Brave New World Series: 3 - The Rising Wedge Target at 1965

I've posted the chart for the rising wedge that broke up on SPX this year a few times with the comment that the upside target was 1965, but haven't added much to that because I was planning to look at this pattern target in detail in this dedicated post.

It has to be said that there are a lot of people having serious doubts about the overall bull case here, and thinking that 1965 looks a long distance away still, but really it isn't far at all if we turn and consider the road behind us that has already been traveled. From the March 2009 low SPX has advanced 141%. If this pattern target is made then that would increase to 195% That's a significant increase for sure, but most of the distance covered has already been covered, and to reach that target requires only a 22.3% increase from here.

Furthermore the primary bull market from October 2011 has only advanced 57% trough to peak so far, and the only primary bull market since 1974 that rose less than 100% was the 1987-90 bull market at 70%. A move to 1965 would increase this to 82.8%, which would still be small by historical standards. I have explained how I am dividing primary bull market periods in my post yesterday which you can see here, but both the 1987-90 and 2009-11 primary bull markets would still end in the same place on the standard view as the subsequent decline was more than 20%.

Here is that pattern on the SPX weekly chart from 2006. The wedge underthrew (or overthrew downwards) as a signal that it was going to break up, and then broke up earlier this year. The target is the 1965 area. If the current retracement low at the retest of broken wedge resistance holds that will strengthen the target, though a deeper retracement that stayed above 1474.51 wouldn't invalidate it. SPX weekly chart from 2006:

The first question to ask is whether there are any previous examples of this happening on SPX? There is one very clear previous example of this happening on the linear SPX chart when a rising wedge that started to form in 1980 broke up in 1985 with a target in the 301 area. The 2007 high was comfortably over that target at 337.88 so the target was made. This is a very clear example of a rising wedge breaking up as there was no underthrow before the wedge broke up, and therefore no possible argument that the wedge broke down and failed rather than breaking up. Here's that wedge on the weekly chart from 1980 through 1987:

The next example is less clear but still qualifies in my view, though I would generally disregard this target if I saw this setup because the wedge broke up after the rising wedge trendlines had crossed. This weakens the setup in my view but the following move still broke up through wedge resistance further up the line, and the retracement after this pattern was only 24.9% of the previous move, close to the 23.6% fib retrace but very well short of the 38.2% fib retrace that I would treat as a primary bear market. As in absolute terms the move was only 9.8% peak to trough this would also not qualify as a primary bear market on the standard view. Here is that 1990-4 wedge on the SPX weekly 1987 through 1994 chart:

The pattern that followed this rising wedge was a consolidation symmetrical triangle and if I was to treat this wedge as valid I would calculate the target as a rise of 188.85 points on the conviction break over the wedge high at 482.95. That gives a target at 671.8 and the top for the broadening ascending wedge that followed was at 681 at the 1996 spring high. I would take this example with a pinch of salt but it did make target so .....

Here's that setup on my chart of the 1990-2000 primary bull market and 2000-2 bear market. This primary bull market was so large that I normally split it into three parts to see the earlier patterns clearly, but you can still see this rising wedge and the broadening ascending wedge that followed it that made the wedge target. SPX weekly 1990 through 2003:

Obviously that is only two previous examples, one of which is questionable, but I've said before that on the higher degrees, a sample that only goes back to 1925 on SPX isn't actually a large sample, particularly for patterns that only break up 31% of the time on Bulkowski's pattern statistics. On Bulkowski's stats rising wedges make target on upward breaks 58% of the time, and this fits or is somewhat more pessimistic than my personal perception that breakouts like these make target most of the time. As all these moves subdivide into subsidiary patterns of the next degree down we should also get some warning if this target isn't going to be made.

What about the economic backdrop? Well I'm not a fan of Fed economic policies but hey, we got this far so why not? If we are going to see failure we should get some warning from the charts. Crashes are generally only entirely unpredictable if you are not a chartist. Consider the 1987 crash shown in the second chart in this post. The move into the previous high was framed by a broadening ascending wedge that would have had any decent pattern chartist out of longs near the high, and the wedge overthrew giving a strong signal that it was about to break down. An obvious target for the decline after the breakdown was the cross of the 200 week MA area with the 50% fib retracement of the primary bull market from 1982. Charts wouldn't have given you the timing and speed of the crash, but the bear market itself and the depth of the retracement shouldn't have been a surprise for good chartists.

The 2000 high was also well signaled and the subsequent bear market was straightforward though the 2007-9 setup was less clear from the charts, as the double-top only targeted 1170 and pure chartists might have been considering longs at 1200. I would add to that though that the first weekly RSI long signal only came after the 741 low so ....

I'm also much less convinced than most that the news matters much. A very good chartist trading the last forty years purely from the price data should in my view have done very well indeed, and might well have done considerably worse given access to the news. At best the timing of big economic news is hard to pinpoint, and at worst the continuous weaving together of the news and market price action is just a plausible stream of rationalization. My view is generally a pure technical assessment and that's the case here as well. I shall leave you today with my personal favorite assessment of the power and prevalence of rationalizations from Jeff Goldblum's character in the classic film The Big Chill:

Brave New World Series: 2 - Fleas and Fibonaccis

I started writing a post talking about the 2011-13 rising wedge target and after a lot of work I have divided that into two posts that I will post on today and tomorrow.

