No Mans Land

I posted a channel derived from my friend Alphahorn's chart on Friday, but I regretted not posting the original chart to give the proper context. Alphahorn is running a primary bearish scenario and a secondary bullish scenario, and the high on Thursday was pretty much exactly at the dividing line between the two. Here's the full chart below, and if the red declining channel breaks up, then the bullish scenario will become Alphahorn's primary scenario:

Is this level the dividing line between a continuing bear market or a new bull market? Another indicator I watch suggests that it is, and that is the ichimoku clouds on the SPX weekly chart. Historically a break below the cloud has been a decent indicator of a bear market and a break above a decent indicator of a new bull market. as you can see SPX is testing the top of the weekly cloud. A break above with confidence would strongly suggest that SPX is in a new technical bull market:

Will we see more reversal here, regardless of whether SPX will later break up? Very possibly. On ES I have a rough rising channel where rsistance has been hit. Strong support should be at 1254.5 ES, which is close to the strong support level at 1257 SPX. A break below with any confidence would strongly suggest a deeper correction, and if the blue channel support trendline were to break, then ES might retrace much of the recent move up:

NQ is suggesting that deeper retracement is possible, with another rough channel there, but more importantly, a test of the 2400 level last week followed by a slightly lower high. That's obviously a possible short term double top and NQ has had some very major reversals from the 2400 area so far this year:

Such a reversal may not last that long of course. One thing that I'll be watching is the possible H&S forming on 30yr Treasury futures (ZB) that I've been writing about for the last couple of weeks. As I was suggesting, ZB bounced at 135 to complete the head on this pattern, and has so far bounced strongly almost back into the 138 area. An ideal right shoulder on this pattern would take a week or two to form and target the 141 area:

I still have very mixed feelings about EURUSD. It broke up strongly at the end of last week of course, and that looks bullish, but it has since reversed hard and is now below my strong S/R trendline in the 1.41 area. While it remains below there is still a bearish option that the spike last week was just an overthrow on a bearish rising wedge and I'm watching the 1.39 (neckline) level. A break below with any conviction would look very bearish:

If we do see a decent retracement here, then oil is well worth watching. Oil has been rising within a tight rising channel since the low, and looks as though it may have put in a short term double top. If the channel breaks down this will look very attractive as a short:

Posts are likely to be a bit shorter this week. The clocks here in the UK changed from summer time at the weekend, and until clocks in the US do the same next weekend, I'll have an hour less in the morning before the market opens. The key levels to watch today in my view are 1257 SPX and 1.39 on EURUSD. Breaks below would strongly suggest deeper retracement over the next week or two, which would fit with the formation of a right shoulder on the big potential H&S on ZB. A break above last week's highs on SPX would look bullish short term and longer term, particularly if sustained into the weekly close.

Bear Capitulations

If there's one thing that I'm noticing around the blogosphere this morning, it is that a lot of bears are throwing in the towel. John Murphy is leaning bullish now I think, and Carl Futia has also thrown in the bear towel. They might well be right. While the sovereign debt crisis is likely to result in a major crash at some point, that debt crisis won't be about two bit players like Greece or even Italy, it will be about the US and the EU as a whole, and when the members of the Euro zone bind themselves together ever more tightly to escape these first sovereign debt problems, they are increasingly creating a situation where if they go down, they all go down together.

The key thing here is that sovereign debt levels in the US and the EU (on average), on the optimistic reading where onerous pay as you go future pension and other commitments are excluded, are reaching about 100% of GDP and are still rising fast. I've read that the tipping point at which it starts to get a lot more expensive to roll over debt is at about 120% of GDP, and by 140% you are effectively insolvent. Debt can go higher of course, Japanese debt is close to an astounding 200% of GDP, but it's hard to find a serious analyst who doesn't think that Japan is effectively insolvent, and that default there is just a matter of time.

The key question is whether policies are changing to stop this slide into sovereign insolvency, and the answer to that is clearly no. The crisis may have been kicked down the road for a while in Europe now, but this summer has been the beginning of the sovereign debt crisis, not the end. More will be coming down the road and the problem will be larger then. There's an excellent article posted by Ritholz at his blog on this subject and it's well worth a read. You can see that here. Just for clarification on some of the comments there the average maturity of US treasuries is just over 5 years, which means that approximately 20% of it needs to be rolled over every year. The US national debt clock, which you can see here, has the US national debt at just under 100% of GDP and $15 trillion. That's roughly $3 trillion in debt to roll over each year in addition to any new borrowings and the amount owed has doubled in the last seven years. When lenders start to demand higher interest rates to compensate for default risk then the interest bill starts rising fast.

