CITI Vix Triangle Hunt

I received an interesting email last night which was a forwarded warning from CITI to clients warning of a triangle on the Vix suggesting that the Vix might spike to new high very soon while equities fell hard accordingly:

Obviously this was potentially very interesting, and I had a look at the Vix chart. I could see no triangle. However I did see a rectangle and suspect that the setup seen by chartists at CITI was lost in translation as they tried to explain to to non-chartists there. I'll show the rectangle on the 60min, and the target on an upside breakout would be in the 55.50 area, which would indeed be a major move.

The rectangle is a bottoming rectangle, which has only a 45% chance of breaking up, but with an 80% chance on making target on an upside break. Under the current circumstances though an upside breakout looks (from a TA perspective) a lot more likely than a downside breakout, and I've noticed in the past that these rectangle bottoms tend to break up if the decline into the rectangle was small, as in this case:

It's the last day of the month today of course, and the SPX would need to rally to 1206 to close over the monthly 20SMA. That seems unlikely. I showed the chart for this yesterday and you can see that here. This has important implications as in the last two bear markets after the monthly close below the 20SMA, that moving average was an impenetrable ceiling until the start of the next bull market, being retested only once in each of the last two bear markets before further declines.

So where does that leave SPX unless we see a huge and unexpected rally today? Not in a good place at all and a sizable rally from here looks unlikely. I've posted my SPX daily range and S/R levels chart a few times recently, and here it is again. I've added some notes noting the similarity between the last three days and three days in late August where the action was a decline preceding the move into the late August high at 1230.71:

Obviously that looks cautiously bullish, but I have another take on this SPX range chart that points in the other direction, and I think my second take is the correct one. On this chart I've marked the rising channel that formed into the late August high in blue arrows, and the loose declining channel that has formed since the declining channel broke in red arrows. On this take the rising channel / bear flag broke down after the 1220.06 high, and has since been retested, with yesterday's high almost at broken channel support. On this view the bear flag started to break down several days ago, and we haven't noticed yet only because SPX has not yet broken down out of the trading range of the last few weeks, which would be likely to happen soon:

Is there anything else that support this bearish view? Obviously I've been posting the 30yr treasury futures (ZB) charts every day this week with the bearish (for bonds) setup that had formed there. I mentioned yesterday morning that the break down from trendline support and the H&S might be a false break and that if it was, then we might well see ZB break back up through broken support to reach a potential IHS neckline just over 142. That's something I see regularly on charts where an H&S pattern fails in one direction, and then evolves into an H&S facing in the other direction.

As it happens that's exactly what happened on ZB yesterday, completing the head on an IHS, with the right shoulder having then formed overnight. If that's going to break up, we should see that break up today, and the target would be in the 144'15 area, suggesting a spike down on equities:

What else? Well one of the best trendlines in recent weeks has been triangle support on the RUT 30min chart. That trendline broke down last week with a recovery over it this week and then another break down. Trendline breaks can be tricky to play, with sometimes a fall directly from the break, sometimes a retest, and often a break back up over the trendline before another break down which would generally be decisive. That happened in February as I recall when SPX first broke rising support before the correction then. This latest breakdown on RUT may therefore hold and takes us to new lows.

The last chart for the day is an excellent chart I received last night from Chart of the Day. This is an excellent free email I get every day and is well worth signing up for if you're interested. You can sign up here. This chart is an analog of the trading months on the MCSI AC World index for the year up to the 2008 crash compared to the last few trading months this year. It is thought-provoking. Click on the chart for the full write-up:

Overall this is an ominous looking setup right here, and looking at ZB particularly I think equities might well have a very bad day today. Overall this weak close to September strongly favors the bears and the rectangle on Vix suggests that we may well see very big falls on equities soon, though confirmation of a break up on Vix in my view would be an hourly candle closing at 44 or higher and not until then. Until then this is looking like a market where any rallies should be sold.

