Four and a Half Horsemen

It has been a few weeks since my last post on 25th September, due to holiday, illness and other reasons. I was looking then for an all time high retest on SPX to make the second high on a large double top, and we saw that all time high retest in early October. For the rest of October SPX trended down into a low on Friday.

In the short term SPX touched and broke slightly below the daily 3sd lower band at Friday’s low, and as is generally the case when the SPX gets close to or hits the daily 3sd lower band, that has triggered a strong rally.

By my count SPX has tested or come very close to a test of the daily 3sd lower band thirteen times in the last eighteen months (before Friday) on the chart below, all marked with yellow highlights, and the results were as follows:

• 9x delivered a rally that broke back over the daily middle band (currently 7723)

  • of which five delivered new all time highs, including a further two on the way to those new all time highs.

• 2x delivered a decent rally that peaked on the next trading day

• 1x delivered a decent rally that peaked on the second trading day

• 1x delivered two more days of 3sd lower band tests into a big swing low

On this basis, assuming we don’t see serious lower lows today, which currently looks like a safe assumption, there is therefore about a 40% chance that a swing low was made on Friday, leading to a new all time high. There is about a 35% chance that a rally has started that will deliver a break back over the daily middle band, but not a new all time high. There is about a 25% chance that this rally will peak today or tomorrow before making a new low.

SPX daily chart:

In terms of heading to an new all time high the historical stats from the end of October into the end of the year are strongly bullish in a normal year, and even stronger in a midterm year.

That’s just a historical average of course, and doesn’t deliver every year. We do also have a lot of news coming up this week that may move the markets.

There will likely be no all time high retest on SPX unless Tech & AI rally with it. I’ll be doing a dedicated post tomorrow looking at that but I’m watching the sector carefully and one risk this week is that if the Democrats take back both House and Senate, that may well be perceived as bad for AI.

There is also a lot of talk that the US and Iran will resume bombing Iran after the midterms end, very possibly on Wednesday, and if that happens then that may quickly escalate into major infrastructure damage across the US allies in the Persian Gulf. That could deliver a big decline on equities into the end of the year.

So what is the pattern setup like for continuation down? Well it’s pretty decent actually, and there are four (and a half) big patterns that I will be watching if we see more downside.

The first is the double top on SPX. We saw in early October the high retest I was looking for in my last post on 25th September, and that has set up a high quality possible double top. A sustained break below double top support at 7507.77 would look for a target in the 7160 to 7190 range.

SPX 60min chart:

The second is the double top on QQQ. We saw in late September and early October the all time high retests I had been looking for in September, and that has set up a decent quality possible asymmetric double top. A sustained break below double top support at 660.45 would look for a target in the 554.41 to 571 range.

QQQ 60min chart:

The third is the mostly formed H&S on DIA. I mentioned in my last post on 25th September that an H&S right shoulder might form, and so far we have seen that. There is now a decent quality possible H&S mostly formed on DIA. A sustained break below the neckline currently in the 507 would look for a target in the 463 area.

DIA 60min chart:

The fourth is the mostly formed H&S on IWM. I mentioned in my last post on 25th September that an H&S right shoulder might form, and so far we have seen that. There is now a very high quality possible H&S mostly formed on IWM. A sustained break below the neckline currently in the 269.50 area would look for retest of the April low at 237.50.

IWM 60min chart:

The half is the H&S set up on SPCX that I’ve been following since Starlink services in Ukraine were restricted three weeks ago, as I’ve been interested to see what the effect would be on the international reputation of Starlink, which is expected to be an important profit centre for SPCX in the future. That reaction has been mainly negative, with concrete plans made now by Europe and Canada to build their own alternative, and a general perception elsewhere that depending on Starlink for an essential services would be a mistake.

It may be for unrelated reasons but a decent quality H&S has formed on SPCX and broke down on Friday with a target at a retest of the August low.

SPCX daily chart:

I take historical stats seriously as they often deliver, and they most definitely point up from here into the end of the year. I’m also skeptical that the AI bubble is bursting now, rather than starting a topping process that might take another year or so to complete.

On the other hand I was saying in multiple posts in September that there wasn’t a good topping setup then for all these US indices to go down much further, and that is clearly no longer the case. We will see how this plays out.

