broke up through both of the inflection points that I was looking at in my post earlier this week with the second one at the island top gap into 3337.75 yesterday. SPX here is very stretched, but that doesn't mean that it can't go higher, and there are no longer any significant resistance levels between here and a retest of the all time high, which I'm now leaning towards seeing before SPX makes the next serious retracement.

A serious retracement is of course a retracement strong enough to break and convert the daily middle band and then likely deliver a reversion to the mean move or more. I was asked earlier this week what I meant by that and I'm going to take a little time today to explain what I mean as it is very simple and extremely easy to incorporate into your market views if you don't have a system to do this already.

The system I use is based on the distance that price on SPX is from the 45dma, and I've found that this gives a good view. If you were to use the 50dma instead that would likely be just as effective but I've always used the 45dma myself. On the two charts below I've looked at the highs over the last seven years on SPX that delivered a mean reversion move, here defined as a retracement to the 45dma or lower. Obviously the 45dma is a moving target and I have marked some of the interim highs on the way to those highs that didn't deliver a mean reversion move to show that the markets could be less stretched by the time that mean reversion high delivered. As SPX has risen considerably over this seven year period I have listed both the approximate number of handles above and the percentage above for each high.

SPX daily vs 45dma 2013.5 to 2017.5:

The chart that interests us most here of course is the chart including the current move and at the close today I had SPX about 175 handles over the 45dma which is about 5.2% above. That is stretched by historical standards though the two highs since the March low have both been more stretched, at 6.8% for the April high (no mean reversion completed), and 8.7% for the June high (almost exact mean reversion move). That isn't untypical after a big decline and there was an interim high at 6.1% over the 45dma just after the early 2016 low.

I haven't marked in some of the smaller highs over the seven years but all of the highs I marked in before March 2020 landed in a range between 2% over the 45dma to 5% with the exception of the late 2015 high at 5.7% and the early 2018 high at 5.4%. I also noted that early 2016 interim high that didn't deliver a mean reversion move at 6.1% above that went into a mean reversion high at 4%.

The point is that from a mean reversion perspective the air is getting pretty thin up here, though after the resistance breaks this week I'm not seeing any strong signs that the next mean reversion high will be below the retest of the all time high. Let's look at that next.

SPX daily vs 45dma 2017.5 to DATE:

On the 15min chart I have a decent short term resistance trendline currently in the 3365 area, though that would be unlikely to deliver the mean reversion high. I would note the beautiful triangle on the 15min RSI 14 that broke down today and may well deliver a more modest retracement early next week.

SPX 15min chart:

On the hourly chart there is no current negative divergence and while the current move might still be an overthrow of the resistance trendline now in the 3300 area, my eye is drawn to the possible alternate wedge resistance trendline currently in the 3405 area.

SPX 60min chart:

There's no current divergence on the daily chart either so I'd be looking for a retracement and then high retest before a likely swing high. Given the lack of either distance or resistance between here and the mean reversion high, I'd expect that retest before we see that high, but that the next mean reversion high would likely not be far above it.

SPX daily chart:

Stan and I are doing our monthly free Chart Chat at theartofchart.net on Sunday 9th August at 4pm and if you'd like to attend then you can register for that on our August Free Webinars page. We'll be looking at the likely impact of COVID-19 on economies and markets over the coming months and years as well as the usual market analyses. Everyone have a great weekend.

Tuesday, 4 August 2020

Testing 3300 on SPX

The nice topping setup from my post last week failed to deliver, with SPX finding support once again at the daily middle band, and the very nice bull flag channel on NDX failed to break down as I was hoping it might. Instead it continued to form and delivered the high retest that we have seen this week. So what now? Well the high retests on NDX and SPX have of course set up possible alternate double top setups which are again of high quality, so this is the next important inflection point,and in the event that the SPX daily middle band continues to be solid support, perhaps the last inflection point before a retest of the all time high on SPX. 

On The NDX daily chart an RSI 14 sell signal has already fixed, supported by another on DAX daily, but those are the only good daily RSI divergences on indices unless they go higher. On the NDX hourly chart below weak RSI 14 and RSI 5 sell signals have fixed and there is a very high quality possible double top setup here. 

NDX 60min chart:

On SPX I'm watching the high quality rising wedge resistance trendline that I was looking at in my last post and that is overthrowing slightly in what should be a bearish overthrow. I mentioned yesterday that if that trendline was broken then the ideal range to make a high here would be in the 3000-20 SPX area (3290-3310 on ES) and the high today at 3306.94 is in that range. An hourly weak RSI 5 sell signal fixed today. 