End of Quarter Tomorrow

Just a quick post today as I've been overdoing it a bit since I returned from vacation and I'm feeling a bit washed out. The trendline setup today looks pretty simple today in any case. As I said yesterday morning, the ES rising channel breach and retest looked bearish unless ES broke back up into the channel and we duly had a down day on SPX. A declining channel has since formed since the high this week and immediate resistance is at the broken 1162.75 level (ES). That has been tested and the declining channel established at the overnight high. If 1162.75 resistance and the declining channel hold today then the outlook is still bearish with declining channel support in the 1125-30 area today. If we see a break up through the declining channel and 1162.75 then the outlook will turn bullish and we might see a significant rally today. Here's the setup on the ES 15min:

The end of the month and the quarter are tomorrow of course, and this is a moment of truth for one long term indicator, which is the monthly 20 SMA on SPX. As you can see from the chart below this has been support in bull markets and resistance in bear markets over the last 16 years. In the last two bear markets after the monthly close below the 20 SMA the line was not crossed again until the next bull market so this is worth watching and the level is at 1206.26 today. This is my chart but I first saw this long term indicator at Breakpoint Trades. They do excellent charts and writeups every morning and weekend and supply an outstanding service in my view. If you're interested in trying them out then they have a sale price offer on at the moment. I don't have any arrangement for promoting them but if you were thinking of signing up then you could throw my pal Steveo a bone by signing up via this link from his blog. I wouldn't get anything for that, I'm just mentioning them because I think they provide an excellent service at a very reasonable price. Here's the SPX monthly chart:

I was talking about the possibility of a sizable multi-week rally yesterday, and that possibility looks weaker today unless we see a very strong move up in the next two days. Are the bears entirely (as it were) out of the woods yet? Not yet no. I posted the chart below on twitter yesterday showing a very bearish setup on 30yr treasury futures that would look bullish for equities if it played out:

That's looking more encouraging this morning, with ZB back up over the neckline, the declining channel broken, and retesting the broken rising support trendline. A failure here would  still look bearish for bonds and bullish for equities, but if ZB breaks back up over the neckline then we might have a failed support break suggesting a strong reaction rally. If we see that I'm considering the possibility that an IHS might form with 142 resistance as the neckline:

I mentioned that a big declining channel was established at the silver futures (SI) low, and here is that channel. We might well see silver rally further within it:

Copper futures (HG) made a new low yesterday which looks bearish. The closing low also established a big declining channel on copper, but unlike silver copper pinocchioed through channel support before closing back there. Copper looks likely to bounce a bit here with this support hit and some positive RSI divergence at the low, but a rally to channel resistance seems unlikely:

I'm leaning bearish on equities today unless ES breaks back up over 1162.75 resistance.If it does break back up over that resistance there's the potential for a strong gap up and go rally today.

Inflection Point

I've been considering a possible multi-week bull scenario this week and that's very well summed up in the chart below which was posted on twitter yesterday by Gann360 (aka Joe8888), a chartist I admire. I've been using twitter a lot in recent months (username shjack666) but I originally signed up to twitter last year to follow Joe's charts there:

This monthly chart suggests a potential strong rally here that might last into the end of the year and is based on SPX holding a key pivot level at the end of the month.

What do I think of this scenario? Well from a TA perspective I like it a lot, and it fits very well with the forex charts I've been posting on GBPUSD and AUDUSD particularly, as well as the hits of significant support and resistance levels in the last week on bonds, silver, oil and so on. People tend to expect trends to play out quickly but that's often not the case. The 2007-9 bear market had been going almost a year before the collapse after the failure of Lehman Brothers, which was already sufficiently well telegraphed on the charts that I warned my sister in late August 2008 that in my view there was a 50% chance of a crash in the following few months.

What are the problems with this scenario? Well it doesn't seem to fit with the timeline of the current Euro area crisis at all. Short term the resolution of this crisis seems to hinge on the solvent members of the Euro, essentially Germany with some weaker sidekicks, agreeing to guarantee a huge amount of debt from borderline Euro members over whom they have little practical control to ensure good behavior afterwards. For obvious reasons this is unpopular on the german street and may also be unconstitutional there, as well as potential political suicide for the current german government if they back the plan. Against that, in the words of CNBC's Steve Liesman yesterday "If the market is going up on my (€TARP) rumor, it is ahead of itself... Europe is either in for €2T, or the euro is done."

So Europe is between a rock and hard place here and to say that the proposal that this can be sorted out in the next six weeks is ambitious is a profound understatement. Chancellor Merkel has carefully avoided committing herself to any such program and yesterday some german officials even seemed to be denying that there was any such proposal. This proposed rescue plan could unravel easily and could do so at any time, which isn't a great starting point for a big relief rally. We'll see what happens next as the crisis continues to unfold.