This may be a new technical bull market, but this elephant in this room won't be getting any smaller. As and when this crisis will return.

Back in the shorter term though, that was a major bullish break yesterday, with SPX taking out the 61.8% retracement, the 200 day SMA, and the H&S neckline in one day. Strong support is now at 1257 at the 61.8% fib. You can see from the chart below that the fib level breakouts so far have all been retested, though in each case so far only after a test of the next fib retracement level, which in this case would be the 78.6% retracement level at 1307.27 SPX:

Many thanks to my EW pal Alphahorn today, for pointing out a channel that I had missed. That channel is on SPX, and makes grim viewing for bears here as it is a rising wedge turned rising channel from the 2009 lows. I've also made a couple of other points on this chart, which are mainly that while we are very short term overbought, the daily RSI is not yet in overbought territory. The second point is that you can see that the daily 50 EMA and 34 EMA are important bull market support, and prices tend to return to them very regularly during bull markets. The daily 50 SMA is at 1183.41 today and the daily 34 EMA is at 1203.54. Just sayin'. That said these MAs rise and fall fairly quickly and a retracement to hit them might well meet them somewhere in the middle:

I posted a TF chart the other day showing the possible HS forming there and the key resistance levels to watch. I've charted this up on IWM today. I tend to switch between the RUT, TF, and IWM charts treating them as essentially interchangeable. You can see that IWM moved more than 5% in a day from one strong level, through the thin zone inbetween, to hit the next strong resistance level at the highs yesterday. This is the last strong resistance level before IWM gets into the level occupied by the topping H&S there and we may well see some retracement here:

RUT/TF/IWM has been the weakest of the three indices that I mainly watch, but NDX/NQ/QQQ has been the strongest. You can see from the QQQ chart that it is now close to challenging the last high. I've marked in the rising resistance trendline from those last three highs at slightly over 60:

EURUSD broke up strongly through resistance yesterday and the IHS I've been watching there is playing out. This is of vital importance to equities as EURUSD and equities have been very strongly correlated lately. I've marked in a couple of untested resistance levels on this bigger picture chart, but the IHS target is 1.467, and if those levels are broken, the chances are that target will be made:

30yr Treasuries have reached my possible neckline area at 135 and that level is holding so far. I have marked in the possible right shoulder that could now form here:

Copper reached my resistance area at 465-70 yesterday and has only pinocchioed through it so far. We might see a retracement here but the setup suggests that it will break up through it soon:

Silver broke up through strong resistance at 33.5 yesterday and I'm expecting a move to my declining channel upper trendline in the 40/41 area. I've marked in two minor resistance levels on the way there:

I don't think we have made an interim top yet and my feeling is that SPX will at least test 1307 and may well go higher before we see a meaningful retracement, which might by then only be to retest the resistance levels that broke yesterday. I'm leaning towards seeing some retracement today, and strong support is now at the 1257 SPX level at the 61.8% fib retracement. A break below that with confidence would suggest that an interim high has been made. Any retracement today may well not survive until the end of the day. The Gap Guy's tip for today is that 'historical odds favor a gap down on Friday and gap fill by end of the day'.

Euro Area Bailout Deal

Just a quick post today as I have to do a lot of offline stuff, but obviously my doubts about the reversal this week were well founded, and ES has leapt to new highs overnight. The big news overnight of course was that the terms of a Euro area bailout were agreed, and that may kick the Euro area problems a few months down the road. You can see that story on Bloomberg here. The EU has arranged a 50% 'voluntary' writedown of Greek debt, though how that can be effected without triggerng CDSes still seems a bit doubtful. It strikes me that any holders of greek debt who refuse the writedown could make a lot of money here at the expense of other bondholders, and if they are forced to accept the writedown, then the writedown isn't voluntary. It will be interesting to see what happens. It seems likely though that the main bondholders, the banks, will be strongly encouraged to accept the writedown, and that they will probably accept the loss for fear of a formal default and/or loss of official goodwill from their governments, who have been effectively underwriting the banks since 2008.

The plans to lever up the EFSF look sensible, within the insane logic of the growing government debt mountains, as rather than borrow money to lever up the plan is to insure debt through the EFSF, which should at least double its firepower, at the risk of wiping out the fund altogether in a default situation where other PIIGS get into trouble. This isn't the end of this story in all likelihood, but the sovereign debt crisis may now have been kicked down the road while sovereign debtors everywhere in the developed world continue to amass fresh debt.

