Tweezers and Cannon

Yesterday turned out to be a consolidation day and ES retraced back to 1183 overnight. Since then it has bounced to slightly over yesterday's overnight high on some mildly bullish news about Chinese reserve requirements. The article about that on Bloomberg is here, and is interesting as it's the first reference I've seen to government 'fine-tuning' in a while. That's a phrase that has grown rare in recent years as central banks have graduated from using fiscal tweezers to fiscal cannon to try and move economies.

I'm expecting a green day today but it's hard to say how far this will get. On SPY the IHS I posted yesterday is still in play though the neckline was mashed up somewhat yesterday which weakens it. Big resistance in the area of yesterday's highs at the 50 day SMA on SPX. Big resistance too in the 1210-20 area on SPX which will be hard to get through:

On IWM the action yesterday was looking like a bull flag:

On NQ the declining channel I posted yesterday is still holding, though the upper trendline has been retested again since I capped the chart. Interesting that while ES has beaten yesterday's overnight high, NQ has not and neither has TF as yet:

The H&S I posted on DX was badly battered yesterday. DX broke back up through the neckline and almost went higher than the top of the right shoulder. If it makes a higher high than that then I would write this H&S off but at the moment it's still in play, just:

EURUSD is just chopping around at the moment but the bullish setup on GBPUSD still looks strong. The broken falling wedge trendline and rising support from the low were both retested overnight. Still looking good on the long side there:

On 30yr Treasury futures (ZB) I was looking at a triangle and since I capped the chart that has broken down. At least a retest of 142 support looks likely which is modestly bullish for today:

To finish off the post today I'll post a couple of interesting looking charts on instruments that I don't trade much. The first is the nice looking double top on German bunds that George Cavaligos of Naked Trader mentioned to me the other day. A break of 133 support would give a double-top target of 126.50 so this is an interesting looking short. Would that be bullish for equities? Possibly, though declines in other european sovereign debt values lately haven't been of course. This might just be a decline to reflect the decreasing creditworthiness of Germany as it slides further towards guaranteeing the sovereign debt of the P(FB)IIGS:

The last chart is an eight year weekly chart of USDJPY, which is the inverted Japanese Yen vs USD. There's is a very nice falling wedge suggesting a big rise in USDJPY (and therefore decline in Yen) may be coming soon. I'll be watching for a break of the resistance trendline, as if ever a currency both needed and deserved to be weaker, that is JPY, with Japan swamped by debt, and with the famous Japanese export surpluses now wiped out by the strong Yen:

I'm leaning towards seeing a green close on SPX today, but with a gap up likely that's not a particularly ambitious expectation. If SPX reaches 1210-1220 resistance I'll be watching to see what happens there. If this is just an oversold bounce we're seeing this week, and I think it probably is, then it may well fail there.

US Dollar Breaks Rising Support

I was talking yesterday morning about the very strong rally setup that might develop if USD futures (DX) broke rising support and we've seen that happen overnight. I've talked before about the relationship between USD and equities on moves, and commented that when they are in short-term sync, with equities falling and USD rising strongly, or vice-versa, then that's when we tend to see the fastest moves. That may well be what we are looking happening this week.

On DX I've been watching the strong rising support trendline and that has broken overnight. An H&S formed at the high and that has a target at 78 though I'd expect to see a deeper retracement. I've put the fib levels and targets on the chart. The technical target for a falling wedge is a full retracement of the wedge of course and you may wonder why I haven't mentioned that on the chart. That's because while rising and falling wedges are good indicators of a reversal, they don't actually make the full technical targets often enough for me to consider them seriously. The target remains of course and that might happen:

I was talking about an overthrow on the EURUSD chart yesterday, and that falling wedge has now broken up with confidence on some news from Europe this morning. EURUSD has touched the strong resistance levwel at 1.343 and that is obviously the first level that must be broken on the way up. After that I have targets at 1.361 and the 1.38 - 1.382 areas and I'm leaning towards 1.38 as my preferred target:

