Wall of Worry

It's rare that the path for any market looks entirely clear, and that's as it should be, as if more upside were guaranteed it would already be priced in and historic. It is a concern that last week's decline looked like a single wave down, and is entirely possible that there is more downside coming as many expect. Fortunately there is a decent looking line in the sand drawn on ES in the 1320-1 area, as an IHS has formed there with a target at 1347. If 1321 is broken with conviction today then the path will look clear to new highs, with Mondays being historically strongly bullish and the first of the month (tomorrow) also historically strongly bullish:

The picture is slightly less clear on NQ, with a resistance zone in the 2335 to 2365 area, with the key levels in the 2335, 2350 and 2365 area. A break with confidence of Friday's 2350 high will look bullish, and a break with confidence of 2368 will open up a retest of the 2400 area:

Copper broke up on Friday and the next obvious target is strong resistance and the potential IHS neckline in the 451 area. There's significant negative divergence on the 60min RSI however and I'm wondering about a retest of broken resistance:

Silver broke up from resistance at the close on Friday and may be forming an IHS with the target at 35.7. There's some negative divergence on RSI suggesting there might be another test of broken resistance and I'll be watching the current short term support trendline:

Oil has a lot of geo-political risk at the moment and increasing unrest in the middle east may well push it up further. It has made the broadening formation target from last week and negative divergence on the chart looks weak short term:

A lot of people, including myself, are looking with great interest at the longer term short setup on Yen, and I've been suggesting for over a week that Yen might have another last push up to deliver a good entry level. USDJPY (inverted Yen) has now reached my highest probability target and reversed there so this looks like an attractive entry for those scaling in to a longer term short Yen position. If I have room I'll post the longer term chart tomorrow to show the full setup

I'm leaning strongly bullish on a break with confidence of the IHS neckline on ES today. Until that happens I'm seeing this as the highest probability reversal area if we are to see another wave down on equities so longs should be cautious until we see that break up.

Testing Resistance

Yesterday's action looks quite a bit like a short term bottom at least, and overnight ES and NQ have risen to test the first real resistance levels that need to be taken out if we are to see further upside. ES formed a gently declining channel over the last day or so, and has broken up through that. It is still within the strong resistance zone at 1310-3 however, and a break over 1313 is needed to open the path to higher levels:

NQ was stronger than ES yesterday, which is generally bullish, and formed a channel that was rising rather than declining. It is testing resistance on that channel at the moment and a break above would be bullish:

Copper is reaching the next upside target at 439 at the upper trendline of the broadening descending wedge. A break above would be very bullish, and would suggest a move to the next resistance level at 450. A small rising wedge has formed on the way back up though, so it may fail at resistance. An hourly close over 439 would be bullish:

30yr treasuries have been rallying in recent days, which is bearish for equities, but after a test of strong resistance in the 122 area the recent support trendline has broken, so short term treasuries look likely to retrace:

EURUSD hasn't been an indicator for equities in recent days, and hasn't yet reached my next upside target slightly under 1.40, but a rising wedge has formed and now broken down in recent days, so EURUSD looks likely to retrace here. I've marked the likely targets on the chart:

Overall a mixed picture this morning and I'm leaning cautiously bearish until resistance is broken with confidence on ES, NQ and copper. If these all break up, then I will be leaning strongly bullish. Copper is one to watch this morning as it has been a good lead indicator recently. If it breaks up any retracement from resistance on equities is likely to be short-lived. 

Buy Like Hell Zone?

It's always nice when a plan comes together. I posted two downside targets for ES on Tuesday morning. We hit the first on Tuesday and the second on Wednesday. We have now reached the highest probability reversal area IF this is going to reverse back up.

The arguments for a reversal back up here are strong.  It's four months until the end of QE2, so a major top here seems unlikely. The technical setup also argues that a break below this level on SPX particularly would extend the downside move considerably. The overthrow on the main rising wedge on SPX since July has eliminated the possibility that the wedge would evolve into a rising channel, and the technical wedge target on a break below here would therefore be 1040, which seems overambitious to say the least.

