Bearish Engulfing Candlestick

Yesterday was a good start for the retracement that I'm expecting to see here, with a daily bearish engulfing candlestick on SPY. I am concerned though that there was no daily RSI 5 negative divergence at the high, and am wondering whether the high will need to be retested. Either way the engulfing candlestick, while a strong reversal signal, needs to be confirmed with more downside in the very near future.

Some of you will have noticed that there is no daily bearish engulfing candlestick on SPX for yesterday and be wondering why that is. I looked into this oddity a while back and the answer is that there is a flaw in the data coming from S&P for opening gaps in either direction, with these not shown properly on SPX and some other indices. There was a significant gap up on Tuesday morning on SPX and if that were shown properly then the bearish engulfing candlestick would be clearly shown there as well. SPY daily chart:

On the SPX 60min chart I am again concerned to see that there was no negative RSI 14 divergence at the high, and would note that the 50 area on the 60min RSI 14 is support in short term uptrends and resistance in short term downtrends. The 50 level was hit at the low yesterday so obviously the bears are going to need to get further to confirm the downtrend there. After a very short term top has formed however I'm seeing the 1740 area as the next decent support and the neckline for a possible larger H&S. SPX 60min chart:

On the ES 60min chart I think that we are seeing either an H&S or double-top forming here. Of the two the H&S is my preferred option unless we see ES break back over the 1761 possible double-bottom trigger level that would target the 1770.25 area. The 50 hour MA is now in the 1762.25 area so a break over both would set up a retest of the highs. ES 60min chart:

On other markets USD has been rallying somewhat but I'm thinking that USD bulls may be starting the reversal party a little early. Looking at the six year GBPUSD and EURUSD I have obvious major declining resistance trendlines a little higher than either has reached so far. Here's how the declining resistance trendline from 2009 looks on the GBPUSD daily chart:

I'm planning to post some charts showing why I think the levels being tested in recent days on GDX and GC are a major inflection point, but for today I would just note that GC has been retracing as expected, having now formed and broken down with a target in the 1317 area. GC 60min chart:

CL rallied a bit as I was expecting and has then retested the lows. There is now a very possible double-bottom forming that might be capable of breaking CL over the current falling megaphone. watching that with interest. CL 60min chart:

The setup today is very clear on ES. Key resistance is in the 1761/2 area, and a clear break over there would target a retest of the highs. A failure to break 1761/2 invites a test of the lows yesterday and, if broken, a move to test the larger possible H&S neckline at 1734.75. There is a higher than usual chance of a trend day today.

FOMC Trick or Treat

Three weeks ago today, near the low for the last move down, I was writing that the weekly S2 pivot was decent support, and that while ES was then below it, there was a good chance that it would close the week back above it. Today ES has broken above the R2 pivot at 1769, and given that the weekly upper bollinger band on SPX is in the same area, thee is a very good chance that ES will close the week back below it. What I'm also seeing this morning on ES is that there is confirmed negative divergence on the 60min RSI, the confirmation being that RSI has dropped below the low made after the first RSI peak. Will ES decline from here this week? FOMC may determine that of course but in normal circumstances that would be likely. ES 60min chart:

I mentioned that there was a possible rising channel support trendline on the SPX 60min chart yesterday and that is still intact today and clearly acting as support. That's good because any break below that should now be a serious signal of weakness, and equally while SPX stays above it there's not much to get excited about on the short side. SPX 60min chart:

For any big reversal in the last two days there would have been daily NYMO and RSI 5 negative divergence to confirm the high. Unfortunately the RSI 5 made a new high yesterday so that only the NYMO divergence remains today. There is still clear negative divergence on the ES and SPX 60min RSI 14s though. SPX daily chart vs NYMO:

On the weekly chart SPX closed in the likely 1770-5 maximum closing area, with lower probability spill to 1780, that I gave on Monday morning based on the likely closing level of the weekly upper bollinger band this week. SPX could punch above of course, but if that punch persists into the weekly close this week that would generally be a strong signal of a high that would be both imminent and more significant than anything that I am expecting to see here. SPX weekly chart:

I posted the RUT and NDX charts yesterday morning and will post them again today as neither made a significant new high yesterday, stalled at obviously significant levels on both. If we see a very strong spike up today we might see a resistance break with follow-through action at these resistance levels and I'll also be watching for a possible gap up over these resistance levels at the open, in which case I would be considering the possibility of breakaway gaps until those gaps were filled. RUT 60min chart:

NDX 60min chart:

We shall see what the mad munchkins at the Fed have in store for us today. Subject to that I'm leaning cautiously short. My apologies for the late post today, I've had a very busy morning offline.

