Bearish Setup Almost Complete

The ES H&S pattern continued to build yesterday with a perfect reversal at 1186-8 resistance, and the right shoulder of the pattern is almost complete. Worth noting on this chart as well is the series of rising blue trendlines that ES has been falling through and retesting each time. That gives us our first resistance zone today in the 1178-80 area. Key resistance is still at 1186-8 and key support is at 1166-8. A break of either key level should signal the start of a significant move in that direction::

On the SPX 60min chart I now have a provisional declining channel. ES is at 1172.75 as I write, and sustained trading below 1175 ES during trading hours will break the most recent SPX rising channel. The obvious lower target for the provisional declining channel would be 1130 if reached within ten trading days. That could be as high as 1140 if reached earlier:

There was a big rally in the USD currency pairs yesterday that was worrying me, as a major breakdown in USD right here would most likely derail this retracement scenario. These moves have reversed nicely overnight though and no serious technical damage was done to suggest that the bounce in USD has finished. Here's the EURUSD 60min chart:

GBPUSD was the strongest of the USD currency pairs that I was watching yesterday. This has reversed overnight and I'm watching this carefully to see whether the current rising channel can be broken. If not then GBPUSD at least could make a new high soon:

This late October retracement isn't a done deal yet, but it is looking extremely promising now. To confirm it a break with conviction of 1168 ES is needed. On the upside, a break of 1178-80 ES would weaken the retracement scenario significantly, and a break of 1186-8 would kill it off altogether in its current form. I'll be watching those levels today and obviously today's GDP numbers could push this decisively onto one path or the other.

Possible ES H&S Forming

ES bounced off the possible H&S neckline yesterday and bounced to make the right shoulder for that pattern. If that's going to continue to form then I'd expect ES resistance in the 1186-8 area to hold today:

It could still go the other way of course. The current (green) rising channel on the SPX 60min chart held yesterday with a pinocchio down through to touch the H&S neckline. If we reach the neckline again that should break that rising channel. While that channel holds though the next rising channel upside target is in the 1210 SPX area:

If we did see a break up through 1200 SPX, that would be a very major resistance break. The 200 weekly SMA for SPX is sitting at 1194.20. That trendline was the resistance at which the SPX failed in April and from a technical perspective a break up through it would be the cherry on top of the already impressive bullish technical case that we are seeing at the moment. Here it is on a thought-provoking log chart of the SPX since 1980:

We haven't yet reached my EURUSD declining channel target at 1.36. Within that declining channel we have a short term support trendline which I'm thinking may be the lower trendline of a short term declining channel. If so, then we have reached the top of that channel at 1.386 overnight and it is currently being tested. I'm expecting that to hold, and it will be worrying for the short term bear case if it doesn't, though I do have an alternate declining trendline at 1.393 that would be the obvious resistance level if 1.386 doesn't hold:

We have a sloping H&S forming on gold which I'm watching with interest. The neckline's currently in the 1310 area and the target would be in the 1240 area:

Down Move Not Finished Yet

After yesterday's recovery and gap fill there was more more weakness on ES and EURUSD overnight. It seems likely that there is more downside coming because EURUSD is still well short of the channel target in the 1.36 area. I had drawn a trendline for a likely interim bounce from EURUSD overnight and so far it has bounced 55 pips from the hit there so I'm expecting EURUSD to bounce a bit more before the decline resumes. I'd normally expect to see a small declining channel on a move like this and if so, the short term target will be in the 1.39 area if hit today:

On the basis that the current EURUSD move doesn't look finished, I'm also expecting to see further weakness in ES this week, though with EURUSD bouncing in the very short term, it's possible we may not see much more downside today. On the ES 5min chart I'm looking for a bounce that could reach the 1182-4 area in the short term and then another move down, possibly towards 1167, to complete the head on a possible head and shoulders pattern:

That 1167 target isn't quite as speculative as it might seem from the ES chart. A natural support level for a retracement is the SPX daily 20 SMA and that was at 1167 SPX at the close yesterday and is rising of course so it will be a little higher today and more so tomorrow so if we hit it tomorrow the ES and SPX targets will be close to each other. On the SPX 60min chart I'm seeing support for the current (green) rising channel in the 1175 SPX area and that is the minimum target that I'm expecting to see hit:

One thing that we've not been seeing on any weakness in recent days is a flight to treasuries. Just the opposite and it is very clear now that we're seeing a significant correction on long treasuries:

Why have treasuries not been boosted by any weakness in ES? Well bonds tend to trend down as equities trend up and equities really have been trending up for a couple of months now. I've been saying for months that any substantial QE2 push would be likely  to send bonds trending sideways to down while equities trend up and the direct effect of QE2 on bonds, if any, will be only to cushion any fall.

There's also the fact that the technical position for equities looks so strong here that people are viewing any dip as a buying opportunity rather than a cause for alarm. Even the bears are mostly just looking for a dip towards 1130 SPX here, and there's every reason to think that might happen, with USD having bounced off strong support and commodities looking ripe for a correction. I was looking at the CRB chart yesterday and it is looking very toppy. It has also tracked EURUSD closely over the last few months so a correction in EURUSD should deliver the same in commodities:

Losing Steam I Think

There's been some talk of how much the current wave up resembles the wave up between February and April and they do look similar. Here's a chart of how I'm seeing SPX on the 60min chart:

As you can see, the initial rising channel broke down into a shallower rising channel and I think it may be about to break down into an even shallower rising channel (marked in purple). This would be a topping pattern similar to the one we saw in April. Here's an SPX chart that I posted on April 27th.

We might still make new highs from here, but this wave up is weakening, and if USD continues to bounce, I'm expecting it to break down in the next few days. For today I have a couple of downside targets on ES if we see more early weakness and they are 1178 for an alternate rising channel and 1167 to complete the head on a possible H&S pattern:

I was watching EURUSD yesterday to see whether the current rising channel would break down and it broke down overnight. I have a large declining channel on EURUSD and if it holds then I'd expect to see a fall to just over 1.36 next:

I have a similar but even shallower declining channel established on AUDUSD since the momentary touch of parity with USD a few days ago. I'm seeing the next target in the 96.4 area:

Bulls Break Up

I posted two channels on Friday, one rising and one falling, and at the intersection they formed a diamond. That diamond broke up late on Friday and ES moved to a new high overnight. It may have peaked, but looking at the chart the obvious next target is 1200:

USD moved down as well, but as yet there's nothing yet to suggest that the recent low in USD was not a major low. If EURUSD makes a new high though then the next target up is 1.43, and USD will then make a new low. Any move on EURUSD over 1.41 will make that look very possible:

There was some odd stuff appearing near the close on Friday and over the weekend. For a while on Saturday /TF (Russell 2000 futures) appeared to be trading on TOS and OptionsXpress and 5% down. Even stranger was the apparent move in /DX (USD futures) on Friday night, where there was a massive spike down that was recovered within 30 minutes. In terms of scale this move would have been approximately equivalent to a move on EURUSD from 1.395 to 1.46 and back again. I'm assuming that this was a ghost in the machine and that any trades from this 'USD flash crash' will be cancelled this morning. Here it is on the DX 5min chart:

Looking at other charts I saw on Friday that the big falling wedge on XLF had evolved into a big declining channel. Financials have shown few signs of life on this big move up on equities, and there's no sign yet that they're going to start recovering anytime soon:

There's been a lot of talk that natural gas might bounce soon, but there's not much sign of that on the daily chart. It could bounce, we're not at the last major support level above the 2009 low. If it breaks then a retest of the 2009 low looks very likely:

Friday was an unusual day for two reasons. Firstly the range was the smallest of the preceding seven days, so the GapGuy says that any opening gap is less likely to be closed. The second reason was that Friday was an all up day, in which SPX,USD, Oil, Gold and AGG (bonds ETF) were all up. Historically these are usually followed by negative closes but I'd be cautious about putting any money on that today unless we first see a hit of the obvious ES resistance level at 1200.