This first post will lay out the theoretical basis for my analysis and is going to be a little dense. If you don't much care for math and TA theory you can skip onto the next in the series which I will be posting tomorrow and see the short version with an explanation of the current setup and the two previous examples on SPX that I am treating as comparable.

Before I look at the other two examples I need to explain my view of bull and bear markets historically on SPX, as my first post in this series looking at secular cycles on equities was considering these cycles from a conventional TA standpoint. You can see that first post here. What I'm going to do today is to look at both primary and secular cycles from another standpoint that works better in my view.

Historically there are two main schools of market analysis and both have strong merits in my view. The first is fundamental analysis (FA), which looks for investment instruments that are relatively good value compared to other comparable instruments, in the expectation that concentrating on such relatively undervalued instruments will allow practitioners to outperform the market. This is a sound strategy and I've seen good practitioners of this outperform the market fairly consistently in equities, though trying to do this between asset classes seems to have much more mixed results.

The other school of market analysis is technical analysis (TA), and the foundation of TA in my view is purely mathematical, based on the natural tendency of much in the world around us to fall into mathematically based structures. Classic examples of this of course are Pi and the golden ratio, both extensively studied by mathematicians since antiquity and the golden ratio is the source of Fibonacci numbers and ratios which have been derived from it. TA uses the historical performance of mathematical structures on markets to predict future moves and again, good practitioners can outperform the market fairly consistently.

Both forms of analysis are attacked as pseudoscience by many academics on the basis of the efficient-market hypothesis, which has three variants, but essentially argues that markets incorporate all available news and information at any given time, and as future news is inherently unpredictable, markets must therefore by extension also not be predictable. The weakness in this theory is that it's either obviously untrue, or that patterns forming in markets somehow anticipate the news. A good example is the chart I posted on 23rd May showing the broadening ascending wedge on SPX. You can see that here. Since then that wedge has tested support, bounced, then broken down to make an almost perfect 38.2% fib retracement, and that's very much what you would have looked for after seeing that chart. This sort of thing happens too often to be chance so either patterns like this somehow anticipate future news, or the news is just nowhere near as important as everyone seems to think. The media, all seemingly enthusiasts for the efficient-market hypothesis, spend a lot of time weaving the news and market moves together into an ongoing narrative, but correlation is not causation, and I think it's obvious that news and information can only be part of the overall picture here.

I would compare efficient-market hypothesis with rational choice theory, another very weak theory that is in effect a rough working assumption to underpin economic theory in derived fields until assumptions that better describe reality can be developed.

In terms of schools of TA there are quite a number of those, and I'm not familiar with them all. There's more than one way to skin a cat however and I've seen some really impressive work done with Elliot Wave, volume levels, bollinger bands, moving averages, tick analysis and gap analysis. My own approach is mainly based on trendlines, pattern setups, fibonacci retracements, momentum indicators, moving averages and bollinger bands, and today I'll be looking at bull and bear trends of various sizes from a trendline and pattern basis combined with fibonacci retracements.

Looking back over the lifetime of SPX, and I'd stress that in terms of the size of some of the patterns we are looking at here, that can be a very small statistical sample, I would make two rules governing bull moves on SPX of primary degree. Primary and secular bull trends differ from bull trends of lower degrees in that cumulative inflation becomes increasingly important, but too small to be a factor in the smaller degrees.

1. All primary bull trends are trendline pattern based and come in four related forms on the linear charts. The first three are all variants on a rising channel and they are the rising wedge (channel narrowing inwards), a rising channel (parallel trendlines) and a broadening ascending wedge (channel broadening outwards). The fourth type is a support trendline only and that may just be one of the other three where insufficient data is available to identify the upper trendline. This doesn't apply to secular bull moves as these are too large to be charted on linear charts.
2. All primary (and secular) bull trends end with a fibonacci retracement of 38.2% or more of that bull trend, after which a new bull trend will begin unless there is a fibonacci retracement of a secular bull trend to follow. Bull trends can be composed of a single trendline pattern followed by a fibonacci retracement of that move, or a combination of more than one trendline pattern, with that trend ending with a fibonacci retracement of the move covered by the combined patterns.

Otherwise all trends of any degree follow similar rules in the higher and lower degrees. Clear patterns and trendlines are visible down to the smallest scales on SPX and up to the highest. In effect from highest to lowest all these trends open up on closer examination like Matryoshka Dolls, with smaller setups following identifiably the same rules down to the limit of detection. This is obviously a similar position to that taken in Elliot Wave Principle, and that has stood up to my inspection to date. The difference in the smaller degrees is that there can be long bear trends, which aren't there in the higher degrees.

This means that I am discarding the definition of a primary bull or bear market being a move of over 20%, which is an arbitrary boundary that regularly doesn't fit the trendline and fibonacci structure of the overall moves, and I am also discarding the idea that secular bear markets look much different or last longer than primary bear markets. Given that the highs and lows in all three secular bear markets to date were made in a single bear market in three years or less that seems a reasonable working assumption.

