One Day Bear Market

I posted the stats for the first trading days of every month in this bull market at the beginning of March, and I've done the same for the last trading days of every month on the same basis today. The contrast is stark. The SPX closed at 1328 yesterday, up 662 points since the intraday low of 666 in March 2009. Of those 662 points up, 184 were made on the first trading day of the month on a close to close basis, and if you'd sold at the open on a gap down, that would have increased to 234 points On that basis over 35% of all gains in this bull market could have been made on the first trading day of the month.

The last trading day of the month is statistically very weak in sharp contrast to the first trading day, and going long on a close to close basis would have lost you an accumulated 69 points since March 2009, which is to say that the last day of the month has been a brutal one day per month bear market within the overall bull market. That could have been improved somewhat by just going long at the open on a gap up from the previous close, but even in that case, you'd be up only three points over the period. Here's the table showing the stats:

In summary, the historical odds for an up day today are poor, and the odds for a long taken out at the close tonight, and held through tomorrow unless there is a gap down from the previous close, are extremely good. On that basis the important support levels on ES and NQ are covered in yesterday's post, and I'll just mention that I'm seeing rising channel resistance on ES in the 1337-39 area in case ES beats the odds today and rises anyway.

As that's cleared some space today, I'd like to have a good look at copper, which I'm concerned about because it is divergently bearish compared to equities. I posted the current range levels yesterday, thinking as I did so that the obvious next move was to support at 426.5, and it moved there shortly after I posted the chart. It's been trading around there since then and is showing some encouraging signs of making a low, though I'm concerned that it is still in an overall declining channel, and the strongest short term trendline is the declining support trendline from 440. That support trendline now has five hits and looks a very good counter-trend long entry if it hits again, within the larger downtrend:

On the weekly chart the outlook also looks somewhat bearish, with a very strong resistance trendline that has now been hit six times in the last five years, though it has a history of multiple hits in short succession and we've only hit it once so far this time. I've added two internal trendlines to show that copper may have made a decent short term low, but if it gets back to 400 the obvious target is in the 360 area:

I've charted the second chart against SPX as there's a question in my mind as to whether equities might follow if copper breaks downwards. The evidence is ambiguous as though copper and SPX have tracked very well in the current bull market, the correlation was much weaker in the last one. Something to watch however.

The other instrument that I'd like to have a close look at is EURUSD, where a very important moment of truth is approaching. I mentioned this a few times but I'd like to underline quite how important this area is as it is the upper trendline of a huge falling wedge that would indicate to the 1.10 area if EURUSD fails to break up through it. The test will come in the 1.428 - 1.43 area, and the current rising wedge is not immediately encouraging for EURUSD. If EURUSD does top here, that doesn't have any immediate implications for equities as the last peak was in November 2009, some five months before equities topped in April 2010:

I don't know if anyone reading this trades the european stocks much, but I've seen something worth seeing if you do, and it is a simply beautiful broadening wedge on the Euro Stoxx 50. Nice clear upside target for this current wave up there:

I won't post the charts for main US indices today but the Russell 2000 made a new high yesterday, and we're close to new highs on most indices. The overall uptrend looks strong and I'm leaning strongly bullish on equities here. There are some concerns about the uptrend, but that's why they describe bull markets as climbing a wall of worry.  If ES obeys the statistics then we could see a test of 1315 today and that would be a very nice long entry in my view. Any move below 1310 would break the current rising channel lower trendline, and a break with confidence of 1300 would be a strong signal to exit longs until the situation clarified.

Business As Usual

Most mornings I have a quick browse through the blogs of my favorite chartists and analysts but I was in a rush yesterday and didn't manage to do my usual rounds, so I missed Cobra's warning that after Monday's bearish engulfing candlestick on the SPX daily chart, yesterday was statistically 90% likely to close up. Nice call from Cobra on his 03/28/2011 Market Recap.

Cobra still thinks that we'll make a new low on SPX with positive divergence on the daily RSI, but I'm very doubtful about that, as barring a new high on SPX, there's not much left to confirm that we're in a new wave up in my view. It's disappointing that we didn't see that lower low with positive divergence, but it only happens about two times out of three, and so it isn't unusual not to see it. Cobra makes the point that the rise in the last nine days has failed to exceed the decline in the previous nine days, and so looks corrective, and he could still be right of course, but strong support has now been established at yesterday's ES low at 1300 and as long as that holds I'm not expecting a lower low.