Short Term Bearish Setup

I wouldn't regard myself as a bear on equities on anything other than a very long term basis here and almost everything I'm seeing argues that the traditionally strong period November to April in most annual investing cycles is likely to be strong this time too. I'm not wild about the economic backdrop we're looking at, but I'm expecting equities to rise over the next few months regardless.

That said we would normally expect to see a significant high and retracement in October and right here and right now, the short term setup for a correction from yesterday's high is looking very good. On SPX we hit an important trendline for the second time in recent days and were rejected again. The previous steep rising channel has broken in recent days and we've spent several days making what looks increasingly like an interim top:

Strong assistance for a correction looks ready to be provided by USD, which is bouncing within the strong declining channel. The setup looks good for USD to bounce back up over 80 here and while that's happening is the best chance that we're going to see for any correction in equities:

One thing that I look for in a reversal within a big channel like this one is a reversal head and shoulders pattern and I've got one of those forming on USD as well. These tend to be very reliable performers though the target is the other side of the channel in practice rather than the measured target:

I did have a nice little declining channel on ES to support my bear scenario today but resistance blew out at 1177 and I don't think that it's in play now. I have two others, one rising and one falling. We'll have to wait to see who wins the battle of the channels today:

Other indicators are a mixed bag here. The gold:silver ratio is rising, which is promising for a correction. We had a Vix sell signal earlier this week, which was encouraging, though most definitely not definitive. Vix looks flat, which isn't particularly encouraging and treasuries have not bounced with the sharp declines in equities in recent days, which isn't encouraging either though with treasuries trending flat to up during the bull move in recent weeks that may not signify much. It is also a POMO day today which could derail my bearish scenario. We shall see, but unless my declining resistance trendline breaks I'm leaning short today.

One last chart to share on silver where we have a perfect broadening descending wedge from the recent high on the 60nmin chart. The wedge looks very tradeable in both directions:

The US Dollar and Equities

I've been watching the US Dollar carefully for weeks, predicting a bounce or major reversal at the lower triangle trendline. I've been watching /DX, which is generally a very good proxy for USD, and hasn't diverged much in the past when I've been watching it. I was therefore surprised to see yesterday on $USD that my target trendline for a reversal had already been hit. Here's how that looks on the weekly $USD chart:

The triangle target is in the 86.5 to 87 area but there is another target to consider as well. On the $USD daily chart I have a perfect declining channel and the lower trendline was hit at the same time as the triangle lower trendline.The target for the upper trendline of that declining channel is in the 80 area. Here it is on the $USD daily chart:

Now it's hard to be a USD bull at the moment. There's a lynch mob baying for the dollar's blood and it's led by the guardians of the currency at the Fed. That's not an ideal situation and the triangle may well break downwards. It is definitely something to bear in mind though and you can see the importance of USD to equities from the second chart where I've divided the USD waves to show the complex correlation with equities. These divide into four possible states as follows:

USD in wave up, equities in wave down:

As we were between the equities top in April and the first bottom 180 points below in early June, and also between the January top and the February bottom. The two were in sync and the equities moves down were very fast.

USD in wave down, equities in wave down:

As we were between the first hit of 1040 SPX and the interim low at 1005 SPX. Equities are fighting against the USD wave down and downside progress was slow and broken by numerous strong rallies.

USD in wave down, equities in wave up:

As we were from the end of August to the middle of October, and between the February low and the April high, with the two back in sync and so fast moves up in equities.

USD in wave up, equities in wave up:.

As we were in December with equities fighting the USD move up and making a little progress up with numerous retracements, and as we may be now if USD has bottomed, and until we make the next equities interim top.

So where does that leave us this morning? Well it may not say anything useful this morning at all. We could go on to hit the $USD declining channel lower trendline again shortly and I have a reasonable looking IHS on EURUSD that has an immediate target at a new high of 1.425:

We may therefore also hit my triangle lower trendline on /DX if this continues to play out. That target is at 75.75 of course. GBPUSD is pulling in the opposite direction to EURUSD this morning though EURUSD strength may carry it up regardless:

That's not what I'm expecting to see today however. On balance I'm expecting EURUSD to reverse and for USD to have a good day while equities have a bad one. Everything looks ripe for an equities fall today if resistance just overhead holds. If that resistance breaks though,  then I have an immediate target of 1200 on ES that I'd expect to see hit today or tomorrow. My line in the sand for seeing that is a new high on ES at 1182.5. If w're going down then a break of 1173 will open up an immediate target of 1165 and if that breaks then we could well see a drop to 1140.

