Finely Balanced

 In my last post I was looking at strong daily lower band rides on SPX that have the daily lower band ride as intraday resistance, rather than as support as would be the case on a standard daily lower band ride, and I used a previous instance from September as an example. Interestingly the path then taken by this band ride was similar to that last example, with the daily candle on Monday punching down through the 3sd lower band and then closing back above it, also generating a bullish daily high volume spike, then the daily candle on Tuesday being an inside day trading part of intraday back over the daily lower band, then the daily candle on Wednesday opening an closing back above the daily middle band.

So where does that leave SPX now?

SPX daily BBs chart:

Ideally what we would then have seen would have been a rally strong enough to move the daily RSIs up so that a low retest would be on positive RSI divergence. That hasn't happened as the rallies so far failed intraday and came back most of the way to the lows of the day.

There are also some reasons to think here that the next short term move may be that low retest, with of course the possibility that SPX might then continue down. What is the evidence for that?

SPX daily chart:

On the 15min chart below you can see that the rally on SPX so far has failed exactly at a declining resistance trendline on SPX. That declining resistance trendline comes off the right shoulder high on SPX that I showed on the SPX chart I used in my last post, but didn't talk about because I didn't think the H&S was of high quality. The establishment of this declining resistance trendline has confirmed that the H&S was valid, in which case of course I would expect main declining resistance to come off that right shoulder high.

Unless that declining resistance breaks, the next obvious move is a retest of the lows and possibly lower, but I don't have an obvious lower trendline yet so it is hard to say exactly where that might be heading. The next low though would likely deliver a support trendline on a decline pattern.

SPX 15min chart:

There is more. On the NQ 60min chart I have a decent quality bear flag channel, and if that breaks down the obvious next target would be a retest of the low on NQ.

NQ Mar 60min chart:

There is also a decent quality bear flag wedge on YM so again if that breaks down the obvious target would be a retest of the low there.

RTY has already retested the low so there is no bear flag there.

YM Mar 60min chart:

In the short term I'm watching the bear flag support trendlines on NQ, currently in the 13900 area and YM, currently in the 33800 area. Breaks below would strongly suggest low retests. On the upside I'm watching that declining resistance trendline on SPX, currently in the 4410 area. A break above opens a possible test of the weekly and daily middle bands on SPX, currently in the 4567 and 4603 areas respectively, and main bigger picture resistance here.

It looks as though January will very likely close red now and, if so, that greatly increases the historical odds that 2022 will close red too. That's called the January Barometer indicator, and I'm planning a weekend or Monday post next talking about that.

Everyone have a great weekend :-)

Teaching Moment - Strong Daily Lower Band Rides

The type of very strong daily lower band ride that I was describing on Friday turned out to be exactly what we saw, so I'm taking a moment to look at that this morning as these happen on a regular basis, two to four times a year or so, and tend to behave in a very characteristic way.

Looking at the SPX daily chart below, with just the two and three standard deviation bands marked, you can see how the body of the daily candle for the last two days is roughly under the 2sd daily lower band. That is normal, though a little misleading as I was noting on Friday that these often find resistance very close to the daily lower band. It looks from the chart as though the high on Friday was well above the 2sd lower band, but that's because the 2sd lower band declined from 4492 at the time of the high of the day, with that high just above at 4494, into 4468 at the close.

I have highlighted the last one of these stronger daily lower band rides in September 2021, and you can see how the low was made with punch well below the 3sd daily lower band, with a high volume spike the day before. Both of those signal that the odds of a decent reversal being close are very high. On the third day SPX broke back over the 2sd daily lower band, rallied back towards main downtrend resistance at the daily middle band, and then retested the low to form the double bottom that ended the retracement. All pretty classic stuff.

What is all this telling us here? Well I'm obviously watching for a strong volume spike, but in terms of the bands the most important resistance level today is the 2sd daily lower band, currently at 4468. A sustained break above opens a possible rally to the daily middle band, currently at 4669, and may well mean that a significant short term low is being made.

SPX daily BBs chart:

On the SPX daily chart the RSI 14 sell signal has now reached target, as has the same signal on the NDX daily chart. The possible H&S neckline in the 4500 area has broken, and if this decline continues the next obvious support is next next big level and possible H&S neckline in the 4280 area.

SPX daily chart:

There was a little positive divergence on the hourly RSI 5, as there is also on NDX and IWM, but it is marginal and could be easily extinguished with a further decline.

SPX 60min chart:

I was mentioning on Friday that there is some possible support that might hold before SPX had a chance to go down to the next level and that support is now being tested on NDX and INDU. On NDX that is the possible H&S neckline in the 14385 area.

NDX 60min chart:

On INDU the support is the possible H&S neckline in the 34000 area. A break below opens the larger possible H&S neckline in the 33,300 area.

INDU 60min chart:

There is some positive divergence here on the hourly futures charts, but nothing yet indicating that a reversal is imminent. I'll be watching the SPX 2sd daily lower band today, starting the day at 4468, and if we see a sustained break above that then this strong daily lower band ride is likely over. If we see the daily high in that area, then we may well see a strong lower low in the afternoon that could potentially take SPX down into a test of the next big support area around 4290.

Taking Stock

 In my post on Friday 6th August last year I was looking at a possible backtest scenario on SPX that could be setting up and I reviewed how that is looking on my first post this year, as I was thinking, and am still thinking, that backtest may well be delivered over the next few weeks.

That backtest would be of a huge resistance trendline on SPX that broke at the end of 2020 / start of 2021, and is currently in the 3850 - 3900 area. The break over that trendline may have been a break up over a rising megaphone resistance trendline with a target in the mid 6000s on SPX , but if that is the case, to confirm that target, the trendline would need to be backtested and hold into new all time highs on SPX.

Obviously the strength of this decline so far in January has surprised most, so I'd like today to review what the decline so far is telling us, and to talk about the monthly SPX chart.

I've been talking about a backtest of the monthly middle band, now at 3995, which is a decent match with the backtest of the broken trendline I have been looking at, now in the 3880 area.

If you look at the chart below you can see that the monthly middle band was tested or broken every year from 1998 - 2009, when this current very strong bull market started. Since then there have been three years with very strong bull moves when the monthly middle band wasn't tested, those being in 2013, 2017 and 2021. In the years after those the middle band was backtested in 2014, and broken hard at the end of 2018. There have been strong breaks below the monthly middle band in 2011, 2015/6, 2018 and of course 2020. Backtests of the monthly middle band usually happen in bull markets in a normal year, even in this very strong bull market from 2009, particularly in a year after it has not been backtested, like 2021.

The second thing to say here is that the backtest of the monthly middle band and broken trendline resistance could deliver a 20% decline, putting SPX into a technical bear market. That sounds alarming but in practical terms doesn't mean much. The declines on SPX in 2011, 2015-6 and 2018 all delivered declines in the 15% to 22% range. The decline in 2011 was 21.5%, the decline in 2015-6 was 15.2%, and the decline in 2018 was 20.2%. Both of the 2011 and 2018 declines passed the 20% boundary for a technical bear market, and both ended almost immediately after doing so, so in effect all three were just strong corrections. The decline in 2020 went further, but was a crash rather than a bear market, like the one in 1987, but recovering far faster due to massive intervention by the Fed and US government.

There hasn't been a real bear market since 2008-9, and while we could potentially see one of those here, the confirmation of that would have to be a sustained break below the 3800-4000 support range, and the conversion of that area to resistance. Until then it is just business as usual, and it is way too early to get excited about a real bear market happening here.

Is there a setup for a real bear market here? For sure. With inflation rising the Fed's room to intervene to support markets is limited, and an activist Fed supporting the market has been the main driver for the market for years, but we have yet to see how far inflation will go, and what impact that will have on policy. We'll see. In the short term a red close for January would be cautiously bearish for 2022, and so would the monthly RSI 5 sell signal that will likely fix at the end of January if SPX closes much under 4600. I'm watching the next few days with particular interest as we move into the end of the month.

