Forks in the Road

Every so often you reach an important fork in the road where a market must take one way or the other, and once taken, the option not taken becomes very low probability. Yesterday was such a day. I told my brother in the morning that if we were going to see a major top on equities in 2012 then that was likely to be yesterday around 1440 SPX. Obviously QE3 was announced in the afternoon and 1440 was broken with a lot of confidence. I'd like to see that confirmed with a weekly close today over 1450, but I'm now no longer seriously considering the possibility of a major top in equities in 2012, and am writing off all the huge bear patterns that have formed over the last three years on many instruments and indices as a huge bear trap. I'll be expanding on that with various charts in the next few days but it what it is, and we are where we are. The trend is now most likely up well into 2013.

What was also interesting yesterday was that the QE announced was relatively small, with the unsterilised part being the MBS purchases at $40bn per month, and that it is open-ended, to be continued until the Fed board consider that either it is no longer needed, or that continuation poses an unnacceptable inflationary risk. QE1 and QE2 both had clear end dates, and equities rose into those dates and tanked as they finished. This is a potentially very important change and may have a significant impact on the bull/bear seasonality of recent years.

We won't be seeing a straight spike into infinity however, there will be advances and declines within the overall trend, and I think we are are most likely close to a short term decline now. On the daily SPX chart we saw the second spike yesterday well over the upper bollinger band. The advance is therefore very stretched now, and we are likely to see SPX back within the daily bollinger bands within two or three days. We are also now close to main rising channel resistance from the June low on SPX in the 1470 area and I would expect significant resistance there:

On the ES 60min chart I also have a nice rising channel from the 1395 lows that I'm expecting to hold. ES is looking toppy right now, but if we should see a hit in trading hours of resistance in the 1470 area (Sept contract) and we still have negative RSI divergence, that would be a very attractive short entry for a possible retest of broken 1440 pivot resistance:

On EURUSD the strong resistance level at 1.30 was broken with a lot of confidence as I suggested was likely the other day. The rising wedge target is in the 1.34 area and I have a potential IHS neckline in the 1.35 area:

DX is now within striking range however of the M Top target in the 78.25 area and I have a strong support level and possible H&S neckline just below in the 78.1 area. That is a decent level to expect a bounce and I'll be watching for signs of one there as DX is now significantly oversold on the daily chart. Even Ben Bernanke can't make USD fall in a straight line .... I think:

Gold had a very good day yesterday and is now approaching the very significant resistance level in the 1800 area.Very overbought now on the daily chart and we may well see some retracement there. The descending triangle target is in the 2050 area, and with the following wind from QE3 I am expecting that target to be made as a minimum for gold from here. It's worth mentioning again here that Bulkowski, who wrote some of the key textbooks on patterns, says that a descending triangle that breaks up is a strong candidate for his favorite pattern to trade, as these make target 84% of the time:

TLT broke channel support yesterday, but not with enough confidence to state confidently that the trend is down. The reasons for that are complicated and I'll illustrate why that is with bond charts on three timeframes.

On the 60min chart TLT broke channel support and made a lower low, which is bearish. However the new low was marginal and would need to be followed through with a more confident low to remain bearish. There is clear positive divergence on the 60min RSI however and we might well see a strong bounce here if yesterday's low is not followed through quickly:

What are the odds of a TLT bounce here? Pretty high actually, and you can see why on my 6yr weekly chart below. I mentioned on 24th August that TLT had not hit obvious trendline support and that the low was therefore suspect, as TLT might return to hit that obvious trendline support. Well the low yesterday was both an exact hit on that trendline support from the 2011 lows, and a test of the major support level around 120. On a break below the obvious next target is 115, but only on that break below. Only on a break below 115 area support does the technical picture on TLT then look dire, as that would be a break of the last potential uptrend rising channel support level and would open up the next support level around 108:

The last bonds chart for today is the TYX chart since 1985, showing the amazing 27 year declining channel on 30yr Treasury Yields. I mentioned when I last posted this that there was a serious case that TYX had made a major low without hitting channel support, with a possible IHS partially forming over the last couple of years, and a possible bigger picture double bottom at the 2008 and 2012 lows.

I've marked the important levels and targets on the chart, and in terms of shaping government and Fed policies over the next few years, this is in my view the most important chart to be watching at the moment as we see which way bonds break. 30yr Treasury yields are at 3% now, up from a low of 2.5% this year. If the possible double-bottom here were to play out, the target yield would be over 7%, and a break above channel resistance at 4.5% here would confirm that the more than 30 years old bull market in bonds is over. As current government and Fed policies are all built on the assumption that low interest rates will last indefinitely, that would be a huge shift in the policy landscape that might well end quantitative easing and force fiscal austerity across the developed world. Watch this space:

Short term I'm expecting serious resistance in the 1470 SPX area and we may well see a retracement from there to retest broken resistance at 1440. That would look like a very buyable dip.

Last comment for today is that I'd like to mention that there is one analyst/blogger I follow that has totally nailed the move from the lows this summer, and is also expecting equities to run quite a bit higher over the next few months. That analyst is Pug from Pug Stock Market Analysis. Way to go mate. Kudos.