SPX 60min chart:

On the SPX 15min chart an RSI 14 sell signal fixed yesterday and is still open and should deliver a move to the target 30 area on that RSI 14. We might well see that directly from here. 

SPX 15min chart:

The key support on SPX recently has of course been at the daily middle band, and if that isn't broken and converted to resistance soon then we are likely to see an attempt to retest the all time high on SPX. If we see another retracement soon, which seems likely, then I'd note that the next test will be a test of three important levels. The first of those is rising wedge support, now in the 3250 area, supported by the 50 hour MA currently in the same area, then the daily middle band, which closed today in the 3230 area. If that can be broken and converted to resistance then there is a high quality double top setup here that on a sustained break below 3200 would look for the 3100 area. 

If the daily middle band holds as support again that will open then test of the island top and breakaway gap into 3337.75, and a fill of that gap would clear the path for a retest of the all time high on SPX. 

SPX daily chart:

Stan and I are doing our monthly free Chart Chat at theartofchart.net on Sunday 9th August at 4pm and if you'd like to attend then you can register for that on our August Free Webinars page. We'll be looking at the likely impact of COVID-19 on economies and markets over the coming months and years as well as the usual market analyses. I'll also be doing a post tomorrow or Thursday looking at the way markets have behaved in past recessions, as the GDP figures last week have now confirmed that this is the steepest recession since records began in 1947. Everybody take care :-)

Monday, 27 July 2020

Possible H&S Forming Here

SPX didn't quite reach the 3290 bull scenario target area that I was talking about last week but made a respectable 3280 or so before rejecting back into a retest of the established support and possible H&S neckline in the 3200 area. The SPX hourly RSI 14 sell signal reached the possible near miss target and an RSI 5 buy signal has now fixed. 

Interestingly the high last week established a possible new rising wedge resistance trendline from the March lows, which is a development that I'm watching with interest, as the retracement since has broken rising wedge support and has put SPX into a possible topping process. 

SPX 60min chart: 

In a topping process the first thing I look for is the formation of a reversal pattern, and there is a very nice H&S that may be forming at the moment. The ideal right shoulder would be in the 3240 which is pretty close to the 3237 area high today at the time of writing. A sustained break below 3200 would look for the 3120 area, but the break down might fail at the daily middle band, which held the last two retracements and is currently in the 3186 area. 

Against a reversal directly from here on SPX though I'd note that neither the hourly RSI 5 buy signal nor the 15min RSI 14 buy signal has made the possible near miss target area yet, and none of the open hourly buy signals on ES, YM, DAX or ESTX50 have reached those either, though the hourly buy signal on NQ has reached the possible near miss target.

SPX 15min chart: 

Further downside looks promising on the NDX daily chart, where the RSI 14 sell signal finally fixed last week. 

NDX daily chart: 

..... though I'd note the perfect bull flag channel on the NDX hourly chart that is suggesting a high retest. NDX needs to break that channel support to open the downside.

NDX 60min chart: 

The DOW chart also has me wondering about a high retest here, with a perfect test and hold of rising support from the late June low at Friday's low. That too needs to break to open the downside. 

INDU 15min chart: 

In summary there's a very nice scenario to retrace back into the 3100-20 area here on SPX and that may well be part of a larger topping process as evidence mounts that there will be no V shaped economic recovery from the COVID-19 pandemic. We'll see how that develops and if SPX breaks back over the 3260 area I'll be leaning towards a retest of last week's high on SPX, NDX and Dow. 

Monday, 20 July 2020

Three Theoretical Bears

Just to start I want to state a clear health warning for the historical stats I'll be weighing at the start of this post. This stats can give a useful lean, but even an 80% bullish lean still assumes 20% odds that the market closes higher that day, and this lean in either direction does not carry with it any indication of how far up or down markets might close. That said, as a tool in the technical toolbox these are always worth looking at in my opinion, and often deliver decent results.

In my intraday video on Thursday and my premarket videos on Friday and this morning at theartofchart.net I was looking at the historical stats for those days and for this week and proposing a possible course that SPX might take into the end of this week.

The historical stats for Thursday and Friday leaned 57.1% green, with the stats for today at 66.7% green, and I proposed that I would be looking for a double top setup to continue to form, noting this morning that the high retest that wasn't quite reached on Friday should be made today, ideally after an AM low which we saw in the first hour of RTH (regular trading hours). Ideally that higher high would be marginal to leave an ideal nested double top setup.