I posted four reasons to now be bullish on SPX last night in various places, and they are as follows:

• The low today was at the SPX daily 50 SMA 
• Declining resistance had already been broken on SPX, today saw a perfect retest 
• 13/34 daily bull cross on SPX, first since September 
• April has been the best performing month on the Dow on average since 1950 

These are all good reasons to be bullish, and as long as 1300 holds on ES, I'm taking the view that we're back to bullish business as usual, with buying every dip being the order of the day. Here's the updated SPX daily chart with all of the various MAs and EMAs I watch on the daily shoehorned onto it. The 13 and 34 EMAs are in thin dotted lines to distinguish them from the others:

Browsing through the other main indices this morning the Transports chart springs to the eye for a couple of reasons. Firstly there is a perfect rising channel on it as with SPX, and secondly on the daily chart there was a lower low with positive RSI divergence. TRAN has been stronger in this correction than SPX or NDX, so we're likely to see a new high there before the others:

The Vix has already given up most of the gains made since the correction started, but hasn't yet managed to fill the gap at 16.88. I'll be looking for that to fill over the next few days and will see a move below it as additional bull wave confirmation:

I understand that yesterday was a trend day up in the end so we're likely to see a day or two of retracement or consolidation here. Strong support has now been established at 1300 on ES, which is also close to the 50 SMA on the daily chart. There's also decent support established at 1315, and that would be an obvious reversal level, with the gap fill at 1316.5 today:

On NQ strong support is now established at yesterday's low at 2290, and I'd be surprised to see any move below that. There's also a support zone in the 2310-20 area that should cap any downside move today:

I'm not sure what to make of copper at the moment. I'm thinking it might make most sense to see copper as trading within a series of strong support/resistance levels. If so the next decent long entries would be a test of the 426.5 level or a break up through the 437.5 level, which is also the neckline for a large IHS, and a shorter term IHS that may be forming at the moment. On a break of 437.5 the next target would be 445.5:

It looks as though ES will gap up this morning, and there are a number of reasons to think that this gap will fill today. One of those is the tip from the GapGuy last night which was 'The past two days' unusual price action has only happened 5 times in the past 10 years and all 5 times it gapped up the next day and filled by the end of the session'.

Retracement Targets

Obviously I was right to think that the setup looked weak yesterday and the short term support trendlines for ES and NQ were broken at the close. For those of you following me on twitter I posted the short term patterns yesterday afternoon with an observation that we were likely to see a break down from them. For any of you wanting to see intraday updates from me my twitter handle is shjack666.

I've had a late start this morning so I'll keep it short today and just focus on ES, NQ and copper (HG). On ES the short term triangle / falling wedge broke down and a very nice looking declining channel has formed. As long as that channel lasts, playing this retracement will be very straightforward, so I'm hoping that it lasts until this retracement reaches my main targets today or tomorrow:

In terms of the main target for this retracement, I'm thinking that the larger rising wedge that also broke down yesterday, and retested overnight, may turn into a rising channel. If so then the target today would be in the 1286-90 area:

In terms of this just being a retracement, both the pattern setup and the target are clearer on NQ. On the 15min chart NQ broke down from the short term gentle declining channel yesterday and has formed a small falling wedge. Again, as long as that lasts the upside and downside trendlines are easy to play:

In terms of the bigger picture on NQ, the obvious retracement target is the 2270-5 area for the lower trendline of the rising channel as I mentioned yesterday. If that lower trendline is broken I'm going to start wondering about a lower low, as there is a larger declining channel in play until declining resistance from the recent top is broken:

EURUSD has held support, but copper broke support yesterday and I've been considering downside targets there. No single target springs to the eye, but there is a potential neckline at 427, strong support at 425, and if 425 is broken, then there is a declining channel pointing to a test of 400. Short term copper is trying to bottom looking at the 60min RSI, and we might see a bounce to reset that before it falls further:

I'm expecting more downside and will be expecting more downside until ES and NQ negate the current setup by breaking up through declining resistance from the recent top, or my targets are hit. Longs should be cautious today and if my downside targets are exceeded, then there is a strong possibility that we will see lower lows on equities.

