Signs of Reversal

Obviously I've been talking at some length this week about the possibility of a bounce from the 200 DMA area and I think that may well be exactly what we are starting to see here. Let's consider the evidence.

Firstly I'll showed the 200 DMA analysis chart that I led with yesterday. You'll note that since the start of 2009 tests of the 200 DMA have outnumbered clean breaks by two to one. Further to that both of the declines in 2010 and 2011 were preceded by a test of the 200 DMA followed by a strong bounce before the main summer decline:

On the daily chart again the lower bollinger band was penetrated and held on the last decline, which was a relatively weak lower low on positive RSI divergence. Now obviously positive (or negative) divergences can be a treacherous tool as an immediate further decline can wipe them out, but that looks promising for a bounce:

I post the SPX vs NYMO chart every so often, and one thing to look for to indicate a strong bounce is positive divergence on a lower SPX low after the NYMO has reached the oversold zone marked on the chart. We have that positive divergence at the last low and you'll note that all of the nine previous positive divergences shown on the chart signaled at least a strong bounce:

I mentioned yesterday morning that a lower close on Vix would confirm a Vix Buy (equities) Signal and we got that. I don't rate these signals highly, but I have noticed in the past that they perform better after recent failures, and three of these signals have failed to confirm in the last two months. Support is at the middle bollinger band at 22.5 and the IHS neckline in the 21 area:

Looking at the SPX 60min chart the question in my mind here is whether we are looking at a bullish falling wedge with a slight overthrow at the low. Could be, though the upper trendline only has two touches so I'm not certain. That trendline would be strengthened by either a test before breaking up, or a retest after breaking up. Either way a break over declining resistance would look bullish. Key resistance above would be the last high (and potential IHS neckline) at 1334.93. If an IHS were to form there that would obviously look very bullish and the target would be in the 1403 area, which looks very ambitious from here. Worth noting that the technical target for the falling wedge would be 1415, but these frequently don't make target of course:

If we do see a bounce here then that would fit with what I'm seeing on USD. I posted my main USD Daily IHS chart a few days ago suggesting that we might well see a reversal at resistance in the 83.5 to 84 area to retest the IHS neckline and we are seeing a reversal there so far:

That reversal now also has support from EURUSD, where the tight declining channel from the last high has broken up, and I'm looking for a bounce to the important resistance level (and potential IHS neckline) at 1.2625. If we were to see an IHS form there then we could see a very strong bounce to test resistance in the 1.30 area. That's highly speculative at the moment of course though, and much depends on news from the Euro area over the next few days and weeks:

Overall I'm leaning bullish here, and will be leaning more bullish on a break over SPX declining resistance in the 1310 area. If we see that then we could well see a bounce to test the 1340 or 1360 areas, though I think the greater trend is still likely to be downwards. The move up overnight has pushed the 60min RSI into overbought so upside today might be limited.

There are two scripts to choose from here and it's worth mentioning both. The first is the presidential election year script, where we have just made a major low, and are on the way to new highs. Under the circumstances that looks like a long shot but you never know I guess. The second script is the script for the last two summers, where the first bounce from the SPX 200 DMA was followed by a strong bounce before the main summer decline started. I'm favoring the second script at the moment as it fits the economic backdrop a lot better. If Helicopter Ben announces QE3 tomorrow however I'll be considering the first script more seriously.