I suspect this week would be playing out rather differently if a significant statement were not expected from Bernanke at Jackson Hole on Friday. A lot of people are looking for an announcement of QE3, and the expectation from the QE2 announcement from Jackson Hole last year that sparked off a big move up is considerable. I'm not expecting a QE3 announcement as US inflation has risen considerably in the last year and Bernanke's backing for further QE both on the Fed Board and in Congress is at best questionable. Nonetheless it is possible that some sort of extension of QE will be announced and that might spark off a rally. Equally if there's little or nothing to announce that might trigger a new move down. In the interim I'm not expecting any huge moves while we're waiting for Bernanke's statement.
In the very short term the setup looks promising for some more upside after yesterday's rally. ES has formed a rising channel from yesterday's low that looks solid and has a very well defined support trendline with multiple touches on the 5min chart particularly. A small IHS has formed at support on the 5min with a target at 1163 and I've inset that on the 60min chart. If the channel breaks down then we might see a significant move down, as the current very well defined support trendline would be broken:
It is possible of course that we have now made a significant low, and that we are beginning a major rally. I have a few things I'm watching for that, mainly on precious metals and bonds, and on silver we have seen some of the retracement that I was looking for from the charts I posted on Monday and Tuesday. However the silver chart is now more interesting than it was before, in that silver has now returned to the main support trendline for the last five weeks and hit it twice overnight. That is a very strong support trendline and a break below it would open up a move to the 38.5 to 39 area. A very nice looking potential short and a break further down would look bullish for equities:
Bonds have also been trading inversely to equities and are also showing signs of an interim top on the daily chart. If we see a retracement there I'm looking primarily at the 135 area as the best support area and target:
If we see further moves down on silver (as a general PM proxy) and bonds then we could well see a signficant rally develop on equities. Another thing I'm watching is the bollinger bands on the Vix daily where the Vix is approaching the middle bollinger band. Vix has stayed firmly in the upper half of the bollinger bands for a month now and a move with conviction into the lower half of the bands might well signal a larger rally than I'm currently expecting:
I haven't posted the EURUSD chart in a while, and that's mainly because it hasn't been doing much of interest, and is still stuck in the triangle on the daily chart. I am still watching it though as a break either way, particularly upwards, might signal a big move, and a break up would also be bullish for equities:
I'm leaning bullish for today and expecting a move into significant resistance in the 60s and 70s on ES. I'm watching silver and 30yr treasuries particularly for a signal that this rally might have legs beyond this week.
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