Bear Flag on S&P 500

The bulls failed to hold the 1320-2 area yesterday morning and I posted the SPX 60min chart on twitter in the afternoon pointing out that unless we were to see a more decisive break up, then what we are looking at on SPX is a bear flag with a downside target in the 1210-20 area:

ES bounced at rising / bear flag support there overnight so there's little to contradict that assessment this morning:

Bear flags don't always break down of course, but they generally do, and there's little reason to think that this one won't at the moment. I would still like to see another move up to hit the middle bollinger band, now in the 1339.50 area, but we may not get that. If we do it will look like a short entry level:

I posted the RUT chart the other day giving the obvious rally target as the retest of the H&S neckline there. Unlike the SPX H&S the RUT H&S has not yet made target of course. RUT has double-topped at the neckline retest so far, and the obvious next target is now a move towards the H&S target in the 720 area:

Is there anything that looks encouraging for the bulls this morning? Not much, though AAPL is trying to break up. So far however that rally has only reached the theoretical declining channel resistance trendline I've been marking on that chart. That's not particularly bullish yet for obvious reasons, but any higher would look more encouraging. Given the overall chart setup on equities though I'm doubtful about AAPL reaching the IHS target at 625:

I posted the chart showing TLT testing five year channel resistance last week and earlier this week. We are seeing a break over that at the moment, though we need to close a week above to kill that as resistance. If we see that I'll repost my charts for where I think bonds would most likely be heading on a major breakout:

I mentioned yesterday morning that the next significant resistance was at 83.50. I have a static resistance level and a rising resistance trendline in the 83.5 to 83.75 area and that would be my top pick for a reversal area if we are to see USD retest the IHS neckline. We may well reach that resistance area this week:

On my bigger picture 32 year USD monthly chart declining resistance from the 1985 high is in the 92.5 area, and that would be the target I am mainly looking for rather than the IHS target at 90.5. That test would be very important, as there is also a possible double-bottom on the chart that triggers a target of 105 on a break over 89, with the only really strong resistance above at 92.5. Worth mentioning that again here as we may be making that test in a few months:

I have SPX bear flag support in the 1303-5 area. I would like to see a test of 1340, and that's possible, but that becomes less likely on a break below flag support. If we do see a break below I will be considering two main options. The first will be a potential double-bottom that holds above the SPX 200 DMA in the 1283.50 area on a closing basis. On a break below there I would be looking for a move well below 1250 that would most likely see most or all of my large and very bearish patterns across various indices finish forming and test their pattern support necklines. We'd then see what happens then, but obviously that could get very ugly.

Mean Reversions

I'm a trendline and support/resistance level chartist mainly, and these should be important tools in any chartist's toolkit. Both of these are what I would describe as linear support/resistance level tools, as in the case of a trendline it is a straight line moving upwards or downwards at an angle, and in the case of support and resistance levels and areas, these are static levels that have been demonstrated by past market action to be important.

These can last a very long time indeed, and a good example of that can be found on the BP monthly chart, where I used a 13 year support level on 25th June 2010 to argue for a low in the 26-7 support area, and a three year declining channel to argue further that BP might well close June back above 28. BP bottomed the next day at 26.51 and closed June back above 28. You can see that post here, and it's worth noting as an aside that BP then recovered back to the top of that declining channel, made a potential double-top there, and has since retraced half of the move up from the 26.51 low. The point I'm making is that trendlines and support/resistance levels can last a very long time and have real force.

They're obviously only a part of the tools in an analyst's toolkit though, and I'd like to look in more detail today about bollinger bands and moving averages as they relate to the technical picture that we are looking at on SPX at the moment. On the SPX daily chart below I have the SPX daily bollinger bands since October, and have also marked the daily 50, 100 and 200 SMAs.

Bollinger bands are obviously a mean reversion tool, with the middle bollinger band being the 20 period SMA, and the upper and lower bollinger bands on a standard setup are two standard deviations away from the 20 period SMA. Moving averages and bollinger bands are therefore two non-linear methods for assessing support and resistance levels.