The US GDP figure is also out today so we could see a very wild news-driven day. If ES holds the current levels over 1260 there will be a huge gap up on SPX and a decent US GDP figure could deliver another trend up day. This is definitely a day to consider caution on either side.

I'll have a look at related markets first today. The first thing to note is that EURUSD has reached the major support/resistance trendline that I've been looking at in recent days, and that the line is holding so far. If it holds then EURUSD is in a rising wedge in my view, though as some of the touches on the upper trendline were part of the previous trend more classical technicians would disregard those. Either way this is a very important support/resistance trendline, and a break above would be very bullish:

30yr Treasury futures (ZB) are still kicking around in the recent consolidation zone. If ZB makes a new low I'd be expecting a hit of the 135 support area, which is also a possible H&S neckline:

Copper has ontinued rising and is approaching the very important resistance level at 365. Declining resistance is also there and if it's going to reverse, that is the likely area. If it breaks up with confidence that would be very bullish:

On Vix I'm still watching the possible bear flag there. If we see a new low the flag target is in the 24 area:

On the equities charts I'm going to do something different today. Firstly I've marked up the ES 15min chart to show the long signal at the low yesterday and have added my amateurish wave count for both the retracement and the move up since. As you can see, it's possible that we are seeing a wave 5 high at the moment, though it's also possible that we're still in wave 3. I'll expand on the wave 5 possibility in the next chart. Please note the postive RSI divergence on this chart yesterday though, and have a look at the clearer divergence on the 60min chart if you can.  The lower low yesterday was with strong positive divergence on the 60min RSI, which is generally a good point to get cautious on the short side:

The reason I was counting the waves up from the low yesterday however is that a very nice rising wedge has since formed on the ES 15min. The support trendline is now slightly over 1260 ES and if it breaks down then the bulls might get a nasty surprise today. Always worth remembering though that these wedges break upwards 31% of the time and that there's often an overthrow or false break in the opposite direction to the one that it then plays out. Still if the GDP disappoints, we could see a gap fill at the least:

Not much to add to that really. If the GDP is good this huge gap might be the prelude to a trend day. If my wedge breaks up then the upside target would most likely be in the 1310-20 area so be careful on the short side if that happens. If EURUSD breaks over my trendline with confidence then that would also be very bullish for EURUSD and equities.

Reversal at Resistance

That was a strong reversal day yesterday and that was an encouraging start. There haven't been two consecutive down closes in October so far and we'll see if that can be broken today. On the big picture the reversal at main resistance yesterday was very encouraging for the bear side. On ES (though not on SPX) there was a bearish engulfing candlestick and a potentially very bearish setup that I've detailed on the daily chart:

There were nice double-top daily candles on NQ and TF as well, though neither showed a bearish engulfing daily candlestick. NQ has been the strongest of the three and there's no particularly interesting bearish setup there, though on TF, the weakest of the three, there is a reversal at important resistance and possibly the top of a right shoulder of a huge potential H&S that I posted a few weeks ago. Details on the chart again:

It's a bit too early to get excited about these though as the key for bears here is to reach the very strong support level (and potential H&S neckline) on ES at 1185. There was a promising development yesterday that might deliver that though. I posted a SPY 15min chart on twitter intraday showing a trendline break that should deliver more downside, and SPY reached (give or take) my first target, which is the potential H&S neckline that would target that main support level below. I'll be watching to see how that develops today, and here's the updated SPY 15min chart:

Looking across related markets this morning there's nothing that looks really encouraging on the bear side. EURUSD is still holding the 1.39 support level, though stalled at resistance in the 1.394/5 area. Given the importance of EURUSD on this run up, the bears really need to see some weakness on EURUSD soon:

Copper has actually made a new high for October overnight, though since the low it has still obviously been strongly negatively divergent relative to SPX:

30yr Treasury futures have bounced a bit and made a higher low,which is a  start. Still essentially in a consolidation range though:

Vix rose sharply yesterday and has also made a higher low. So far the move has only backtested the broken bear flag though and obviously a larger move to fill the open gap just above would be more encouraging:

The last two charts are only weakly correlated and they are the gold and silver charts, which I haven't posted much in recent weeks as not much has been happening. That changed yesterday, when gold broke above serious resistance at the double top base and looks ready to move higher:

That fits with my big declining channel on silver, which I posted at the silver low and a few times since. Silver is still testing big resistance in the 33.6 area, but the break up on gold looks encouraging, and if silver breaks up too then the path is clear to test the next resistance level up at 36.9, and then too run to the top of the channell in the 40 area:

I'm still skeptical about yesterday's reversal developing into something larger, but it's an encouraging start. For today I'm watching the rising support trendline from yesterday's low on the ES 5min chart, currently slightly over 1230. If that breaks down then I'd expect at least a test of yesterday's low today. Worth remembering though that if an H&S right shoulder is forming on the SPY 15min, then it would take much of the mornng to form and that there is a LOT of news today. The Gap Guy say the odds are decent today for a gap fill by the end of the day.