At the end of today the historical lean would change and we might then see a significant reversal. The lean for Tuesday this week is only 19% green, making it one of the most bearish leaning of the year, and the historical stats for the rest of the week all lean bearish, albeit less strongly, at 38.1%, 42.9% and 47.6% green closes respectively. If the market follows the historical stats then there is a very nice looking topping setup at the moment, though that will be deteriorating a bit at SPX continues to go higher, so ideally SPX would stay under 3265 or so today.

So what are the three theoretical bears that i am referring to in the title today? Well at the moment this is a very nicely formed triple nested double top, with the smallest double top support at 3198 looking on a sustained break below for the 3155 area, then the medium double top support at 3127, with a target in the 3010-30 area.

SPX 15min chart:

The third and largest double top setup has support at 2965 with a target in the 2590 area. Signals are promising with both hourly RSI 14 and daily RSI 5 sell signals already fixed, though a strong close today could kill the daily sell signal.

SPX 60min chart:

The first big support level is the daily middle band that has held as support on the last two retracements, with that currently in the 3144 area. On a break below that would open possible tests of the 50dma, now in the 3075 area, and the 200dma, now in the 3035 area, and close to the targets for the medium double top setup.

SPX daily chart:

Is there an alternate bullish scenario? For sure. On a hard break higher from here the obvious wedge resistance trendline target, shown on the 15min chart, is currently in the 3290 area, and that's another reason that I'd be concerned if SPX continues to grind higher from here. We''ll see how that goes.

A couple of announcements today. Stan and I are doing our month free public webinar looking at FAANG stocks and sectors an hour after the close on Thursday. If you'd like to attend you can register for that on our July Free Webinars page.

Secondly we are running another Traders Boot Camp at theartofchart.net starting on 3rd August teaching technical analysis and trading skills. These are mainly aimed at existing subscribers but are open to all and are comprehensive, include a lot of useful trading tools, and very cheap relative to an equivalent courses that I have seen online. If you are interested you can read more about that here.

Monday, 13 July 2020

Moving To The Next Screen

One thing I try to stress in these posts is that the movement of the market can, to a significant extent, be broken down into a series of inflection points and, depending on the outcomes at those inflection points, the market moves to the next inflection point or screen.

Last week there was a very nicely formed inflection point and the decision at that inflection point was made on Friday, with a smaller bull flag channel ultimately breaking up with a target at a retest of the short term high at 3184.15, and a larger bull flag channel also breaking up with a target at a retest of the June high at 3233.13. Both targets have now been reached, with the high today on SPX at a marginal higher high at 3235.32.

Was this good news for bulls? Well not necessarily no, as my bear scenario had a decline ideally into the 2880 area before a likely retest of the June high to set up a possible double top for this move up since the March low. As that retest has been done now instead, that possible double top has been set up earlier and SPX has arrived at this next inflection point.

How decent is the pattern setup here? Well pretty good actually, at least to set the ball rolling to the downside. There's a decent RSI 14 sell signal on the SPX 15min chart and a small H&S there that has broken down with a target in the 3165 area, close to current rising wedge support now in the 3157 area.

SPX 15min chart:

On the SPX hourly chart there is already a previously fixed RSI 14 sell signal that is still valid, and I have sketched on the possible double top setup that may now be in play. A sustained break below the 2965 low would look for the 2595 area.

SPX 60min chart:

On ES another hourly RSI 14 sell signal has also fixed after the high today with a small H&S that has broken down with a target in the 3154 area, close to the next decent support level and the weekly pivot at 3156. A break and conversion of 3156 would open another retest of main current support at the daily middle band.

ES Sep 60min chart:

If the daily middle band can be broken and converted to resistance then that would be a serious support break and the large double top setup here would be in play, subject to successful breaks and conversions of the 50dma (currently 3039) and the 200dma (currently 3028). I'd note that a possible daily RSI 5 sell signal is now also brewing. Let's see how this develops. :-)

SPX daily chart:

A couple of things to mention today. We are running another Traders Boot Camp at theartofchart.net starting on 3rd August teaching technical analysis and trading skills. These are mainly aimed at existing subscribers but are open to all and are comprehensive, include a lot of useful trading tools, and very cheap relative to an equivalent courses that I have seen online. If you are interested you can read more about that here.

The last thing to mention is that our Paragon Options Service trading options on futures and ETFs is up about 82% so far this year and has just closed a sixth green trade in a row. If you're interested we offer a 30 day free trial and you can read more about that here.

I'm planning two special posts over the next few days, one looking at the next year or two under the shadow of COVID-19 and the other looking at the progress of the tech bubble this year and the gap that has been increasing between tech stocks and other stocks in US markets.