Some Signs of Weakness

Mondays are generally bullish nowadays, but looking at the charts this morning, there is some significant looking weakness. Much of this may be due to the surprise Fed announcement on Friday that they are looking seriously at raising US interest rates to 2.5% in a year. This has led to a sharp bounce in USD, and weakness in bonds and copper.

I've posted the rising wedge on EURUSD before, and EURUSD is now flirting seriously with a break of the lower trendline. An hourly close below 1.40 would break the current support trendline and open up a move towards main rising channel support in the 1.325 area:

Copper has broken down from the 1.45 area to some serious support in the 435 area. As with EURUSD, no serious technical damage has yet been done, but an hourly close below 434.50 would break the short term uptrend:

30Yr Treasuries have been rallying since January, but have now broken the rising support trendline. If the bond markets take the Fed plan seriously then bonds may well resume the larger downtrend here:

I've been surprised by the degree of weakness in gold and silver overnight and have had a close look at the silver chart this morning. My short term channel on silver has an upside target in the 40 area, but there's a larger rising channel that may prevent that. Resistance is at 38.4 and support is slightly over 35. A break below 35 would open up a return to the larger channel support trendline slightly above 30:

Altogether the picture looks vulnerable to a breakdown, so where does that leave equities? Well, as I mentioned on Friday, the next serious upside target for equities is to break declining resistance from the recent highs. Equities were stalled there on Friday, and they're still stalled there. On ES I'm looking for an hourly close above 1314 to break declining resistance, and there's a possible rising wedge that has formed from the recent low. If support is broken on that wedge with a move below 1303, the obvious next move would be another test of the 1285 area:

NQ is also stalled under declining resistance slightly above 2330. An hourly close above 2335 would break declining resistance but I have a rising channel on NQ that suggests that we may first see a move back into the 2270 area to hit the lower channel trendline:

Overall there's definitely reason for some caution today, albeit this is a Monday. I'll be watching for an hourly close above declining resistance on ES and NQ for bullish confirmations, and I'll be watching support on EURUSD and copper for an early warning that things are going the other way. If ES and NQ reach my downside targets that would look like a very good dip to buy, though if we see hourly closes below those, the uptrend since the recent low will be cast into serious doubt.

Challenging Declining Resistance

That was an amazing run yesterday, with NQ firmly back in the saddle leading equities up, which was bullish. SPX recaptured both the daily 20 and 50 SMAs, and NDX recaptured the 20 and stopped just under the 50. The main targets now are for NDX to move back above the 50, and a number of important declining resistance trendlines need to be broken. The first of those declining resistance trendlines is on the SPX daily chart, and if ES can hold the overnight gains then SPX will gap up over declining resistance this morning:

NQ spiked up to touch declining resistance from the high after hours yesterday, and breaking up through that is the next major target for NQ. That declining resistance trendline could be the upper trendline for a large declining channel, so that is an important level to recapture:

ES was at a bearish level at the close yesterday, as it stopped just below a candidate rising wedge upper trendline, and the short term setup was therefore looking distinctly bearish. The after hours spike up then took it through that trendline however and that broken trendline has acted as support for ES overnight. Both ES and NQ look overbought on the 60min, but as long as that support holds (currently at 1309.25), ES still looks bullish:

Copper is consolidating under declining resistance within a short term broadening ascending wedge. I'm leaning towards seeing that consolidate a bit longer, but an hourly close above 443.75 would signal that copper is breaking up. I have short term support at 440.50, rising support from the low at 438.75, and the IHS neckline at 437.75. A break of 437.75 with confidence would look very bearish but I'd be surprised to see that:

I post my EEM vs SPX chart regularly as an indicator and there are two important levels to watch there at the moment. The first level is the broken rising support trendline on EEM, which is close to a second retest. The second is the EEM:SPX relative trendline, where a break of declining resistance will signal that EEM has returned to outperforming SPX, which would look bullish:

Vix has collapsed in recent days, and is now back in the gap zone. This is the third attempt to close the open gap since the correction began and I'm watching to see whether Vix can close the gap this time:

Lastly for today I had a close look at gold futures after it dipped sharply yesterday, and noticed an interesting setup on the 60min chart, as it appears to be partway through an evolution from a rising wedge to a rising channel where (unusually) the lower channel support trendline has already been established. if this continues then it should move down into the 1415 to 1420 area before reversing back up. That would be an interesting long entry level:

NQ and ES are both overbought on the hourly charts and I wouldn't be at all surprised to see some consolidation today. ES has decent support at 1304 and 1300, and NQ at 2300. I'll be looking for good long entries on any dip and would like to see SPX close the week above the daily 50 and 20 SMAs.