The arguments against a major reversal back up here are also worth noting however. The shorter term rising wedge target on ES is 1262, and the target for the rather ugly HS pattern on ES is 1277. The move down so far is within tight declining channels on both ES and NQ, which suggests a single wave down, which implies that this may well not be the low. Too soon to say, but a break of the shorter term declining channels on ES and NQ would imply a strong bounce at least. Yesterday's weakness after the trend day on Tuesday is also a very weak sign, and was disturbing in terms of looking for a significant low here. I also posted my EEM chart the other day with a setup that mirrors the one that preceded the April top last year, and that's worth remembering too.

Here's the main rising wedge on SPX with a secondary support trendline also arguing for a bounce here at least:

 Here's the picture on the ES 60min:

 Here's the picture on the NQ 60min:

One thing that disturbed me about the low yesterday was that copper had reversed well short of the obvious 421 target. That was corrected overnight with a hit of 422.55, which is close enough. Worth noting however that the target is a possible HS pattern neckline, and that copper might therefore be reversing to build a right shoulder:

Oil reached my 98.8 target yesterday and blew through it overnight. I have a higher target at 115 on the basis of a rising channel sice the 2009 low with some resistance in the 111 area:

So will equities reverse for the start of a fresh wave up here? I have a lovely macro-scenario for the next few months if they do, and I'm really struggling with the idea that they might not four months before the end of QE2. I've heard all the arguments that this move up in the market is unrelated to quantitative easing, but when charting equity values next to periods of quantitative easing since 2009, there has been at the least a very remarkable correlation so far. We could see a major support break here, but that I'll have to see it to believe it I think, and I'm leaning strongly long here until yesterday's SPX lows are broken with confidence during trading hours.

Wave A Completed?

ES bounced at my 1310 target yesterday, though NQ overshot 2338 to bottom at the strong support zone in the 2315-2320 area. The first target on SPX has therefore been reached, and if the move since July last year was a rising channel rather than a rising wedge, the retracement is complete. I'm expecting a bit more downside however and and looking at the main SPX rising support trendline in the 1295-1300 area as the main retracement target, so I'm expecting a bounce and then another wave down to reach that. Here are the main trendlines on the SPX 60min chart:

That was a nice technical low on the ES 60min chart, and I'm expecting that to hold for today. It's worth noting on the chart that the bounce level is a potential HS pattern neckline, and that pattern has a target at 1277 ES. Reaching there would cause a lot of technical damage though, and I'm not expecting to see that. If the forming right shoulder matches the left shoulder however, immediate upside may be limited to 1323:

There was also a nice technical low on the NQ 60min chart, and there is also some immediate resistance above that could cap this bounce. That resistance is the broken support level at 2338, which I gave as my downside target yesterday:

The bounce might well go higher though, as falling wedges formed and broke up on both ES and NQ yesterday, and the targets for those are 1334 ES and 2365 NQ. Here's the falling wedge on NQ:

I'm watching copper as main main indicator for this decline, and the obvious target for this copper decline is 420. It hasn't reached that but positive divergence on the 60min RSI is arguing for a bounce here, which might take copper to declining resistance over 440:

I was arguing the other day that EURUSD was looking bullish and was unlikely to be contained in the falling wedge turned declining channel that I posted. Sure enough it has broken up, and the next target is declining resistance from the Nov 2009 high at slightly under 1.40. If that breaks I have a large void until the next upside target in the 1.47 area, but to break through 1.40 the main rising support trendline for USD would have to break, so a large move up from there on EURUSD would be expected:

I know the bears are celebrating this week but I'm really not expecting this retracement to last long. I've been working on some really nice longer term charts to show my upside targets in the next few months and I'll try to fit those in later this week. Pug's primary and secondary scenario targets are exactly the same as mine here though, and while we might both be wrong, 1295 looks like the downside floor to both of us for this retracement. Obviously if that breaks then the picture would look much more bearish. Leaning cautiously long for a bounce today.

What are the odds?

I was taking a lot of flak last week for posting broken support trendlines on ES and NQ and suggesting (gasp) that this POMO driven market might ever retrace even to provide a bigger dip to buy. Here we are this morning and the opening gaps down on ES and NQ are looking likely to be substantial. Will it last? Perhaps, and I think the obvious retracement targets are at a lower level than I'm seeing this morning. We'll see.