So how have these performed since the low last October? I've marked eleven tests of the daily middle bollinger band in the period since then, and of those four reversed at the middle bollinger band, two closed beyond the middle bollinger band to reverse at the 100 SMA, one closed beyond the middle bollinger band to reverse at the 200 SMA, and four closed beyond the middle bollinger band to hit the far bollinger band.

How does this relate to what we are looking at now? The daily 200 SMA is a key bull/bear dividing line, and is support at 1282.90, slightly below the current retracement low. The middle bollinger band is obviously the next key target and resistance level, and that is at 1344.22 today, with a static resistance zone in the 1340-3 area. A daily close above there opens up a test of the 100 SMA. The 100 SMA is at 1356.83, with the valley low for the April double-top at 1357.38 as static resistance. This is the second key resistance level. A close above these opens up a move to the upper bollinger band, currently at 1406.70, and would most likely mean that 1291.98 was a retracement low that will last a while:

Short term SPX is struggling above the double-bottom neckline on the 60min chart, and while the possible triangle I mentioned yesterday really needed another touch of the lower trendline to confirm it, the upper trendline broke yesterday and then retested as support. The bulls need that to keep holding in the 1320 SPX area today:

On the SPX 15min chart I have a possible rising wedge forming, though it's too early to describe it as one for certain. If that wedge continues to form then we will most likely see this rally fail in the 1340-3 area. In the short term rising support from 1296.53 is again just above 1320, and a move below 1320 would be a signal that this rally may have already ended:

Is there any reason to think that this rally may already be topping out? Yes, though I'd be happier with a touch of 1340 as a near miss of the middle bollinger band on the daily chart. The Vix is showing clear support at the IHS neckline and the middle daily bollinger band there. That might break of course, but until then it is limiting any rally on equities:

The other reason is the AAPL chart. This is at a level that suggests that we will see failure here or rally hard, but as of the close yesterday it is clearly out of the falling wedge and testing the IHS neckline. A clear break above would look very bullish, but until then it is testing strong resistance and repeatedly failing there:

The last chart today is the updated daily IHS chart on USD. Obviously we have a conviction break of the IHS neckline and the pattern target is 90.5, but short term USD is looking rather overbought and is approaching a significant resistance level in the 83.5 area. We might well see a reversal there to retest the IHS neckline:

For today I'll be watching the 1320-2 SPX level as short term support, and the 1340-3 level as the next upside target and strong resistance.

First Resistance

We have a promising setup for a decent bounce on SPX but it has been failing at the first decent resistance so far. It may not get any higher, but I think it's too early to write it off altogether yet. We also have a possible triangle forming on SPX and if we don't see a break up today, then rising support from the low and triangle support is just over 1300:

An obvious target for any rally here, as I've mentioned frequently, is the middle bollinger band on the daily chart or the 20DMA. That's now at 1347.50 and we might see a test of that in the 1340 area on Thursday or Friday:

I've mentioned before that the development of a strong support trendline in a downtrend or of a strong resistance trendline in an uptrend is generally a signal that a channel or pattern is forming. We have such a support trendline on ES at the moment and I have drawn in a (currently wildly speculative) potential channel resistance trendline in the event that this rally gets any further and that a channel is developing. Obviously if the developing pattern were something else such as a wedge this potential target and resistance would be elsewhere:

There are good reasons to think that this rally may get no further. I posted the Vix chart the other day showing that the pullback there is holding the IHS neckline and that is decent support:

On the Russell 2000 support at the October high was broken a few days ago and that has since been acting as resistance. As with SPX a possible double or W bottom has formed but this rally may get no further than this resistance level. If it doesn't, then RUT is obviously forming a bear flag:

On the potentially bullish side there are a couple of things to consider today. The first is that there is now some positive divergence on the EURUSD daily RSI. That doesn't mean a lot but would start to look promising if EURUSD were to rally over the current possible double-bottom neckline at 1.2625:

I posted a longer term TLT chart the other day showing that TLT had hit five year rising channel resistance on this latest move up. That's holding so far and it's possible that we may have seen the TLT high on this move. I doubt that but if that were so then the outlook for equities would look a lot more bullish:

The potentially bullish pattern that catches my eye though is the falling wedge on AAPL. This has attempted to break wedge resistance once and has fallen back. A more definite move that cleared the last high at 576.50 would look bullish. I've highlighted the strong support zone that has held in recent days. A move below would target wedge support in the 510 area and a break below that support would target 390. In that case this failed break up from the wedge would have been a bearish wedge overthrow but there's no reason to think that is likely as yet:

The bottom line here is that the Euro crisis is far from resolved, seasonality favors the bears, and the overall technical picture on equities looks potentially dire. The rally off SPX support so far looks corrective and we may well just be seeing equity indices form bear flags here. This rally might have some more legs, but if so, then I'll be looking for decent entries to re-short from. It would be nice to see a decent short term support trendline form but the rally so far has been too weak to do that.

Corrective So Far

I mentioned a couple of days ago that I was looking for a slow rally with deep retracements to signal that the rally is a corrective bounce, and that's certainly what we're seeing so far. The rally is on, and ES has put in both a higher low and high now, but neither was much higher than the previous one. That said we still have a possible W bottom in play and ES is struggling to get over the pattern neckline and hold it at the moment. I have rising support from the last low at 1318 ES and we'll see if that holds today. You can see from the chart that the current move has more than a passing resemblance to a rising wedge at the moment. We'll see how that develops:

On the SPX 60min chart the neckline has not yet broken on this possible W bottom of course. This is a promising setup for a short term low though there are some strong resistance levels in the 1340 and 1357 areas that would be obvious points for any rally to fail before reaching the W bottom target:

I've been mentioning the middle bollinger band on the daily chart (the 20 DMA) as an obvious rally target. I've also mentioned that this is dropping rapidly and it is now at 1351.77. If SPX keeps chopping around for another three days then this would be close to the strong resistance level in the 1340 SPX area:

Looking at the AAPL chart, yesterday's strong setup looks less encouraging this morning. The IHS neckline was tested, but only for a marginal new high on negative RSI divergence. The setup remains bullish as long as AAPL stays over the right shoulder low at 552.58, but any lower than that and I would be wondering about a bearish overthrow on this falling wedge. These are bullish patterns generally, but they do break down 31% of the time of course:

Looking at the Vix chart, there's strong support that would probably need to be gapped under for equities to rally much further. Vix tested the middle bollinger band two days ago and has been holding the IHS neckline as support during this retracement so far. That might well continue to hold:

I thought that I should have a look at GDX today, as the setup there is looking interesting. I'd been posting the H&S there as it developed over the year or so until it broke a few weeks ago. I gave the pattern target at 31-2 and marked a support level at 39 on the chart. We're seeing a bounce from the first test of that 39 level so far, and I'm wondering about a possible test of the broken H&S neckline in the 47.50 area here:

Looking more closely at the GDX chart, you can see that declining resistance from late February has broken up, and that an IHS formed at the low which is now playing out. The target is 48.70 with strong resistance at 47.50 and the 48.40 areas. In the event that the pattern makes target then the next resistance level above is in the 50.80 area:

To close today I have the USD chart. Obviously I've been following this for months and the IHS finished forming the other day. It has since broken up, and while it looks very overbought short term, this is obviously a strongly bullish setup for the next few months with the IHS target at 90.50:

I'm very cautiously bullish today as long as ES can stay above rising support in the 1318 area (and rising). If that breaks we might see another deep retracement. My view is that we are most likely currently in a relief rally with more downside likely after this peters out.

1,2-3?