Short term the charts I'm looking at this morning are ambiguous, though they suggest strongly that that we are an important inflection point today and the direction of any break today may well therefore be very significant. On the SPX 30min chart the high yesterday had slight negative divergence on RSI, but not enough to be confident that a short term top is in:

In terms of where we saw the close on SPX yesterday, SPX closed back below the significant closing level in the 1178-80 area that I highlighted before the open yesterday. I've marked these current daily candle ranges on the chart below showing the overall current range within the black box:

On ES after short term rising support broke yesterday a rising channel was established at the low before the close. In the overnight session that channel broke, and the premarket high so far has been a perfect retest of that broken channel. This looks bearish unless and until we see a break back over that broken channel support trendline:

On the NDX 30min the upside gap filled yesterday as I expected, and the decline before the close didn't quite fill yesterday's opening gap, which remains open at 2234.28:

RUT's 30min chart looks the most interesting of the three this morning, with yesterday's high failing at declining resistance from the late July high. Again the opening gap from yesterday morning at 665.62 has not been filled and that is close to important rising support. A break down through that with confidence today would look bearish:

In terms of the significant inflection points that we have reached here these are best summed up in the USD and treasury charts. On USD I'll use the UUP (dollar bullish ETF) 60min chart as a proxy, and you can see that UUP bounced at significant short term support yesterday. If that rising trendline breaks today I'd expect to see significant further downside on USD and I've marked in the obvious UUP support levels:

It is the 30yr treasury futures (ZB) hourly chart that perfectly captures the inflection point that we are sitting on here though. On the (bond) bear side rising support broke yesterday before a failed retest of the important support / resistance level at 142. A second more confident break of the rising support trendline that broke yesterday would look very bearish for bonds here, and therefore bullish for equities. On the (bond) bull side the support break yesterday failed, and that trendline is holding as support since the 142 level retest. The decline into the support break formed a decent looking bullish falling wedge that may now play out in a bigger tretracement upwards that would be bearish for equities.

On the purely technical view I am leaning slightly towards the (bond) bear camp here, as my experience with these in the past suggests that falling wedges into important support levels are only bullish until those levels break, and often turn bearish on a support break. A good example of that is the falling wedge on gold that broke down through trendline support as it was forming a few days ago. Obviously we all know how that ended, though I would add that the gold falling wedge never broke up with any confidence as this one has, and that two rising support trendlines on gold broke and retested from underneath before gold then fell off a cliff from the falling wedge:

So there we are, the markets could either go up or down from here in my view. We'll have to see which way this breaks :-)

Other things to mention today are that I have short term rising support from the overnight low on ES at 1172, that the gap guy favors down gaps over up gaps today, and that I often add notes and details to the charts I post that I don't mention in the write-up, so click on the charts if you want to see those. Lastly we have a confirmed Vix Buy Signal at the close yesterday which could be bullish, though in a bear market this often just tells you that you have already had a short rally. Anyone buying on confirmation of the last of these signals a couple of weeks ago almost perfectly caught the short term high then, so I haven't bothered showing the signal on a chart today.

Bouncing Hard

I'm going to concentrate mainly on equities today, with quick looks also at gold, treasuries and AUDUSD. On the SPX 30min yesterday's close wasn't yet at broken support in the 1170 area, though with ES now at 1174.5 as I write, we may well gap over that at the open. Worth noting is that no bounce since the August low has ended without hitting the RSI 70 line on the 30min chart:

The daily close today will also be significant. On my SPX daily support/resistance levels chart daily resistance is in the 1178 area. A daily close above this level would strongly suggest a test of the 1204 resistance level:

On the NDX 30min chart my rather porous broken support trendline in the 2230 area was breached at the close. The next target is the gap fill and broken support at 2258.30:

On the RUT 30min chart RUT close at the broken triangle support trendline that I highlighted yesterday. A gap up over it at the open currently looks likely and that would open up a test of declining resistance in the 702 area

Short term though TF (RUT futures) are looking a little tired and failing so far to breach a rising resistance trendline I have there on the 60min:

I mentioned yesterday that GBPUSD and AUDUSD particularly have bounced at levels which suggest that we could see a bounce lasting several weeks. I posted the GBPUSD chart on Friday so here is the AUDUSD daily chart, which is definitely thought-provoking:

I'm watching 30yr treasury futures (ZB) carefully here to see whether short term support holds. If it doesn't then it's very possible that we've seen a major swing high on treasuries, and possibly even a major top. My ZB daily chart that I posted yesterday shows the trendline hit that could indicate a major high on treasuries. My ZB 60min chart below shows support at 142, being tested now, and rising support below in the 141 area. A break below would support an extended rally here on equities:

I don't think the gold chart is of great inter-market significance, but the break below support in the 1575 area yesterday, though not sustained long, strongly suggests to me that we will soon see a break below there to rising support in the 1440 area. This break below 1575 was the first breach of the daily 150 SMA since early 2009:

I don't believe that a very major low is in on equities, as there aren't any of the usual bottoming signals. However we could be looking at a big rally that might reach the 1250 area on SPX and last several weeks. That's by no means certain yet, but I'll be watching treasuries and the daily resistance levels on SPX particularly for signs that a significant interim low is in. We're likely to see a big gap up at the open today, but it could well fill as everything is looking rather overbought short term.

Big Support Hits

Another interesting overnight session but I'll post charts for SPX, NDX and RUT today as well as the charts for other important markets. The overnight session is looking sharply higher at the moment and for a number of reasons I'm wondering about a strong move up. I'll explain more about that later on but here's the SPX 30min chart for the moment, showing the rough broken triangle there. There's some positive divergence on the 30min RSI (often a good indicator) and the obvious retracement target would be a retest of broken support in the 1170 area:

On NDX, the rising wedge that broke down last week looks very ominous, but again we have some positive RSI divergence and if NDX can recover the broken support trendline then the first target is the gap fill at 2258.30. Any move above there would be a significant resistance break and support the possibility that this rising wedge has evolved into a rising channel, with the next target then at rising wedge / channel resistance:

On RUT there's also some positive divergence on the 30min RSI and the obvious target is the gap fill at 664.58. A break above 670 would be a significant break back up through broken triangle support:

Equities aren't the reason I'm wondering about a big bounce here though so much as the big support levels hit on many other markets on Friday or overnight. Silver, after an astounding drop in the last three days, has hit the fourth and last support level that I highlighted last week when SI was still in the 40 area. Support at 26.32 was overshot overnight by 17c and SI has bounced back now to over $29. This is a potentially very significant low for silver and there is now also a large declining channel established on silver that I've shown on the chart:

Oil futures also hit my 77.40 target overnight, overshooting by only 2c and has since bounced back up $3 at the time of writing. Again, this is a very significant support level on CL / Oil, and we may well see a strong bounce here:

I mentioned the 1.34 area support for EURUSD last week and that has held for a couple of days now. It isn't as obvious from the chart but this is a very big support level for other USD currency pairs as well. I posted the GBPUSD chart on Friday to show that and a glance at the AUDUSD daily chart will show the same. Who can know what will happen in Europe this week but from a technical perspective, this is a natural level for big bounce on EUR and other currencies against USD:

Copper hasn't reached an obvious bounce level here yet, but I'm wondering about 30yr Treasury futures (ZB). There are obvious signs of a possible ST high on the 60min chart with negative RSI divergence and a break down through short term support. If we see a decent retracement then the two month support trendline is in the 140'22 area at the moment:

Looking at the ZB daily chart I'm wondering about a possible major top here with marked negative divergence and a double resistance trendline hit last week:

None of this means that I'm thinking we've seen the low on equities here. As I showed last week I'd expect to see lows made on EEM and copper made before equities, with bonds and precious metals possibly doing the same. It seems unlikely that we've seen a major high on USD, but we might have seen a high that could last a few weeks. We may also be seeing some significant lows now on some beaten down stocks that may hold on the next move down. We'll see. The Gap Guy suggests caution on a gap up today.

United We Fall

I'm a member of Pug's excellent subscription site and find his counts a very useful reference to use with my take on the markets, with my take almost entirely derived from trendlines and patterns so the comparison is a very useful cross-check.