Looking again at the SPX since 1925 on  this basis, and ignoring the 1929-32 market as I don't have the data on the prior move to assess it as a fibonacci retracement, I therefore have the following secular markets since then:

• 1932-72 Secular Bull Market, 40 years, trough to peak 2667% rise
• Rising Wedge into Diamond Top
• 1972-4 Secular Bear Market, 2 years, peak to trough 50% decline
• Part of Diamond Top, failed so continuation (overambitious downside target at 0)
• Almost exact 50% fib retracement of 1932-72 on quarterly close basis with pinocchios
• Multi-quarter test of 100 quarter MA
• 1974-2007 Secular Bull Market, 33 years, trough to peak 2485% rise
• Broadening Ascending Wedge into Double-Top
• 2007-9 Secular Bear Market, 2 years, peak to trough 57.7% decline
• Part of Double-Top, failed so continuation (overambitious downside target at -120)
• Just under 61.8% fib retracement of 1974-2007
• Multi-quarter test of 100 quarter MA with pinocchio to final low
• 2009-204(?) Secular Bull Market in progress, trough to peak 153% so far

On the SPX quarterly (LOG) chart from 1925 that looks like this:

I would break down the primary bull and bear markets on SPX from the 1974 secular low to the 2007 secular high as follows:

• 1974-80 Primary Bull Market, 6 years 2 months, trough to peak 132.8% rise
• Rising Channel into Double-Top
• (Disregarding the 20.5% decline in 1976-8 as less than 38.2% retrace of prior move)
• 1980-2 Primary Bear Market, 1 year 9 months, peak to trough 28.5% decline
• Declining Channel into W Bottom
• Almost exact 50% fib retrace of 1974-80
• 1982-7 Primary Bull Market, 5 years, trough to peak 233% rise
• Rising Wedge broke up then Broadening Ascending Wedge into Double-Top
• 1987 Primary Bear Market, 2 months, peak to trough 36% decline
• No identifiable pattern between Double-Top and Double-Bottom
• Almost exact 50% fib retrace of 1980-7
• Exact test at 200 week MA
• 1987-90 Primary Bull Market, 2 years 9 months, trough to peak 70% rise
• Broadening Ascending Wedge into Double-Top
• 1990 Primary Bear Market, 3 months, peak to trough 24.5% decline
• Falling Wedge into IHS
• Almost exact 50% fib retrace of 1987-90
• Multi-week area test at 200 week MA
• 1990-2000 Primary Bull Market, 9 years 6 months, trough to peak 428% rise
• Rising Wedge, into Broadening Ascending Wedge, into Broadening Ascending Wedge into Double-Top (and slightly larger H&S)
• (Disregarding the 22.4% decline in 1998 as less than 38.2% retrace of prior move)
• 2000-2 Primary Bear Market, 2 years 4 months, peak to trough 50.5% decline
• Declining Channel into Double-Bottom
• Almost exact 61.8% fib retrace of 1990-2000
• 2002-7 Primary Bull Market, 5 years, trough to peak 105% rise
• Rising Wedge into Double-Top (and larger H&S)

I would break down the primary bull and bear markets on SPX from the 2009 secular low as follows:

• 2009-11 Primary Bull Market, 2 years 5 months, trough to peak 105% rise
• Rising Wedge into H&S
• 2011 Primary Bear Market, 5 months, peak to trough 21.6% decline
• Declining Channel into W Bottom
• First bottom almost exact 50% fib retrace of 2009-11, second bottom pinocchio through
• 2011-? Primary Bull Market in progress, trough to peak 57% so far
• Rising Wedge broken up with 1965 area target

Here on the the SPX weekly chart since 2006 is my breakdown of the primary market patterns on SPX since the 2009 low. It's worth noting that the trough to peak rise so far has only been 57%, with the only primary bull market since 1974 that rose less than 100% being the 1987-90 bull market at 70%. SPX weekly chart since 2006:

To illustrate my point about similar patterns and rules being apparent at lower degrees here is a chart of the SPX 1min over four days that I posted on twitter earlier this week with a jokey poem about fleas. SPX 1min chart:

There are some notes for this analysis.

As usual my view here is a purely technical analysis view of the markets. I'm not convinced either of the value of adding economic forecasting, or my ability to do so with accuracy much better than the many highly qualified pundits and forecasters who already generally fail to manage to do this successfully, so unless there is a fundamental case that seems particular clear (RIMM/BBRY 2011 or JYPUSD 2012) I generally won't mention it.

I have only charted SPX in great detail back to about 1970, though I have checked SPX for primary rising wedges that have broken up back to 1925. I may need to modify rules slightly by the time I have fully charted SPX in detail back to 1925.

There are only two completed secular cycles on SPX going back to 1925. Statistically that is a very small sample and while those secular cycles look remarkably similar so far, the next one may not. As waiting a few centuries for a larger sample is impractical I am deriving rules from what we have so far, but would warn that an assumption that the next secular cycle will look very similar to the last two would be statistically unsafe.

I am aware that in the classic reference Technical Analysis of Stock Trends by Edwards and Magee it is stated clearly that pattern trendlines from a bull trend cannot extend back into a previous bear trend and vice-versa. I have tested this proposition carefully and consider this to be demonstrably untrue. I do this all the time and it works very well and helps clarify pattern structures. Even the greats in their fields get it wrong some of the time. 

Testing Serious Resistance

I posted a SPX 5min chart on twitter yesterday shortly after the high pointing out the negative RSI divergence there, and that the high was an almost exact test of the daily middle bollinger band. I won't use that today but you can see that chart here. On the SPX daily chart we can see that the high yesterday was a test of the daily middle bollinger band, the 50 DMA, and an approximate test of broken broadening wedge support. This is obviously a very significant confluence of resistance levels and the most obvious place to see either a retracement within a new uptrend, or possibly a rally high within a continuing downtrend. On a clear break above this area the obvious target is the daily upper bollinger band, now in the 1662 area. SPX daily chart:

On the SPX 60min chart you can see that this is a fairly close test of broken broadening wedge support, and if we see a 60min close back above this trendline I will be treating that as a strong signal that the main retracement low is now behind us. That said the next level of resistance above would be declining resistance in the 1642 area. SPX 60min chart:

Looking at the current reversal setup on the ES 60min chart, there is now a clear possible double-top in place with a target in the 1596.50 area on a clear break below 1605.50. This nice looking short term reversal setup is supported by the first high at serious SPX resistance yesterday, clear negative divergence on the ES 60min RSI, on the SPX 15min RSI, the 61.8% fib retrace of the plunge from 1654 SPX, and a rising wedge breaking down on the SPX 15min chart (not shown today). 50 hour MA support is now in the 1602.50 area. ES 60min chart:

I've some more time to look at other markets today, so CL broke over 96.2 resistance as expected yesterday and the next obvious target there is in the 100 area. CL 60min chart:

USD is assumed bullish until demonstrated otherwise but while we're waiting to see whether USD can break the current highs with confidence I'll look at GBPUSD, one of the stronger performers against USD in recent weeks (AUDUSD and CADUSD particularly both looking much weaker). I am assuming an overall downtrend on GBPUSD and that has now completed what looks like an ABC retracement into the 61.8% fib retracement of the decline from the turn of the year high. If I'm right about the overall downtrend then we should soon see the May then March lows taken out as GBPUSD moves towards the 1.40 support area. I've mainly watching the 60min chart for signs that GBPUSD might reverse back up and there's nothing to suggest a reversal is near on that chart yet. GBPUSD 60min chart:

I'm also watching the 60min TLT chart for signs of reversal near the major 105/6 support level, and I'm seeing some positive RSI divergence at the last low. It's worth adding though that the current declining channel from 123.98 has not yet broken up and that even when it does, that five of the last six significant reversals reversed with a strong bottoming pattern that cannot yet be seen on TLT. If TLT is bottoming out we might well therefore see new lows for a closer test of the 105/6 level. TLT 60min chart:

The last chart of the day is AAPL, and the question there is whether the possible double-bottom setup there will deliver. In support there is the broken falling wedge, the positive daily RSI divergence at the current main low, and that low being an almost perfect 50% fib retracement of the 805% (wow!) move up from early 2009. I really like this reversal setup on AAPL, which also looks cheap compared to the market as a whole. If we see the current low broken with confidence however my next target would be at significant established support in the 305-15 area, with the 61.8% fib retracement at 312. AAPL daily chart:

No time for a gold chart today, though I'm planning to post a chart on Monday talking about the important of the 1160 area target and the reasons why we could very well see a major trend reversal there.

I like the odds for a retracement on ES and SPX today, and as I mentioned, that might turn out to be a rally high before new lows, though I'm doubtful about that at the moment. If we see SPX bulldoze through resistance here (and close today above it) without a retracement that would go a long way to confirming that the main retracement low is behind us, and would also open up the next main target at the SPX daily upper bollinger band, now in the 1662 area.

I have mentioned a few times that the upside target on the rising wedge that broke up earlier this year is the 1965 SPX area, but haven't talked much more about that as yet. I will be doing a weekend post going up tonight or tomorrow that will be looking at that target in more detail and explaining why I am treating it as a serious target that may well be reached.

No Retrace Yet

SPX blew through the 1597/8 level easily enough yesterday, and so far there is no sign of any IHS forming on SPX, with the best opportunity to do that behind us now. This increases the probability that the lows will be retested later as there is usually (though not always) a clear IHS or double or W bottom at a main retracement low.

Have we seen that main retracement low? NYMO supports that strongly, and the low was a 38.2% fib retrace of the move from November, and a retest of the rising wedge that broke up earlier this year with a target in the 1965 area, and a test of the 100 DMA on a closing basis. I'm assuming that was the low until demonstrated otherwise.

To illustrate the importance of fib retracement levels after strong pushes up on SPX I have divided the current cyclical bull market since October 2011 into four component moves and their subsequent retracements. As you can see all three previous retracements were fairly precise Fibonacci retracements. SPX daily chart:

On the weekly chart the candle this week is on the lower bollinger band with the low being an intraweek low only. On the usual closing basis that is a test of major support that has held. Between this being for several reasons a good technical level for a low (if somewhat high), and the NYMO divergence, my default assumption here has to be that the low is most likely in, and that the best the bears are likely to see here is a retest near the lows. SPX weekly chart:

I've been considering the merits of the close area yesterday in terms of a possible retracement today. On the plus side the high yesterday was a 50% fib retracement of the move down from 1654.19 and a test of the 50 hour MA. There is also some negative divergence on the more sensitive RSI settings. On the negative side the best opportunity to form an IHS was lost yesterday with the break back over 1597/8. We'll see what happens at the open today. SPX 60min chart:

On the ES 60min chart there is some negative RSI divergence but this might just be consolidation. If we see some retracement then 50 hour MA support is in the 1587 area. ES 60min chart:

I won't post silver , gold or USD charts today and will just say that I have the next big levels on gold and silver at 1160 and 16.25 respectively. On USD I am waiting to see whether the last highs can be taken out with confidence. If they can then I am VERY bullish on USD, and if they can't then I am VERY bearish on USD, so we'll see. My baseline here assumption is the bullish scenario until demonstrated otherwise.

CL is testing resistance in the 96.2 area and for the current uptrend to continue that will need to be broken soon. CL 60min chart:

I'm going to finish today with two thought-provoking charts, and the first is of the Hang Seng index. I've been reading a lot this week about how China is doomed and Shanghai is doomed with it, and my possible IHS there did fail to complete. On the other hand when an IHS in a larger promising bottoming setup fails to complete I then look for a double or W bottom, and that is still very much in play here. I won't show that chart today however as instead I want to show the massive support confluence hit on the related Hang Seng index at the current low. Just sayin'. HSI daily chart:

The last chart today is 30yr treasury yields back to 1945, which is as far back as my data goes. This is just to show the overall bottoming setup on bond yields here and to show how long major trends in bonds tend to last. Just to illustrate that I would note that if I am right about the major reversal setup on bonds here, and I think that I probably am, then I'd expect the next test of 25 (2.5%) on TYX sometime between 2075 and 2100. Don't buy the dips on bonds here as a long term trade. We might see a big H&S right shoulder rally on TLT over the next few months here, and I'm watching TLT and TNX carefully with that in mind, but it might well not happen, and if it does it would only be an opportunity to dump remaining bond longs and reload on shorts. TYX quarterly chart:

I'm expecting higher on SPX and ES, looking for a test of resistance in the 1620-30 SPX area at the minimum. I'd expect a retracement at some point on the way there ...... probably.

Unicorn Deathmatch

I posted a chart of the daily SPX vs NYMO since 2006 on twitter last night and I'll lead with that this morning. The charts show 22 hits or very near misses of -100 on NYMO and below since the start of 2006, of which 10 showed marked positive divergence at the low. All of these lows with markedly positive NYMO divergence delivered strong bounces, and the last three of those divergences were seen at the main lows on 2010, 2011 and 2012. This is therefore a strong signal that this retracement low is in, and significant further downside on SPX without a rally that at least reached 0 on the NYMO indicator beforehand would be a rarity that has not been seen since the start of 2006 at the least. SPX vs NYMO daily chart:

The possibility that NYMO divergence might not signify a significant low is the first rarity or 'unicorn' that I'm looking at today. The second I was talking about yesterday morning and will talk about further this morning. Since 1925 on SPX, there has been at least one retracement during any calendar year that has at least hit the weekly lower bollinger band over 80% of the time. Of the others most were near misses, and there are only four previous instances where SPX has not closed significantly below the weekly middle bollinger band during a full calendar year. Those previous instances were in 1927, 1928, 1954 and 1995. The last two of those both followed years where SPX closed down for the year so the last genuinely comparable instance if we see that again in 2013 was in 1928. Again a real rarity. As I'm expecting that this is most likely the only serious retracement we will see on SPX this year we are therefore likely to see one of these two historically very improbable outcomes here. SPX weekly chart:

The possibility that we are seeing a significant low form here was boosted yesterday by both SPX and Vix closing back with the daily bollinger bands. There is strong established resistance on SPX in the 1597/8 area of course but if SPX can break back above that then the obvious next targets are the 50 DMA, currently at 1618, and the daily middle bollinger band and broken wedge support, both currently in the 1625 area. SPX daily chart:

I mentioned yesterday that the 1597/8 resistance level on SPX is also a possible IHS neckline. If we see a reversal today to form an IHS right shoulder the ideal right shoulder low would be in the 1577 area, and the IHS target on a decent break over 1597/8 would be in the 1636 area. SPX 60min chart:

On ES broken triangle support in the 1591/2 area has been tested overnight and the 60min RSI is just edging into the RSI 70 area. No reversal signal but obvious resistance there. ES 60min chart:

On other markets gold and silver had a bad night and I was shocked to see silver break the major support level at 19.5. I'm expecting more downside on both and will post updated charts with the next targets tomorrow. USD is consolidating and there's not much to see there. On CL, having bounced on Monday at the 50% fib retracement of the move up from April, the next move was a test of the 23.6% fib and the overnight low was at the 38.2% fib. I'm assuming bullish on CL unless we see the last low taken out. CL 60min chart:

The last chart of the day is the ten year weekly TNX chart. Obvious I was looking at a possible IHS to form on that chart with the neckline in the 24 area, but TNX blew straight through that. The next target is wedge resistance on the falling wedge that has been forming on TNX since 2003, and I have that in the 27 to 27.25 area. If we see a reversal there that would obviously be a good fit with a possible TLT reversal at strong support in the 105/6 area, although on both I would be seeing that as a strong counter-trend reversal preceding another powerful move at least equal to the one we have been watching on TNX and TLT in recent weeks. TNX weekly chart:

I read a strange comment last week from Ben Bernanke, in which he had apparently said that he was perplexed by the move up on yields since the start of QE3. That was a really very odd comment. I think that an stated aim of QE is to deliver lower interest rates, but I have shown very clearly on the chart above that periods of QE have so far been very strongly correlated with rising interest rates, and assuming that the analysts at the Fed are sufficiently compos mentis to dress themselves without assistance in the mornings, they and Bernanke must know that too. Equally, with this period of QE being open ended, there's no particular reason to think that the current primary and possibly secular bear market on bonds will be ending anytime soon. Odd, though for some reason it seems to be widely believed by many that QE favors lower interest rates, despite the evidence clearly indicating the opposite.

Overall I think there is a very good chance that the retracement low is in, though it might still go the other way. Short term I'm watching to see whether an IHS will form on SPX with 1597/8 as the neckline. Normally, though not always, I would expect to see an IHS or double-bottom form on SPX at a significant low, and I don't see that on SPX yet. If that IHS does form on SPX, the target would be in the 1636 area.

Possible Retracement Low

I posted a chart on twitter yesterday showing the intraday low, and showing that it was a possible retracement low as it was both a test of broken rising wedge resistance (target 1965 area) and very close to a 38.2% fib retracement of the move up since November. Since then a bounce on ES has been trying to get established. Here is that chart that I posted intraday yesterday. SPX daily chart:

I am not keen on this area as a low, and if it was the low, and we didn't see a break below the weekly middle bollinger band later in the year, then this would match the very weak retracement seen on SPX previously in only four calendar years since 1923. Those years were 1995, 1954, 1928 and 1927, and if I exclude years where the previous calendar year closed down, that would leave only 1928 and 1927, and with Dow (though not SPX) having closed down in 1926, the only previous instance with a strong rise in the previous year would be 1928 out of the last 90 years. That said there were no previous years with QE running throughout the year so it is possible that we might see this rarity again in 2013. SPX weekly chart:

On the SPX 60min chart we had strong positive RSI divergence at yesterday's low, and a possible broadening descending wedge has formed. Resistance on this chart is at the possible IHS neckline at 1597/8, and broken wedge support currently in the 1620 area (and rising). You can see on this chart that yesterday's low was 4 points shy of the 38.2% fib retracement, which isn't exact but is close.  SPX 60min chart:

When I capped the ES chart below ES was still testing the 50 hour MA at 1575, and that was an obvious point of resistance. That has since broken and I have a possible double-bottom in play with a target in the 1608 area on a conviction break over 1580.5. The positive RSI divergence kept increasing over the day yesterday and seems likely to deliver the promised bounce now. ES 60min chart:

On CL yesterday morning I noted the test of the 50% fib retracement for the move from April, the failure so far to make a lower low,  and the positive 60min RSI divergence, and CL has bounced hard from there. I've moved the support trendline accordingly and am looking for move above the last high next. CL 60min chart:

The AAPL IHS was looking extended and AAPL has broken down to a level where the pattern formed would no longer be an IHS, it would be a double-bottom. Given the bullish nature of the falling wedge that broke up, and the fact that AAPL still looks pretty cheap, I'm assuming that this is a bottoming setup unless we see a strong new move downwards begin. AAPL 60min chart:

My chart of TLT that I posted in March with a projection for the following twelve months is still looking good, and TLT has now reached the high end of the area where I was expecting a large bounce to begin that would last into the end of the year. It may not happen of course but I still like the overall setup. TLT daily chart:

I like the odds for a bounce here and if ES can hold above the 50 hour MA then I am expecting to see one. I am concerned about the possibility that the retracement low may now be in, but we'll know more about that soon as this likely bounce develops.

No Bounce Yet

As the markets closed on Friday I was concerned about the possibility of a strong bounce starting and the possibility that strong bounce might develop into a major low. Of course, just as promising reversal setups can be steamrollered in strong uptrends, the same can happen in strong downtrends, and we may well be seeing that here. . The triangle targets on ES are still well below here of course, though the strong positive RSI divergence on the ES 60min chart is still worth noting today. ES 60min chart:

In the event that ES manages to struggle back to the 1577 level by the open, this reversal setup on the SPX 60min chart is worth keeping on mind. There is a possible IHS forming there with a target at a retest of broken broadening wedge support in the 1618-20 area on a break back over 1599. SPX 60min chart:

In terms of why I was concerned about a major low being made on Friday I was looking at the raft of significant support levels hit on Friday. SPX traded below the weekly middle bollinger band of course, and the low for the day was a test of the 2007 high and the 100 day MA. SPX also bounced to close near the daily lower bollinger band and while it trades below that SPX is obviously significantly oversold. SPX weekly chart:

On other markets CL last week followed up on the break of the short term rising channel with a break below rising (possibly rising wedge) support from the April low. I'm watching to see if CL can now undercut the June low, though we have now seen a 50% retracement of the move up from the April low and there is some positive divergence on the 60min RSI. At the moment CL is still making higher lows and highs from the April low. CL 60min chart:

TLT broke the falling wedge a week ago and is approaching the key support level and possible H&S neckline in the 105/6 area. I'm concerned that this may not hold, as TYX and TNX have now both overshot the possible IHS necklines on those charts. I would note that in addition to the other support in the area, the 105.5 level is the 50% retrace of the bull move between February 2011 and June 2012, but if it breaks then the falling wedge target is in the 97 area and that would be my next TLT target. TLT daily chart:

My last chart for today is the FTSE chart, which I'm posting for two reasons. Firstly my brother was asking what the key support levels there are, and secondly it is an interesting proxy to watch when considering possible lows for the current retracement on SPX.

FTSE tends to trend well and there are two possible patterns in play from the March 2009 low. Of these the rising wedge support trendline is in the 5800-5825 area and should be solid support for the current retracement. On a conviction break below 5800 the obvious target would be possible ascending triangle support in the 4790 area. There is some shorter term rising support from the 2012 low in the 6025-50 area.

How does this relate to SPX? well for starters there's no reason why the decline would stop at Friday's low, but there is very strong support another 5% or so below. That's similar to SPX though FTSE, as with most markets, has obviously fallen considerably further than SPX so far. The rising wedge support trendline on FTSE is comparable to the rising support trendline from the 20011 low on SPX, now in the 1490 area, in that a conviction break would most likely trigger a strong further move to the next big support level, which on SPX would be rising support from the 2009 low in the 1325 area. As with FTSE however, I'm not expecting to see that happen here. FTSE daily chart:

I would very much like to see this overnight weakness on SPX last into the open for a strongly bearish open below the weekly middle bollinger band, the 100 day MA and the 2007 high. This will clear the technical way for the obvious main targets for this retracement, which are strong support and the possible H&S neckline in the 1535-40 area, and the 50% fib retrace for the move since November in the 1515 area, which is my preferred target as it is a good fit with both the 200 day MA and a nearish miss of the weekly lower bollinger band. It is also a relatively low risk long entry area as it is not far above rising support from the October 2011 low in the 1490 area.

Just the Fibs Ma'am

I have to be out for a few hours before the markets open tomorrow so I'm writing this post after the Thursday close and might add a couple of comments at the bottom when I return 90 minutes or so before the market opens on Friday.

Obviously the broadening ascending wedge on SPX broke today, and as I hoped it might, it broke with an opening gap through wedge support, which is the strongest way to break a pattern trendline. That broken trendline should be good resistance on any counter-trend bounce that we might see here. SPX then tested the 1598 low, bounced a little and then broke down through it. That was also a very significant support break, as I explained in my last post.

I'm not expecting any serious low to be in today, so I am looking in this post at the key levels to watch on the way down, and to highlight the two key areas that I am seeing as a strong candidate for a retracement low.

First the SPX weekly chart, where the low today was 2 points above the weekly middle bollinger band. A week ago I gave this as my absolute minimum target for a retracement this year on the basis that the only year since 1980 that had not made it almost to the weekly lower bollinger band was 1995. That target has now been hit but we should go lower. The weekly lower bollinger band is in the 1490 area, at almost exactly the same level as rising support trendline from the October 2011 bear market low. SPX weekly chart:

On the daily chart the low today was a very strong punch through the daily lower bollinger band, which means that we may see a counter-trend rally very soon. I'll get to that later but for now I have isolated the four important support areas that are the potential downside targets on this retracement. They are as follows:

1. Broken rising wedge resistance in the 1550-60 area. This seems too high but is also the 38.2% fib retracement of the move up from the November 2012 low, and this broadening ascending wedge was the pattern created in that move. 
2. Established support and the possible large H&S neckline in the 1535-40 area. This is a strong support level and we might get a strong bounce there, but I'm not expecting to see a return to the November lows, which would be the H&S target. The technical target for the wedge is of course the November low, before someone points that out, but having looked at many wedges of similar scale over comparable timeframes over the last sixty years on SPX, I can state with confidence that it is a rarity for these to make target, and possibly unprecedented without negative divergence on the weekly RSI.
3. The 200 DMA, now in the 1505 area and rising. This is a good fit with the 50% fib retracement in the 1515 area. 
4. Bottom line support is at the weekly lower bollinger band and, if lower, the rising support trendline from the October 2011 low, though I am not expecting SPX to test that. 

