Rolling Over

Just for a change of pace I'll mainly be using futures charts today. Not much to add to yesterday's charts on SPX with a doji at the upper bollinger band on the daily chart, and the rising wedge I showed on the 15min chart has now broken the support trendline as expected.

Rising support has also broken on the ES 60min chart on strongly negative 60min RSI divergence. If you look at the last couple of months on the chart you can see that these divergences have been a very good signal of a coming reversal:

Much the same on the NQ 60min chart, though on NQ this is a much stronger resistance area. Most of the last two months has been in a well defined trading range and we hit the top of that on Friday. Again the RSI divergence are worth a close look:

On GBPUSD, which I prefer to EURUSD as a gauge of the anti-USD trade, a small H&S has formed and broken down. Don't short USD today and this adds to the short term bearish feel here:

The rising wedge setup I was looking at on oil last week is still very much in play. I am wondering whether a double-top is forming and we might see some more upside there to make it. There is a very nicely defined resistance trendline offering a nice short entry on any hit of that:

Gold is moving up towards a test of the very important 150 DMA at 1642. This was key support from 2008 to 2012 and, as you can see from the chart, has been important since as well. Possible failure there though I'm leaning towards at least a test of declining resistance now just under 1680:

The technical setup is shifting here, subject to the ECB and Germany. If Merkel unlocks the ECB's printing presses then we might see quite a boost to equities and that might well last several months. I'm still doubtful about that happening but it might and the technical picture on bonds and USD particularly is weakening. Last Wednesday I was a medium term bear leaning short term bullish. Today I'm leaning bullish medium term as long as SPX channel support in the 1335 area holds, but I'm leaning short term bearish.

If we see a reversal and retracement here, which seems likely, then IF we are now in an uptrend I would be looking for strong support at the daily middle bollinger band and 100 DMA around 1360 SPX. If that folds then I'd be looking at channel support in the 1335 area. If that folds then it will be unlikely that we are in a medium term uptrend and I'll switch back to medium term bear mode.

Possible Bull Breaks

We saw some big moves last week on the basis of talk by Draghi, backed up by Merkel, that the ECB would take whatever action necessary to save the Euro. Talk is cheap though and Merkel hasn't yet confirmed that she will accept the ECB printing money to save sovereign EU nations in trouble. I suspect she won't, and unless she does this move doesn't look likely to last long. Be that as it may some interesting things happened from a technical perspective last week so we'll go through those.

On the SPX daily chart the SPX closed at the upper bollinger band on Friday. This is an obvious time to look for some retracement though I note the overnight action on ES looks like a bull flag so far. If a new uptrend has started then there should now be strong support in the middle bollinger band and 100 DMA area around 1360:

On the SPX 15min chart I posted a chart on twitter on Friday night showing a perfect rising wedge from Wednesday's close and marked negative divergence on the 15min RSI. Some retracement looks close:

On the SPX 60min chart the low last week established the lower trendline of a rising channel from the June low. Until this was established the lack of a support trendline looked bearish. Not now though and only a break below this channel will put me back firmly into bear mode:

There were significant looking breaks on related markets last week as well. On USD the support trendline from April broke intra-day. If that follows through then the next big support levels are at 81.5 for the IHS neckline and 80 for rising support. It's worth noting here though that if the ECB starts printing lots of Euros that should be bullish for USD

The reversal on TLT looks ominous. Rising support from April broke on the 60min chart and there's a potential double-top on the weekly chart, with a marginal new high on negative RSI divergence. Strong support is still at 124 but if that breaks I'd expect a test of the main rising support trendline in the 117 area:

Copper is still unimpressed and continues to form the bear flag that has been forming for several weeks now, within the context of the huge H&S forming there:

I'm still not convinced that any bull breakout here has legs but we'll see. Short term I'm watching the rising wedge on the SPX 15min chart for the retracement that we'll most likely see soon. Longer term if the bears are to regain control then the rising channel on the SPX 60min chart will have to break down.