Pug tends to lean slightly bullish while I tend to lean slightly bearish but Pug eliminated his last alternative bullish count last night, and we stand united in the strong expectation that we are going to see more downside.

Pug's main count for a while now has leaned more bearish than my expectation, as I'm seeing likely support in the 1000-1020 area, and Pug's looking at the same area as his highside expectation, but thinking we might go somewhat lower. Both of us are assuming that the world financial system won't collapse, which seems a decent assumption for another year or two at least at the moment. If you include Tim Knight, targeting the 1040-50 area, you have an odd reversal of the usual arrangement, with Tim being the most bullish, Pug being the most bearish, and myself, as before, between the two. Whoever is right we should see a number of decent signals as we approach the low, with likely positive divergence from Dr Copper and EEM when we reach it, and we'll all be watching for those signals.

Obviously we had a wild day on the markets yesterday, and it was so wild, and so wide-ranging, that I'll have to do another broad spectrum post rather than focusing mainly on equities. The first question to consider here is whether the powerful wave down that we've seen since the Fed announcement has finished, or whether we are entering the last stage of that now.

We should find out shortly, with ES looking to test yesterday's lows at the moment, but I have a couple of points to make on my ES chart. The first point is that a strong support/resistance level has now been established in the 1123-5 area on ES, and that level was support overnight repeatedly until it broke 90 minutes ago. If we see a break back above there today then we should be into the retracement wave. The second point is that unless we see a very powerful further break down, then the next low will be established with decent positive divergence on the 60min RSI, which would be a decent low signal. Depending on where that low is I have a provisional retracement wave target in the 1160 ES area:

The other equities chart I'll show today is the RUT 60min chart where the triangle I posted a couple of days ago was greatly strengthened by RUT gapping through the support trendline. RUT made a new low below the August low, which backs up the bear analysis here, but the big gap down also establishes two obvious retracement targets at the top and bottom of the gap, roughly in the 655-65 range:

Looking across other markets, 30yr treasury futures are up to over 146 after breaking strong resistance at 142 after the Fed announcement. I have a very rough target of 148 based on a rough channel but it may not make it yet. The lower trendline is more solid than the upper trendline. I understand that the Fed target reduction for Operation Twist on 10yr treasury yields was 0.10% to 0.15%. With those yields now down over 0.3% in the last two days Operation Twist has exceeded those targets without the Fed shuffling a single treasury around. I did mention that the targets were ridiculous yesterday morning and I think that point is well made now:

Silver is down an astounding 20% in the last two days, and was testing the very important 33.5 level on SI as I capped the chart below this morning. It has fallen since but I'll be watching the close today to confirm a support break there. SI is now testing the May lows:

Copper pinocchioed my first target at 330 overnight but is holding above it for the time being. We may see a decent bounce here but if it breaks then next support is in the 300 area:

I haven't space to show the Vix chart today but obviously we saw the clear break of the 40 level that I was looking at yesterday. Vix closed above the daily bollinger bands and I'll be watching for a buy signal on equities now, though that's much less meaningful in a bear market and the last one failed miserably. I'll show the oil chart though and oil has now almost reached the strong double support level in the 77.40 area (Dec futures) that I was targeting yesterday. Oil may well bounce there but if it breaks then I'd expect a move into the 60s:

Possibly the most interesting and important charts today though are the forex charts, so I've saved those for last. First on EURUSD we are seeing the support zone I highlighted yesterday and the day before tested, but it's holding so far. This is a natural level to see a bounce and the level is holding so far. I'm fairly confident that it will break in the next few weeks but it may well hold short term:

Just to underline the importance of the current support levels on USD currency pairs, here's the GBPUSD daily chart. This chart didn't make the cut yesterday, though I posted it on twitter, but you can see that GBPUSD has now reached a very important support level in the 1.534 area, and I'd expect a bounce here:

We're reaching a number of important support levels on a number markets here, and this is a natural area to expect a bounce. My feeling is that we'll put a wave low in on equities sometime today and then bounce for a day or three before resuming the downtrend. There are some important meetings among world leaders over the next three or four days where attempts may be made to 'save' the financial system with further cross-guarantees of worthless paper by (currently) solvent guarantors. Any resemblance in this process to the securitisation of mortgage debt in the runup to the last financial crisis by bundling bad bonds with good bonds and giving the result a decent rating is accidental and irrelevant I'm sure.