FOMC Tomorrow - Take 2

It was pointed out yesterday that the FOMC announcement is actually on Wednesday and so there is another day's grace while we wait. Ranges tend to be narrow on pre-FOMC days and I'm expecting the gap today to fill.

My top range for closing the week based on the weekly upper bollinger band is in the 1770-5 SPX range with a possible but lower probability spill into the 1780 area. That's not far above of course and on the ES 60min chart I have another red line that should hold the weekly close and that is at the weekly R2 pivot at 1769 (about 1775 SPX). Support below is at the 50 hour MA in the 1756 area, and if we should see a break below yesterday's low at 1751.5 then I have a double-top target at 1740.75. I'm leaning cautiously bullish for today though.

I do also have an ideal trendline target in the 1775 area, and that is at the retest of broken rising megaphone resistance that marked the August high. SPX won't necessarily test that, but it fits well with other resistance and if we see a positive day today then we could well see that tested. I would be leaning strongly short at that test. SPX daily chart:

The daily SPX chart is ready to peak and roll over here with clear negative divergence on the daily NYMO and RSI 5. These are generally reliable signals. SPX daily chart vs NYMO:

On the SPX 60min chart I have possible rising channel support established yesterday. Otherwise this is a very toppy looking chart, but that possible channel support is worth bearing in mind. SPX 60min chart:

Looking through other US equity markets RUT is showing a similar setup to SPX here, with a rising wedge from the last low that has broken down, negative 60min RSI divergence and a possible double top that has formed at a retested support level. RUT 60min chart:

There is another similar setup on the NDX 60min chart:

On other markets CL is rallying as predicted on Friday morning, GC is forming a topping pattern as predicted yesterday morning. I've been talking about a likely reversal on GBPUSD soon and the setup for that is on the chart below with two tests and fails at declining channel resistance from 2010 on strongly negative daily RSI divergence and a possible double-top that has formed with a downside target in the 1.55 area on a break below 1.589. GBPUSD daily chart:

I am expecting to see a short term top this week, most likely tomorrow but possibly today. I'll be looking for a retracement into the 1700-20 area before the main winter event starts with a move towards 1900 SPX. I would like to see the current high made in the 1775 SPX / 1770 ES area but it's possible that we'll see reversal below that. I wouldn't expect to see a strong move over that level.

FOMC Tomorrow

The big news this week is FOMC tomorrow, and that is a big risk factor for this week as it may well be that some Fed members are irritated that there is now talk that, with Yellen coming in to replace Bernanke, there is no prospect of QE being tapered in the foreseeable future and that it may well be expanded. A number of Fed members have significant reservations about QE still and it would be strange if they weren't disturbed by such talk, which may prompt some hawkish talk tomorrow that in turn could well trigger a retracement.

Regardless of that risk/reward is tilted towards the downside here. I said when SPX reached the weekly upper bollinger band that the weekly upper band would now be the main resistance level. SPX closed Friday at 1759.77, just 0.04 above the weekly upper band. I would see a maximum closing range for that weekly upper band in the 1770-5 area this week with a possible overshoot to 1780. Potential downside is considerably larger here. SPX weekly chart:

One last thing that I would note from the chart above is that in my view the resistance trendline from the October 2008 rally high through the 2010 and 2011 highs has now broken and should no longer be considered as significant resistance even on a retrace below it. One other key resistance trendline I have been watching was rising wedge resistance from the June low and that has also broken upwards. As I mentioned some 90 points ago, a break up through that would target over 1900 and I have the target now for that at 1930. That target joins the 1965 target already in place from the rising wedge from the 2011 low that broke up earlier this year, and my main scenario here is that we hit that target area for the Spring high next year. I am regarding any retracement soon as a buying opportunity for the push into that target area. SPX daily chart:

Will we see such a retracement soon? I think so, and the setup for seeing that soon looks increasingly good. From the chart above I would note that another test of broken broadening wedge support from November 2012 is now in the 1770-5 SPX area, which is a good fit with weekly upper band resistance. From the chart below I would note that we now have a setup to deliver both daily NYMO and RSI 5 negative divergence on a high made in the expected range this week, which is promising. SPX daily chart vs NYMO:

I'm not expecting that retracement to have already started, but I would be remiss not to note that there is now a perfect possible double-top made on SPX here, and that if we were to see a break below 1740 SPX next then the double-top target would be in the 1720 area. SPX 60min chart:

On ES the possible bull pennant I was looking at on Friday morning obviously broke up, and ES is currently retracing from an overnight high at 1762.25. I have 50 hour MA support at 1750.75. ES 60min chart:

On other markets I am watching USD carefully as it approaches the possible double-top trigger level at 78.60. This is the do or die level for US Dollar bulls, and will be particularly interesting to watch this week in the context of the FOMC meeting tomorrow. If an expansion of QE is announced I would expect USD to trigger that double-top shortly afterwards. USD daily chart:

GC formed a rising wedge from the last low which has now broken down on strongly negative RSI divergence. I'm expecting some significant retracement to start shortly. GC 60min chart

I was updating my AAPL chart over the weekend as my double-bottom target at 540 has almost been reached and I've been considering the possibility that the next target for AAPL would be channel resistance in the 570 area.That's possible, but what was looking on the chart was the very sharp negative 60min RSI divergence here at the 50% retracement of the move down from the high last year. The last two equivalent negative divergences were both after that low and both delivered declines over 5%. Worth bearing in mind as AAPL reports earnings today. The chart setup suggests that those may well disappoint. AAPL 60min chart:

The main story this week is ts the weekly upper bollinger band on SPX. A punch above it on a weekly close basis would be rare and would usually signal an imminent top that would look more significant than anything I am expecting to see this year. If it doesn't break up on a weekly closing basis then I have the likely closing range in the 1770-5 area with a possible overshoot into 1780 SPX. That's not a lot of headroom and a retest of the overnight highs would take ES to just below the lower end of that range. I'm leaning cautiously bullish today and, subject to any possible policy lunacies discussed at FOMC, bearish from there.

Looking for Clues

I've had a very busy morning with offline stuff so just a quick post today. There have been two promising setups for a decent decline on SPX and ES this week and, so far at least, both have just faded away as ES has instead been forming a rough triangle. In the context of the steep preceding rise I'm inclined to interpret this triangle as a (62%) bullish pennant, so I'm leaning towards at least a test of the highs here. ES 60min chart:

On the SPX 60min chart you can see the H&S that was forming and then faded away after reaching the top of the right shoulder. The most likely moves from here are a test of the highs to put in the second high of a double-top, or a break over the current highs, possibly to retest broken rising wedge support that would be in the 1770 area today. SPX 60min chart:

If we do see a strong day today then the highest close that I would expect to see would be in the 1765/6 area. That fits with the weekly upper bollinger band and where the daily upper bollinger band would be likely to close if we see a strong day. SPX daily chart:

I'm very pressed for time today but I thought I should show the nice looking short term reversal setup on CL here that could deliver a strong bounce into the 101.5 area. The main downside targets are still in the 90-2 area but this could be a nice scalp long followed by a highly profitable short. CL 60min chart:

I don't have a lot of conviction on direction today. ES frankly looks a bit lost here, the loose bull pennant isn't a sharp enough pattern to inspire much confidence, and in any case this pennant/triangle is only 54% - 62% bullish depending on interpretation. I'm leaning bullish but it could easily go the other way. For the moment we are in range on SPX between 1740 and 1760. I will leave you today with a Monty Python sketch that came to mind for some reason when looking at the ES chart for the last couple of days. Enjoy and have a great weekend :-)

Short Term High Forming

Yesterday's trading on SPX was ambiguous about whether a top had already been made, particularly at the close. The SPX rising wedge had obviously broken down and I gave the options of a retest of the highs or an H&S to form in yesterday's post. What we saw was the H&S option form and at the close yesterday that was looking pretty good. ES broke up overnight but at the time of writing has given back most of the overnight gains, and if SPX can open under 1750 then that H&S will still be looking pretty good. If SPX breaks up I'll be looking first for a retest of the highs and on a break above that I'd be looking for a short term top in the 1765-75 range. SPX 60min chart:

What had disconcerted me on the ES 60min chart chart was the positive RSI divergence at yesterday's low and the very nice looking double-bottom targeting 1752 on a break over 1744. When ES broke over 1744 I mentally wrote off the H&S on SPX but as it happened ES went to 1751.75 and then gave most of the overnight gains back, having worked off the RSI divergence with that move. I have support at the 20 and 50 hour MAs in the 1744/5 area, which is being tested at the moment, and if the bears break back below that and stay below then they will have the technical advantage today. If ES can't break back below then a retest of the current highs won't be far away. Below 1744/5 however there is now a nicely formed double-top on ES targeting the 1715 area on a break below yesterday's low at 1734.75. ES 60min chart:

What I don't see here is the divergences that I would usually see on the SPX daily chart at a significant high or low and those divergences are on the daily NYMO and SPX RSI 5 shown over the last few months on the chart below. SPX would need to make a marginal new high to establish those but they aren't a requirement. As reversals get small these divergences also become rarer, and the retracement I am expecting here would be smaller than any shown on this chart with a signal. SPX daily chart vs NYMO:

On my main SPX daily chart the close today was well below the daily upper bollinger band but that doesn't preclude a marginal new high before an attempt to test the daily middle bollinger band. If we see the current high taken out the obvious target would be another retest of broken rising megaphone support from the November 2012 low, and that would currently be in the 1770 SPX area. SPX daily chart:

If we were to see a marginal new high then it's worth noting that the weekly upper BB is now at 1756.55 and could close the week in the 1760 to (at a stretch) 1765 area. Breaks over the weekly upper band are rare, and generally signal significant highs, so I'm not expecting a weekly close tomorrow to be significantly above that this week. SPX weekly chart:

I've read quite a few comments about the recent spike up on GOOG having been a big TA fail, and after looking at my GOOG charts I entirely disagree and am planning a weekend post showing why this was very much a failure of weak analysis rather than TA as a tool. While I was looking at that I posted a chart on twitter yesterday showing the open wedge target at 1090 and the current rising channel where channel resistance was being tested. After that GOOG surprised me by breaking channel resistance. I'm posting this chart to say that the 1090 target may well be made soon, and that while we may well see GOOG close the week back inside the channel, the break yesterday suggests strongly that GOOG will make the 1090 target without a big retracement beforehand. GOOG weekly chart:

The bull/bear line couldn't be much clearer on ES this morning and it is at 1744/5. Below that the SPX H&S and ES double-top are in play and I'd expect to see both break down today. Above 1744/5 ES I'll be looking for at least a test of the highs and most likely a higher high in the next few days in the 1765-75 area. I'm leaning towards the first scenario at the moment but it could very much go either way.

Keeping It Real

I have been watching two trendlines with particular interest over the last few days, and have stated repeatedly here that a break up on either should confirm the bull case for a strong run up on equities into next year. Both have broken up in the last two days, and I am leaning very strongly here towards this bull scenario. I wrote up part of that scenario back on 30th June this year, when I gave a target in the 1965 area for the rising wedge from the 2011 low that had recently broken up and you can see that post here.

After the 1646 SPX low I warned that if the rising wedge from the 1560 low in June should also break up, then that 1965 target would be joined by a target in the 1925 area from that second rising wedge, and that rising wedge from the 1560 low broke up with some confidence yesterday. I posted this SPX daily chart yesterday showing the close back on the daily upper bollinger band and SPX closed at the band again yesterday. Historically this strongly suggests a retracement or (less likely) consolidation short term, but neither would negate this break up from this rising wedge. SPX daily chart:

The other trendline that I have been watching is the four hit resistance trendline from 2008 running through the highs in 2010, 2011 and May 2013. This is a strong and very precise trendline, as I have shown on the chart below using the thinnest possible line to join the points together, and it broke yesterday. That's only a small break as yet, and might just be a pinocchio through resistance if SPX stalls until the end of the month, but either way this break is a strong signal that this trendline is likely to break up soon, which I was already expecting from the overall pattern setup. SPX monthly chart:

Back in the short term I posted a rising wedge from the 1646 SPX low on twitter yesterday afternoon, and the overnight action on ES suggests strongly that SPX will gap down through wedge support at the open today. I would then expect either a retest of the highs (and broken wedge support) today or for an H&S to form, with the likely neckline in the 1740/1 area if that is the case. SPX 60min chart:

There were significant moves on other markets yesterday and first among those was USD, where the rising channel, having been tested on Friday, was then broken. The last ditch defense level for USD bulls is the double top trigger level at 78.60, and that will most likely be tested soon. USD daily chart:

I've been following the IHS on TLT in recent days and today I'll show the inverted view of that on TNX, where the H&S targeting the 21 to 21.25 area broke down hard yesterday. We should now see a solid rally on bonds over the next few weeks into that target. TNX daily chart:

I've been watching the precious metals complex for signs that a new bull market is underway and there was another promising bull signal yesterday with the break up on SLV over falling megaphone resistance. There is a sort of reversal pattern on SLV, nearest to a very ugly IHS most likely, but whatever it is I would be targeting the 30 area on a clear break over 24. SLV 60min chart:

On the CL daily chart I was showing the rising channel support target on WTIC yesterday in the 91.5 to 92 area. On CL that is boosted by an H&S target in the 91 area. I have shown on the chart below how almost every significant reversal on CL in 2013 has been signaled with daily RSI divergence from overbought/oversold and I would expect the next reversal to do the same. That doesn't look at all likely in the near future. CL daily chart:

I won't show the ES chart this morning but the first resistance level to watch today is the 50 hour MA at 1741.5. ES has been testing resistance there for the last five hours and that could hold. If so then the next big level below and a possible H&S neckline is at 1734/5 ES. If ES can break back over 1741.5 then we may well see a retest of the highs for what would most likely be the second high of a double-top. In terms of retracement targets the SPX daily middle BB is now at 1700, and the 38.2% and 50% fib retracements of the move up from the 1646 SPX low are at 1716 and 1703 SPX respectively. I'll be looking for a decent bull pattern to form on the way down, but regardless of that I think this will be a dip to buy for a strong move up that should last several months.

Bear Case Almost Dead

There has been a lot of talk in recent days about how the bear case is dead, and how equities will rise considerably further from here, and how this bull market can go on for years longer. I think that talk has a decent technical foundation, and am planning a post once 1750 SPX is decisively broken talking about the technical case for seeing SPX reach the 1950 area next Spring, and the 2450 area sometime in 2016/7. Until that time however ......

I take the view that it's best not to count your chickens before they hatch and there remains a large technical obstacle between where SPX is trading now and the scenario that I have sketched out above. That resistance, for this week at least, is the convergence of three very significant resistance levels in the 1755 SPX area, and as such a convergence is also a very attractive target, I am wondering whether we will see that level tested before seeing the retracement that I am expecting to start sometime this week.

The first two of those resistance levels are on the SPX monthly chart below. The first and strongest level is the four touch resistance trendline from 2008 through the highs in 2010, 2011, and June 2013. Arguably that trendline is being tested now, but there's enough play in that line to allow a test of 1755. The second level is the monthly upper bollinger band, now at 1754.24. The third is the weekly upper bollinger band, now at 1756.16.

I think that strong five year resistance trendline is most likely going to break, but until it does the technical bear case is not yet dead, and I would note that as well as both the trendline setup and the weekly RSI looking similar to the setups at the 2011 top, there is now visible negative divergence on the monthly RSI. SPX monthly chart:

SPX closed back at the daily upper bollinger band yesterday and it would be rare to see a closing break above that here. I would expect the upper band to be at most at 1752 by the close and would not expect a close above there.. What I would add though is that there have been four punches well above the daily upper BB in the last year, and when SPX closed back inside the upper band in all four cases that marked a short term high. On three out of those four occasions the next move tested the daily lower BB, and in the fourth case SPX consolidated in a bull flag for a week before the next leg up began. SPX daily chart:

On other markets TLT is still testing the neckline of the large IHS I have been watching form there. I'm expecting this to break up but this will be a more attractive long after a strong close over 107. TLT daily chart:

I was saying last week that if oil broke back below 100 then I have a double top target in the 92.5 area, close to rising channel support in the 91.5 to 92 area. That's very much the case here, and CL is bouncing this morning, so I'm looking for a decent short entry there. Here is the bigger picture setup on the WTIC daily chart:

USD has finally touched support on the rising channel that I have been posting over the last few months. If the USD uptrend is to continue, this is the likely reversal area, and it is holding so far. There isn't much indication of reversal on the USD chart, but the GBPUSD chart I posted yesterday looks very promising for reversal. USD daily chart:

I was showing the bullish break on the GL:D chart yesterday, and the GDX chart also looks very promising, with a double-bottom target in the 40.5 area on a clear break over 31.35. First however falling channel resistance in the 27.5 area will need to break. As and when we see that GDX will be a very attractive looking long. GDX weekly chart:

AAPL closed back over 521 yesterday and is close to making the double-bottom target in the 540 area that I have been watching over the last few months. Once that target has been made I would mention that I have a higher target at rising channel resistance, currently in the 565 area. AAPL 60min chart:

I'm expecting a decent retracement to start soon, and am encouraged to see that rising support from 1740 on ES broke overnight. However ES then tested the 50 hour MA four times in five hours, and it held. That support is now in the 1737.50 area, and until we see an hourly close below that, there's not much to see on the bear side. In effect however that gives us a range between 1737.5 and 1749 that is narrowing rapidly and very likely to break out in the next day or two. The direction of that break, for a number of reasons, is likely to be down. I'll be trying to catch the low on the subsequent retracement to add heavily to my longs.