First up this morning is the ES 60min chart, where I'm seeing an obvious target at the 1310 level, for a wedge turned channel support trendline and potential HS pattern neckline:

The target is less clear on NQ, but I'm liking 2338 as another potential HS pattern neckline, and NQ has reversed in the pre-market (so far) at the obvious short term resistance area, which is the broken wedge turned channel support trendline:

Oil's been spiking heavily on the news that unrest in the Middle East may topple some incompetent kleptocrat dictators in the oil rich countries. I've been having a close look at the oil chart and the last low has established a rising channel with the next target just over 98. There is some longer term resistance at 96.6:

I've been watching USDJPY (inverted yen) in recent days and I'm wondering if the Yen is likely to make one last outing as a flight to safety trade before it resumes the march to likely oblivion. It looks promising:

I saw an amusing headline from those sly wits at Bloomberg this morning and it read ' Stocks in developed countries are rising the most since 1998 while emerging markets slump, a sign the U.S. is returning to its role as the engine of world growth aided by a recovery in Europe.' What is it exactly that the US is doing to be the engine of world growth at the moment? Simple, the US is the world's leading manufacturer of money, and is exporting it worldwide along with its inseparable companion, asset inflation. Fun while it lasts, but it can only last until the first serious revolt in the bond markets, and after that the US will have to consider alternative ways of boosting growth with an empty wallet and deflating assets.

I haven't called a top here, and I'm not planning to, as the end of QE2 is still months away and it's hard to see how we can see a major top until it ends. Nonetheless I think this bull market is unlike other bull markets in a number of important ways, mainly that it's stronger and faster than any bull market since WWII, and that it is the only bull market supported by huge deficit spending and money printing since WWII. These characteristics are obviously linked and considering the prospects for this bull market without considering the future of quantitative easing is a nonsense.

What's my point? I was reading the other day that no bull market since WWII had more than one correction over 10% before it ended, and as the retracement last year was 17%, that ruled out a retracement larger than 10% this year. For the obvious reasons that's not really applicable to the bull market we're trading here, and if, like QE1 last year, QE2 finishes with the Fed talking about an exit strategy for quantitative easing and without announcing QE3, then a major retracement this year is very much on the cards, and if there is no QE3, the bull market may well finish with QE2.

I've been watching the emerging markets too, as they have often worked well as a lead indicator for SPX in the past. EEM starting to underperform SPX was one of the indicators for the equities top last year and we're seeing something similar now. That amusing Bloomberg headline could have been posted in March 2010 as well looking at this chart. The bottom section of the chart is EEM:SPX and that definitely looks interesting here:

Why's that interesting now? Well I posted yesterday that the main resistance trendline on SPX had either broken or overthrown, and I'm watching carefully to see how far this retracement now goes. On the SPX daily chart my targets are in the 1315 area for the lower trendline of a possible rising channel since July, 1295 area for the lower trendline of the rising wedge on SPX, and if that last target breaks with conviction the technical wedge target would be 1040 SPX, with the overthrow ruling out the possibility that the wedge would become a rising channel. I'm not expecting to see that, but with what the EEM chart is showing it's worth bearing in mind:

The buy the dippers should be out in force today, and we might bounce from the open, but if not I have 1310 ES and 2338 NQ as the likely reversal targets and I'll be watching those.

Mixed Signals

Friday's close was bad for bears on ES, as it convincingly broke the resistance trendline of the main ES daily rising wedge. This might still be an overthrow, but that would have to be in the context of a major top here, and it seems unlikely that we would see that top four months before the end of QE2.I'm very sorry indeed to lose this trendline, as I was hoping it would help signal that major top as and when it arrives:

Silver has obviously broken up hard, which is bullish, and EURUSD has also broken up, which is bullish. It has reversed for the moment at what would have been the resistance trendline for the recent falling wedge to become a declining channel. However as the wedge overthrew at the low, that's not a trendline that seems likely to hold. I'm expecting a short-term retracement here and then a move to test main declining resistance in the 1.40 area:

I posted the falling wedge on oil breaking up the other day, and it has rallied much of the way to the wedge target. Again, it looks likely to retrace slightly here but after that a move to the wedge target in the 91.60 area seems likely:

