The Fed and Labor Day

Ben Bernanke is speaking at Jackson Hole at 10am ET today and it's hard to predict what he might say there. The Fed minutes from last week suggest that he might announce QE3, though there doesn't seem any good reason to do that here unless it is intended either as a competitive devaluation of USD, or an intervention in the presidential election in favor of Obama. Either way it might well backfire on the Fed and I'm doubtful about QE3 being announced today. What seems more likely is some sort of extension of Twist. We'll see.

Short term the bollinger bands on the daily SPX chart are now pinching together. This is when the distance between the upper and lower bands become unusually low and generally signals a significant move. The two previous pinches in 2012 were in March and April, and respectively signaled the moves into the April 1 and May 1 highs:

I posted a chart on twitter yesterday afternoon showing the possible H&S, and as SPX didn't move much before the close I'll repost that again here. A move below last week's lows would looks distinctly bearish with the H&S target in the 1370 area and rising channel support on SPX in the 1380 area:

EURUSD broke rising support yesterday but never triggered the possible double-top. Instead a triangle formed and has broken up overnight. The obvious target is wedge resistance in the 1.264 to 1.265 area, and EURUSD is testing the rally highs at the moment:

CL broke below rising wedge support yesterday, which I wasn't expecting yet. I think a top is now being formed and if we see a break over declining resistance in the 96 area I would be looking for a retest of the highs for a possible double-top. Worth mentioning though that the break yesterday might have been a wedge overthrow before a break upwards. 31% of rising wedges break up and in my experience are rather better at making target than the ones that break down. I'd be looking for topping signals in the target area rather than just diving in short there. I would only expect a big move up on CL from here in the event that QE3 is announced however.

TLT returned to test the recent highs yesterday and arguably an IHS has formed, though the right shoulder is undersized. I see three decent paths from here. For the first option, in the event that TLT breaks up, I would cautiously expect a test of the 2012 highs. On the second option, if TLT turns down again here, then a short term double-top has formed that indicates to the 123.5 area on a break below Wednesday's low. I would then expect reversal back up there to complete the IHS and  break up towards new highs. The third option is that TLT reaches 123.5 and breaks support there again to resume the downtrend. I'm favoring option 2 at the moment:

Hard to call today with Bernanke speaking in a few hours, but I'm leaning cautiously bullish. On a break below last week's low that would switch to bearish and I'd be looking at those 1370 and 1380 targets, or at least I would be if I wasn't taking the rest of the day off. Everyone have a great long weekend! :-)

Broken Support on ES

On the SPX daily chart the middle bollinger band was support again yesterday, but there's every reason to think looking at ES that SPX will break below that this morning. If so then the obvious targets are the lower bollinger band in the 1382 area and rising channel support in the 1379 area. There is a poor quality H&S that has formed on SPX with a target in the 1365-70 area on a break below last week's low but I wouldn't rely on that being reached:

On ES and SPX a new support trendline from the late July low had formed, and on ES that has broken down overnight. The obvious ES target would be rising channel support in the 1368/9 area, and that would fit with the low quality H&S on SPX, but the strong support in the 1379 - 82 area on SPX is the first target and may well hold:

EURUSD looks fragile here, and on a break below the new support trendline from the 1.23 low the obvious target would be the 1.2465 area. On a break below that the double-top target would be in the 1.2356 area with rising wedge support somewhat above in the 1.239 area:

CL almost reached the target rising wedge trendline overnight, and I'm expecting that trendline to be tested shortly. If CL reverses there then there is a double-bottom target at 98.65 on a break over 96.55. Rising wedge resistance is currently at 99.3. On a break below rising wedge support I have the next decent support level at 92:

TLT has been reversing back down towards major support and the possible right shoulder low on the potential IHS that I've been talking about. If that IHS completes and then plays out then the target is a new high in the 132.9 area, so a hit of the 123.5 to 124 area looks like an interesting long opportunity. 

Overall I'm leaning bearish for today and more so if EURUSD should break short term rising support. 

No Decent Topping Setup Yet

Some of you might be wondering why I'm still looking for a higher high on SPX here. The answer is simple. Without at least a hit of 1430, and ideally 1435-45, we don't yet have a decent test of the 1440 area SPX pivot, and that makes any high here look like a short term swing high before continuation upwards. I'm looking for something more definite. We also don't yet have a decent short term topping pattern, generally an H&S, or a double or M top, to signal the high and deliver downside targets. That higher high might deliver both.