Gold Breaks Up

SPX closed at the 100 DMA, the higher resistance level I gave yesterday morning. This is an obvious point of failure and we could well see that failure here. A break up over the 100 DMA opens the way to a likely test of last week's highs and the upper bollinger band in the 1380 area:

On the 60min ES chart we're seeing resistance at 1360, which has been a significant support and resistance level in the last few weeks. Again a break over with any conviction would strongly suggest a test of last week's highs:

This is a very important area for both equities and USD. A break over here opens up the possibility, absurd as it seems given the earnings and economic backdrop, that the bullish rectangle scenario that I outlined earlier this week on ES might play out. On USD the plunge yesterday took USD to rising support from April. A break below suggests another test of the IHS neckline in the 81.5 area and leaves an ominous setup of a marginal high and short-lived break over strong resistance on sharp negative RSI divergence on the USD daily chart. You can see the importance of this level on both EURUSD and GBPUSD as well and on balance I would expect this to hold:

Gold broke up from the symmetrical triangle yesterday and, if this isn't one of those false breaks which make triangles very treacherous, the obvious upside target is at declining resistance in the 1680 area, with very significant resistance on the way at the 150 DMA in the 1640 area. There is the possibility IMO that we are watching the start of a big bull run on PMs so watch this space:

The silver chart is worth showing here too as silver is testing the 50DMA, which has been very important as support and resistance. If this isn't a false breakout on gold then silver should break over that shortly:

Earnings have been disappointing so far, and that was expected given the stagnant revenue reports last quarter. The fundamental economic backdrop is weak and getting weaker. If Draghi was in charge in Europe then we might see a rally based on him papering the world with freshly-printed Euros, but he isn't in charge. Merkel calls the shots in Europe and she has to answer to a German public firmly against any such action. I'm treating this move as just being another rally until demonstrated otherwise.

Ozymandias Speaks

Draghi made an impressive announcement this morning that the Euro is irreversible and, in effect, that the ECB will do whatever it takes to save the Euro. Both EURUSD and ES have spiked up impressively this morning on the strength of that. Now this won't be the first time in history that some European has made grandiose statements that didn't stand the test of time, many will recall that a past German leader made not dissimilar statements in the 1930s that didn't work out, but be that as it may, in the short term this looks impressive.

In honor of Draghi's bold statement I am dusting off one of my favorite poems by Shelley to share with you this morning:

I met a traveller from an antique land

Who said: "Two vast and trunkless legs of stone

Stand in the desert. Near them on the sand,

Half sunk, a shattered visage lies, whose frown

And wrinkled lip and sneer of cold command

Tell that its sculptor well those passions read

Which yet survive, stamped on these lifeless things,

The hand that mocked them and the heart that fed.

And on the pedestal these words appear:

`My name is Ozymandias, King of Kings:

Look on my works, ye mighty, and despair!'

Nothing beside remains. Round the decay

Of that colossal wreck, boundless and bare,

The lone and level sands stretch far away".

Why did this particular poem spring to mind? Who can say? On to the markets.

I was talking this morning about the setup for a bounce and possible return to last week's highs. On the ES 60min chart we now have higher lows and highs from Tuesday's low and since I capped this chart ES has been as high as the 1355 area. Short term an uptrend is established and we'll see where that goes:

On the SPX 15min chart I have a support trendline from the low on Tuesday that looks likely to hold this morning. We're already above it on ES but I'm watching the 1353 area as a possible IHS neckline so we'll see whether SPX opens above it:

Also in the 1353 area today is the middle bollinger band on the daily chart so that is very much the key resistance level to watch today. the 100 DMA is in the 1359 area:

I've been mentioning this week that EURUSD has now completed a massive H&S pattern that has taken nine years to form. The neckline is an obvious support level of course and a bounce from there is not unexpected. Short term declining resistance has been broken and I have next declining resistance in the 1.245 area, and main declining channel resistance in the 1.28 to 1.285 area. If the declining channel breaks I will be very surprised, and pledge to retract 25% of the uncharitable 'thousand year reich' jokes that I have been making about Draghi this morning:

I posted the symmetrical triangle on gold a couple of days ago, giving the next likely target at triangle resistance which (buffs fingernails modestly) was hit at the high yesterday. In the absence of a breakout here the next target is triangle support just over 1560:

The last chart for today is AAPL, which I was looking at this morning as it is an important market bellwether. AAPL tends to trend well and form decent support trendlines to signal important reversals so the breakdown yesterday morning looks very significant and I'm expecting more. I have important support areas in the 565 and 525 areas and a break below 522 would trigger a technical double-top target at 400. Short term we could well see a bounce to test broken rising support in the 590-600 area:

I'm only seeing this as a bounce. The very bullish scenario to new highs I outlined yesterday morning seems unlikely in the absence of major Fed intervention, which seems unlikely unless the equities beat the June lows by a decent margin. Still, a new short term uptrend is established for the moment. We'll see where that goes.

