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Wednesday 27 May 2020

In Between Days

SPX gapped up over 3000 this week and has been sustaining trade above it, with retracements. My working assumption is that SPX is on a path to reach my 3100 target area. So how is that looking on the SPX hourly chart?

Well I drew in two high quality possible rising wedge resistance trendlines on my SPX chart a couple of weeks ago and the first was resistance last week and then was gapped over at the weekend. I'm looking at the next one higher and if that was to be hit in the 3100 area, that would likely be towards the end of next week. There is already a possible hourly RSI 14 sell signal brewing but I'd expect SPX to need to go at least a bit higher to deliver a decently formed divergence. Main rising channel support is now in the 2900 area.

SPX 60min chart:
On the daily chart main support is at the daily middle band, also now in the 2900 area. I've drawn in the possible wedge resistance area that I'm looking at and ideally I'd  be looking for daily RSI 5 and NYMO negative divergence to have formed by the time that 3100 target area is hit.

SPX daily chart:
As well as IHS target on SPX in the 3110 area of course I am also watching the rising megaphone on NDX, which has been lagging so far this week. The main target that I am watching for here is on NDX at the test of rising megaphone resistance, that would require getting through resistance at the retest of the all time high before continuing up towards that higher target in the 10,150 - 10,200 area. NDX will likely need to pick up the pace a bit to get there.

NDX weekly chart:
In summary I am looking for both of these targets, 3110 area on SPX and 10,2000 area on NDX, ideally to be hit together near the end of next week or the start of the week after. We'll see how that goes.

Stan and I are doing a webinar an hour after the close on Thursday at theartofchart.net on FAANG stocks and key sectors.  If you'd like to attend then you can register for that on our May Free Webinars page.

Wednesday 20 May 2020

Another Inflection Point

In my last couple of posts I was writing about the rally scenarios on SPX and was saying that the recent lower high on SPX increased the chance that the retracement from that high was to finish forming a bull flag that would then break up into a minimum target at a retest of the rally high. The close last Friday back over the daily middle band was a pointer that SPX might be breaking back up, and that has followed through into a retest of the rally high, so that bull flag has broken up and played out. So where does that leave SPX now?

Well the first thing to say here is that the economic situation is not improving. The chart below is the Atlanta fed GDP forecast for Q2 2020 and at the moment that is looking like an expected Q2 2020 GDP in the -32% area. That is dire and it would be tempting to say that it is just deranged to think that stocks can head much higher in this environment. That said though, making money on stocks using economic fundamentals analysis has always been a chancy business and, while new all time highs directly from here look very ambitious, we could well see SPX go a bit higher before economic gravity drags SPX down to the lower lows that history strongly suggests will be coming in the next few months.

Atlanta Fed Median GDP Forecast Q2 2020:
On the bigger picture the main resistance at this current inflection point is the SPX weekly middle band. That's currently in the 2960 area, backstopped by the 50 week MA in the 2998 area, and to go higher SPX bulls need to break the weekly middle band on a weekly closing basis, convert that to support, and then head to the then open higher target area around 3100.

SPX weekly chart:
On the NDX weekly chart that conversion was done weeks ago of course and as I've noted previously, the next obvious target on NDX is either a retest of the all time high, or a little higher into rising megaphone resistance currently in the 10,150 area.

NDX weekly chart:
Supporting that higher target area on SPX is also the perfect rising channel that was established from the March lows at the lows last week. That channel support is now in the 2820 area and rising at about fifteen handles per day. That support would have to break to open the downside.

SPX 15min chart:
On the SPX hourly chart a retest of this week's high would set up negative divergence on the RSI 14 and that might deliver either a full reversal or just a larger retracement than the one we saw yesterday. The support for that retracement would be the 50 hour MA, currently in the 2890 area, the 5dma, currently in the 2882 area, and the daily middle band, currently in the 2872 area. That 2872-90 range should hold on a simple retracement and, if broken, bears would need to confirm the break with a break of SPX rising channel support.

SPX 60min chart:
In terms of resistance, if we are going to see a reversal before a break up towards 3100 then I'd expect to see 3000 hold as resistance until then. The fixed sell signals currently on ES, NQ, RTY, YM, DAX & ESTX50 area are supporting that retracement so I'd be surprised to see that break up over 3000 before that larger retracement. Overall I think the odds to a test close to the 3100 area before we see a rally high are now about 60%, with 40% odds on a hard fail under 3000.

Stan and I are doing a webinar an hour after the close on Thursday at theartofchart.net on FAANG stocks and key sectors.  If you'd like to attend then you can register for that on our May Free Webinars page.

Wednesday 13 May 2020

The Next Inflection Points

I was talking on Monday about the decent looking setup for a lower high on SPX, and so it proved to be. What next?

Well the rising wedge from the early May low has broken down and almost entirely retraced. There is some possible support here, but the trend down day that ES/SPX has delivered so far today may well see 2800 support broken and the next obvious move back into the 2750 area.

SPX 5min chart:
In terms of the options I was talking about in Monday's post, a bounce directly from the 2800 test, supported by possible RSI 14 buy signals brewing on the 5min and 15min charts, would be a decent (ish) fit with the triangle option I was talking about then, though that positive RSI divergence would mean nothing until the end of the day if today remains a trend down day.

SPX 15min chart:
If, as would be more likely I think, a bull flag channel or megaphone is forming here, then there is a very decent looking flag channel support target currently in the 2750 area. I'll be watching that for support if reached.