The top fib targets are obviously the 1555 area and the 1515 area, and of those two targets I favor the lower as it is a better historical fit in terms of the 200 DMA and the weekly lower bollinger band. SPX daily chart:

Here is the updated SPX 60min chart showing the broken broadening ascending wedge with the gap through the wedge support trendline and the fib retracement levels. You can also see that the 60min RSI is very oversold here and that supports the possibility that we may see a decent counter-trend rally soon. SPX 60min chart:

Lastly the SPX 15min chart, with a closeup of why and how we might see a bounce here. Divergences on the 15min RSI have been a decent guide during this retracement, as they generally are during retracement periods, and the positive divergence here is impressive. I have sketched out a possible path to retest broken broadening wedge support in the 1615 area and that that is the highest I would expect any counter-trend rally to go. That would also be a 50% fib retracement of the post FOMC plunge as I've marked on the chart. SPX 15min chart: 

I posted a TLT chart in March with what I thought was the highest probability path over the following year. Here's the current updated version with the text from a couple of weeks ago. The falling wedge has now clearly broken down and the obvious next target is in the strong 104.9 - 106.2 support area that is also a possible H&S neckline. We may well see a bounce there, though I should mention that the wedge target is in the 97.5 area is that strong support level should be broken. TLT daily chart:

Last chart for today is my updated main daily silver chart. I last posted this in April after the break below the 26 support level and haven't changed anything on the chart since then. As you can see silver has now reached the falling wedge target at 20 and tested today the strong support in the 19.5 area that I mentioned then. If that breaks, and it might well, then I have the next big level in the 16.25 area. Silver daily chart:

PRE-MARKET NOTES: After a decent bounce overnight the prospects for rallying back above 1600 SPX look ok. I should mention ES resistance at the 50 hour MA is now in the 1607 area and declining fast, and I wouldn't expect any rally here to recover above that for more than a few hours. If we see the opening gap fill and a short term double bottom form then the target would be in the 1617 ES area (approx 1623 SPX), though as I said, I wouldn't usually expect to see a break back above broken wedge support here, and that's in the 1615-7 SPX area. 

Testing Wedge Support Take #2

I have a working hypothesis for the next year or so on equities. The high so far this year shows no signals of a bull market high, so I'm looking for a summer retracement to test the SPX 200 DMA, currently at 1504 (and rising obviously), and attempt a test of the SPX weekly lower bollinger band over 1500, currently at 1488 and rising. SPX would then make a tradeable low and the next move into the 2014 spring/summer high would begin. I have more to say on downside targets on a break below the current June lows, but I'll talk about those another day.

To see a decent tradeable low however, the current broadening ascending wedge on SPX needs to break downwards. The technical target at the November low is of no practical importance, but the wedge cannot realistically last into next year, and historically is unlikely to break upwards. Now that the bullish setup into FOMC yesterday has failed I'm looking for a retest of wedge support, now in the 1615 area, and if my scenario for the next year is right, that should soon be broken.

Looking at ES, the pattern setup here is still the descending triangle that broke up a few days ago. I've mentioned often that triangles are very prone to false breaks in one direction before resolving in the other, and that's what I'm looking for here. On ES the next test is of triangle support in the 1592 area, and on a break below there the pattern target would either be the 1542 area (conservative) or the 1525 area (full target). ES 60min chart:

On the SPX 60min chart main broadening ascending wedge support is now in the 1615 area and a break below there should signal a retracement well below 1600. However the June low at 1598.23 is still in a very significant support area, as it was effectively a test of the April high at 1597.35, and that level is the breakout level for the major resistance trendline from the 2000 high through the 2007 high. That's very strong support, and I'm expecting it to break, but until it does it's still very strong support. SPX 60min chart:

On the SPX daily chart we obviously saw a strong break back below the middle bollinger band yesterday. The key support levels for today are the 50 DMA at 1618 and the lower bollinger band at 1610. SPX daily chart:

I was saying yesterday morning that retracement soon on CL looked likely and we got that. It went further than I expected however and broke short term channel support. The break at 97 is being retested this morning, but the break is bearish and I'm expecting some more downside. I have drawn in a possible rising wedge forming on CL here and if CL returns to test rising (possibly wedge) support that is currently in the 93.4 area. CL 60min chart:

I've been watching DX with increasing concern over the last couple of weeks, wondering if we were seeing a major trend reversal. I was therefore very happy to see yesterday's strong and impulsive looking spike up back over the 200 DMA and broken support at 81.35. I am treating this as a probable significant low and am now looking for a break with confidence over the recent highs with a working target in the 86 area. DX daily chart:

I posted a long term TYX (30yr Treasury Yields) chart last August talking about the possibility that an IHS would form as part of a long term low and here is that chart again. TYX Monthly (LOG) chart (25th Aug 2012):

Since I posted that chart bonds have been pounded hard and as of yesterday TYX has now almost reached my IHS neckline. If this IHS continues to form I would expect a very strong rally on bonds soon, and on TYX this would ideally be a right shoulder forming over six months or so with a downside target in the 27 (2.7%) area. We may therefore be close to a big multi-month reversal on bonds and that should be borne in mind by anyone shorting bonds here. TYX daily chart (intraday yesterday):

There's a big opening gap today and I'm hoping SPX will open below 1615, breaking the wedge. If we see that then broken wedge support may well immediately convert into strong resistance. If SPX opens above wedge support the gap fill has a better shot and I'll be looking for a test of wedge support in the 1615 SPX area today.

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