On GBPUSD the falling wedge there has also broken up with confidence. There's a significant resistance level at 1.569 but my preferred target is the next strong level up at 1.589:

I'll just look at 30yr Treasury futures (ZB) quickly, as it was the support break there that kicked off this rally in equities. That had a surprisingly strong bounce yesterday which is a concern on the bull side. The neckline of the H&S was retested, but that's something you usually see before the H&S has played out to target rather than afterwards. Nonetheless I'm expecting ZB to continue down and my preferred target is strong support and the possible H&S neckline at 140. If ZB holds 142 on an hourly close basis that will be a warning flag on the bullish scenario I'm laying out today:

The short term bullish scenario on equities is best shown on the SPY 60min chart. You can see the island reversal and double bottom on the chart of course, though I would add that island reversals that I've seen anywhere on the last few months haven't tended to last long. Of more interest however is the IHS that has formed with the neckline in the 120.1 area. That indicates to the 123.9 area and if we should gap over the neckline at the open today particularly, then we might well see that target made quickly:

On ES we now have a decent rising channel from the lows. I'm hoping that holds as if it does then it does that should deliver some nice in-channel trades, and also signal when this move up is ending. Channel resistance today will be in the 1217 - 22 area, and support is currently at 1190:

On TF I have a candidate declining channel I'm watching. TF was testing strong resistance at 704 at the time I capped the chart, but once that breaks then I'll be looking at channel resistance in the 730-33 area:

On NQ I have a possible declining channel upper trendline that was being tested at the time I capped the chart. Once that breaks I'll be looking at strong support turned resistance in the 2280 area, and then declining resistance in the 2330 area:

From a purely technical perspective, this is a very strong bullish setup in the short term that could carry SPX into the 1240-50 area while USD retraces. It's worth mentioning however that there is a lot of resistance in the 1215-20 ES that will be hard to get past, and that this is not a purely technical market. The mess in Europe hasn't gone away, and either good or bad news from Europe could have a big impact on the scenario I've outlined here. The wall of worry that any move up has to negotiate is in this case almost a wall of disbelief from the market that any strong rally can be sustained.

That said, the short term trend is now up, and buying the dips looks likely to pay off until at least Thursday, subject to any unpleasant surprises on the way. After that we'll see how it looks. Short term I'd be concerned to see ES break below 1190, and alarmed to see it break below 1180. If it breaks below 1170 then this strong rally setup would most likely be trashed entirely.

Return-Free Risk

I was amused this weekend to read again the wonderful phrase 'return-free risk' applied to sovereign bonds in Europe, which is a better description for sovereign bonds generally nowadays than the 'risk-free return' that used to describe these in days when interest rates were higher and government debts were lower.

The article (in The Economist) was talking about the latest European proposals to shoot the messenger on sovereign bonds, with restrictions on rating agency ratings changes for vulnerable sovereign issues, along with the usual attacks on short sellers and attempts to restrict the CDS market. Utter nonsense of course, and worrying for anyone who still thinks that governments in the Euro zone might have any idea either of what is happening, or what might usefully be done about it.The proposals might as well be designed to scare away any remaining potential buyers of Euro zone bonds and is characteristic of the arrogance and incompetence that we are used to seeing from central planners everywhere.

Nonetheless the outlook is looking promising this morning for a decent reversal back up from last weeks troughs on equities and the Euro. I was saying all last week that there was unlikely to be much of interest on the bull side on equities until 30yr Treasury futures (ZB) broke the strong rising support trendline there, and that was broken overnight on Thursday. On Friday morning I commented on twitter that an H&S had formed on ZB and that has played out to target overnight, finding some support at the important 142 support level:

That has delivered an impressive move up on ES, and at the time of writing that is suggesting that we might see a 30 point gap up on SPX. ES has recaptured the important support turned resistance level at 1180, and the next obvious target is the psychologically important 1200 level. That's also a potential IHS neckline, so I'll be watching any action at that level carefully:

This might well in my view be the start of a strong multi-day bounce. I've been reading a lot of analysts arguing for a bounce into the 1216-30 SPX level and for a nice chart on that possibility I'd suggest that you have a look at Serge Farra's chart at Stock & ETF Corner. You can see that here. Whether we bounce that far or not is heavily dependent in my view on what USD does here, so I'll be concentrating heavily on forex charts today.

