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Friday, 6 December 2019

Forming The SPX High

I was talking about mean reversion in my post at the weekend and that was well timed, with the first spike down on Monday. The daily RSI 5 sell signal fixed and reached target and there was the first sustained break under the SPX 50 hour MA since the cross back above that in the 2920 area. So far, so good.

Now the more impatient of our trader brethren are always looking for a first sign of weakness to be followed by a wagnerian twilight of the gods with SPX falling like a rock and blood running in the streets, but in practical terms that is pretty rare, and there's no reason to expect that here, as even if we pull more than 20% into April in a technical bear market, as I think we might well, I'd expect that to just be a technical retracement on the bigger picture before higher highs.

I've looked back through the SPX data as far as that goes back and 70%+ of all significant highs and lows on SPX are some kind of double top or bottom. The decline we saw this week on SPX is what I would describe as the low before the high, a sort of warm-up spike down before the more serious high is made, and that is generally followed by a retest and new high, which I'm expecting to see next week.

On my subscriber chart last night I drew the setup on ES as an IHS which would likely break up over 3125 last night or this morning and then either run the bull scenario into a minimum all time high retest, or fail after the break into a lower low, after which we'd likely make the same all time high retest from lower down. ES has obviously gone with the bull option on this morning's strong job numbers, and the minimum IHS target is a retest of the all time high, with a possible extension target into the 3180 area.

ES Dec daily chart:
There's a similar setup on the SPX 15min chart and the possible IHS extension target there is in the 3175 area. These targets don't have to be made, but often are. One other thing that I would note from this chart is that the move up from 3070 is within a tight rising channel, and I'd expect to see a test of that short term channel support earlyish next week:

SPX 15min chart:
On the hourly chart I'm always talking about the importance the the 50 hour MA as short term trend support and resistance. That was resistance yesterday and SPX gapped over it at the open today. That will likely now be support until the next leg down has started. We should see negative RSI divergence on the hourly chart before than next move down begins.

SPX 60min chart:
On the daily chart as soon as the current all time high is retested a full possible RSI 14 daily sell signal will start brewing as well as a weekly RSI 5 sell signal. Those divergences will likely last into the next short term high and those sell signals should fix when the next leg down gets started.

SPX daily chart:
The minimum target for this move is satisfied as soon as the current all time high at 3154.26 is retested, but SPX may well run a bit higher. I mentioned the possible IHS extension targets in the 3170-80 area. I'd be surprised to see SPX much higher than that and it may well not get that far. We'll see.

The monthly free public Chart Chat covering equity indices as well the usual wide range of other market and instruments on Sunday at 4pm EST and if you'd like to attend you can register for that at our December Free Webinars page. Everyone have a great weekend :-)

Sunday, 1 December 2019

Coming Soon - Mean Reversion

I've been talking in my last few posts about expecting a significant high at the end of November, to be followed by a downward cycle into April 2020, and here we are at the end of November, so how's that looking here? Well as it happens a rare and significant event happened at the close today that confirms the inflection point here and leans strongly towards seeing that retracement next.

Stan and I are from different schools of charting of course and are always looking for strong matches in our analyses across the many market that we cover at theartofchart.net as when we find them it strengthens the forecasts and this cross confirmation is a very nice one to see.

That event was NDX closing clearly above the monthly upper band at the end of November. This is a stat I've been watching for a few years now, and this has happened at the end of nine previous months (not within a monthly upper band ride) since the bursting of the tech bubble in 2000. One of those instances was at the major high in 2007. Another three were early in monthly upper band rides in 2007, 2013 and 2017. The remaining five signalled significant multi-month consolidation in late 2006 (consolidation) , early 2012 (over 5% retrace), late 2016 (consolidation), late 2017 (over 10% retrace), and mid 2018 (over 20% retrace). The odds here favor multi-month consolidation or retracement by two thirds, and over 50% in favor of a significant retracement, which would fit with the retracement that we have been talking about from the swing high we have been expecting here.

NDX monthly chart:

So where might that retracement go? Well on SPX there has also been an interesting development at the high this month, as a decent quality rising channel may now have been established from the 2009 low. If that channel resistance holds and SPX returns to channel support, then that is now just under 2300. I'm wondering whether this retracement might return to retest the December 2018 low at 2346, and perhaps establish a firm floor there, and then return to channel resistance, just tested of course, and rising at about 145 handles per year. That would be an ideal trading scenario here and it might be too much to hope that SPX would give us such an generous gift. Still that scenario will certainly be at the top of my Xmas list for Santa this year. :-)

SPX monthly chart:
In terms of the shorter term setup on SPX, the trendline that I was looking at in previous posts was the rising wedge resistance trendline from the December low last year and that has been hit and slightly overthrown, which is pretty standard for a rising wedge before it breaks down. That's looking good to the downside with rising wedge support now in the 2960 area. A high quality RSI 5 / NYMO daily sell signal is now brewing.

SPX daily chart:
On the hourly chart there is currently no negative divergence on the RSI 14, and that has me wondering about a high retest on Mon/Tues before we see a larger move down to set a possible hourly RSI 14 sell signal brewing. Key short term support is in the 3125 area at the 50 hour MA, which has not been convincingly broken since SPX crossed back above it.

SPX 60min chart:
One thing I like to see in a candidate high is a rising wedge within a larger rising wedge, as these are frequently termination patterns. In this case there is a very nice smaller rising wedge from early October and wedge resistance was hit at the high last week. Possible H&S or double top options to go lower depending on the high tomorrow, and this shorter term rising wedge support is currently in the 3128 area.

SPX 15min chart:
A couple of announcements today. The first is that we are running our annual Black Friday sale on annual memberships at theartofchart.net, which as well as the usual two free months on an annual membership is an additional 20% off. That is running until the close on Friday 6th December and if you are interested, you can find the link for that here.

The second is to mention that our next monthly free public Chart Chat is in a week on Sunday 8th December. If you'd like to attend we will be covering the usual very wide range of instruments and you can register for that on our December Free Webinars page.