Bullish Options

Well we got the test of the last SPX low that I've been looking for, but we haven't seen that low broken yet, and the RSI setup on the 15min and 60min charts looks promising for a bounce so we'll see. On the daily chart SPX found some support at the 50DMA and closed above the 1335 IHS neckline again. That neckline has now been tested so many times that I'm inclined to write the IHS off altogether, but at the least it is obviously a very strong support level. If we see more downside the lower bollinger band and the 200DMA are at 1320 and 1315 respectively:

On the SPX 15min chart there is very marked positive divergence at yesterday's low and an interesting looking triangle has formed, though as patterns require crosses between the trendlines as they form, it doesn't really make it as a pattern. The 15min chart looks bullish here on a break over declining resistance in the 1340 area and I'm watching a possible IHS neckline in the 1353 area:

On the ES and SPX 60min charts I've been talking about the possible double-top since last week. There is another possibility worth mentioning though that requires a clear range to form, and that is a bullish rectangle. If a rectangle is forming the next move would obviously be a return to last week's highs, and I'll be wondering seriously about that on a break over declining resistance in the 1336 area. Again, very clear positive divergence on RSI at yesterday's lows:

I've been looking carefully at the CL chart this morning, and at first glance the action since the rising wedge broke looks like a bear flag. On closer inspection however there is a clear IHS with a target in the 90.5 area on a break over the 89 area. That would deliver another test of the broken wedge support trendline and that is very much in play here. Longer term this chart still looks bearish:

One of the oddities about this rally since the early June low has been the way that bonds have diverged from equities. The consolidation on TLT that I was watching through June broke up, the possible double-top that I thought would most likely fail seems to have done so, and TLT is in a healthy looking uptrend since early April. I have short term rising support in the 129.2 area, and main rising support from early April in the 128 area. As long as this TLT uptrend looks healthy any prospect of a major upward breakout on equities seems doubtful:

The technical setup for a reversal back up here looks good, and if we see declining resistance break on ES and SPX I'll be leaning bullish for the moment. On the upside I'll then be watching the 1353 SPX area to see if the right shoulder of an IHS forms there. If we see more downside short term then a move below the last low at 1325.41 looks distinctly bearish and triggers that possible double-top. The lower bollinger band at 1320 and the 200 DMA at 1315 would be decent support though, and we might well see a strong bounce from that area before seeing more downside.

Flags

I was saying yesterday morning that there would most likely be a bounce before any test of the 1325 SPX support level, and we saw that yesterday afternoon. So far that bounce looks like a bear flag, and if we see more upside today I have a target in the strong resistance area 1357-63, with the gap fill from yesterday morning at 1362.66 SPX of course. The middle bollinger band held on a closing basis, and if we see a close below 1350, and a break of rising support from the June low on the daily chart then the next obvious support and target are the lower bollinger band and the 200 DMA in the 1315 area:

On the 60min chart the support trendline from the June low vanishes. I've sketched in three possible contenders but there's nothing usable. The key support levels to watch are the 1335 area (IHS neckline), and 1325.41, the last low and possible double top neckline / valley low:

I was looking at the DAX daily chart this morning and it's worth noting there that the bounce from the lows a few weeks ago looks like a retest of broken support from October and a failed attempt to recover the important 100 DMA. This looks like a bear flag but that flag has not yet broken down of course:

A reader yesterday suggested that my huge H&S on EURUSD was a bit of a stretch and well, beauty is in the eye of the beholder I guess. H&S patterns are often unpleasing to the eye however and this is a good time to review the last ugly H&S on EURUSD which broke down late last year. Again it isn't particularly pretty, but it has behaved perfectly as an H&S so far and it's worth mentioning at this stage because the target I gave at the time was the 1.12 area. That target is still very much in play though obviously the larger pattern is suggesting a move much lower. You often see a smaller H&S pattern at the top of the right shoulder of a larger pattern so these should be considered  in combination:

The rising wedge I posted on CL yesterday has broken down and retested. This is a very bearish looking setup and I'm expecting more downside:

I'll finish with gold today, where there is a very nice symmetrical triangle from the May low with the next obvious target in the 1610-5 area. As and when this breaks it should deliver a decent move, though it's worth noting that triangles have a nasty habit of breaking one way before resolving in the other. The possible double-bottom indicating to new highs is worth bearing in mind:

I have mixed feelings about direction today and it could go either way, with perhaps a slight bias towards more upside to try to fill yesterday's gap. After this bounce is finished I'm leaning towards a test of 1325 SPX and if that breaks I think we may well see the June lows tested. A close over 1363 SPX would make this less likely.

Possible Double-Tops

Equities and EURUSD have both been crumbling overnight. The potential double-top on ZB and TLT is also looking a good deal less impressive on ZB this morning. I've been mentioning regularly that the overall setup on bonds is still bullish, and if TLT clears the potential double-top area that will be even more the case.

On ES I mentioned the possibility of a double-top forming on Friday morning and that's starting to look pretty good. ES is extremely oversold on the 60min chart, and we may well get a decent bounce soon, but there are two key support levels to watch if we do get much more downside. The first is rising support from the June low in the 1335 area, which is also a potential H&S neckline. The second and far more important support level is at 1320. Anything below there delivers a lower low and triggers a double-top target in the 1265 area, effectively for a test of the June lows:

The small rising wedge I posted on the RUT chart on Friday morning broke down and it seems likely that the decent rising support trendline from the June low will break at the open. The next key level of support is at 778.54, and anything lower delivers a lower low there:

I've been wheeling out some very bearish bigger picture charts this weekend and you can see my weekend post at MarketShadows here. In that post, which might have been better titled 'The Four Horsemen' I was talking about the very bearish-looking (for equities) setups on copper, USD/EURUSD, bonds and EEM. I'll post the EURUSD chart again this morning as the monster H&S I've been posting on EURUSD has now almost completed forming overnight, and is about the test the neckline in the 1.205 area. As the pattern target is at (cough) 0.77, this is an important level to watch:

What I wasn't talking about at the weekend was oil, though I know a lot of people watch that as an important indicator as well. Oil has a huge bearish setup as well of course on the weekly chart, though we've seen a very strong bounce from the double-top neckline / valley low so far:

Zooming in on that strong bounce however, and it's not looking bullish so far. I posted the beautiful bearish rising wedge there on twitter on Friday, and in the context of the weekly chart this looks a lot like a bearish pennant. There is strong resistance in the 92-3 area and I'm very much wondering about a test of the highs followed by failure on a short term double-top. If that rising wedge breaks down and then the larger double-top breaks down too, we are looking at a potential shorting opportunity from 92/3 to the huge double-top target in the 42/3 area. Would that be a reason to short equities? Possibly, but it would be a much better reason to short oil: (NOTE: ON THE CORRECT SEPTEMBER CONTRACT CHART THIS RISING WEDGE HAS BROKEN AND RETESTED OVERNIGHT)

Most of the Elliot Wavers I follow have been abandoning their bearish counts for the rest of the summer, and historically they've been right a lot. They might be wrong this time though. The fundamentals backdrop looks weak, and the technical setups here look potentially apocalyptic. We shall see. On a break below 1320 ES I would be looking for a test of the June lows and we would then see whether those will hold. If they don't hold then a lot of bearish EW counts will be back on the table. ES is really very oversold here so if we do see a test of 1320 this week, there would most likely be a decent bounce beforehand.

Opex Friday

The first thing to mention today is that it is Opex Friday, and we don't tend to see big moves on Opex days. That said there are some real signs of weakness this morning. I was looking for a hit of the upper bollinger band on SPX yesterday and the high fell slightly short of that. I would normally expect to see an exact hit here but we don't always get that:

We did however get the new high on negative divergence on the SPX 15min chart that I was looking for. I have rising channel support in the 1363-5 area today:

Looking at the RUT chart, that has been substantially underperforming SPX in recent days and has not yet made a higher high. A little bearish rising wedge has formed from the last low that looks as though it will break down at the open. The obvious target would be rising support from the June low in the 790 area:

EURUSD hasn't bounced much in recent days but I tend to look at GBPUSD as a better guide to the anti-USD trade. That has formed a rising wedge from the last low which is breaking down overnight:

USD needs to maintain upwards momentum and break over strong resistance at the August 2010 high. I'd be looking for a strong move up starting soon. That fits with GBPUSD weakness here and with the next obvious EURUSD target in the 1.19 - 1.20 area:

I'm still reading some very bullish takes on the market here, but this still looks corrective to me. Dr Copper is also not impressed yet:

I'm not expecting a big move today, and I have SPX support in the 1363-5 area. My feeling is that support should probably hold today. If support breaks then there is a very significant possibility that the rally from early June has finished, with a nice looking potential double top set up on ES, SPX and NDX with targets near the June lows.

