Follow the Leader

One thing I aways look around for in the event that trendlines aren't lining up that well on SPX is another major index that may have assumed the lead for the time being. That index for the moment is the Transports index, and I say that because the last low there was a perfect hit of the rising support trendline from the October low. On the transports index I'm seeing what looks like a 70% bullish ascending triangle, which just needs (ideally) another reversal from the upper resistance trendline to confirm it. That resistance level is now 2% above and 'll be seeing that as strong resistance this week:

It does look like we might see a sharp reversal soon. ES is making higher highs on increasing negative 60min RSI divergence and is inching up through a strong resistance zone. There is a clearly defined support trendline that should signal when a retracement begins. On the SPX the daily 200 SMA has now been penetrated and the last close above this in October reversed after a day or so:

So where are equities on the bigger picture? On thing I'm watching for is a bullish cross on the SPX weekly 13 & 34 EMAs. The 13 week EMA is now only 6 points below the 34 week EMA and a break over the 34 with confidence has been a very reliable bull signal in the past:

On the SPX daily chart a (golden) cross of the 50 & 200 daily SMAs is still some distance away. I've marked those crosses up on this 6 year chart but I've also added the a review of the reversal H&S patterns (four made target, one failed) that formed on all of the last five big reversals on SPX. There is no sign of one here, as the several week IHS that many are looking at doesn't qualify as a reversal IHS. You don't have to have one of these form of course, but I'd be more comfortable with the idea that a big new bull trend has started if there was one:

What else do we normally see on a big new bull wave up in equities? Positive divergence from copper and other commodities, and negative divergence from USD and bonds. You don't need to see all of those, but at the moment we aren't seeing any of them. For that reason, if we see a big move up on equities over the next few weeks, and I think we might, I'll be looking for failure in the 1320-1400 area and will throw out again the possibility that we might see a double-top, with the October low on SPX as the pattern neckline.

Over the next few weeks, and regardless of the sharp retracement that I'm expecting to see this week, I'm leaning bullish now, and would see that sharp retracement as a buying opportunity. SPX has broken declining resistance from the July highs, and for me the next obvious target is declining resistance from the high in the 1310-20 area. 30yr Treasuries have broken rising support from the October lows which opens up more downside there:

A bounce on EURUSD would help a strong bounce on equities a lot, and EURUSD is still trickling up towards declining resistance. I think EURUSD may well be in a short term bottoming process but the pinocchio through short term rising support on Friday has me leaning towards a test of the lows before any more substantial bounce. Rising support will meet declining resistance on EURUSD within a day or two so it will have to break one way or the other soon:

The other reason I'm leaning towards seeing a sharp retracement this week is that we are now testing the limits of what can be expected on a Santa Rally. If we see a move up straight into 1300 resistance by the end of the week then that would put this Santa Rally on a par with the previous strongest example in the 80 years since the idex was founded. That would be a very rare event and rare events are by definition rather unlikely. The current move up is showing signs of exhaustion and I'm expecting reversal shortly. After that reversal I'm expecting to see more upside into mid-January.

I'm not going to be trading much this week and will be away for some of it. I should get a full post out tomorrow, a short post out on Thursday and possibly no post at all on Friday.