Obviously I've been posting a lot of seriously bearish looking long term charts in recent weeks, and I should take a moment just to emphasize that I don't think that it's time yet to buy in a large supply of ammunition and baked beans and head for the high ground in preparation for the end of the world as we know it. What I am saying is that these setups need to be borne in mind as part of the overall technical mix, and that these patterns being at a late stage of development, at a time when we are looking at the potential for the forced breakup of the eurozone and a string of possible sovereign defaults, is definitely something to think about. I'll be posting some more of these charts today looking at US equity indices.

Short term however we have a distinctly bullish looking setup developing on SPX after the deep retracement from Tuesday's high. Obviously the declining channel from the high was broken on Tuesday, which was bullish. The deep retracement after Tuesday's high to establish a higher low has then set up a possible W bottom, which has a target in the 1365 area on a break over Tuesday's high at 1328.49. This setup also looks classically like a first wave up, followed by a deeply retracing wave 2, and that would put us currently in a wave 3 up so we'll see how that develops. There are a couple of other comments to add about this however.

The first comment is that I've mentioned before that 65% of potential double-bottoms or tops never get back to the pattern neckline, and that it's therefore not wise to take these too seriously before seeing a move back past there to trigger the pattern target. The second comment is that what happens after the pattern triggers is very important. In a strong bear trend bull patterns will often fail to make target and vice-versa. You may recall that the last double-bottom on SPX near the highs failed to make target and that was a good example. If we are still in a strong bear trend then this pattern too may well fail to make target. Equally if the pattern does make target, then that would be a significant signal that we may well no longer be in a strong bear trend:

Is there anything to support this bullish setup? Well not much on EURUSD so far, but I've definitely got something on AAPL. I've been following the very nice falling wedge on AAPL this week and it confirmed as a strong pattern on Monday (three touches both trendlines) and has broken up yesterday. You have to be a bit careful with wedges as they have a nasty habit of breaking in one direction (overthrow) and then resolving in the other, but provisionally that break looks very bullish. What makes it look more bullish still is that this can also be read as a mostly formed IHS with a neckline in the 575 area. On a break over 575.88 I'd be looking for an IHS target at 625. If we see that move it would most likely be in the context of a strong general rally on equities:

The possible double-bottom on EURUSD that I was looking at yesterday morning died swiftly, and the only possible pattern I'm considering this morning is a currently wildly speculative possible IHS that might form at 1.282 resistance as the neckline. If that formed and played out it would target declining resistance from the February high but as I said, currently that's wildly speculative. The positive RSI divergence on the 60min chart is striking though, and if we were to see a strong rally on equities I'd expect EURUSD to at least stop falling much while that happened:

Well that's the cheery charts out of the way so I'll post some US equity indices for my apocalypse chart collection. It's a tougher call doing this for the US, unlike the rest of the world where most indices (that haven't already melted down) look to be on the verge of possible meltdowns, so my US charts are very selective and it should be borne in mind that on the Nasdaq and Wilshire 5000 particularly, there are no obvious large bear patterns forming. Of the indices where they can be seen, the NYA Composite is the largest and there is a decent looking H&S forming there with a target just above the 2009 lows. Worth noting though that the top of the right shoulder is close to the top of the head than the top of the left shoulder, so the symmetry of this pattern isn't great:

There's also a very decent topping setup on the Russell 2000, where the high this year was a perfect retest of broken rising wedge support from the 2009 low. There is a decent possible double-top setup from the 2011 and 2012 highs that would target just below the 2009 low on a break below the October 2011 low:

There's also a possible double-top setup on Dow, though the tops are 3.6% apart, which is within the 5% acceptable range, but too far apart to make this a decent potential pattern in my view. The target would be the Nov 2008 low in the 7450 area on a break below the October low:

The nicest technical setup however is on the SPXEW, the equal weighted SPX index, where there is a potential perfect double-top at the 2011 and 2012 highs, with both of those those tops at failed tests of the 2007 high. This is a nice looking setup, and if we see a break of rising channel support from the 2009 low in the 1775 area, then I would be looking at this very seriously:

For today my lean is bullish and I'm looking hard at the potentially very bullish setups on SPX and AAPL to see whether we see resistance breaks there. If we do then my lean will become more bullish. I have rising support from yesterday's low on ES just under 1310 and a break below that would throw the bull scenario into some doubt.