Rising Wedges

The bears dropped the ball yesterday, and the SPX looks likely to break back above the daily and 20 MAs today. ES has already broken back above the 20 overnight and is currently testing the 50. If this level holds then SPX will open over both:

On ES the next significant resistance level is at 1304, and that is a potential IHS neckline. If ES reverses there I'd be looking for a return to the 1279-80 level to make the right shoulder for that pattern. A small rising wedge may be forming to deliver that move and the hourly RSI has moved into overbought territory so it may well happen that way:

On NQ, the next significant resistance level is at 2304, which is another potential IHS neckline. Another small rising wedge is forming that may deliver that move. Again the hourly RSI is now in overbought territory:

Copper has hit declining resistance in the 445 area and is struggling there, but has pinocchioed through on three consecutive hours which is encouraging for a break through later. Short term it has hit resistance with negative RSI divergence on the hourly chart, so it may well pull back here to consolidate:

EURUSD is looking very interesting today, as a rising wedge has formed as it moves towards lifetime declining resistance in the 1.428 area. It could well fail at this triple resistance level (shown on the chart) and I'll be watching this very carefully:

I'm not a precious metals expert, but now that gold and silver have broken up to new highs, I have a target for gold in the 1490-1500 area from the five year futures chart. That seems the obvious target for the current move up:

I'm leaning bullish today and am watching the potential IHS necklines on ES and NQ.

Make or Break

I have mixed feelings about the current level on SPX particularly. I think that the low is probably in, but there's no doubt that if this move up is going to fail, this is the likely place for it to fail. SPX has been trading slightly below the 20 and 50 SMAs this week, and they have just crossed bearishly, with the SPX daily 50 SMA at 1303.75 and the 20 SMA at 1302.95. The key target short term is for SPX to recapture those levels and close above them:

I haven't mentioned the 50 SMA on NDX as that is still well above 2300, and that's because NDX tends to lead on both the way up and the way down. It is still looking slightly weaker than SPX this week, which is weakly bearish. Copper has finished forming the right shoulder on the forming IHS and has broken the neckline to reach 440. That looks unequivocally bullish, and I'm now watching declining resistance in the 445 area and the resistance level in the 455 area. The IHS target is 468:

I have short term trendlines on SPX and NDX that I'm watching for directional clues, and I'll be watching to see how they perform today. Hard to tell at the time of writing whether the indices will open up or down, as overnight trading has been rather volatile. Here's the 15min SPX chart:

Here's the 15min NDX chart:

There's been a lot of talk the last few days about the US dollar breaking longer term support. I have mixed feelings about that to, as it has broken down from a symmetrical triangle, and they are treacherous patterns, frequently breaking out one way before playing out in the other direction. Nonetheless it is worth noting that the technical target for this broken triangle on USD is in the 55 area, and that I do have a couple of trendlines supporting a break well below 70. Against that it was pointed out to me yesterday that the USD weekly chart is still showing some positive RSI divergence, though that is only significant in the event USD reverses soon of course. It's also worth remembering that QE2 is scheduled to finish at the end of June, and that there are no current plans for QE3, so US money printing on a huge scale is due to finish soon. Here's the setup on the weekly USD chart for what it's worth:

I'm leaning very cautiously bullish today, mainly on the strength of the break up on copper.

