The Age of Fed Bubbles

We have reached a very important crossroads on bonds and equities as we wait to see whether the Fed will announce QE3 today. I was writing about the likely test of this level on SPX in my weekend post on the 19th August at Marketshadows and you can see that here. I've updated the chart but have left the comments on the chart as I wrote them then and they're well worth a read again today I think:

The exact level I was expecting to see tested was the 2008 high at 1440.24, and SPX would generally test the key resistance level and reverse within a few points. The intraday high yesterday was at 1439.15 so that test has started and may even have already ended. I've marked up the 15yr weekly SPX chart below with the 2009, 2010 and 2011 major highs at key resistance levels, and marked in the previous hits that established those key levels.

I've also marked up divergences on the weekly RSI on the chart and you can see that five of the six negative RSI divergences like the current one signaled retracements of over 10%, though it's worth noting that the 1997-2000 divergence took a long time to come good and might be better seen as two linked negative divergences into the 1998 and 2000 highs, just as the current divergence could be seen as linked divergences into the 2011 and 2012 highs. In the latter case however the 2012 divergence is not established until we see a strong reversal which would ideally be here:

On the SPX 60min chart we have a little double-top set up at 1440 area resistance on negative RSI divergence. The pattern target is only at the daily middle bollinger band at 1415, but if we saw that retracement I'd then be looking for a possible follow through into the strong support level and possible H&S neckline in the 1397 area, which will intersect with the rising support trendline from the June low on Monday or Tuesday of next week. I'm not posting the SPX daily BB and MAs chart today but the daily lower bollinger band is now at 1392 and the 50DMA is at 1389:

On the ES chart we saw a marginal higher high yesterday on strongly negative 60min RSI divergence and a strong support trendline has been established from the 1395 low which has been tested overnight and this morning. On a normal day I would be looking for any break below that trendline to be followed through hard, with a double-top target at 1402 on a break below 1421. Today? Very possibly the same though this is definitely a wild card day. As on SPX you can see that rising support from the June low will intersect with the strong support level and possible H&S neckline at 1395 early next week:

Obviously I mentioned bonds as well as equities, and I have two key levels marked up on the TLT chart. The first is strong support in the 123.5 to 124 area, there was an unfilled gap below that and then rising channel support in the121.7 area. Yesterday TLT gapped below both the 123.5 to 124 level and the unfilled gap below to test rising channel support. If we see a bounce here then new highs on TLT are still very much on the cards, but if support breaks then TLT is in a confirmed downtrend with a double-top target in the 115 area. No doubt the Fed announcement will show which way this will go. Obviously the unfilled gap that was below has now turned into an unfilled gap above.

I love Apple products and drew some flak last year when I posted a very bearish looking chart on RIMM in May 2011 with the comment that the iPhone was head and shoulders above any other smartphone on the market.l You can see that post here. RIMM broke support a few days later and I gave a conservative triangle target then at 21 which was hit in midsummer 2011. It closed at 7.42 yesterday. You can see that second post here.

What's my point? Well, it's that however much you may admire a company, you should never ignore technical warning signals, and I was looking at AAPL yesterday and thinking that the AAPL charts are now looking distinctly bearish, though not on the scale of the RIMM chart last year. The setup on the daily AAPL chart is that rising support from December 2011 was broken in July and then recovered. As you often see at key resistance levels (like TLT), AAPL gapped below support and then back over it. Since then a shorter term rising support trendline has been established and then broken, and a possible double-top has formed on strongly negative RSI divergence. On a break below 656 the double-top would be just over 630, for a 2nd test of that recovered rising support trendline. A second break of that trendline would look very bearish and I'd then be looking for a move to the strong support level and possible H&S neckline in the 565-70 area:

On the longer term AAPL view I have the 200 DMA at 544, and on a break below 519 I would have a much larger M top target in the 360 area, which I have very close to long term rising channel support on the weekly (LOG scale) chart. This is very speculative at this stage of course but AAPL's actually looking pretty interesting on the short side here and this bear scenario on AAPL would fit right in with the bear scenario here on equities if today's widely expected bull breakout doesn't happen. Here's the weekly (LOG scale) chart on AAPL, and I've also marked up the previous RSI divergences on the chart:

Today is obviously a huge wild card day and the consensus is that the Fed will announce some sort of QE3 today. If they're right then SPX will most likely break up and TLT will most likely break down. If we see that happen with any confidence then the technically attractive case for a major top here will collapse, having already been significantly weakened by the strong reversal down on USD. The gold break up isn't good news for bears either. You can see on the second chart on this post that I have used gold as the background to SPX and you can see that uptrends on gold have been strongly correlated with uptrends on SPX since the Fed started easing seriously after the 2000 crash.

If we don't see that bullish break up then that bear case is still very much alive, and if we are to see a major high in the second half of 2012, then the most likely place is right here and right now. We shall see what the Fed have to say today.