A slightly rushed post this morning as my labrador died overnight and I was consoling my eldest son this morning. She reached a very good age for a labrador, almost 15, but a sad day nonetheless.

Smoke and Mirrors

Well after all the anticipation, the Fed announcement yesterday amounted to little or nothing presented as action. Sure the Fed will roll over maturing treasuries and mortgage bonds but so what? With the Fed Twist program selling $1 of short term treasuries for every $1 of longer term treasuries purchased there will be no new money and in effect this is akin to supporting the housing market by not selling houses. The truth is that the annual market boosting QE pushes of the last two years have now been abandoned. That's a good thing as the markets can now find their natural levels without the effective Fed subsidies for equities that we saw in 2009 and 2010.

As for the apparent aim of Twist to reduce 10 year treasury yields by 0.1% to 0.15%, it is laughable. For starters 10 year treasury yields have halved since the February 2011 high from 3.744% to 1.875% at the close yesterday, so the target reduction is less than 10% of the reduction we have already seen this year. Why have rates fallen so much since February? Because QE2 was drawing to a close with no announcement of a QE3 that has now been ruled out for the time being by the Fed. Both of the big rallies in treasury yields that we have seen since 2009 were clearly driven mainly by QE1 and QE2 and died with them, as you can see from the chart below. This is a 20 year TNX (10 year treasury yields) chart and you can see that the obvious target now is in the 14 (1.4%) area:

I'm going to do a broad spectrum post today looking across the main markets as I think we are starting another big move down on equities now, and I'd like to review the various interrelated market areas. I'll have a quick look at SPX though to identify the main levels that are important today. On the SPX 15min chart the double-top target is at 1156.05, which is likely to be made with ES trading under 1130 as I write this. The rising wedge target is at the last swing low at 1136.07 and that is a very important level today. If the next swing low is above 1136.07 then we might see another last push up before the next big move down begins. If 1136.07 breaks however then the chances are that big move down has already started. as usual I have taken my pattern targets and probabilities from Bulkowski's outstanding reference site here and the probabilities are marked on the chart:

On the SPX daily chart I've marked in the two key target levels for today. The first is rising support from the SPX low and the bottom daily bollinger band in the 1145-7 area, and the second is 1136.07 again:

Looking at the Vix I gave a bold target over 36 yesterday morning and it reached 37.32, closing at the high. As you can see from the chart this was somewhat more than a retest and if sustained today my next target is in the 38.5 area. Anything over 40 will suggest that new highs will be coming soon:

On precious metals the picture was complex yesterday morning with two competing scenarios. The first was a rising channel from the lows that I have posted often and posted last when it broke last week, but a smaller falling wedge had formed from the last high and that broke up yesterday morning. So far SLV has failed at broken rising channel support and unless that is retested and broken quickly then the broken channel is the pattern to watch. I'm looking for a test of strong support (and potential H&S neckline) in the 36 area, and if that is broken, then a test of the June lows:

Bonds broke up on the Fed announcement yesterday, which as much as anything else triggered the waterfall decline in equities that we saw after the Fed announcement. EEM made a new low and copper has broken the important support level at 365 that I highlighted on Tuesday morning. I'm looking for a move on copper futures at least to declining support in the 330 area and possibly further to test support in the 300 area. As I mentioned yesterday, I'm expecting to see major lows on copper and EEM significantly before any major low on equities:

As I mentioned on Tuesday morning the rising wedge on oil broke down last week and has since retested this week and fallen hard yesterday. I have a strong support level and rising support in the 77.4 to 77.6 area and that's my main target area for this move down. The rising support trendline is a decent one so it may hold. a break below it would look very bearish and suggest a move into the 60s:

EURUSD is at an interesting level here but is still in a strong support zone between 1.342 and 1.35. A conviction break below 1.342 should deliver a move to the 1.20s, but until then this is still a strong potential bounce area:

The ES 60min RSI is now extremely oversold and we may well see a low made and a strong bounce start this morning. I hoping for a retest of the ES lows later on with positive RSI divergence for a long signal. How far might that bounce go? Topside would probably be broken support in the 1182 area, but it might fail before then.