Strong Headwinds

In my last post on Friday 4th September and my previous post on Wednesday 2nd September I was looking at the case that the current retracement 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.

To a significant degree I’m looking for high retests for purely technical reasons, because there isn’t much here in the way of topping patterns that have formed, so I’d like to see some high retests to set up double tops, but there are also H&S options that might form after a significant further decline from here.

In terms of the technical setup for high retests from here the setups are decent, but the main problem has been the steady stream of bad news, which got a lot worse last week. That is increasing the possibility that we might see a break down directly from here.

So what’s the bad news? Well the first part is the worsening inflation picture, mainly due to the Iran War. The Producer Price Index inflation numbers last week were bad, and the CPI numbers this week will most likely be bad too. The odds I’m seeing for a rate rise of 0.25% at FOMC on Wednesday are currently at 86% on Kalshi. 30 year treasury yields have now risen from a low at 39.06 (3.906%) in September 2024 to a high so far this month at 54.24 (5.424%), while over the same period the Fed Funds rate has been cut by 1.25%.

The other bad news was from the Iran War, where the Strait of Hormuz has been relatively quiet, but the civil war in Yemen has started moving very fast. Last week the Houthi rebels took the entire Yemen Red Sea coastline from the Saudi-backed government forces, capturing a fortune in weapons and war materiel and taking full control of the Bab al-Mandeb Strait, which is the main way the Saudis have been bypassing the Strait of Hormuz to export their oil.

Just to make the Saudi exclusion from the Red Sea all the more complete their seven million bpd East-West oil pipeline to the Red Sea was bombed last week and badly damaged. It has closed down for at least a month. Saudi oil exports have likely now been cut by at least four million bpd which will exacerbate existing shortfalls which, as you can see from this statement from Chevron CEO Mike Wirth that I saw tonight, were already very serious:

It looks possible that the Houthis may control the rest of Sudan within days which would be a further big victory for Iran-aligned forces in the Middle East, and may well result in further damage to Saudi oil facilities.

All that said I still have a couple of very nice looking bull flags, which haven’t failed down yet. The first is on SPX with a very decent looking falling megaphone bear flag.

SPX 15min chart:

The bull flag on DIA is even nicer, with a perfect bull flag channel.

DIA 15min chart:

There may also be a bull flag forming here on IWM, though more obvious is the large double top that has broken down with a target in the 270.48 to 271.94 range.

That is not necessarily bearish of course. Any pattern like this breaking up or down has in effect two targets, either the pattern target here in the 270.48 to 271.94 range, or rejection back into a retest of the high, which is of course what a bull flag target would also be.

IWM 15min chart:

The key may well be the Philadelphia Semiconductor Index (SOX), which was encouragingly strong with QQQ last week against SPX and DIA, with breaks and closes over the daily middle band combined with tests of main resistance at the 50dma on Tuesday, Wednesday and Friday last week. None of those 50dma tests delivered a break above though, and SOX was back retesting the daily lower band today.

SOX daily chart:

I’ve been saying repeatedly that high retests would be a lot easier with a push up on Tech, and I’m thinking that in the absence of any actual good news we may well only see those high retests if SOX can break up.

On the hourly chart below you can see that as well as very clear resistance at the 50dma SOX has now also developed a very strong five touch resistance trendline from the all time high at 14655.29. If SOX can break that trendline then we may finally see that break over the 50dma and have a decent shot at multiple all time high retests.

SOX 60min chart:

If we don’t see a break up soon though, we’ll likely see a break down instead.

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Well That Escalated Quickly

In my post on Tuesday 4th August I was looking at the ambiguous setup on US indices and the Nikkei after the strong rally into the beginning of August, noting the three good quality topping patterns that were still intact on the Philadelphia Semiconductor Index (SOX), QQQ and Nikkei. Since then the Nikkei pattern has failed with a target at a retest of the all time high.

I also noted that SPX was close to the daily 3sd upper band, and said that I was looking for a short term consolidation of a week or so, to allow time for the daily middle bands to go higher, and for the daily outer bands to expand, opening up further possible upside. We have since seen that consolidation last for four weeks so far, the daily middle bands turned up, and the outer bands expanded, but then contracted again before the lower bands were hit again this week.

In my last post on Wednesday I was looking at the case for making a short term low and perhaps retesting some all time highs. I was looking for a rally, then a low retest, and then ideally retesting the all time high in a three day strongly bullish leaning series of days Wednesday to Friday next week.

So far that has been going faster than I expected and the odds of a low retest have dropped. On the SPX the very nice bull flag channel I was looking at on Wednesday SPX returned to flag resistance and broke it slightly at yesterday’s high. That’s not encouraging for a low retest and and is suggesting a strong break up towards a retest of the all time high in the near future.

SPX 15min chart:

On the daily chart SPX broke back with conviction over the daily middle band yesterday. This might fail, and if it is going to fail that would likely be today or perhaps Tuesday. Another close above today would confirm the break.

SPX daily chart:

On the daily chart DIA broke back with conviction over the daily middle band yesterday. This might fail, and if it is going to fail that would likely be today or Tuesday. Another close above today would confirm the break.

SPX and DIA were the star performers yesterday and QQQ was significantly weaker, though it did manage to close at resistance on the daily middle band. Considered with the breaks above on SPX and DIA, the odds are decent that we will see a break back above soon.

QQQ daily chart:

Bringing up the rear on the US indices was IWM, struggling to rally and not managing to get anywhere close to a daily middle band retest. This is the US index traditionally most affected by rising interest rates of course and led the way down on this retracement.

IWM daily chart:

Lastly on the Philadelphia Semiconductors Index (SOX) there has barely been a rally, underlying the the weakness in Tech here and with a strong H&S target in the 9150 area still open.

SOX daily chart:

If we are going to see some high retests and then a larger retrace as the SOX chart is suggesting, then I’d note that we already have decent topping patterns that have already broken down on QQQ and SOX, and that a good quality double top has already formed on IWM. The two indices that look most in need of high retests to set up topping patterns are SPX and DIA, which are the two indices that look most likely to see those all time high retests next week. This may be a solid overall topping setup forming.

In the short term the historical stats lean neutral today and Tuesday, and then significantly bullish Wednesday through Friday next week. That would be an ideal window to see those high retests. The odds to retesting this week’s low directly don’t look great, though we may see some retracement today before likely heading to those high retests.

What could change that outlook? Hard breaks back below the daily middle bands today on SPX and DIA. Everyone have a great weekend. :-)

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.