First USD futures (DX). I've posted the DX chart a few times last week and I've been struggling a bit with the resistance trendline there. I had two candidate wedge upper trendlines, both of which broke up, and DX has reversed so far at the third option just below 80. I have the strong support trendline in the 78.8 area, and a break below that with confidence should open up a move to strong support in the 77.75 area. That would be a potential H&S neckline of course and might well then signal a larger reversal after a bounce there. Without a reversal on USD I suspect that any rally on equities will be short :

I think that support might well break on DX, and both GBPUSD and EURUSD are in promising looking bullish falling wedges that might well break up here. On EURUSD my spookily accurate EW chartist friend was suggesting a couple of weeks ago that the current move down should finish by 1.31, and that we should then see a strong C wave up from that low. When he made that forecast EURUSD was in the 1.38 area and the low so far is near the 1.32 level. In pattern terns EURUSD broke wedge support late last week and it looks as though that was an overthrow that would normally precede a break up. In the short term EURUSD looks as though it might be forming an IHS at the 1.34 level. If so I'd be looking for a pullback into the 1.332 area today to form the right shoulder:

There's another falling wedge on GBPUSD. Wedge resistance in the 1.56 has almost been reached overnight and GBP is pulling back from there at the moment. A break above 1.56 with confidence should be followed through and I'd be looking at the resistance levels at 1.569 and 1.59 there:

Oil has also bounced strongly overnight and I'm wondering whether it will retest the highs to make a double-top. The setup there is shown on the chart, and the action on oil in recent days is also an excellent example of why triangles can be tricky to play, as a small triangle formed on CL last week, broke down, and then resolved up hard

I'm leaning towards seeing a strong bounce on equities here. One reason is because my spookily accurate EW friend is expecting a wave up on EURUSD here, but the other is that the many huge H&S patterns forming on a number of indices and instruments all look a bit undercooked, with another few weeks needed to improve the symmetry of the right shoulders before they play out to the downside. A good representative example of those is the H&S forming on the EEM chart. This Emerging Markets ETF is something I often refer to as a useful leading indicator for SPX and if this H&S plays out, it would target a return to the March 2009 lows:

As for today the recent action on ES could be a bull flag, and if that plays out then we might well see a test of the 1200 level today. If we see some retracement then strong support is at 1180, and if that's broken we might see an attempt at filling the huge gap. I'd be surprised to see any retracement get much below 1170 ES.

Equities Attempt Holiday Bounce

I wasn't planning to do a post today, but it looks as though equities are attempting to bounce here now, so I thought I'd post the three main charts that look important right now.

On ES declining resistance from the highs has been broken overnight and that's a promising sign. f this continues then we may well see ES form an IHS at the 1178 neckline and I've shown on the chart how that would most likely look. If that forms and breaks up, the IHS target would be 1198:

More important however than that declining trendline on ES is the rising channel support trendline on 30yr Treasury futures (ZB). Until that breaks down I don't think there can be much of a bounce on equities. That trendline has been tested overnight and might break down. If it does break down with any confidence then the case for a bounce on equities will strengthen considerably:

On DX, USD futures have now broken up far enough away from the support trendline that we could see a decent bounce on equities without DX having to break the support trendline. The short-term setup looks promising for some reversal on GBPUSD and EURUSD:

We might well see a holiday bounce here in my view. If it happens that bounce may well fail at the test of 1200, and bulls shouldn't get excited until and unless ZB breaks support, but that could well happen. If ZB holds support and ES fails here though then the setup will start to look extremely bleak over the next few days, so anyone playing a bounce here should be appropriately cautious.

