In the Shadow of a Volcano

The very strong decline yesterday caught me by surprise, as we had a very nice setup to retest the highs and a strong daily buy signal to back that up. I was expecting SPX to hold the 1940-50 area in line with fib retracement targets and that didn't happen. So where does that leave us this morning?

Well in terms of the buy signal these are most immediately bullish in the context of a supportive pattern setup. We had one yesterday morning and we don't have it now. The very nice double bottom setup is badly, and most likely fatally, damaged. I'm not a big believer in triple bottoms, which are rare, and tend to be raised as a possibility mainly when a possible double bottom is in the process of coming apart. The falling megaphone target back at the highs was only really interesting in the context of that double bottom. My megaphone targets as counter-trend patterns are the standard range of fibonacci retracements, and this one has already retraced slightly over 50% of the megaphone move.

So where does that leave the buy signal? Well five of the eighteen signals since the start of 2007 retested the lows, and four of those made new lows, with two of those four then failing altogether and the other two making significant new lows afterwards. Only a break below the first RSI 5 low in the setup invalidates the signal, so we could potentially see a decline of 50-75 points from here without invalidating that buy signal. I'll be bearing it in mind but this won't be an immediate bull signal unless another bullish reversal setup forms or we see strong rejection at a strong support level, with the obvious candidate for that being the 1904 low, which is both main double top support and the current are for the SPX 200 DMA. At test of that level looks likely soon unless SPX can break back over the 50 DMA, now at 1972.

Short term, as long as we don't see a gap down under 1925, the odds of a decent bounce this morning look good. Yesterday's falling megaphone broke up near the close and a reversal pattern appears to be forming. I'would be looking for a rally into the 1942-6 area, with a possible extension to the 1954-6 area on a break above that.  SPX 1min chart:

On the daily chart the close yesterday was on the daily lower band. As the last three days have all touched the lower band, my working assumption is that SPX is still on a daily lower band ride unless it can sustain a break away from it. The daily lower band closed at 1929 yesterday and could close as low as 1916 today. SPX daily chart:

I was saying yesterday morning that although we could see a retest of the highs, further upside would be limited until we saw a deeper retracement. the reason for that is that is the rising megaphone that has formed since the October 2011 low. Rising support for that is in the 1780-90 area and there is a clear double-top setup here that on a break under 1904 would target the 1789 area.

That megaphone support and double-top target will be in the same area in October only, and will be strongest support at this crossover point. On a sustained break under 1904 that will be the obvious target and would really be the highest good target for this retracement. the 38.2% and 50% retracement target on a break down from this rising megaphone would be in the 1660 and 1550 areas. A strikingly similar setup in summer 1987 retraced to near megaphone support, gapped down through it, and made a rather fast move to the 50% fib retracement target, and I'm not entirely discounting the possibility that we could see a repeat of that here. SPX weekly chart:

Oil broke hard through my 87 area support yesterday and  killed off the positive divergence on the daily chart. This opens up a possible test of four year support at 75.70 and has triggered a possible double top target at 70. CL isn't going to be an interesting swing long again for me unless one of those targets is reached or we see a convincing reversal pattern on positive daily RSI divergence. WTIC Weekly chart:

I was saying a few days ago that the short term low on EURUSD might be in and since then it has rallied through declining resistance from 1.34. I'm not seeing a reversal pattern yet and we could see a retest of the lows to make the second low of a double bottom. EURUSD daily chart:

Short term I'd like to see a bounce in the morning, but if we see that the rally high would most likely be a short. There is an outside chance that we reverse yesterday's decline today. On the last occasion I saw candles like the last three days, the fourth day did exactly that, but that's one a sample of one so I wouldn't be relying on that. The overall pattern setup is still very much bearish.