I have a request today. My brother is looking for decent track record 1X ETFs to short financials with. Suggestions welcome.

My Apocalypse Charts

I've posted quite a few charts in recent weeks and months that suggest that we could see a very bad 2012 indeed on equities, EEM, MSWORLD and so on, and I jokingly referred to my 'Apocalypse Charts' the other day when chatting to a trader friend. She asked me what I meant, and I replied that they were the various longer term charts suggesting that the next big move on equities might be to test the 2009 lows.

I added that I'm not necessarily expecting these to play out, but that they need to be considered as part of the technical mix here, and that if these patterns, mainly H&S patterns with some double-tops there as well, were to complete forming and then break their respective necklines, then that would be a major crash warning that could not be lightly disregarded. There are several such charts that I have posted here so far, and I'll post some more here today. It's fair to say that most major developed world stock indices are in the late stage of developing these patterns, excluding some US indices and those such as Greece, Italy, Spain, Japan etc where they are already either below or not far above those 2009 lows.

I remarked to another trader friend yesterday that the setup was encouraging for a rally higher on SPX to test the 1340 or 1357 levels, but that I'd be much happier about that if we saw a two-way trade, with moves up balanced by deep retracements so that the overall move did not look impulsive. Shortly afterwards the SPX peaked for the day and on ES we have so far seen a pullback of over 20 points since then. Support is at the lows and until those are breached (on SPX) I'm not seeing this as immediately bearish. If we do see a decent bounce the middle bollinger band on SPX is the obvious target, but that it's worth noting that this has dropped 3 points to 1359 since yesterday morning. This is a target that will decline steadily as we move towards it.

The relief rally may already have ended, but there has been an encouraging development on EURUSD that might help deliver a larger one, and that is that EURUSD tested the January low overnight and slightly undercut it, and is rallying from there so far on positive RSI divergence. If EURUSD can hold that low, that sets up a potential double-bottom with the target in the 1.30 to 1.304 area, approximately a 50% retracement from the rally high. We'll see how that goes:

I was talking about a possible falling wedge on AAPL yesterday morning. That is now a confirmed falling wedge after the reversal at declining resistance yesterday. This is a 69% bullish pattern, though until it breaks up the next obvious target is at wedge support in the 515 area, so that is currently pointing down. As and when it breaks up though (or 31% chance downward break of course) it should be a decent signal for overall market direction:

I've done three new charts to add to my apocalypse chart collection today and the first is on EWC, the Canada iShares ETF. There you can see a very nice H&S that has mostly formed and indicates to the 2009 low area:

There's another on EWA, the Australia iShares ETF, this time an upsloping neckline H&S. Worth noting on this chart is that there is also a rising channel in play from the 2009 low, and that this would make reaching the neckline look rather more bearish. The target would be in the 11.5 area, some 25% above the 2008/9 double bottom:

There's another horizontal neckline H&S forming on the FTSE. A hit of the 2010 and 2011 lows in the 4790 area would complete the pattern and the target is again in the 2009 low area:

If this were to play out, what would happen on bonds? I posted my long term channel chart a couple of weeks ago suggesting that we might see a move on 30yr yields to the 2% area. On the TLT chart the upper trendline of a five year rising channel is being tested and on a break above we might see a very large extension. The action over the last year obviously has the look of a large bull flag:

What might we see on oil? Well I have a possible double-top in play there, with a target just below my strong 14 year support trendline in the 40 area, and that would be the obvious target there on a break below 75:

As I said, I'm not saying that these will play out but when we see charts like these, we need to look around to consider whether there is anything developing that might precipitate a major crisis and flight from risk in the near future. Hmmm .....