Everyone have a great Thanksgiving. :-)

Thanksgiving Thoughts

This will probably be my last post this week, unless Friday morning looks particularly interesting, as the markets are closed in the US and only open briefly on Friday. The markets are open elsewhere of course, which is worth bearing in mind on the forex markets particularly, and obviously everything's still open here in Britain, where for some reason the successful secession of the US from the British Empire has yet to be given the status of a national holiday.

I always think of my family links to the US on Thanksgiving, as my paternal grandmother's family were very prominent in early New York, and my ancestor Stephanus Van Cortlandt was the first native born Mayor of New York. It went downhill from there as his grandson Cortlandt Skinner, after being Attorney General of New Jersey and Speaker of the provincial Assembly, was a prominent loyalist general in the War of Independence. When the Brits lost he was forced into exile, losing all of his holdings in the US. I still have the original maps showing how much of Long Island was divided up within the family and look at it wistfully on occasion.

Backing the wrong side has a cost of course and General Cortlandt Skinner was just following a family tradition, as his father Reverend William Skinner fled to the US after one of the Jacobite rebellions in Scotland. He was a MacGregor, and the Gregor clan was proscribed in 1603, when King James I banned the clan name and made it a death penalty offence to use it. Skinner was one of the names that members of the family took during this period of proscription, which lasted until 1774 when the ban was lifted.

I was saying yesterday that a significant bounce wasn't likely to happen on equities unless we saw 30yr Treasuries (ZB) and USD (DX) break support, and that didn't happen. On DX the resistance trendline on the current rising wedge was touched overnight and we may therefore see some retracement there today. I'm currently leaning towards seeing this 70% bearish rising wedge break up, though a break down through the wedge support trendline should be respected:

I'l post the chart on GBPUSD as it provides a cautionary example of the dangers of playing counter-trend bounces in strong downtrends. You can see that after hitting the wedge support trendline, it has since bounced twice on the same trendline lower down without any return to wedge resistance. EURUSD has broken strong support at 1.343 overnight and that looks bearish as well:

On 30yr Treasuries channel support was tested yesterday and then channel resistance was reached overnight. ZB is retracing from there at the moment, but there's nothing much happening on the bull side on equities really until ZB breaks the strong support trendline for this move up:

ES broke strong support at 1180 overnight, and has traded as low as 1166.75 overnight. I'm seeing 1180 as strong resistance today, particularly as declining resistance is now just above there. I have falling wedge support at 1155 today and that is also the classical target for the broken symmetrical triangle of course. If ES doesn't break declining resistance, we could well see that today:

On the SPX chart I've been dusting off my range levels for the August to mid-October trading range, as we're now well back into it. I have SPX divided into range levels over that period with those ranges defined through a close into the next range having always led to a hit of the following range level. I have levels at 1178 and 1140, and a close below 1178 today would therefore suggest that 1140 should be tested before any serious bounce. We'll see if that still holds true now:

Last chart of the day is oil, where after another look I have redefined the broken channel as a broken rising wedge. That opens up the possibility that CL will now retrace all of the move from 75, but the initial target is still strong support in the 89-91 area, with the little H&S target at 92.5 of course:

Overall I repeat what I said yesterday, which is that in the absence of breaks of the strong support trendlines on ZB and DX, we aren't likely to see a strong bounce on equities. EURUSD breaking strong support at 1.343 overnight was also not a good sign of the bull side. I'm expecting strong resistance today on ES at broken 1180 support and the declining resistance trendline just above. A break of those with confidence would look bullish, but wouldn't be likely to last without those support breaks on ZB and DX.

One last thought for the day. I sent an assessment of a UK company, Icap, to my brother the other day, and though I thought I'd made the explanation clear and simple, he told me that he couldn't understand it, and that he thought it would be incomprehensible to anyone without a detailed knowledge of charting terms. He might be right and I've been wondering if I should write a glossary to make these posts more accessible to non-chartists. Any comments welcome.