Looking Overbought

A shortish post today as I'm still feeling a bit drained from returning yesterday from holiday and have a headache today. Looking at the SPX daily chart the current move up from support at the 50 DMA is close to reaching the upper bollinger band in the 1383 area. If the current move peaks like the last two then that would give a likely upside target in the 1385-90 area:

Looking at the 60min chart we have a solid uptrend with higher lows and highs, though this still looks like a corrective rally rather than an impulsive move towards new highs. The rising wedge that was looking very promising a couple of weeks ago has faded and there's no current pattern worth mentioning other than a possible double-top here, currently at the wild speculation stage. People have been talking about a possible cup and handle formed from the lows last month. I see it but the quality looks poor, so I'm disregarding it:

On the 15min chart I have a nice looking rising channel from the last low. I have channel support in the 1357-60 area today but I'm really looking for another push up to establish negative RSI divergence and set up the next short term high, ideally in the 1385-90 area as I mentioned looking at the daily:

I've been looking at bonds carefully this morning. The possible double-top on TLT and ZB that I was talking about a couple of weeks ago has set up, and while the overall picture on bonds looks bullish that's worth bearing in mind as a possibility. The signal for this playing out would be a conviction break below very firm support at 124 on TLT. Looking though at my 30 year declining channel on 30yr bond yields (TYX), you can see that TYX is still testing support at the 2008/9 lows, with the obvious target on a break below at channel support in the 1.7-8 area. That seems the more likely outcome here:

Would that be bearish for equities? Somewhat I think, though it's worth noting that TYX reached the last peak in early 2011 while SPX was trading in the 1300-1350 range. Since that time long term bond yields have almost halved while equities have slightly increased. Short term on SPX the current move looks to be topping out and though I'm looking for a bit more upside before a substantial retracement short term longs are starting to look risky here.

Year of the Dollar

My brother asked me near the end of 2011 what my top pick for 2012 was, and I told him that everything I was looking at pointed to 2012 being a very strong year for the US Dollar (USD). I added that it was hard to say where that would leave equities, though I'd be leaning bearish on balance. 55% of the USD index is made up of the Euro of course, and on my main weekly chart that is now nearing the neckline (1.195 area) of the huge possible H&S that I've been watching form for some years now. The only bullish setup on this chart was the rising channel from 2001, until that broke and retested broken support in the last three months.

This strength of the US Dollar muddies the picture on US equity indices somewhat this year, as they are benefiting from a strong flow into the US Dollar, some of which is flowing into US equities. This has meant that US equities have held up much better than foreign equities this year, and it's harder to judge where US equities may be heading as a result. Looking at EEM though, the emerging markets ETF, where I've been posting the possible huge H&S pattern forming there regularly since last October, the current move up from the June low looks like a bear flag, and we are really only waiting for a weekly close below rising channel support from 2008 for this setup to look extremely and immediately bearish:

The setup on my weekly TLT chart also looks bearish (for equities). Five year channel resistance was broken in May and broken resistance has been retested repeatedly over the last few weeks and has held, with TLT breaking up away from there this week. Obviously there's a potential double-top in play here but overall this setup looks strongly bullish for bonds, and therefore bearish for equities:

So where does that leave us in terms of SPX? Leaning bearish overall in my view. Key support at the moment is obviously at the IHS neckline at 1335, and until that is broken on a daily close basis then the IHS target in the 1403-5 SPX area is still in play. The uptrend looks fragile and corrective however, and if/when we do see a daily close much below 1335 SPX, I would expect to see at least a test of the June lows not long afterwards.

My holiday in 1990s Spain is going well, though most of my internet-capable devices have been left in the safe since we arrived, and that still feels very strange. I'm arriving back home on Wednesday after the market opens, and my next post will be on Thursday morning.