However we are where we are, and ES / SPX could go either way short term. On ES I have declining resistance in the 1412 area, and a break below would open up a test of the highs. A break below last week's low in the 1395 area would suggest a run at rising channel support in the 1368 area:

Rising channel support on SPX and the lower daily bollinger band are a bit higher in the 1377 area. A break below last week's low would look all the more bearish short term because the middle bollinger band is now at 1403. If we move up the upper bollinger band is in the 1430 area which is at the low end of my ideal topping area:

EURUSD, CL and TLT are all backing up the larger bear scenario at the moment. EURUSD and CL are both in very nice looking and large bear rising wedges, and TLT may well be forming an IHS targeting new highs. They're not quite cooked yet though. On TLT the left shoulder and head of a possible IHS have formed and there is clear negative divergence on the 60min RSI. A retracement to retest major support in the 123.5 to 124 area would be ideal to form a right shoulder, and if we see that, and the IHS then completes and breaks up, the target would be in the 132.9 area, not far below channel resistance on a broad rising channel I identified this morning. This is a nice looking setup and could well play out this way:

On CL I'm expecting a test of rising wedge support in the 94.3 area soon. We might well see a reversal back up there after that third touch of wedge support:

On EURUSD the double-top I was talking about as a possibility yesterday is now a probability, though there might be a move to retest wedge resistance in the 1.263 area before it turns down. I'm watching short term rising support and I've put the downside targets on the chart:

I've been saying all year that the technical picture on USD looks bullish, and posted a big picture view on this in April that you can see here: The technical bull setup on the medium and long term USD timeframes is very compelling. It could fail of course, but it hangs together very well indeed. The main potential danger to that setup is of course the Fed and QE3, and we're all waiting to see what the dude with the beard and the abysmal forecasting record has to say about that on Friday. In trendline terms DX is very close to a test of rising support from the 2011 low, and even if it bounces there, there is a part formed H&S that I will be watching. This is potentially very significant as when an H&S pattern  fails, it often fails with a smaller H&S forming that points in the opposite direction.  I'm expecting a strong bounce from rising support, and will be watching that potential bear H&S right shoulder until USD can make a new high:

Short term the likely retracement coming on TLT looks short term bullish for equities, and I'm thinking that we may well see EURUSD push to test 1.263 to support that. If we see TLT and EURUSD make those moves, then  they would deliver very attractive medium term long and short entries for TLT and EURUSD respectively. If it goes the other way and we see SPX break below last week's lows, then I'd expect a test of the 1377 SPX area soon, but without a decent technical high on SPX I think there would be a very good chance that support there would hold.

Bearishly Bullish

I was asked yesterday why I'm thinking the 1440 SPX area might well be a major high rather than a retracement on the road to test the 2007 highs. From a TA perspective both are definitely valid options, and I would go so far as to say that in all likelihood we will do one or the other. I covered both options in my weekend post before last and you can see that post here.

There are a few technical reasons why I'm leaning towards thinking this is a major double-top being formed and they are as follows:

1. There are major topping patterns formed and very much still in play on copper, EEM and many other indices. These need to be borne in mind and make downside risk here unusually high.
2. SPX highs tend to be at tests of important previous support or resistance levels, and the April 2012 high wasn't. This has me thinking that the April high was part of a topping pattern rather than a significant interim high in its own right. 
3. The huge Dow Theory divergence between Dow and TRAN here is characteristic of major tops.
4. There is a very nice setup of negative RSI divergence on the weekly chart, and there is also a decent resistance trendline that is a few points above the 1440 area SPX pivot

You can see the trendline I'm talking about in the 1450 area on the SPX 10 year chart below:

In the short term SPX is failing at the retest of the rising support trendline that was broken last week. SPX has been crawling up the underside of that trendline and will need to either break back up or turn back down soon. If it turns back down I would see a break below last week's low as a signal that rising channel support from the June low will most likely be tested. That's now in the 1375 SPX area. Worth noting on the chart above is that rising support from October is now in the 1335 area, and on a break below 1375 that would be the next trendline target:

ES looks weak overnight but might well have a bullish following wind for a move up from both EURUSD and TLT today. On EURUSD I was wondering yesterday morning whether declining resistance from the high might break up. It held yesterday but has broken up overnight. I'm thinking that the valley low for a double or M top has been established and the obvious upside targets are 1.259 for a retest of the highs and 1.261 for a retest of wedge resistance. Both options would be valid for a topping pattern, and on a subsequent break below 1.2465 I'd expect wedge support to be broken, as the target would be well below that wedge support:

TLT has filled the first gap I showed the other day and the 60min RSI suggests that it is topping out short term. I'm expecting a retracement to retest the 123.5 to 124 area and a reversal there would establish a decent support trendline for the current upswing:

Oil spiked down a couple of hours after I posted the very bearish looking chart on that yesterday morning. It has since been retracing but unless short term declining resistance breaks I'm expecting a test of rising wedge support in the 93.9 to 94 area soon:

Unless last week's low is broken I'm expecting some upside today. EURUSD and TLT look supportive of that so far. ES looks very weak though and I have a short term M top target at 1400-1402 ES still in play from yesterday morning. A break below 1400 would look bearish. If we then get a break below last week's low at 1395.25 ES then we're most likely going to see continuation lower towards my 1375 SPX trendline target. 

Topping is a Process

I posted the SPX chart below in my MarketShadows post at the weekend and I'll post it again this morning. You can see that full post here. It shows the very ambiguous close on Friday at the retest of broken support and at resistance on the declining channel from the high. I sketched in two topping options if we see a break up from there this morning, and they are that SPX has made the first high and valley low of a double or M top, or that SPX has put in the left shoulder of an H&S pattern. Either of those would obviously allow the current high to be tested or exceeded:

As you can see on the ES chart below, declining resistance there has already been broken overnight and that's looking bullish for today so far: The same options apply there:

As I said on Friday morning the low on Thursday was a textbook bounce at the middle bollinger band (or 20 DMA) on the daily chart:

In my view the odds favor SPX having at least started the topping process for the next swing high, but we often see a sharp retrace at the start of that process, and as long as SPX is holding that middle bollinger band the top technical candidate for that next swing high is at the test of the 1440 area SPX pivot.

Looking at other markets the bearish rising wedges on oil and EURUSD are obviously looking very promising for a more significant decline on those soon. On CL the chart is at a stage where all of the trendline chartists will already have left the long side for the moment, having hit the top of the wedge and then broken rising support from late July. Wedge support is now in the 93.5 area and I'd be expecting a move towards that soon, though we could see a sideways move towards that trendlineabove 95.3 support

EURUSD looks similar to oil, though there is a W bottom look to the recent action and we might see a retest of the highs on a break above short term declining resistance to make a double or M top:

Silver has broken slightly above declining resistance from the high and my view is that the retracements from the 2011 highs on both silver and gold are most likely over. RSI is rather overbought on the 60min though and we could see a retracement before the next move up:

I've been posting a lot of bonds charts in recent days, considering carefully whether a major high may have been made. You can see my very long term chart of TYX in my weekend post, looking at the bottoming options on 30 year treasury yields. Here is another very long term chart, this time looking directly at USB, 30 year treasuries. The channel isn't as perfect as the one on TYX, but it's good, and is suggesting a reversal at major trendline resistance from 1980:

I think a swing high on SPX is close, and it may be a very major high,depending mainly on whether rising channel support on SPX can be broken on the next swing down. Topping is a process though, and often the first spike down just signals that the topping process has started. I've shown before how major swing highs on SPX tend to be made at major resistance levels, and the obvious candidate for that is the 1440 area SPX pivot and the rising resistance trendline just above that I showed in my last chart on my weekend post. Declining resistance has broken on ES overnight and we may well see a test of the highs today or tomorrow.

Gold Breaks Up

The downtrend continued yesterday and on the SPX daily chart the middle bollinger band was tested. If this is just a retracement, or the decline so far has been the first part of a topping pattern, then this is the obvious bounce level. On a break below here, rising channel support, the lower bollinger band and the 50 DMA are in the 1365-70 area and that would be the obvious next target:

On ES a declining channel seems to have formed from the high and if so we would be due a bounce within that channel shortly. There is some positive divergence on the 60min RSI:

EURUSD reached rising wedge resistance yesterday, pinocchioed it a couple of times but closed the hours within the wedge, and then reversed, breaking short term uptrend support. The next obvious target is at rising wedge support in the 1.235 area and there is a possible H&S neckline at 1.243:

TLT is retesting an important level on the weekly chart, and that is the long term rising channel resistance that was broken earlier this year, held once as support and then broke. This is an important technical level at 125. This may just have been a retracement on TLT but if so, I'm not wild about the failure to hit the obvious target at the support trendline from last summer. We might yet see TLT return to hit that:

The big news yesterday though was that gold broke up. Looking at the action since the high we have been watching a large descending triangle form. These are actually 64% bearish patterns but perform best on breaks up, reaching the upside target 84% of the time according to Bulkowski. The target in this case would be in the 2050 area. I'm a bit wary of triangles as they have a nasty habit of breaking one way before resolving in the other but this break looks very promising and gold is now provisionally in a new uptrend:

Silver is now testing declining channel resistance from the high, and if it breaks up that would act as confirmation for the breakout on gold:

I'm slightly wary about this current downtrend on SPX here because I know that important highs are often preceded by a sharp spike downwards. If we are going to see a strong bounce then yesterday's low is the obvious place. On a conviction break below that area the next obvious target is the 1365-70 area, which is the key make or break area for the bulls for this uptrend since the June low.

Ms and Ws

There were a couple of developments yesterday that could be very important game-changers. The first from the Fed minutes is serious talk of implementing QE3 if the US economy continues to weaken, which seems likely. QE1 and QE2 both had a big impact on the equity and other markets and there's no reason to think that QE3 wouldn't have a big impact too.

The second was that the German representative on the ECB came out against the Bundesbank in favor of a European QE program that would buy up the bonds of troubled sovereigns as soon as the yields reached certain trigger thresholds.

Together they amount to a position where we may see a wave of QE implemented in the US and Europe on a large scale. If so this could boost markets to the next bubble highs and, in the US, could push SPX to the test of the 2007 highs that I was talking about in my weekend post, in the event that 1440 area SPX resistance is broken. You can see that post here:

None of this may happen of course. In the case of the Germans this looks like electoral suicide for the government there, and will at the least be most unpopular in Germany. They may well pull back from this or the German representative on the ECB may not have been speaking with Merkel's backing. In the US the Republicans may win the election. Obama's doing OK at the polls so far, but most sitting presidents in the past looking for a second term with a grim economic backdrop have lost. If Romney wins then the Fed's wings may well be clipped and the autonomy to carry out actions like QE3 severely reduced. In that case there may be no QE3.

We shall see. Short term ES made a nice W bottom yesterday on positive 60min RSI divergence and made the 1417.75 pattern target overnight. I posted that target on twitter yesterday afternoon. These patterns are very classical topping (M) or bottoming (W) patterns and always worth looking out for. On the slightly bigger picture I'm thinking the spike into yesterday's low may have been the valley low on a double or M top, and if so we may retest the highs or push a few points beyond. I have put a box round yesterday's W bottom on ES for anyone who wants a closer look:

ES broke trendline support yesterday for a while but SPX did not though the trendline was frayed sightly. That trendline is in the 1409-10 SPX area today and if we see an hourly close below that then most likely we won't see any test of the highs before this retracement has played out:

EURUSD held the 1.444 level I mentioned yesterday on an hourly close basis, and the bull flag played out. The 1.25 W bottom target was made and the rising wedge upper trendline (now) at 1.259 was almost reached. RSI looks promising for reversal there, though I mentioned on the chart that it's worth noting that while 69% of rising wedges break down, that means 31% break up:

Looking at the USD chart, which plunged after the Fed minutes yesterday, the IHS neckline is being tested again. There is the worrying look of a classical M top to this chart, with the marginal new high and resistance break on negative RSI divergence, and I am concerned that we may see a breakdown here. If the neckline doesn't hold then  have rising channel support from the 2011 lows in the 80.4 area. If that breaks then the USD uptrend may be over, and the M top target would be in the 78.1 area:

TLT broke back above broken resistance at 123.5 to 124 yesterday, which was interesting. If it can hold above then the plunge on TLT from the H&S may just have been a retracement. There are two gap fill targets above that I have marked on the chart:

Gold was the big winner yesterday, as buyers flooded in to a long term store of value that can't be printed by demented central bankers. Gold broke over the very important 150 DMA and is close to a test of declining resistance from the high in the 1673 area. Silver is close to a similar test and if both break over those then the pullback in precious metals is most likely over:

I've been talking a lot about forms of double-tops and bottoms today as they are a very common reversal setup and always well worth looking out for. We saw examples at the SPX low last year, the TLT and USD highs (so far and not played out yet) this year, the EURUSD low on Monday. Typically they involve either two peaks or troughs at the same level, or a marginal new high on negative RSI divergence at a high, or a marginal new low on positive RSI divergence on a low. Yesterday's low on ES was a perfect example on the 60min chart. These often mark major reversals that run a considerable distance.