Thanksgiving Bounce?

I was expecting ES to hit 1185 yesterday, which it did, and I was expecting that to hold, which it didn't. 1180 held though and on SPX that was an almost perfect 50% retrace of the rally from the October lows. It might hold and deliver a bounce into the Thanksgiving holiday. ES is at 1193 at the time of writing and there's a promising looking falling wedge on SPX that might deliver a bounce on a break up:

On RUT I have a perfect declining channel that should again deliver a bounce on a break up:

There's a lower quality declining channel on NDX that I'm watching, but I'll be looking mainly to SPX and RUT for direction:

Will we see that Thanksgiving bounce? Perhaps. If we do see it we will have to see the current rising support trendlines on DX (USD) and ZB (30yr Treasuries) break down. I have support in the 143'05 area on ZB:

Support is in the 78.12 area on DX. A break below the rising support trendline should deliver a decent retracement that would fit with a bounce on equities:

EURUSD and GBPUSD both look as though they are basing for a bounce. On GBPUSD that would be within an overall falling wedge that might deliver a bounce into the 1.576-8 area:

I've written off the interesting potential IHS on Vix that was forming as the right shoulder has extended too far. I do have an interesting looking triangle that might deliver a decent move in either direction:

Oil might also be basing for an oversold bounce here, though there is some H&S neckline resistance just overhead that might send it further down instead. The H&S target would be in the 92.5 area and that looks a credible target in the next two or three weeks regardless of what happens this week:

I'm leaning towards seeing a Thanksgiving bounce but to see that we'll have to see those formidable support trendlines on DX and ZB break downwards. We'll see whether that happens today but if they break down, and the little falling wedge on SPX breaks up, then I'd expect a strong bounce that should take us into the weekend and might last into Monday or Tuesday of next week. I have marked the key retracement targets on on the SPX, NDX and RUT charts.

If this goes the other way today and yesterday's lows are broken then it's hard to see where equities might find support in the short term. If those support trendlines on DX and ZB hold and they bounce strongly from those, then we could easily see SPX at 1100 or below in the next few days. If we do get a Thanksgiving bounce I'm not expecting that to last more than a few days before the bears take back control of the tape.

Possible Bounce Brewing

I was out for the first half of the session and was very pleased to see (buffs fingernails modestly) that DX and ZB both bounced at the support levels I had said must hold for the bear scenario. Overnight ES has fallen hard into a potential short term double bottom in the 1192 area and is now close to the 1185 level that I've been talking about as main support on ES. Here's how that looks on the ES 60min chart and I would draw your attention to the short term falling wedges confining the current downtrend. Those are suggesting that we may see a strong bounce in the 1185 area later on, and I have noted the wedge resistance levels on the chart:

There is another falling wedge on the NQ chart that's also well worth a look. Longer term I'm seeing the next big support for NQ at rising support in the 2110-20 area:

There is yet another falling wedge forming on the TF chart, so I'll be watching those carefully today. TF has now broken the triangle that formed there and I'm seeing longer term downside targets there in the 675 area and possible declining channel support in the 665 area:

Going back to the DX and ZB charts we obviously saw a strong bounce on USD futures (DX) on Friday and I'm watching to see how that develops today. DX is again testing strong resistance at the 78.60 level and we'll see whether that breaks today. If it breaks I have marked in two possible rising wedge resistance trendlines, but the main target is obviously the IHS target at 80.85 which would be a new high for 2011. If the support trendline that held on Friday morning should break that would be a strong warning to USD bulls to become very cautious:

30yr Treasury futures (ZB) have broken up to a new short term high overnight and the rectangle target is back to test the 2011 hghs. ZB needs to hold the 142'15 area on any retracement and I have some short term trendline resistance in the 144'12 - 144'14 area:

Oil has broken and retested the rising channel since the October low. My preferred retracement target is strong support and the potential H&S neckline in the 90 area:

Overall the bear case is looking pretty good here but the falling wedges on ES, NQ and TF are suggesting that we might make a short term low today followed by a strong bounce, probably to retest the support levels that broke last week. After that I'd expect more downside, but it's possible of course that these falling wedges will resolve downwards. If so the DX and ZB charts particularly suggest that equities may fall very hard.