Thursday, 9 July 2020

Quick Update On COVID and SPX

I was reading a very interesting article yesterday on the progress of COVID-19 and it was interesting not so much because of what was said, as for the decent quality numbers that it was quoting on COVID-19 exposures in the US population, and the fatality rate from the now decently sized statistical sample of exposed population and consequent deaths. In summary about 5% to 8% of the US population has now been exposed and are showing antibodies, and the death rate so far, subject to some likely attribution of deaths to other causes, is coming through at between 0.49% to 0.78% of those exposed. If you'd like to see the source article you can see that here.

If you haven't seen it before I'll be referring back to my 20th March post 'A Short History Of Superflu Pandemics' and so I'm linking back to that for reference.

Now I've said before that I'm skeptical about an effective vaccine or cure being developed at all, and in the event that there is an effective one developed, whether it will be widely available before 2022, by which time it would likely not be a lot of use. I will be delighted to be pleasantly surprised about that, but my working assumption is that the coronavirus will just run through the population in the usual way for these pandemics and then fade away as an issue.

On that basis, though I'm seeing estimates that 70% of the population would need to be exposed to develop herd immunity, my working assumption would be that number might be as low as 33% to 40% infected in the 1889 and 1918 pandemics, ranging up to the 70% number because in the 1889 and 1918 pandemics those who were asymptomatic were likely not counted and that may, as now, have been a high proportion. On that basis 5% to 8% exposed is just a decent start, and will likely need to rise at least four or five times by the time herd immunity is established.

The death rate at 0.49% to 0.78% is much lower than appeared likely in my 20th March and so is actually good news, though if there is no vaccine or cure, and the number of exposures needs to be as high as 33% to 70% of the population, then as many as another one to two million people in the US may die of COVID-19. That would likely happen mainly over 2020 and 2021 and, given that many victims of COVID-19 are in sufficiently fragile health that they would have died in that timeframe in any case, then would likely increase the 6 million or so deaths in the US expected in any case over that period to 7 million to 7.5 million.

That's a lot of COVID-19 deaths, but by historical standards would be a decent enough result. By those historical standards this might also be enough of a reminder that some basic preparations might be made for the next pandemic, as these do occur regularly, albeit infrequently, and it was a dispiriting moment for the ongoing search for intelligent life on earth that this pandemic caught governments all over the world so completely unprepared, despite being perhaps the most predictable natural disaster in the history of the human species in every regard except timing.

If this pandemic plays out as I'm expecting then COVID-19 will be a major issue for a while yet and the management of COVID-19 over the next year or two, having already caused major economic disruption since March, may cause much more disruption over the rest of 2020 and possibly much of 2021. Stan and I are going to be running a webinar in early August at theartofchart.net looking at investing and trading in this environment and as soon as we set a date I'll be mentioning that on my twitter and in my posts of course.

On to the markets

SPX has been consolidating choppily for the last couple of days and this morning has come close to delivering a backtest of the daily middle band. There are three important levels of support just under 3100 and they are the daily middle band, now in the 3099 area, and the monthly and weekly pivots, at the 3099 and 3098 levels respectively. That is a lot of big support in a small area and and any break below would be potentially significant. A conversion of 3100 to resistance would open up a lot of potential downside but I won't be getting that excited about that until we see it.

SPX daily chart:

Hourly RSI 14 sell signals on both of SPX and NDX fixed earlier this week, and while the 3100 area has been backtested as expected, I'd note that neither of those signals has reached target yet, suggesting that there is likely to be at least another significant downside attempt in the near future. In the very short term there are clear bull and bear scenarios here.

SPX 60min chart:

The bull scenario is shown on the SPX 5min chart below and that shows the rising wedge from the 3000 low that broke down earlier this week. The minimum 38.2% retracement target was hit almost exactly this morning and a high quality bull flag channel has formed that would look for a retest of the last high at 3184 on a break over flag resistance.

SPX 5min chart:

The bear scenario is shown on the ES hourly chart below, and I was outlining this possibility in my premarket video at theartofchart.net on Tuesday morning. I was talking about the possibility that ES would retrace back to the area of the possible H&S neckline at 3106, with the low this morning was at 3105, then form a right shoulder with an ideal high in the 3155 area, with the high this afternoon at 3154. This H&S is in play and on a sustained break back below 3105 overnight or tomorrow the H&S target would be in the 3026 area.