This finely balanced situation is nicely summarised by the ES 60min chart, where you'll note the nicely formed IHS indicating to 1200. The rising blue trendline is short term support at 1173, the 1165 target is at the higher declining red trendline, and the 1140 target is at the lower declining red trendline:

There is a matching situation on Dow, with resistance at 11,100 and a descending triangle indicating to 11,335 if that resistance is broken with confidence. This should break one way or the other early today so one way or the other it looks like today should be interesting.

More Downside Coming?

The rising channel on SPX was broken yesterday and SPX closed well below it. At the least that is signalling to me that a topping process has started, for an intermediate top if not a major one. Looking at the charts yesterday night and this morning I'm leaning towards our seeing some follow through today, and I have some lines in the sand that I wouldn't expect to see breached if we're going to see that.

On the SPX 60min chart you can see the broken channel and the much larger rising channel where we have reversed at the top trendline is also well worth noting. We've reached similar trendlines on quite a number of charts worldwide and while there's not much in terms of patterns to suggest that we've just made a major intermediate top, the possibility is worth bearing in mind. The lower trendline of that big rising channel is in the 1065 SPX area of course:

Short term I have a declining channel on ES. The upper trendline is in the 1172 area at the moment and if we make it up to that declining resistance trendline, I'd expect to see a reversal there if we're going to see more downside today. The tip from the GapGuy today is that since 2000, fading gaps that follow unfilled down gaps has delivered 245 winners of 319 (77%), with shorts and longs performing equally well. If we do reach that declining resistance trendline the odds therefore look pretty good for a gap fill:

In terms of a target, if we see more downside today the rectangle target is 1145 ES, and I have a rising support trendline that you can see on the top chart at 1148 SPX. That's the same target of course so I'd be looking for a move to there.

I'm not particularly happy with the level that we've seen USD bounce at, as it looks to me as though there is unfinished business to the downside. That being the case I'm slightly doubtful about seeing a big five wave move here, and on both EURUSD and GBPUSD we can see three clear waves already. Having said that both of them have had two waves down of almost equal length and this is therefore looking as though that may well have been the first two drives of a three drives pattern. Here it is on EURUSD:

If it is a three drives pattern then I've marked the likely reversal areas and third drive targets on the charts and would add that if the third drive plays out, then that will strongly imply that both will then correct before continuing down. Here's the GBPUSD chart:

I'll leave you with a very thought-provoking chart today. I've talked about some charts showing the recent high at a major resistance area, and there are quite a few of those. Here's one that is telling a different story, and it is the MSWORLD chart for non-US stocks, which really looks very bullish indeed:

Push to 1201 ES?

In an ideal world the next few days would play out as follows. USD would fall to the strong support trendline at 75.75 while ES rose to a target in the 1200 area. They would trough and peak respectively on the same day and then reverse, with the obvious target for ES being at the IHS neckline in the 1130 area. It may not play out that way of course, and the reversal periods for equities and USD often don't coincide, but sometimes they do, as they did at the low in February, and with both close to decent probability reversal areas it may well happen that way this time.

On ES I know Pug is seeing a likely high in the 1200 area during the next few days and I have a rectangle on ES that is suggesting the same, with a target in the 1201 area. These break up 68% of the time though the rectangle is a bit sloppy to my eye, and the last rectangle that I saw on ES a few days ago broke downwards of course. This one won't break downwards unless we are to see a significant support break on ES, so I'm expecting that it is likely to break up:

In terms of support on ES and SPX, I have the support trendline on ES at 1066.5 ES at the moment, with the SPX lower channel trendline in the 1172 area. Those will obviously break downwards at some stage but I'm not seeing anything to suggest at the moment that the break is likely to happen today. Here's the ES chart from the August low:

On EURUSD  have a clear rising channel at the moment, with the next upside target slightly over 1.42 and support at 1.385. Support looks strong with four touches on the support trendline, but EURUSD has started a topping process by the look of it, and the next part of that process would be a break of that support trendline, but I'd expect even in that case to see a last spike up into the 1.41 area. Here's the current EURUSD rising channel:

Copper is very close to the upper trendline of the broadening top I've been watching. I've been looking at that carefully this morning, and I have the most likely location for the trendline at 390. There are only two previous touches to the trendline of course, and the first touch had a significant intraday shadow on the candle, so I've drawn in two other possible alternate trendlines and it is also worth noting that the target for the rising wedge that broke up is 405:

There's been a lot of speculation over the last few days as to where the amazing runs on AAPL and GOOG might find their next intermediate tops. I've looked at both charts and I don't really have a view on GOOG, but I have a rising channel on the AAPL weekly chart that suggests that the next reversal should be in the 335 area. That's worth noting as if AAPL reverses then Nasdaq should reverse too:

There are significant downside risks here and now though. While I've been writing GBPUSD, which appears to be topping out, has broken the recent channel support trendline and we're close to completing the head on what may well be a head and shoulders reversal pattern. If so however, I'd still be expecting a last move up to make the right shoulder of course. With EURUSD and GBPUSD both in apparent topping processes though, a bottom for USD looks close, and when it reverses it may well carry equities with it.

SPX Support Still Holding

We're definitely seeing some signs that USD may be in the process of making a significant low. I'm a little concerned about that as USD has not reached my target level yet. The initial EURUSD support trendline for this wave up has now turned into resistance and marked the reversal level on Friday:

GBPUSD broke the initial rising channel for this wave up a few days ago, and has formed a shallower rising channel. If this topping process continues then I would expect to see this turn next into a declining channel or H&S pattern. Today I have a target for GBPUSD just under 1.58 for the lower trendline of the current channel:

I was looking at an SPX daily chart on Friday and on that chart the last SPX high looks as though it may have been more significant than I was expecting at the time. There are two big channels, one rising and one falling, and the upper trendlines of both were hit on the same day, with SPX making an intraday high at the top of the rising channel and then closing at the upper trendline of the declining channel. Of the two channels that makes the rising channel look stronger, and if we are to see more upside as many expect then the upper trendline of the rising channel may well be a key resistance level:

The lower trendline of the SPX rising channel from the August low held on Friday and as long as that holds, I'm expecting more upside as well. Trading has been weak for much of the night and on ES the support trendline was broken on Friday and again last night, but I'm seeing the SPX trading hours support trendline as the important one here, and while that holds the outlook is bullish. That support trendline is at 1169 SPX today:

October Opex

There was a significant intraday decline yesterday but SPX is still in the rising channel:

USD is still working its way towards my target but EURUSD has not quite retested Wednesday night's high. I was looking at the USDJPY chart yesterday and we are now approaching a very significant level, which is the all time low set in 1995:

Treasuries have now definitely broken down from the rising channel of the last few months. If equities are going to do well over the next few months, and I'm expecting that they will, then treasuries should do badly. During QE1 treasuries trended gently downwards and I'm expecting to see the same in QE2:

I was reading some excited talk this week about a golden cross being made on SPX. The golden / death crosses are when the 50/200 SMAs cross on the daily chart, and the bullish crosses have been a very reliable indicators for future rises in the past. Looking at the chart we're close to a golden cross on SPX, but we're not quite there yet:

I'm still leaning bullish at the moment, and will be until the SPX rising channel is broken, but looking at the historical stats, trading on the day of October opex is historically bearish. On the Dow the last four have closed down, and five of the last six, with a 0.4% gain in the one exception in 2004. I'm doubtful about seeing much upside today and if we see a gap up at the open, there's a good chance that gap will be filled. If we see some downside today I have rising trendline support on ES in the 1165 area, and the SPX rising channel support also in the 1165 area which is at about 1162 on ES.

LATE NOTE:

I've just seen something that looks very important on the SPX daily chart. Have a look at the two big channels with thick trendlines on the chart, and where the upper trendlines intersect: