The Worm May Be Turning

At the close last night there was an excellent bull setup that targeted the 1817 area and was as solid as any I have seen in the last few years. SPX had broken back above the daily lower bollinger band with conviction, I had clear RSI buy signals on the daily RSI 5 and the 60min RSI 14, and a double-bottom that has broken up targeting the 1817 area. All this from a bounce at major support with a newly established rising channel.I posted this SPX 60min chart on twitter last night showing the bull setup there and it was a sweet one. SPX 60min chart:

All the major US indices broke up yesterday except Dow, and even there the possible H&S neckline bounce was perfect and the obvious next move most definitely to make a right shoulder for the H&S over the next few weeks, again on very clear positive RSI divergence. Dow 60min:

Overnight however ES has entirely given up yesterday's gains and made a new low. There hasn't been a strong break further down as yet, and the bulls are still in the game as long as the SPX rising channel survives into the open but if we see that break then I have the next support level on ES at the December low at 1754, and I would expect that to hold on a closing basis at least for today for reasons I'll explain on the next chart. ES 60min chart:

The key chart for today is the SPX daily chart. As long as the rising channel holds then the bulls are still in the game, albeit wounded. Once that channel breaks down a lot of potential downside opens up. However the daily bollinger band setup is important here. SPX broke back up hard over the daily lower band after trading below it for days, but did not test any major MAs or the middle band. The daily lower band should therefore now be good as daily closing support for any further downside in this move. The last time that wasn't true was in September 2008 as the market was crashing, so that has been very reliable indeed. I wouldn't expect to see the SPX daily lower bollinger band close under 1770 today so that means I would expect ES today to close at or above the current level as I write at 1765 ES. SPX daily chart:

If we see support hold at the open and a decent recovery today then the bull scenario into 1817 SPX is still very much in play, though I would now give the bearish H&S forming scenario more weight than I would otherwise have done.

Uncertain Smile

Back on 15th January with SPX at 1839 I wrote a morning post suggesting that the low just made was of poor quality and giving two trendline targets for a better low. We hit the lower trendline of those two yesterday and for the moment at least we now have a rising channel established from the 1646 low. It may be that this channel won't last long, and sometimes they don't, but as long as it survives it is now key support, and that low yesterday may have been the low before a move to the rising wedge target at 1965 begins. What is also worth noting from the daily chart is that we now have possible positive divergence on the daily RSI 5, which delivers the best short term reversal signals on the daily chart. SPX daily chart:

In terms of the weekly chart I noted on 19th November after a strong punch up through the weekly upper bollinger band that there had been three similar instances in the last quarter of the year in the last twenty years, and that two of those were followed shortly afterwards by 4% retracements, and that the third rose 4.3% over the next few weeks before retracing 4.5%. That was at 1798, so the market rose 3% over the next few weeks and as at the low yesterday the retracement from the high stood at 4.3%. In terms of these weekly punch retracements seasonally therefore, the current low is exactly where it should reverse back up, and anything lower would be breaking bearish new ground on these statistics. That isn't to say that yesterday's low must be followed by new highs, but it is to say that a 4%+ retracement was likely in the wake of the bollinger band punch in November, and that all three previous made a retracement of similar size before going on to new highs. SPX has also tested both the SPX weekly middle bollinger band and retested broken wedge resistance on this retracement, and those are strong support. SPX weekly chart:

If we do see a reversal at yesterday's low then there is a possible double-bottom in play on SPX with a target in the 1817 area on a break over 1793.87. On the possible H&S forming the left shoulder high was at 1813, so that would be in the right area for a right shoulder to form, though I would note that the left shoulder took five weeks to form, and that I would expect any right shoulder to take at least two weeks to form. If SPX continued straight up through 1817 I would be looking for new highs on the way to my wedge target at 1965. SPX 60min chart:

The setup looks rather different on ES where I have a falling channel from the highs and a possible double-bottom forming that would target 1840 on a clear break over 1801. I would always favor the SPX chart in the case of a conflict but I am going to be watching falling channel resistance in the 1787 ES area if that is tested today. ES 60min chart:

TNX dropped hard on the taper extension announcement yesterday but is testing decent trendline support so we may see a strong bounce soon. TNX 60min chart:

AAPL made a marginal lower low on positive RSI divergence yesterday and I'm wondering about a bounce here, possible to test broken rising wedge support. AAPL 60min chart:

The extension of the taper yesterday was heavily trailed and was significant, though without a timetable for the winding down of QE3 it's hard to say how significant. One might compare it to a 40 cigarettes a day smoker who cut down to 36 a day in December and extended that reduction down to 31 a day yesterday. Is that progress on the way to a healthier life? Definitely. In the absence of further reductions in the near future would it make much practical difference? No. There is still a vast fortune being pumped into markets every month and we don't have any real idea when that might end. The bulls need to show us that they are still in the game today by breaking clearly back above the daily lower bollinger band, which I am expecting to close today in the 1771-5 area. If they can hold on to their overnight gains, with ES trading at 1784.50 as I write, that would do it.

Schrodinger's Market

We have two days of FOMC this week, and that would generally be bullish, but this FOMC has been heavily trailed as including an extension of the modest taper from last month, and may perhaps include a schedule for the full winding down of QE3 this year. This week's FOMC may therefore be bearish, and possibly very bearish.

Generally at a low reversal on SPX of any size we see either a double bottom or IHS form. This week however an ascending triangle has formed from the low which I posted on twitter yesterday afternoon. I am not fond of triangles but these do break up 70% of the time and the upside target would be 1813, which would currently be both an ideal right shoulder high for the H&S that may be forming here and also a retest of the 50 DMA. If it breaks down hard at the open, which at the moment looks very possible, then the target is at a retest of the current lows. SPX 15min chart:

On the daily chart the close yesterday was on the daily lower bollinger band, and on a break much above the next overhead resistance level will be the 50 DMA at 1813. If instead we see another day trading under the daily lower bollinger band then I would expect that to close today in the 1782-5 area: SPX daily chart:

FOMC could also have a big impact on TNX as the end of QE1 and QE2 saw very large rallies on bonds. We may therefore see a significant break either way, depending on what is announced. At the moment TNX is forming a falling wedge on the way to the H&S target in the 26 area. If we see a hard break down I do have a larger target in the 19 area that is worth bearing in mind. TNX 60min chart:

I warned of the bearish setup on AAPL on 13th January and we saw that play out in a single gap down yesterday morning. This has broken the uptrend from the lows last year and I'm not seeing any obvious sign that it might reverse back up yet. I'll be keeping an eye on this one. AAPL 60min chart:

ES is at 1772 as I write and a big gap down at the open looks likely. That being the case I'd normally expect to see a test of the lows in trading hours today and if they hold we will then have a double-bottom setup targeting the 1813 area, which would be the obvious next target area.

Testing Serious Support

I was talking about the cluster of support levels in the 1768-80 SPX area yesterday morning and the low was at 1773. That has tested the weekly 20 and 50 MAs, and is a second retest of broken wedge resistance. There is a little play left in this support area but if we aren't to see a much larger correction develop then this is the likely reversal area. SPX weekly chart:

It may be that the short term low is now in, though I would say that my target at the possible rising channel trendline from 1646 has not yet been hit. if we were to now see a test of yesterday's low that would open up a possible hit of that trendline and would deliver positive divergence on the 60min RSI. That may not happen but it would be a tidier low. SPX daily chart:

Most declines tend to develop a pattern and in this case the pattern is a reasonable quality falling wedge from 1846. Wedge resistance was tested at the RTH high yesterday and is starting today a couple of points lower than that. we may well however see a test of the lows before a break up. SPX 15min chart:

On other markets EURUSD has reversed back down from the failed break over 1.37, though this has the look of a possible bull flag so far. EURUSD 60min chart:

I'm watching gold to see whether it can break back over the key resistance level at the 150 DMA (1290 area) and declining resistance (1310 area). If it can then the bear market in precious metals since 2011 should be over. Short term however a 70% bearish rising wedge on GC is forming, which suggests that key resistance may well not be broken on this move up. GC daily chart:

I've been considering the case for a big rally on bonds starting at the moment and there is strongly positive divergence on the ZB weekly RSI. There is a part-formed double-bottom there which is equivalent to the double-top forming on TNX. These RSI divergence don't dictate that these will play out, but they are very supportive. ZB weekly chart:

SPX has been trading entirely under the daily lower bollinger band since the break below on Friday. resistance yesterday was at a retest of the lower bollinger band and that may be the case again today. if so then i am not expecting the SPX daily lower BB to close much below 1788 SPX and that would be a resistance level to watch. On a break back above the next serious resistance is at the 50 DMA in the 1812 area.

Oversold Bounce

The first thing to say this morning that despite the very impressive showing from the bears on Friday, neither of the double-top targets on SPX or ES has been reached yet, and I can't see any reason at all to think that they won't be reached in the next two or three days.

ES is bouncing at the moment, and I'm expecting the bounce to go further, but it will top out today or possibly tomorrow and then turn back down, so if you went long near the close on Friday don't stay in the trade too long. The resistance levels that spring to the eye on ES are declining resistance in the 1809 area (and declining very rapidly) and the 50 hour MA in the 1807 area. I'm expecting the ES daily lower bollinger band to end the day in the 1795-1800 range, and I'm expecting this bounce to top out somewhere in the 1795-1805 ES range. ES 60min chart:

On the SPX 15min chart I have declining resistance from the high in the 1807 area, again declining very rapidly, and that is an obvious target for this bounce that may well hold. The positive divergence on the 15min RSI that was building for much of Friday should be resolved with the bounce in regular trading hours (RTH) today. SPX 15min chart:

After the very impressive decline of Friday there has been a lot of discussion of the possibility that we may see large further declines, and that is certainly possible. However, the bull case I have outlined into April/May has not yet been compromised at all, and until it is I am working on the assumption that this is just a powerful retracement before the next big move up. What then might change my mind?

On the SPX daily chart the support now not far below is at possible rising channel support in the 1770 area, and the possible H&S neckline at the December low at 1767.99. This is decent support to bear in mind, and even if a substantial top has just been made, the obvious next thing to happen would be to finish forming that H&S at the 1767.99 neckline, which would have an ideal right shoulder in the 1813 SPX area. SPX daily chart:

If that H&S was to form now, the likely downside target would be in the 1690 area, and that brings me to the SPX weekly chart. In terms of support not far below I have trendline support and very decent support at the weekly middle bollinger band, now at 1773. Between the daily and weekly charts there is therefore very strong support in the 1768-80 area. If an H&S should form here then the next big support levels would be the weekly lower bollinger band, now at 1670, and the 50 week moving average, now at 1678. On a strong break below the weekly middle bollinger band the weekly lower band is the obvious target and that is normally tested at least once a year.

I would add though that of the three examples of SPX weekly upper BB punches in Q4 that I posted on 19th November with the comment that all those three had seen a sharp 4% area retracement soon afterwards, the largest of those three retracements was 4.5%. The statistics for those weekly upper band punches strongly supported this current move into the support levels that I have been looking at today in the 1768-80 area, but don't support a move any further, though on a sample size of only three over the last twenty years, it doesn't definitively rule it out either.SPX weekly chart:

On other markets I'll just look at oil today, as that is at the most immediate inflection point. On 15th Jan I gave the key inflection point for oil at declining channel resistance and that was tested at the high last week. If oil breaks up through then the pattern setup starts to look impressively bullish. If it breaks down we could be at the start of a major decline, with the next support levels at declining channel support, now at 86, and overall triangle support, now in the 80.5 area. On a break below triangle support the triangle target would be in the 45/6 area, with my long term support trendline from the 1998 low also in the 45/6 area. Just sayin'. WTIC daily chart:

On the CL 60min chart the reversal at declining channel resistance was on decent negative 60min RSI divergence. A rough H&S may be forming to punch CL down through rising support from the last low. If that happens I'll be looking for a likely retest of 91/2 area support. CL 60min chart:

Leaning cautiously bullish for the open today, reversing bearish again somewhere in the 1795-1805 ES area.

Feeling the Pinch

The SPX daily bollinger bands have narrowed considerably over the last few weeks, until yesterday morning there were less than thirty points between the upper and lower bands. This compression is a pinch, and these pinches will generally resolve into a move one way or the other that will ride the upper or lower band for several days. If the larger double-top on SPX breaks down today then that should play out to the downside.

On the break below 1826 ES yesterday morning I tweeted double pattern targets (falling wedge and double-top) at 1808, and as the overnight low was 1808 dead, those targets have been met. The last ES low was at 1809.5 so the larger double-top there is breaking down slightly with a target in the 1772 area. However the 1809.5 level still needs to be broken with confidence and during regular trading hours (RTH). The key support levels on ES today are the double-top trigger level at 1809.5 and the 50 DMA at 1806. Once below those the double-top target at 1772 is firmly in play. ES daily chart:

On the SPX daily chart the key support levels are the last low and double-top trigger level at 1815, and the 50 DMA at 1812. Once those have been broken the double-top target is in the 1780 area. On 15th January I posted two target trendlines as retracement targets and rising support from 1646 has hit and pinocchioed yesterday. The second one is possible rising channel support from 1646 and I have that in the 1770 area, just above the possible H&S neckline at 1767.99. There is therefore a rich cluster of targets and support levels in the 1768-80 range. SPX daily chart:

On other markets EURUSD reached the 1.37 level I was looking at yesterday morning and broke above it, triggering a double-bottom target back at the highs. However I'm a bit doubtful about that as the 60min RSI is looking toppy and the current rally high is a decent fit with a 61.8% fib retracement of the move from the current top. EURUSD bulls need this to hold above 1.37 to open up the highs again. otherwise this setup could fail at the current rally high. EURUSD 60min chart:

GC has broken declining resistance from the last rally high (and possible double-bottom trigger level). There are two big resistance levels coming up and they are the 150 DMA just under 1300 and declining resistance from the late 2012 high in the 1310-5 area. If GC can clear those levels my assumption will be that the bear market on precious metals is over, and my full attention will be on the possible double-bottom setup marked on the chart below. GC daily chart:

Oil is now testing declining resistance from the last rally high there, and if it breaks up I'll be looking at triangle resistance and the double-top trigger level at 100.75. If oil breaks over that the double-bottom target would be in the 110.25 area. WTIC daily chart:

TNX has broken down with confidence from the H&S there and the target is 26, not far above the large double-top trigger level at 24.71. A break below 24.71 would of course trigger a double-top target in the 19 area, as I have mentioned before. TNX 60min chart:

The short side is looking very good here, but bears need to push today to break (and ideally close) below the SPX double-top trigger level at 1815. If they can manage that, and bears have been having some significant performance issues since 2012, then the lower targets open up and will most likely be reached in the next few days.

A Case for 1775

I gave the ES range in two parts yesterday morning, 1826 to 1835, and 1835 to 1844. The RTH low yesterday was 1835 dead and the overnight high was 1844 dead. Clearly ES has not yet broken out of the range. There was a sharp decline on the Chinese PMI numbers and ES broke down into the lower half of the range and then retested the 50 hour MA on a bounce. The opening advantage belongs to the bears this morning, and as long as we don't see a break back over the ES 50 hour MA, currently in the 1837 area, then we may well see a test of range support at 1826 today. ES 60min chart:

What if the range breaks down rather than up? I mentioned on 19th November after a rare punch up through the weekly upper bollinger band that historically there was a strong case for seeing a 4% retracement starting not too far above that punch. SPX was at 1800 at the time and if we were to see a 4% retracement from the current 1850 high that would target the 1776 area. I have decent trendline support and the weekly middle bollinger band in the 1775 SPX area, and on the 60min chart (not shown today) I have a possible double-top that would target the 1815 low on a break below the current range..On a break below the 1815 low the larger double-top target would be that 1780 target. SPX weekly chart:

Where is main support on SPX from here if we do see a sharp decline? Well the last low was at 1767.99, and rising support from the November 2012 low at 1343.35 is at now in the 1735-40 area. Daily lower bollinger band support is at 1824, but the tight pinch we are seeing on the daily BBs at the moment is signalling that a large move is coming. Obviously there is room for that move to be down. That wouldn't invalidate my 1965 wedge target either, though it would make to move towards it much more profitable to trade. SPX daily chart:

On other markets EURUSD has broken up from a falling wedge and while I'm thinking this is a counter-trend bounce I could be mistaken. I'm watching to see whether the last significant high at 1.37 is tested, and if it is, then I will have possible double-bottom and IHS options to look at there. EURUSD 60min chart:

I have CL in a possible rising channel from the last low and looking a bit toppy short term. the IHS target is slightly north of 98 and I have strong bigger picture resistance in the same area. CL 60min chart:

TNX is at a very important inflection point here, having completed an H&S looking towards 26, and having also formed a possible double-bottom (on positive 60min RSI divergence) targeting the 2014 highs on a clear break over 29.2. TNX 60min chart:

As I've been writing ES has broken down and retested the bottom of the range at 1826.50. The bears have an opportunity here to break ES down from this range and if that happens, there is a decent case and a technical pathway back to 1770 ES. Let's see if the bottom of this range is as solid as the range top. :-)

ES Range 1826-35-44

I was expecting SPX/ES to make a new high yesterday morning but it failed just underneath, which was a significant bull fail. ES then went to retest support in the 1826 area, breaking below the pattern trigger level on a small double-top targeting the 1815 ES area, but instead of following through on the break down ES then bounced strongly for the rest of the afternoon, which was a significant bear fail.

Bottom line is that ES is trading in a 1826-44 range, with a strong mid-level at 1835.Pressure is building and we will most likely see a breakout soon that should be followed through. ES 60min chart:

The main setup I'm watching here is the nested double-tops setup that I posted on twitter yesterday morning. If this breaks down again (and more durably) then the target is at 1820 SPX (1815 ES) where there is strong support from both the rising support trendline from 1646, and the daily lower bollinger band. This is also a bull setup on a break up of course as a failed break down will generally produce a strong reaction in the opposite direction. on a new high I'd be looking for a rough target in the 1865 area. SPX 60min chart:

On the SPX daily chart I have middle bollinger band support in the 1837 area, with the lower band at 1820 and the upper band at 1853. The daily bollinger bands are pinching together tightly and this is suggesting a big move is coming. SPX daily chart:

On other markets TNX is still testing the neckline on the H&S that finished forming last week. TNX has made a marginal low on strongly positive RSI divergence and there is a possible double-bottom setup to return TNX to the highs if the H&S doesn't break down. That would make more sense to me than a big decline in yields at this stage. Big declines in yields tend to happen at the end of QE periods for sure, but a 10% taper seems more like a rounding error than a major policy shift. TNX 60min chart:

I showed the chart when GDX broke up from the falling channel last week. GDX has been building on those gains and after beating the last high at 26.66 the main target will be the possible IHS neckline at 30/1. As I mentioned last week, I have been looking for this break as a probably early indicator that the precious metals sector is bottoming out before the next big bull phase. I'll keep you posted. GDX weekly chart:

I'm still leaning towards seeing a break up next on SPX rather than a break down, but the bears definitely became a more serious alternative yesterday. Until we have a break I have  a two part range 1826-34, 1835-44. trade carefully until we break one way or the other.

Brave New World Series: 5 - A Pattern Projection into 2016-8

This is the fifth post in my Brave New World Series (BNW Series) since SPX broke over major long term resistance under 1600 in April 2013. The thrust of this series is to argue first that the break confirmed the end of the secular bear market that began in 2000, and to look at where equities, particularly SPX, are likely to go from that break.

There will be at least two more in this series after this one, at least one of which will look at bonds. These take quite a bit of work to put together, apart from this one which is mainly pulling together elements from the first four in the series posted May to July 2013, so I'd expect to produce these as and when I can over the next few months. The previous posts in this series can be found through the links below:

Brave New World Series 1 - Secular Cycles
Brave New World Series 2 - Fleas and Fibonaccis
Brave New World Series 3 - The Rising Wedge Target at 1965
Brave New World Series 4 - The Next Big Resistance Levels

In the first in this series I was looking at secular cycles on SPX, arguing that the secular bear markets from 1929 and 1965 had seen both the high and low made within a single cyclical bear market and that each had formed a pattern or resistance trendline from the start of the secular bear market period that broke up to signal the end of that secular bear market period.

From there I argued that the third secular bear market on SPX had started in 2000, that the single cyclical bear market that saw both the high and low of the secular bear market period was 2007-9, and that the secular bear market pattern, in this case a right angled and descending broadening formation (BFRAD) broke up in April 2013 to signal that the secular bear market was over.

I also noted that the two secular bull markets 1943-65 and 1980-2000 lasted about twenty years and saw rises from the lows of 2667% and 2485% respectively, and if that were again to be the case in this new secular bull market, then we could expect it to end on SPX in the 2033-5 period in a 16,650 - 17,750 range.

I'm just mentioning these historical comparisons now to emphasize that in terms of these the targets I am talking about today are small, and smaller still even compared to the gains made so far since the 2009 low. I would note again though that a sample size of two (secular bear markets) is not enough to be relied upon statistically, and that for those prepared to wait, a much more statistically  reliable analysis should be available in a thousand years or so when there is a much larger sample of secular bull and bear markets to consider.

On the quarterly chart from 1923 I show the patterns for the secular bull and bear markets from then to date, and the broadening formation that started to form at the start of this most recent secular bear market in 2000, and broke up in April 2013. SPX Quarterly Lifetime chart:

In the third post in this series I looked at the 1965 target from the rising wedge on SPX (LOG chart) from the October 2011 low that also broke up in April 2013, and I have sketched in a possible path for SPX over the next few years. That path would be to make the rising wedge target in the 1965 area, with a high window in the 1950-2000 range, then a decline to retest broken broadening formation resistance at the 2000 and 2007 highs, and then a move up to the broadening formation target in the 2440 area and possibly beyond. I'd be expecting the 1965 hit at the Spring high this year, the retest of the 2000 and 2007 highs in late 2014 or sometime in 2015, then a move up to the 2440 area target to be hit sometime in the 2016-8 period. SPX Weekly (LOG) chart:

In terms of patterns formed since the March 2009 low, on the LOG chart above I have a tentative rising wedge. I would rely more however on the analog charts for shorter term patterns and there I have the current pattern as most likely being a rising channel from the November 2012 low. That channel resistance would be a good fit with my 1965 wedge target. SPX weekly chart:

Moving back to the short term SPX may have put in a retracement low on Friday at the test of the daily middle bollinger band. If so I'd be doubtful about the prospects for the likely large opening gap up today being filled. SPX daily chart:

ES has already broken declining resistance and over the last short term high overnight and the overnight low was at the hourly middle bollinger band. I'll be looking for support there this morning and that's currently at 1838 ES, and the hourly 50 MA is also significant support in the 1836.75 area. If the retracement low is in then I would expect the support range between those two to hold on any test (hourly close basis). ES 60min chart:

If the short term retracement low was put in on Friday then I'd now be looking for a strong move towards SPX rising channel resistance, currently in the 1910 area, and ultimately my 1965 wedge target. If so then shorts will be scalps only for a few weeks from here.

Retracement Support Levels

SPX/ES retraced as expected yesterday and ES bounced at established support in the 1834.50 area. The 50 hour MA, now in the 1840 area, isn't holding as support so the retracement is ongoing and I'm looking today at some support in the 1830-3 area including the 38.2% fib retrace and the weekly pivot at 1831, and strong established support in the 1825-7 area. Anything lower than 1825 ES would invite a retest of Monday's low. ES 60min chart:

On the SPX daily chart I'm watching the middle bollinger band at 1833, and that is obvious support. Main support is at Monday's low at 1815, which is now close to rising support from 1646 and the rapidly rising lower bollinger band, currently at 1810. I'm still thinking that there is a possible retest of Monday's low ahead here. SPX daily chart:

On other markets my attention was drawn to GBPUSD this morning. I've posted some very bullish longer term charts on GBPUSD in recent weeks, but it has now broken rising wedge support from the last bog low. That's not bullish, though this might yet turn out to be a bullish underthrow before the wedge breaks back up. Watching this develop carefully. GBPUSD 60min chart:

I mentioned the possible H&S forming on TNX on Wednesday morning and it was fully formed at the close yesterday. On a clear break below 28.2 the H&S target is in the 36 area and I have a possible larger double-top scenario developing that could take TNX back to the 19 area. TNX 60min chart:

On the SPX bigger picture here I am bullish with a wedge target in the 1965 area sometime in the next three or four months. I'm going to be expanding on that this weekend with a post looking at that target and with my current preferred scenario for the next two or three years. Short term I'm seeing key support today in the 1825-8 ES area and would be surprised to see a break below that. If we do see that break then trendline support from 1646 SPX would be the obvious target and that's now close to Monday's low.