ES Jun 60min chart:
If SPX can break below that, then there is a possible H&S neckline in the 2727 area. If seen that could deliver a right shoulder bounce that would have an ideal high in the 2880 area, and that would be a match with a backtest of the 50 hour MA and 5dma, both currently in the 2890 area, broken yesterday afternoon and now the obvious resistance above.

If the sequence of scenario options here is sounding a bit confusing I have sketched the arrows on the chart below for the obvious paths from here excluding the triangle option, and merging the bull flag and H&S right shoulder options as they would likely look similar until SPX failed at a 2850-2900 right shoulder backtest.

SPX 60min chart:
On the daily chart SPX has broken back below the daily middle band, currently at 2854, and needs a close below that today and tomorrow to confirm the break. If this is a bull flag forming then that then would need to be reconverted back to support on the next leg up to open the minimum bull flag target at a retest of the 2954.86 high, and maybe higher.

SPX daily chart:
I'd like to stress here that I'm just following the technical breadcrumbs and am not buying the argument here that a new bull market is in progress. That's a very poor fit with both the current economic situation and what has happened historically in these sorts of times. I do think that this rally could go higher before reality bites however. Historically rallies like this usually happen in this kind of situation, and historically they all failed into lower lows. SPX could go higher before than happens though. 

Stan and I are doing a webinar at theartofchart.net an hour after the close tonight from our series on trading commodities, looking at attractive trading setups developing at the moment. If you'd like to attend then you can register for that on our May Free Webinars page. If you're interested in more market analysis you can sign up for a 30 day free trial at theartofchart.net here. No obligation beyond the free trial and I do a premarket video every morning, with Stan doing a video after the close, and access to our private twitter feed with a lot of useful day and swing trading updates. 

Friday 1 May 2020

Full Of Sound And Fury, Signifying Nothing

It's been an exciting week, with wild moves, bold pronouncements about markets, terrible economic news, expectations about interventions by governments, the number of US confirmed cases of COVID-19 climbing over a million, deaths from COVID-19 in the US climbing over 60,000 and over 235,000 worldwide. Exhausting and TGIF.

So what happened on the SPX over the course of the week? Well SPX closed last Friday at 2836.74, and closed tonight at 2830.71, so it dropped 6.03 handles over the week. Like a rollercoaster it was a wild ride that ultimately stopped sedately back where it started.
I did a post earlier this week looking at past backtests of the SPX monthly middle band and the close yesterday at the end of April was a visually obvious close slightly back over the monthly middle band, which has been a rare event, so I've had a look at time when this has happened in the past and, with a warning that a statistical sample of four is really very small, here are the four comparable occasions when this has happened in the past.

Marginal visual closes back over monthly middle band

  • Q2 1939 - Close below following month, then six closes over mid band into lower high then lower low. 
  • Q2 1960 - Higher low following month, then retest same level and close below mid band, then lower lows
  • Q3 1981 - Direct fail into lower lows
  • Q1 2019 - Immediate conversion of middle band into support then higher highs

So what's the take-away here? Well three of these four obviously failed to deliver a new high before lower lows, and the 2019 sample is now looking suspect because on the first day of the next month SPX then opened above the monthly middle band and never closed a day back below it, something SPX has clearly already failed to manage here, but this close was strong enough to suggest that after this retracement SPX may be able to climb back over the middle band and trade above it for a while before then likely heading towards lower lows, which is what happened in the case of 21 of all the 24 backtests that I identified, and in 5 out of the 5 cases I was looking at where there had been an economic shock comparable to the one still being delivered by COVID-19.

Personally I still think the COVID-19 story is still playing out and, while the world may now be past the peak of the first wave of this, the crisis is both medically and economically a long way from reaching the rearview mirror. That said, that's just my opinion, and there are plenty of others that disagree, but they wouldn't be the first ones to seriously underestimate this:
On to the markets, how are we looking on the current retracement from Wednesday's highs?

On the 15min chart the rising wedge has obviously broken down and fell directly though the 2860 area I thought might deliver a right shoulder rally for an H&S. Looking at the chart that area might well be resistance for a rally on Monday, if we see one. The next really big level support on the SPX chart is the much larger possible H&S neckline in the 2727 area.

SPX 15min chart:
An hourly RSI 14 sell signal fixed after the high this week and has reached the possible near miss target. The hourly 50 MA was broken this morning and if we do see a rally back to the 2860 area on Monday, would add to the already impressive resistance there.

SPX 60min chart:
I'm concerned that the daily RSI 5 sell signal on SPX failed at the high on Wednesday, so that is no longer supporting this decline. I'd also note that the strong support levels at the daily middle band and the new monthly pivot are at 2791 and 2771 respectively, and both are important levels to watch. SPX daily chart:
This is a wild market but the standard minimum levels I'd be looking for an a break of a rising wedge like the one shown on the 15min chart above would be at the 38.2% or 50% retracement levels in the 2662 and 2572 areas respectively. There's some decent support below but particularly if the daily middle band can be broken and converted to resistance, these are the levels that I would be generally be looking for even in a retracement that then rejected into higher highs. If seen, the next serious inflection point area for SPX should be the 2550-2700 area.

Stan and I are doing our monthly free public Chart Chat at theartofchart.net on Sunday covering the usual wide range of equity indices, bond, forex and commodity markets. If you'd like to attend you can register for that on our May Free Webinars page. Be there or be unaware! Everyone have a great weekend. :-)