Very Bullish Pattern Setup

I gave three targets for the bulls yesterday and they were to break rising support on Vix just over 18, to break over the IHS neckline at RUT at 776, and to break over resistance in the 1357/8 area on SPX. Vix broke support and retested it, closing at the trendline, RUT broke over the IHS neckline to close at 886, and SPX broke over 1357/8 to peak at 1363 and close just under 1358. I have to say that was impressive and the short term pattern setup here is unambiguously bullish.

Many tops or near tops are being called this morning across the blogosphere, and equities are significantly overbought short term. Is it possible that we are seeing a top here? Of course it is, pattern setups are only ever probability setups, but as I said on Monday, of the five decent IHS setups like this one since the start of 2009, including a 17% fall in 2010 and a 21.5% (technical bear market) fall in 2011, all five made target.

One could argue that the Euro crisis makes this year different, and that's possible, but if you judge that the Fed must think that economic fundamentals are dangerously weak at any point where the it is nakedly supporting the stock market, then that covers the entire period, so what really looks that different now? Unless we see conviction breaks back below these IHS necklines, which didn't happen on any of these five successful patterns, then this setup is bullish and my bias is therefore bullish until these pattern targets are made or we see a clear topping setup.

There is definitely room for some retracement however. SPX punched through the upper bollinger band intraday and closed just above. A close back inside the daily bollinger bands would normally signal either a retracement to test the middle bollinger band or a period of sideways consolidation, but we haven't seen that close back inside yet:

All the 60min equity charts look overbought here. On SPX the IHS target is 1403-5, and the IHS neckline at 1335 should be solid support now. I have rising support in the same area today and a break below both would be a concern if we saw that:

On Dow the IHS target is 13,250. The IHS neckline, rising support from the low, and the April low are all in the 12710 area, so I'd expect that area to hold as support on any retracement. I've been watching a possible rising wedge on Dow here and that broke up yesterday. The lower trendline only had two touches so this isn't a high quality pattern on a break up. If this is an overthrow before breaking down however, then it would look valid, so rising support needs to hold on Dow:

On NDX the IHS target is 2697, and I'd be looking for support on any retracement at the IHS neckline at 2570-5. Rising support from the low is slightly below there at the moment:

On RUT the IHS target is in the 820 area. I'd be looking for retracement support at the IHS neckline at 776 and at 770:

Vix isn't a tradable instrument, and I wouldn't give the H&S target there as much weight as the others. For what that's worth though the H&S target on Vix is at 11.5. On the (equity) bull side rising channel support on Vix broke yesterday and retested, so the pattern and trendline setup on Vix is now clearly bearish for Vix and bullish for equities. On the equity bear side Vix closed below the daily bollinger band on Monday and closed back inside it yesterday. This has triggered a Vix Sell (equities) signal that would be confirmed on a higher close on Vix today. I don't rate these signals historically at all but I know a lot of people watch these. What this does emphasize however is that equities are overbought, Vix is oversold, and there is definitely room for retracement here:

I showed my shorter term TLT chart yesterday with clear support in the 124-5 area. On my six year TLT chart that area is broken resistance on a five year rising channel that was broken three weeks ago, and was then retested two weeks ago and last week. That level is key support for TLT here in my view:

Of H&S patterns that make target there are two common types. The first type is where you see a significant break over the neckline, followed by a neckline retest, and then the main move to target. The second type is where you see a swift move to the target with no retest. Neckline retests happen a lot and we may well see one here. Most neckline retests happen before a move more than 50% of the way towards the target, and that 50% dividing line of SPX is in the 1370 SPX area. If we close above 1370 SPX I would no longer therefore be looking for a retest of the neckline, and on a move above 1380 I would then be watching the 100 DMA (currently at 1359) as primary support for any retracement.

It's Fed day today and I'm expecting either an announcement that the Fed is doing nothing, or that the Fed is continuing Operation Twist, which in my view is just shuffling paper around to create an illusion of activity. The equity markets seemed impressed shortly after the announcement of Operation Twist on September 21st last year though, so mine is a minority view, and we might see a bullish follow-through to any such announcement today. There's a nice review of SPX performance on Fed days at Bespoke Invest and you can see that here. That shows these days to be 71% positive since December 2008, though the largest Fed day fall during this period was on September 21st last year when Operation Twist was announced.