So far, so bullish, but equities are still looking weak here. ES looks stronger than NQ, and has continued to make higher highs and higher lows, but is currently back below the support trendline that broke last week:

NQ has been making lower highs and lower lows and is now considerably below the support trendline that broke last week. I'm waiting to see whether it makes a lower low than Friday's low today, and if so, that will look weak:

Copper is the standout indicator here from the ones that I generally watch. It bounced off a main support trendline last week, and has formed a sloppy triangle since. If it breaks up from the triangle, then it too will turn bullish, but key support is just below, and if that breaks then copper will looks very bearish:

All in all it's hard to say which way this is heading, and I'm not leaning either bullish or bearish today. There is definitely some technical weakness on equities here, but this might just be a consolidation.

Surfin' USA

Trading is like surfing in a way. You wait for a promising wave, you pick your entry carefully, and then you ride it as far as you can. It's a process that requires self-discipline, patience and skill, and inexperienced surfers and traders tend to make a lot of mistakes. I was saying to someone yesterday that the bear setups that I write about when they appear are inherently riskier plays in this cyclical bull market, and that they need to be played cautiously and with an awareness of the shorter and longer term pictures. When they play out though they can be very profitable and set up great buying opportunities at the end of the move.

I've been getting some suggestions this week that I shouldn't write about bear setups as they form, because they distract less experienced traders from the longer term long opportunities in this POMO-driven bull market. Perhaps, but I chart what I see, and it would be dishonest to just paint a bullish picture & chant JBTFD every day as though that was genuine technical analysis rather than just a currently safe medium term mantra for trading rookies. I'll chart and blog what I see, and readers can take it or leave it as they wish.

I'll be posting an unusual seven charts today as there are a lot of very nice looking setups this morning. The first chart is NQ, where the strong resistance trendline was broken yesterday morning before a bounce back into the wedge to test 2400 resistance. NQ is trading under the broken trendline now and I'm hoping to see 2400 tested under the broken trendline today as that would likely offer a very nice short entry:

On ES the picture is subtly but importantly different. The support trendline was also broken there yesterday but after the break back up is still acting as support. I'm not expecting that to last long , but we might well see another move up within the shorter term rising wedge I've marked up on the chart:

There's a mixed picture on other instruments / indicators today. Copper is trending and reversing beautifully at the moment and is offering some really nice short term opportunities. It reversed up yesterday and then down overnight. I'm expecting a main channel support test in the 441 area soon, very possibly today and while I'm expecting a bounce there initially, copper may well break down through it afterwards, opening up a lot more downside:

Silver made new highs yesterday and looks like an interesting, if suicidally brave, short opportunity this morning. I'll cover that another day as I'd like to add the longer term picture in there too, where longer term resistance now looks fatally damaged. Short term it has reached a potential resistance trendline though, and gold's failure to make a new high with silver is a possibly important bearish divergence. On the other important indicators today I've been watching EURUSD very carefully to see whether it has bottomed, and posted the falling wedge upper trendline yesterday as my bull/bear line in the sand. That line was an unconfirmed two hit trendline yesterday and the bounce was slightly higher at an alternate, now confirmed, trendline. While that trendline remains unbroken EURUSD is still in bear mode, and I've given the next downside targets on the chart:

AUDUSD had a similar moment of truth yesterday and reversed at resistance. That line remains the bull/bear dividing line and I'm expecting a significant drop unless it reverses to break that trendline:

I haven't charted the Yen much in recent months, but I was asked to look at this the other day and charted it on various timeframes. I was strongly struck by how well the 60min RSI signals important reversals, so I'll be looking at this a lot more often in future. I was also struck by the simply amazing long term short setup on Yen, which looks likely to drop a third in the next few years, and a lot of people have been talking about this and shorting the Yen. It's great to see such an opportunity on an instrument where the fundamentals really stink, but I haven't shorted it yet, and that's because the short term setup looks bullish rather than bearish, so I'm expecting a better entry soon. I'll cover the longer term setup another day but here's the short term USDJPY chart, which I would stress is an INVERTED Yen chart, so the bearish look of the chart is actually a short term bullish chart for Yen:

The last chart of the morning on 30yr Treasury futures, and I have to say that the bearish setup here is at odds with the bearish setup on equities. Treasuries have been in a counter-trend bounce for the last few days, but there's a nice looking bearish wedge on the chart that suggests strongly that they will soon resume the long march downwards. Obviously that could happen after an equities correction here:

Overall I'm still leaning short today, though NQ particularly might see a bounce to test strong resistance at 2400 again. Obviously it's opex Friday today and there could be some strange moves as a result. Big downward moves are fairly rare on opex Fridays and I'd be surprised to see one of those today.