For today I'm cautiously bullish on SPX and EURUSD, though both are fragile and might break down. Some major indices, Dax and FTSE among them, saw retests of broken support trendlines yesterday so it's possible that this rally failed at the high yesterday. A badly timed statement about Greece might send send both SPX and EURUSD to fresh lows quickly but until then there's some scope for further sideways to upwards action in my view.

Rally at Support

ES broke up through my short term declining resistance trendline at 1300 yesterday and we're seeing the rally from support that I was talking about. Where to now is the question? The first level of resistance is now just above, and that is at declining channel resistance in the 1323 SPX area. Second resistance is at a retest of broken support at 1340. Third resistance is at a test of broken support at 1357. A break above 1357 might well mean that this pullback is over but I'm thinking that seems unlikely at the moment. Here's the setup on the SPX 60min chart:

Looking at the SPX daily chart it's worth noting that the middle bollinger band is at 1362. By the time we reached 1357 that would most likely also be in that area and would strengthen resistance there. As I said, a break above that would look distinctly bullish:

Looking at RUT, there are two obvious targets / resistance levels there, and they are the October high at 769.46, and a retest of the broken H&S neckline at 780. A break above 780 wouldn't invalidate this H&S, but it would weaken it:

I don't often post individual stocks here, but AAPL is well worth keeping an eye on for this bounce. A strong support trendline has developed on AAPL, and while strong resistance trendlines are common in a decline, strong support trendlines in a decline are much rarer and usually signal that a pattern is forming. That pattern would most likely be an (ultimately bullish) falling wedge and wedge resistance is in the 572 area and that is the most likely level for AAPL to reverse back down. Only two two touches on this resistance trendline so far though so this won't confirm as a falling wedge unless we see a reversal there:

On Vix we saw a close back within the daily bollinger bands yesterday and that has triggered a Vix Buy (equities) Signal. That signal would confirm on a lower Vix close today. Personally I don't rate these signals at all but I know a lot of others follow them. Of more interest is the middle bollinger band in the 19.5 area, which is the obvious target if this rally doesn't fail at first resistance on equities today:

I'm going to close with a close look at USD and EURUSD today, as I think they are very key to what happens in the next few weeks and months. I posted the large IHS on USD last week after it completed forming, and we are seeing a pullback from the first test of the IHS neckline, which is natural and strong resistance:

Is there a mirror for this pattern on EURUSD? Yes there is, though it isn't quite as clear. It could be read as a horizontal neckline H&S which has just finished forming, but I would prefer to interpret this as an upsloping neckline H&S that has already broken down and retested, as I think that's a better fit technically. The H&S target is in the 1.11 area that way, and the current decline is within a declining channel with resistance and support at just under 132 and 120 respectively. The next obvious move is a move under 120 to channel support:

There are a number of reasons that I prefer the upsloping H&S, including the shoulder heights and overall symmetry. Another reason though comes from the longer term weekly chart, where I have a strong seven year support trendline that will hit the 110-111 area this summer. That is the natural level for EURUSD to hit and find support, if it's going to survive 2012, and is a perfect hit with the H&S as I have interpreted it:

The fundamentals for EURUSD here stink, and I'm expecting to see a hit of 111 in the next few months. The question really is what happens there. Time will tell as always.

For today I'm thinking we may well see this rally fail at first resistance today. A break over 1323 SPX would open up a test of 1340, and a break over 1340 would open up a test of 1357. I'm not expecting 1357 SPX to be breached on this rally and if it is breached with confidence then that would look distinctly and unexpectedly bullish. It's worth mentioning that EURUSD is still failing at 1.2813 resistance and is now doing so on 60min RSI negative divergence. A failure for EURUSD here and now would support failure on equities here and now as well.