A Rotten AAPL?

I'm doing an all equities and bonds edition today as there are some interesting things I'd like to look at. I'll start with the standard charts so on the SPX daily chart. SPX tried to break up from the middle bollinger band yesterday but returned to close there again. Of the three instances in the last year where SPX broke below the middle bollinger band and then recovered over it, the last setup that looks a lot like this was in June, and that resolved upwards. A small sample though:

On the SPX 60min chart the high yesterday was at declining resistance from the high. That's a very nice and strong trendline now, so a break above should indicate at least a test of the highs. There is also short term rising support below, forming a sort of triangle with trendlines that will cross on Friday, so we should see a break one way or the other soon. In the absence of a break up the obvious downside target at rising channel support is now in the 1416 area, with the 50 DMA at 1414 and the lower daily bollinger band at 1408.5. These strong support levels may all meet at 1418 or so in a couple of days:

TRAN still looks like it's bottoming out short term but is still making lower highs and lows. That's in contrast to SPX and ES which have been making higher highs and lows short term:

I've been watching the TLT chart closely for direction, and the setup there still looks ambiguous. Short term rising support broke yesterday, which was bearish, but there was no break below the little-double-top valley low:

Looking at TLT on the 15min chart, there is now a clear break of the short term rising channel, but TLT is trading in a consolidation range that might yet prove to be a bull flag. We'll see which way this breaks but whichever way it goes this should be important for equities direction as well. A break up would be a break of the falling wedge on TLT,and that would strongly suggest further downside on equities. A break down would suggest a return to falling wedge support on TLT, and that would look distinctly bullish for equities:

For the last section I'd like to talk about the Nasdaq and earnings. The first thing to mention here is that a sloping H&S has been forming on the NDX. That may never complete but if it does there is a very obvious target below at rising support from the June low, which will intersect a strong support level at 2660 in a few days. Something to take very seriously if we see Nasdaq make a lower low below 2768.58:

What could prompt such a retracement on Nasdaq? Well there is a similar H&S setup on the AAPL chart, which I won't show today, backed up by a very bearish setup on the AAPL monthly (LOG) chart. You can see on that chart that AAPL hit important resistance on the swing up before last, and that there was strongly negative RSI divergence into the next high. I've looked back twenty years at these RSI divergences on AAPL, and all five previous instances signaled a swing high, with the smallest retracement being the 15% retracement in 2011. It's also worth noting that the average retracement of the five was well over 50%, with the next smallest retracement at 46%.

Now I'm not saying we are going to see a 50% retracement on AAPL, but it has always been very expensive to ignore this warning in the past, including during the last two equity bubbles, and in the worst case I have main channel support slightly under 400. Just sayin':

The rules have changed over the last twenty years of course, and the Fed is now using QE to try to detach equity prices from the real economy. This detachment has happened before in equity bubbles of course, but this is the first time that it has been explicit Fed policy rather than just cyclical overoptimism supercharged by cheap money, and we have yet to see how long the Fed can manage this. The real economy isn't looking that great here though, and that is feeding through into earnings pre-announcements as you can see on the chart below from Business Insider's Chart of the Day. Earnings are likely to be disappointing and so most of any rise in equity valuations will most likely have to some from rising P/E ratios, already at historically high levels. Again that's not necessarily a cause for immediate concern but it is something to bear in mind. Click on the chart below to see the full writeup from COTD:

Short term ES has risen overnight, and needs to make a short term higher high here to maintain the current run of higher highs and lows. To do that in trading hours that would require a break above declining resistance on SPX and that would be a very bullish looking breakout. A short term lower high followed by a lower low would look bearish and I'd be looking for more downside into my main retracement target in the 1415-20 area. I was asked yesterday whether I would go long there and my reply was that I would go cautiously long there, and would go incautiously long if we then saw a decent reversal setup at that support level. Until it breaks that would be the ideal place to go long with a tightish stop below channel support. I'll be watching TLT for confirmation of a break in either direction.