Opex Thursday

Opex going on in the background this week of course, which makes the week interesting to trade, though so far this week has been very nice to daytraders, and it's possible we might see more decent intraday action today. There are definite signs of rot however as on NQ the strong support trendline was broken slightly this morning with an hourly open below the trendline. That hasn't been followed through yet however, and the ES support trendline is still holding. The support trendlines on NQ and ES are solid and leave no room for interpretation, but the upper trendlines are trickier to pin down and I've been playing around with alternatives. I think I've nailed the short term resistance trendlines on both, though if we break down today those will become irrelevant of course. Here's the picture on NQ:

Here's the ES 60min chart:

Copper had a bad night, and hit my initial target area. It has formed a broadening descending wedge on the move down and I'm looking for a retracement into the 448/9 area, though the bigger picture on copper still suggests more downside to me:

Oil looks interesting this morning. I've identified a right angled and descending broadening formation which is a neutral pattern but gives solid upside and downside targets as long as the pattern lasts. The overall setup on oil looks distinctly bearish too, though a break through upside resistance would immediately target the 100 level if we see that:

I've been watching EURUSD closely for signs of a major reversal. The jury's still out until it breaks up from the wedge, so ther real test should be at 1.365. If declining resistance is broken I'll be leaning strongly bullish on EURUSD but it could go either way:

We could continue the range trading of recent days today but overall the market looks very vulnerable here. Copper is often a good lead indicator and it has looked very weak this week, and may deteriorate considerably further. I gave a possible target for copper below 400 earlier this month and if we see a conviction break of 442 then I'll be looking at that again. If the support trendlines on NQ and ES break down we could see a very sharp correction on equities here.

Wedges Everywhere

I know I've been sounding like a broken record lately, but while the market continues to make new highs, the underlying technical picture continues to deteriorate, and I'm still of the view that we're going to see at least a sharp correction soon. Obviously POMO is still force-feeding the market with billions of dollars every day, but that was the case last January as well, and didn't stop SPX from correcting 10% from the high then. I'm doubtful about seeing a major top before QE2 finishes in June, but that's only four months away now, and on any measure equities are looking rather overbought at the moment, and the pattern setups suggest that the risks are weighted heavily to the downside here.

On the ES daily chart the rising wedge from the July low is still looking pretty good, and I'm expecting at least a return to the lower trendline soon:

Shorter term on the hourly chart there is now another rising wedge on ES with the support trendline in the 1225.75 area at the moment:

On the NQ hourly chart there is yet another rising wedge with a lovely support trendline with five perfect touches so far. I'm expecting some decent downside action as and when it breaks and support is now in the 2380 area:

Elsewhere EURUSD is looking weak and I'm expecting to see more downside today with at least a test of the recent low coming up. I'll post an update on that tomorrow as I want to cover silver, copper and oil today. Silver looks weak with a possible double top on declining RSI. It has tried twice and failed to recapture the lower trendline of the broken rising channel. An H&S pattern may be forming:

Copper also looks weak here with another possible double-top on declining RSI. Another H&S pattern may well be forming:

Oil made a succession of marginally higher highs on declining RSI, and is now correcting. Another H&S pattern may well be forming:

Obviously there is a heavily bearish theme to what I'm seeing, but it is what it is. In my first post of December I was calling for a wave up, and I'm now expecting a wave down. Nothing goes up in a straight line, not even this, the strongest cyclical bull market in history by a wide margin. I'm expecting that we might see a bit more upside today but IMHO at least, when those support trendlines on the ES and NQ hourly charts break down, we'll be moving onto selling the rips for a while.