Energizer Bunny

A big move up yesterday and then some retracement overnight followed by a push to a new high on ES. SPX hit the 61.8% fib retracement at the high yesterday and is now in a very key resistance area:

Obviously equities are very short term overbought, and are hitting key resistance here. Will we see some retracement at least? Perhaps, and I'm watching a short term support trendline on SPY for an indication:

I'm only really looking for some retracement here however, as the other markets I'm watching don't look encouraging for anything more. The Vix bear flag I was looking at yesterday has broken down. It still needs to break through the last low but once that happens I'd expect more downside which would be bullish for equities:

30yr Treasuries have broke down from the rising channel. I've been looking at downside targets and the first is strong support and the potential H&S neckline at 135. If that breaks then the technical double top target is in the 132-3 area:

Copper put in a very impressive 6% move up yesterday and may now have put in a tradeable double bottom:

I'm still looking doubtfully at the IHS on EURUSD, though it has formed nicely and broken the neckline. There is one strong resistance trendline left just over 1.40, and that might yet hold. The eurozone is such a mess it's still hard to take this bullish setup seriously:

I mentioned yesterday that there were some large H&S patterns that might take several months more to form right shoulders and one of those is on EEM. As you can see EEM, like copper, has been much slower to recover so far than SPX, and my ideal target for the right shoulder top is still some way above at 43:

I was asked yesterday why I had become more bullish as this interminable wave up has moved higher, and the reason is mainly that the other markets that correlate positively or negatively with SPX are almost all looking as though this move has further to go. That doesn't mean that we won't see pullbacks, and there's a decent chance that we'll see a pullback very soon from yesterday's highs, which were at some serious resistance. Cobra has put the case for a pullback soon very well in his post last night, mainly based upon NYMO and that's well worth a read. You can see that here.

Technical Damage

Looking at the charts this morning there's little to cheer the bears in the medium to long term. SPX broke above the trading range of the last eleven weeks on Friday, and is close to challenging the last major bear market resistance level on SPX in the 1249-58 area:

Vix retraced on Friday as I was suggesting it would, and the bounce in recent days has the look of a completed bear flag that is ready to start playing out at any time:

On 30yr Treasury futures the large rising channel broke on Friday. ZB is bouncing from that at the moment but more downside looks likely when this bounce has finished. That would obviously look bullish for equities:

Most ominously of all for bears EURUSD has now completed the IHS that I've been suggesting might form for a couple of weeks and has followed as it has. The IHS target at 1.467 looks very ambitious but for EURUSD to move much in that direction would obviously also look very bullish for equities:

Frankly, this all looks as though the bears are finished for the moment, and once SPX closes above 1260 I'd be inclined to write off the bear case until until next year. The bear case would start to look interesting again only if SPX moves below strong support at 1190 and until then I think we're back to buying the dips.

That brings me to the one ray of light here for the bear side, which is the short term bearish look of the ES 60min chart. On ES the short term support trendline from the last low at 1193 broke overnight and that was a decent support trendline. With the strong negative divergence on the 60min RSI, I'm expecting a dip today and possibly tomorrow and it might well be a deep one. That would fit with the usual expectation of some retracement after a strong opex week. :

There was no agreement at the Euro summit yesterday and no announcement of any substance, but it's clear that the markets are expecting the Euro area problems to be papered over for a while. Unless SPX can break back down through 1190 with conviction, a continued rally into the end of the year seems likely. Whether that will take equities to new highs is another question though. I was posting some of the large IHSes that would need a multi-month rally to form the right shoulders in August and September, and I'll be posting some of those over the next few days with targets for the right shoulders.

Opex Friday

We've been chopping round in a range since the high last Friday and momentum is building for a breakout in one direction or the other. As I mentioned yesterday the Euro summit this weekend may well be the trigger for that breakout, and if so then I'm leaning short, as I think the Germans will be most reluctant to commit any new money.