On the broader markets we may well be seeing a shift in the policy backdrop that could give equities and precious metals particularly a major boost. I don't think this changes whether we are going to see (or have already seen) a swing high in the SPX 1420-1445 range, but it may change what happens when SPX nears support on the next retracement. As long as support holds on the main SPX rising channel, currently slightly over 1370, the overall trend should be assumed to be up. Only on a break below there do the pattern setups suggesting that we may see major falls across the board really come into play.

Target Areas Reached

SPX and Dow both reached the ideal target area for a double-top yesterday, with both making marginal new highs for 2012 and reversing. I think there's a sound technical argument for seeing a test of the 1440 area pivot on SPX, but if this is a double-top forming then ideal targets were reached on both yesterday. Here's how that looks on the SPX daily chart:

Here's my Dow vs TRAN chart showing the double-top on Dow with the still very large Dow Theory divergence between Dow and the Transports index that developed at the April highs and since the June lows:

Is this a double-top? Only time will tell for sure, but the trendlines should light the path wherever the market is headed. On ES the high yesterday was at the touch of the lower resistance trendline I gave for the move since the late July low, and ES has fallen to find support at the support trendline from that low. That trendline is now established and any break below it should signal a larger retracement at the least. If we do see a break below the main target for the bears is the support trendline at 1359 and the cluster of SPX support MAs and trendlines in the same area. If those break then most likely we will see at least a full retracement of the move up from the June low and a test of that low:

On EURUSD a new rally high was made yesterday and what looks like a bull flag has been forming, with the overhead targets at 1.25 for the W bottom and 1.257 for rising wedge resistance. For the bull flag to play out I'd prefer to see EURUSD hold the 1.244 area:

On TLT the low was tested yesterday and that has delivered a very nice looking W bottom that broke up by the end of the day. The target would be a test of broken support in the 123.5 to 124 area. I have some trendline resistance at 122.7ish but I wouldn't expect that to hold against this strong bottoming setup:

I think this is a very important support test today. If that support trendline on ES fails then the chances are that the swing high has been made, and we should then see a substantial further retracement, which might well develop into first a test of the June lows, and if that breaks, then a test of the October lows. Key support for the uptrend from the June low is in the 1360 area. As long as support holds this morning then there is definitely room for another push up. ES channel resistance is in the 1439 area today which would fit with a test of the 1440 area SPX pivot. TLT is suggesting that the swing high is already in, and EURUSD is supporting a bounce today so far.

Euro Rising Wedge

Well the big news yesterday was that EURUSD held the lower trendline of the now established rising wedge there and broke up to test the current rally highs. I have a W bottom target at 1.25. I'm not wild about the short retracement into that pattern but rising wedge resistance is now in the 1.256 area so that is supporting the W bottom target. Short term the 60min RSI is VERY overbought so we might see some consolidation or retracement:

Rather than SPX I'm going to show my main ES 60min chart today. There you can see the main rising channel from the June low and the shorter term trendlines, as well as the obviously weakening momentum shown on the 60min RSI. I have a very short term support trendline in the 1413.5 area, rising support from the late July low in the 1404 area, and main channel support in the 1356 area. Overhead I have a resistance trendline 1422-3 and main channel resistance currently at 1435:

Looking at TLT I'm seeing a bullish broadening descending wedge form. From the last low a sloping IHS may be forming that could take TLT back to test broken support 123.5 to 124, but would most likely fail just over 123 at broadening wedge resistance:

Looking at other equity markets I am seeing a couple where there is serious resistance here. On the equal weighted SPX chart I have rising channel resistance being tested:

On EEM I have the same, slightly further along, together with gap resistance, sharply negative 60min RSI divergence and a broken support trendline. Short term EEM looks very toppy:

As I've been saying for a while, I think there's a very decent chance of seeing the 1440 area SPX pivot tested and that's the next big resistance after the April high at 1422.38 gets taken out, and it looks as though that may happen at the open. I am expecting the next swing high in the 1420-1445 SPX area, and that could be a very major swing high, depending on what happens after that. We shall see.