- 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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Friday, 24 June 2022

Rally Testing Second Resistance

Daily RSI 5 buy signals have fixed across the board on SPX (weak), NDX (full), IWM (full) and Dow (weak), so it is possible that the rally may extend significantly further without a low retest. There are also fixed hourly RSI 14 buy signals fixed on all four and none of those have yet made target, though a couple of those may make the possible near miss target on the gap up this morning.

SPX daily chart:

The first resistance for this rally was in the 3785-3800 area, with the SPX double bottom target at 3785 and a really nice topping setup that formed there which is worth a look as it is a very nice example of a strong topping setup that I was following on SPX until it failed yesterday afternoon.

Obviously yesterday was the third day on the Three Day Rule, so bears needed to deliver a daily close below the 5dma in the 3725 area to trigger the Three Day Rule setting up the retracement low retest. A very nice looking topping setup formed on Wednesday afternoon and much of Thursday with an initial H&S marked in red that broke down on Wednesday afternoon to complete the head on the second pattern, in purple.

On Thursday morning there was a gap up into a near perfect H&S right shoulder and that broke down yesterday with a target in the 3710 area, and had that delivered into the close then SPX might have triggered the Three Day Rule retest into the today's bearish historical stats of 71.4% red closes. That would also have set up the third possible asymmetric double top or H&S, marked in black, to deliver the move back to the retracement low.

However SPX instead delivered a classic rejection back into a retest of the rally high. So where does that leave us this morning?

SPX 1min chart:

Well obviously the retest of the rally high yesterday afternoon set up a possible double top setup, but that has been considerably weakened by the overnight gap up that looks likely to fix at the open.

The other main option is that the initial rising wedge from the retracement low is expanding, with a new rising support trendline established at yesterday's intraday low. If so the obvious next target within the wedge would be wedge resistance, which closed yesterday in the 3827 area, and isn't far below the 15th June high at 3837.56, which is of course a possible IHS neckline. That test looks likely today and we'll see how that goes.

SPX 5min chart:

The resistance trendline on the SPX wedge isn't great quality though, and there is a better example on Dow which looks similar, but has a very nice three touch resistance trendline. That trendline is now in the 30,970 area, just below the 15th June high and possible IHS neckline in the 31,000 area.

INDU 5min chart:

The historical stats for today lean 71.4% bearish, and would have been ideal for a retest of the retracement low, but the setup to get there fell apart from yesterday afternoon and I'm very doubtful about seeing that today. I like resistance in the 3840 SPX area today and I like the chances of that holding. If so we could see an IHS right shoulder form that would have an ideal right shoulder low in the 3705 area. If that IHS forms and breaks up that would have a target in the 4037 area, well above the next big resistance area which is the daily middle band now in the 3948 area.

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I should mention again that our Follow The Leader service at theartofchart.net is up 100% so far this year. The technology to support this service is provided by our partner, GFF Brokers. GFF Brokers is an authorized broker for the World Cup Trading Championships Advisor programs. The profits on that so far this year on the nominal  account of size at $25k would be enough to pay the Triple Play subscription at the standard monthly price for ten years. Follow The Leader is included in the Daily Video Service and the Triple Play Service, which includes the Daily Video Service. If you'd like to try a free trial of the Triple Play service you can find that here.

Wednesday, 22 June 2022

Back On The Three Day Rule Again

Last week I was talking about a likely modest rally coming, which we have seen, and then a low retest, which we have not yet seen but I'm expecting to see this week.

After that I'm thinking we may well see a much larger rally on SPX, and one thing I was waiting to see before that rally was decent positive divergence on the weekly RSI 5, which we now have.

If we do see that larger rally, then I'd be looking for a test, and perhaps a break, of main downtrend resistance, which is at the weekly middle band, now at 4209.

SPX weekly chart:

I was looking for two things before that larger rally on the daily chart and both are now in place. The first was positive divergence, and a weak RSI 5 buy signal fixed yesterday. If we see another low retest then a full size daily buy signal should start brewing.

The second thing was a daily high volume spike, often seen near significant highs and lows, and we saw that on Friday.  Does it matter that this spike was likely more about opex than exhaustion? Historically not particularly, though a high volume spike on a really strong down day would have been better.

SPX daily chart:

Yesterday SPX closed back over the SPX 5dma, now at 3726, and that puts SPX back on the Three Day Rule. If there is a clear close (3-5 handles minimum) below the 5dma in the next two days, then there should be a retest of the retracement low before a retest of the all time high, though that is of course a long way above right now. This rule has fixed eight times so far in 2022 and has delivered eight times so far. On this basis of calculation (after a rule tweak in 2019) this hasn't failed to deliver as far back as I have looked, to the start of 2007.

SPX daily 5dma chart:

Now I know the all time highs are a long long way above at the moment, but I work hard to draw my charts with an objective eye, and what I'm seeing on the US index charts, as well as many stocks and ETFs, from the all time highs are bull flags, which have generally been improving in quality as the markets have gone lower.

SPX historically has a very strong track record of retesting highs and lows while making significant tops and bottoms. A few years ago I went back through the full history of the SPX back into the 1920s and found that this happened about 70% of the time, forming double tops or bottoms at those retests. Now that is a significant distance from 100%, and bull and bear flags do break against expectation 20% to 30% of the time, but as long as those bull flag setups are there, then there is some chart support for a possible retest of the all time highs.

On the NDX chart a daily RSI 5 buy signal fixed yesterday and the bull flag setup is pretty decent.

NDX daily chart:

On INDU another weak RSI 5 buy signal fixed yesterday, but I'm showing the hourly chart below to demonstrate how some of the bull flag setups have been improving as markets have dropped lower. On the Dow hourly chart below you can see how the first bull flag trendline broke slightly to establish a better trendline.

INDU 60min chart:

The historical stats for the rest of this week are neutral to slightly bearish except for Friday which leans 71.4% bearish. If we are to see that low retest then the odds of seeing it happen this week are decent.

I find myself having to defend even suggesting that an all time high retest here might be possible, and obviously the economic backdrop isn't promising, but the charts say it is possible and I prefer to take my lead from those. There is also the reality that the news background tends to look bleakest at lows, and best at highs. When I wrote a post on August 6th last year talking about a possible backtest of 3800 SPX coming, the response was mainly polite incredulity, yet here we are. We'll see.

We hold a couple of sales on annual memberships every year at theartofchart.net, and the summer sale is now on, with an extra 20% off annual memberships, so eight months for the price of twelve. If you're interested the subscriptions page is here, and the sale code is july4sale.

I should mention again that our Follow The Leader service at theartofchart.net is up 100% so far this year. The technology to support this service is provided by our partner, GFF Brokers. GFF Brokers is an authorized broker for the World Cup Trading Championships Advisor programs. The profits on that so far this year on the nominal  account of size at $25k would be enough to pay the Triple Play subscription at the standard monthly price for ten years. Follow The Leader is included in the Daily Video Service and the Triple Play Service, which includes the Daily Video Service. If you'd like to try a free trial of the Triple Play service you can find that here.