This current retracement is very important for determining where equity markets go over the next year or so and I'll be showing why that is this morning. From a pattern perspective this retracement has to bottom out above rising support from 1343 or the current bullish pattern setups I'm working with will fail, and the highest probability pattern setup will revert to being a topping pattern for the broadening ascending wedge from 1343.
On the SPX weekly chart a serious concern for bulls here is that we have made, in effect, a marginal new high on strongly negative weekly RSI divergence. This is a signal for a possible major top, though RSI needs to make a lower low under about 56.5 for that signal to fully trigger. RSI (14) is now at 58.33 so that doesn't leave a lot of room. On the weekly bollinger bands the next obvious support level is the middle bollinger band at 1635, and 1635 is also the 50% retracement level for the move up from 1560. On the best bull scenario for the rest of 2013 SPX shouldn't go much lower than that. SPX weekly chart:
On the SPX daily chart the entire trading range on Friday was below the lower bollinger band, which is rare and suggests a bounce or a low soon. At the moment SPX is finding support at the 50 DMA, on a clear break below that the 100 DMA is now at 1631. SPX daily chart:
On the SPX 60min chart since last November I have drawn in the rising support trendline from 1343. This is a key support trendline on any ongoing bullish pattern I have from last year. If it breaks then the most likely pattern setup reverts to being that we are forming a big top from that low, with the 1560 low area being either a double-top valley low or an H&S neckline for a pattern on which the 1709 high was the top of the head. The 1617 level is also the 61.8% fib retracement of the move up from the 1560 low, so if we see rising support broken the next obvious target will be a retest of the 1560 low. SPX 60min chart:
What about the short term? I have the double-top target at 1642 and obviously that is getting close but isn't yet made. What looks interesting on the 60min chart is the positive divergence that was building on Friday as SPX slid down the possible wedge support trendline that I drew on Friday morning. That trendline has strengthened as a result and if we do see a bounce here I have drawn in the targets on the basis that trendline turns out to be the support trendline on a broadening wedge or declining channel. If we are going to see more downside the (currently theoretical) declining channel option is the better option and that would also be a decent fit with a retest of broken support in the 1676 SPX area. SPX 60min chart:
On ES the bounce setup also looks promising, as declining resistance from the 1693 high has been broken overnight and, since I capped this chart below, perfectly retested. There is also currently positive 60min RSI divergence. If ES can hold the 1650 area then this is a strong bounce setup. ES 60min chart:
On other markets CL has broken down from the small rising wedge that I posted on Friday. The next obvious move is down. CL 60min chart:
On GBPUSD there have now been three tests of rising wedge resistance. It could break up and, if so, that would be a body blow to the USD uptrend, unless the break up turned out to just be a bearish wedge overthrow. Until then this is still a nice topping setup with resistance close above and the obvious target far below. GBPUSD 60min chart:
For the bounce scenario today I would be looking for ES to hold the current overnight lows and for the gap fill to be the start of a strong bounce. If there is no bounce then the double-top target is at 1642 SPX and I have the next big support area at 1630-5.
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