I've been out much of the morning so the post is shorter than usual. I've also done some other charts that I haven't had time to post on EURUSD, copper, gold and silver and you can see those by clicking on their names in this sentence. My personal WAG for today on ES is that we see a bounce to the 1200 area now, then a test of the 1185 level, and then a stronger bounce to test the larger falling wedge upper trendline in the 1210 area. At that stage we would see whether the falling wedges will break up into a stronger bounce.

Triangles Break Down

Today's post will have to be short as I'm going out soon and will be out for most of the day. I have to be out most of Monday morning as well so Monday's post may also be short.

Obviously the symmetrical triangle broke downwards yesterday and broke down hard enough that I think it is unlikely to be a false break. This is disappointing from a probabilities perspective, mainly as these triangles are poor performers on downwards breakouts, with only a 48% chance of reaching the target in a break down. That statistic is in a bull market and Bulkowski hasn't even given a statistic for these in a bear market as they don't qualify as a high probability pattern in either direction in a bear market. You can see Bulkowski's page on these here.

Nonetheless a lot of technical damage was done yesterday and I'm expecting to see more downside. The triangle target, for what it's worth, is 1155 on ES, and I'm looking for at least a test of main ES support at 1185.

ES ended the day in a consolidation range yesterday and has broken up from that range overnight. In doing so ES broke the tight declining channel for the decline from the high on Wednesday and I have two potential upside targets today. The first is the test of broken triangle support in the 1227.50 area, and the second is the important support/resistance level in the 1238-40 area. On an hourly close over 1240 I would start to seriously consider the possibility that yesterday's break down was a false break:

I'm not expecting that though and one reason for that is that NQ also broke important support in the 2280 area yesterday. This should lead to more downside, and that support break has so far been retested and held overnight:

I was looking for two things to confirm a bearish breakout and I saw one of those. On 30yr Treasury futures (ZB) the consolidation range was broken to the upside, and that break is very bullish for ZB and correspondingly bearish for equities. I'm not sure whether ZB has formed a rectangle or an ascending triangle in that range and have marked both on the chart. Both however are high probability patterns that perform best on upside breakouts, and have an 80% and 75% probability of reaching that target respectively. The targets for both are in the 146'15 area, close to the 2011 high at 147.

One caveat here however. Broken resistance held as support initially overnight, but ZB has since broken back within the rectange/triangle. I have a shorter term support trendline at 142 and that needs to hold today or the break up will be in doubt. Marginal new highs or lows on RSI divergence can break back the other way hard if not followed through quickly, as we saw at the October low on SPX:

The other thing I was looking for as confirmation on a bear breakout yesterday was a new low on EURUSD, and that was something we didn't see. This is a concern, as EURUSD is either building a bear flag here, or making a short term double-bottom. If EURUSD is reversing then bears will be swimming against the tide, and it will be hard to make much downside headway. I'm expecting this to be a bear flag, and if so then we should see new lows on EURUSD soon. If we see a break up with conviction through 1.356 however, then a double bottom will be more likely, with a target in the 1.37 area and declining resistance slightly above that level:

I'll also be watching the DX chart on any EURUSD move up as rising support for this wave up is now at 77.80, and that trendline needs to hold, as if it doesn't the current wave up on USD may have finished. That would be a bad signal for equity bears here:

Overall though yesterday was a very encouraging signal that more downside is coming. Some follow-through is needed soon to confirm this and in particular EURUSD needs to make new lows soon to confirm that USD is still in a wave up. If USD is still in a wave up, we should see some impressive moves down on equities.