Short term ES is back near the top of the trading range and possible bullish rectangle at the time of writing, and I'm leaning against seeing a breakout today, so immediate upside looks limited. I'm watching the short term support trendline for this move up from yesterday's lows, and if that breaks down I'd expect at least a retest of the 1203.5 support level:

Looking at SPY this move up is looking like a retest of broken channel suport. A break back up through the trendline with confidence would look short term bullish:

Looking at related indices and instruments the Vix is looking toppy short term, though the pinocchios through short term resistance yesterday might be indicating an imminent break up:

As I mentioned yesterday the negative divergence between copper and equities here is huge, with copper bottoming close to the recent low yesterday. Copper looks as though it is forming a bear flag but within that flag looks likely to rise somewhat today:

EURUSD poked through the support trendline yesterday and then recovered. Overall this setup is looking bearish to me, at least to the extent of a likely retest of support in the 1.35 area:

30Yr Treasury futures (ZB) are not moving much at the moment but as long as the large rising channel holds, this looks bullish and therefore equity bearish:

In summary SPX is near the top of the recent range, and I'm not expecting a break up today so I'm leaning short. NDX has been underperforming SPX sharply in recent days which is also not looking bullish. At the time of writing ES is up almost 15 points from the close yesterday and I'd expect that to narrow somewhat before the open. If it doesn't narrow that would increase the probability of an unexpected trend day today, and I'd be watching the 1230 ES level for a possible breakout. The Gap Guy has this to say about opening gaps today: 'Fading gaps on Options Expiration Friday when below the 200 DMA and using an 'end of day' stop: DOWN gaps: 14/18 wins (78%) and 1.8 PF. UP gaps: 17/20 wins (85%) and 4.2 PF'.

Copper Divergence

Just a quick post today as it's halfterm now and I'm taking my children out every day and catching up on some admin until the end of next week.

We are consolidating here and after that is finished we will either push up further or drop. The boundaries on ES are clear enough. So well delineated are these boundaries in fact that I posted the chart below on twitter yesterday speculating whether a rectangle is forming on ES. If so then the next obvious move would be a test of Tuesday's lows and a strong bounce there to confirm the rectangle. The stats and targets are on the chart but that would be a bullish setup:

I'm happy to report that my rising channel on SPY bounced at the newly established rising channel lower trendline yesterday afternoon and then broke down through it. That's encouraging for a retest of the lows in the next couple of days:

Vix bounced nicely yesterday and reached the significant 35 resistance area. A sharply sloping IHS may be forming there which could take Vix higher but it's possible that the bullish (equity bearish) scenario there that I've been looking at this week may have largely played out already without equities having fallen much while that happened:

I looked more closely yesterday at the support trendline I thought had been established on EURUSD and realised that it didn't line up that well on closer inspection. At the low overnight however a perfect support trendline was established, and a break below that would now look bearish. Hard to call EURUSD here until we see a significant trendline break, which fits as we'll know more after the summit at the weekend to try to expand the EFSF bailout fund.

There may well be no increase in the size of the EFSF as the main backer of any such increase would have to be Germany, and this increase is potentially political suicide in Germany, with 80% of Germans against any bailout of Greece, and 75% distrusting the Euro itself. An article on Bloomberg summed up the German domestic situation nicely this morning and you can see that here. If there is no increased bailout fund then most likely the Euro will fall hard and take equities with it:

That would fit with a low on 30yr Treasury futures, where the rising channel established at the low is still holding:

One thing I haven't talked about much recently is copper, and that's mainly because not much has been happening there. That however is in itself interesting and you can see why on the following chart where I have put the SPX in as the green background, and then superimposed EURUSD ($XEU), 30yr Treasury yields ($TYX) and copper ($COPPER) in red on the top over the last three years. You can see that SPX has been trending strongly with EURUSD and Treasury yields recently, but the best correlated of the three with SPX by a long way over the last three years has been Copper:

So what's been happening on copper since the low? Not much. while SPX was retracing well over half of the fall from the high, copper has barely managed to get past the 23.6% fib retracement level, and has since given up almost half of that on this real trading hours chart, and over half on the futures charts after further falls overnight. This is a big negative divergence on copper and it may be that copper will accelerate to the upside soon, but while this negative divergence persists copper is arguing for lower prices:

Tomorrow is opex Friday of course, and I'm not expecting to see a breakout from this range either way before the end of this week. The Euro summit at the weekend may well determine the direction of any break next week, and as I mentioned, if the German Chancellor Merkel is hoping to win the next election, there may well be no agreement this weekend, or indeed at any future summit, to bail out the PIIGS further. The Gap Guy says this in his free daily email about the prospects for a gap fill today 'Both up and down gaps on Thursday of Options Expiration week when below the 200 DMA have a high historical gap fill rate'.