ES Sep 60min chart:

Which of these scenarios looks more likely? Well I think the bearish scenario is better one overall so all things being equal I'd give that 70% on the setup quality. All things haven't been looking that equal in recent months however, and the bulls have certainly earned the benefit of the doubt of late, so I'm giving both options equal weight for the moment and watching key levels. The key level on the upside is 3155 ES. A conversion of that to support tips this to the bulls with a likely retest of 3184 ES after that and a possible retest of the June highs. A break below 3100 SPX from here would likely tip this to the bears, subject to conversion of the 3100 SPX area to resistance, and would open a possible move down to a bigger picture target in the 2880 SPX area next month.

A couple of things to mention today. We are running another Traders Boot Camp at theartofchart.net starting on 3rd August teaching technical analysis and trading skills. These are mainly aimed at existing subscribers but are open to all and are comprehensive, include a lot of useful trading tools, and very cheap relative to an equivalent courses that I have seen online. If you are interested you can read more about that here.

The last thing to mention is that our Paragon Options Service trading options on futures and ETFs is up about 82% so far this year and has just closed a sixth green trade in a row. If you're interested we offer a 30 day free trial and you can read more about that here.

I'm planning a post tomorrow looking at the progress of the tech bubble this year and that gap that has been increasing between tech stocks and other stocks in US markets.

Monday, 6 July 2020

A Killing Joke

I was asked an interesting question yesterday in our monthly free public Chart Chat at theartofchart.net, and I'd like to talk a bit about that before I start looking at markets today. The question was whether, given that market prices reflect everything that is currently known at the moment about that market, then how can that price be mistaken? My reply was that if that was truly the case then the price of tulips in January 1637 (just before that bubble burst) would have been equally justifiable and that, further, if that was really true there would be no speculative bubbles, which clearly there are on a regular basis. 

Something I didn't add, and should have, is that while statements like this are often thought of as economic rules or even laws, what they are in truth is just working assumptions that contain enough truth that economic models can be built using them that will have some relevance in modelling the behaviour of a market that is infinitely more complex than that model. 

There is a lot of faith in markets and this is something I've talked about before. I remember talking to someone years ago about gold, with my companion telling me that the problem with gold was that it was only worth what someone would pay you for it. I replied that he had just missed having an important insight, in that while what he said was true, he had missed that the same was true of anything that could be bought and sold, and also true of anything used to buy or sell it. There is no such thing as absolute value, all value is relative and based on confidence. 

It reminds me of a joke that I read in the 1980s in the cult classic graphic novel 'The Killing Joke'. The Joker tells the joke to Batman and it goes as follows:

I've always remembered this joke and felt that it had something interesting to say about human psychology and the impact that psychology has on our interactions with the world around us. The other thing I said in response to something else in Chart Chat yesterday was that while it was crazy in the current economic background that SPX had recovered as far as it has, it wouldn't be a lot crazier for markets to go even higher, and that we might see that happen. Best to keep an open mind rather than to stand in front of a train which might not stop in time. We have to suspend our disbelief watching the market, just as we would while watching a film or reading a novel. 

On to the markets, where I said two or three weeks ago that the main barrier to SPX retesting the early June high was the main rising megaphone resistance on NDX as if that held exactly than SPX would likely have to turn back down without that retest. NDX closed over that resistance trendline on Friday so the path has been cleared for that retest on SPX and while it may not happen, I'm thinking that the odds of seeing that are now at 50% or higher. We'll see. 

NDX weekly chart: 

Now there is some negative divergence here. On the hourly chart there is now a possible RSI 14 sell signal brewing on SPX and we could see a turn. The main support is now well below at the daily middle band, currently in the 3107 area. SPX 60min chart: 

There is some important support a bit higher than that though as decent quality rising channels have formed from the last low on both ES and NQ. ES rising channel support is now in the 3137 area and I'm watching that carefully. ES rising channel resistance is now in the 3200 area and the retest of the June high could be reached this week within that channel. ES Sep 60min chart: 

A couple of announcements today. Firstly I'd mention that today is the last day of our July 4th sale on annual memberships at theartofchart.net, and if you are interested and had not got around to pulling the trigger for that yet, you can do that here until midnight tonight I think. 

Secondly Stan and I have decided to do a special webinar on the markets in the ongoing COVID economic environment. This is likely to have a huge impact over the next year or three and we will be looking at the markets, sectors and instruments that should do better or worse in this environment. This will be like the webinars we do at the end of each year and we will likely set a date for this in early August. As we approach that I'll mention that in my posts and on my twitter

Lastly if you missed the free public Chart Chat at theartofchart.net yesterday you can find the recording posted on our July Free Webinars page.