If you like my analysis and would like to see more, please take a free subscription at my chartingthemarkets substack, where I publish these posts first. I also do a premarket video every day on equity indices, bonds, currencies, energies, precious commodities and other commodities at 8.45am EST, but only for paying subscribers. Other places to find me are my page on the platform previously known as twitter, and my YouTube channel.

One More Heave

In my last post on Monday 14th September and my previous posts on Friday 4th September and Wednesday 2nd September I was looking at the case that the retracement since the start of August has been a bullish consolidation that would likely be followed by retests of the all time highs on some or all of SPX, QQQ, DIA and IWM.

Since then we have seen a strong rally on Tech on Friday and Monday that delivered an all time high retest on QQQ but so far has failed to deliver a corresponding all time high retest on SPX.

I have been saying all along that what happened on the Philadelphia Semiconductor Index (SOX) was likely to be key, as high retests were only likely if Tech led the retests. On Friday last week SOX finally closed over the 50dma and declining resistance from the high and that delivered the retest of the all time high on QQQ earlier this week.

That was the first of two big levels on SOX of course, the second higher level would be a break over the H&S right shoulder high on SOX at 13,249.07, and a break over that level would fail that H&S and open a target at a retest of the all time high there. Until we see that failure this move on SOX will continue to look like a bear flag forming from the July low.

SOX daily chart:

On QQQ the high retest failed the diamond top that broke down in July and has set up a beautiful possible double top with support at the July low at 660.45. On a sustained break below that level the double top target would be in the 582-3 area, close to a 50% retracement of the move up from the low in April 2025.

QQQ daily chart:

The rally into that new all time high on QQQ was effectively all Tech, but SPX rose strongly as well due to the high Tech proportion of SPX. The rally peaked 34 handles below the all time high, but unless a larger bull flag is forming, that leaves a retest of the all time high as unfinished business. I am looking for that all time high retest in the next few days.

If seen that would set up another possible double top, with support at the September low at 7507.77, and on a subsequent sustained break below that level the double top target would be in the 7200 area, close to both rising support from the April 2025 low now in the 7080 area, and the possible asymmetric double top support or H&S neckline in the 7220 area.

SPX daily chart:

IWM and DIA didn’t meaningfully participate in Monday’s rally, and made new lows for September yesterday but on IWM a double top has already formed and broken down with a target in the 270.48 to 271.94 range, close to a larger possible H&S neckline in the 269 area. If SPX retests the all time high and fails there then that double top might just play out after that.

There is a possible alternate scenario here where a rally might set up the right shoulder on a larger H&S with the ideal right shoulder high in the 291-2 area. An all time high retest does not look likely unless the next move up is much broader based than the last one.

IWM daily chart:

So if SPX retests the all time high, that sets up a possible double top to join the one set up on QQQ earlier this week. IWM already has a decent double top setup that has broken down. That leaves DIA and there I’m watching a possible H&S forming, which would have an ideal right shoulder high in the 530-1 area. After yesterday’s retest of the September low there is a possible small double bottom setup there that on a sustained break over 522.85 would have a target in the 534-5 area.

An all time high retest again does not look likely unless the next move up is much broader based than the last one.

DIA daily chart:

One key reason why I have been seeing the retracement of the last few weeks as a likely bullish consolidation is that there was no decent topping setup on two of these four US indices. If this plays out the way I expect over the next few days then there is a good chance that we will then have decent topping setups on all four. At that point we will have an inflection point from where we could see a much larger retracement on equity indices.

Whether we see that larger retracement would depend on a multitude of factors like the Iran War, crude oil shortages, diesel and gas prices, bond yields, trade conflicts and so on, but for me I’ll primarily be watching to see whether the H&S right shoulder on SOX is broken. If another big leg up on Tech is starting, that would be the main reason in my view to be bullish on equities here. In the absence of that I’d be leaning towards seeing that larger retracement.

If you like my analysis and would like to see more, please take a free subscription at my chartingthemarkets substack, where I publish these posts first. I also do a premarket video every day on equity indices, bonds, currencies, energies, precious commodities and other commodities at 8.45am EST, but only for paying subscribers. Other places to find me are my page on the platform previously known as twitter, and my YouTube channel.