Wedges turned Channels

I puzzled over the rising wedge on SPX at the recent high, as it overthrew, and that raised a number of questions about direction. Normally when a rising wedge breaks down, as they do about 70% of the time, the first target I look at is the trendline parallel to the upper trendline, as rising wedges turn into rising channels a lot, but an overthrow eliminates the obvious channel target, as the upper trendline has then been broken. An overthrow can therefore indicate that the rising wedge is going to play out to the classical pattern target, 1040 SPX in this case, but I thought that was unlikely as the timing is wrong. I've never thought that we were looking at a top like the April top here, I was looking for a pre-high retracement like January last year if the rising wedge support trendline was broken. Here's the rising wedge on the SPX daily chart:

Unexpected price moves aren't always significant of course, but they can signal that a significant change is taking place, and they are placing a marker for a new trendline for a channel or pattern. Looking at SPX now, it appears that the overthrow was setting up a slightly steeper upper trendline for a rising channel, and that the recent low has confirmed the lower trendline of that channel. Here's how it now looks on the SPX daily chart:

This isn't welcome news, as I've been looking for a decent classical low for this move with positive divergence on the SPX daily chart, and with this atypical rising wedge turned channel now established, I think that is now much less likely, though I haven't eliminated it as a possibility.

Short term ES and NQ look weak. ES formed a rising wedge last week which broke down on Friday. The lower trendline for a rising channel from that wedge was established overnight and that has broken down too. ES also made a nice looking double top overnight on negative RSI divergence, so until ES can get over the high for yesterday and overnight the setup looks bearish. NQ is also underperforming ES which likewise looks bearish. Here's the ES 60min chart:

I was doubtful about much upside from the open yesterday in part because copper was retracing. It has now formed a solid low for right shoulder of the forming IHS, and should rise soon if the IHS is going to play out. I'm watching to see whether copper can get much above 430 and the IHS neckline is just under 438:

Vix has broken back down through the support trendline for the first part of the correction, which is a signal that the correction may well have bottomed:

EURUSD is now very close to the declining resistance trendline from the 2008 high, and on close inspection that is at just under 1.43. It could well reverse there though I'm expecting it to break up on the balance of probability:

I'm leaning increasingly towards the view that the correction has bottomed, but short-term, unless ES can break the overnight highs, I'm leaning short. If ES does break the overnight highs I'm seeing strong resistance at 1303.5:

I've started posting links to intraday charts and some charts that don't make the cut for my daily posts on twitter, as I was already using it to follow some traders and chartists, and my twitter handle is shjack666 for anyone who'd like to follow those.

Vix Buy Signal

A Vix Buy Signal for equities triggered on Friday, after the Vix traded above the daily bollinger bands, then closed back inside, then fell the next day. We often see these at the start of big bull moves and they're fairly reliable bullish indicators, though as you can see from the chart below, they sometimes precede sharp dips, and the one triggered on the bounce just after the flash crash last year was not a buying opportunity:

My ES and NQ targets aren't any different really from the ones I gave in Friday's post, and you can see those here. One thing I noticed over the weekend was that an IHS has formed on the SPX 15min chart, as well as a rising wedge. I'm not wild about the quality of the IHS though and am expecting one to form, if one does form, at one of the potential necklines further up:

We've seen a strong rise overnight, but I have mixed feelings about it. We're seeing some negative divergence on the ES & NQ 15min charts, and copper has not confirmed the rise so far. I'm still watching the IHS on copper that I charted on Friday and it hasn't broken up yet:

Oil's likely to be interesting this week, with civil war in Libya and trouble elsewhere in the Middle East still. We've put in a decent looking right shoulder on the IHS I posted on Friday and if oil breaks 104 with confidence 'll be looking for a new high at 110:

I've got a declining channel on silver that I'm watching with interest today. So far it has failed perfectly at channel resistance with negative divergence on the hourly RSI. If it fails to break up I'll be looking for a downside target in the 33.2 area:

USD has broken support and I'm expecting more downside, and potentially a lot more downside. There is however one last declining resistance trendline that EURUSD must break through to reach my next target in the 1.47-8 area, and that is the main declining resistance trendline from the 2008 high. The trendline is unproven as it only has two touches so far, but a lot of people are watching this and resistance will be slightly over 1.42:

We're looking at a big gap up this morning, and obviously ES and NQ might just gap and go, though I'm not really seeing much evidence to support that so far. If ES and NQ break the overnight highs with confidence that will look bullish for today, and those are at 1291.25 and 2251.5 respectively. I'll also be watching the copper chart, but with copper at 431.5 at the time of writing, a break up before ES and NQ looks unlikely.