SPX monthly chart:

Looking at the SPX daily chart this move has broken the daily lower band and tested the 3sd lower band. That is generally a very good sign that a strong rally is imminent. There is a caveat here though. In the event that SPX has moved into the strongest kind of daily lower band ride then the decline can continue until SPX can break back over and convert the daily lower band, now in the 4492 area. Until that happens I'd expect to see the daily lower band tested as resistance every day. I would note that the rally high today was at 4494, and if that holds then SPX may be on this kind of lower band ride. If so, SPX may decline rapidly further from here until the band ride ends, though it is already fairly stretched to the downside of course. 

With 4500 area support broken where is the next obvious big level? There is a much larger possible H&S neckline in the 4280 area, and that may be the next target. If that is reached I would be looking for some daily positive divergence to develop there to signal a bounce, that would require a test, a decent rally that lasted into the end of the day, and then a low retest. If seen the ideal right shoulder high would then be in the 4546 area.

SPX daily chart:

There have been a lot of broken supports over the last day. One of those was the NDX channel support that I posted on Tuesday. NDX is now close to a possible H&S neckline and very big support level that I am watching in the 14384 area. That may well hold.

NDX 60min chart:

So what might happen here if equity indices keep declining? Well we did our big 5 and key sectors review last night and two charts there particularly sprang to the eye.

On AMZN a decent quality double top has broken down with a target in the 2550 area, but as with NDX, there is possible support at a possible H&S neckline and well established support level in the 2881 area. If we are to see a strong rally  soon that would be the obvious place to see that start. If an H&S was forming soon the obvious right shoulder high would be in the 3552 area.

AMZN daily chart:

On the AAPL chart a high quality double top has broken down with a target in the 152 area. That is a strong target as main rising support is there from the 2020 low, but again there is a possible larger H&S neckline in the 156-8 area:

AAPL daily chart:

What's the bottom line here? SPX may be on a strong daily lower band ride and for that to end, SPX needs to break back over 4500 and convert that to support. If seen, the daily middle band would then be key downtrend resistance again, and that is currently at 4689.

We did our monthly free public Big Five and Key Sectors webinar at theartofchart.net yesterday and if you missed that you can see it here or on our January Free Webinars page.

So Far So Good

 In my last post I was talking about an SPX target in the 4500 area as long as SPX stayed under the daily middle band. Since then we saw a short lived break above the daily middle band but SPX failed to convert that back to support and has delivered a new retracement low today.

I would note the open daily RSI 14 sell signal that I am expecting to reach at least the possible near miss target at 34-6 on the RSI 14 by the end of this move.

SPX daily chart:

The new retracement low was signalled by one of my favorite indicators, the SPX 5dma Three Day Rule, which states that after a decline of more than 2%, if there is a break back over the 5dma, then SPX needs to hold above the 5dma for the next two closes. On a clear break back below the 5dma at the close on day two or three, there will be a (generally fast) retest of the prior low before a retest of the prior high. I've run this back to 2007, and with the exception of a fail in 2019 when SPX closed only two handles below the 5dma, and a couple of marginal higher lows when triangles were forming, this has delivered every time since then.

SPX daily 5dma chart:

On the hourly chart the RSI is showing no sign of a low yet, and I have marked in the obvious though as yet unconfirmed support trendline which is a decent match with the 4500 area possible H&S neckline.

SPX 60min chart:

On NDX there is also an open daily RSI 14 sell signal that I am also expecting to reach at least the possible near miss target at 34-6 on the RSI 14 by the end of this move.

NDX daily chart:

On NDX, which has not yet made a lower low, I am watching this leg of the retracement with particular interest. There is a high quality falling channel established from the last all time high and, if that holds, the obvious read would be that the channel is a bull flag channel. The possible falling wedge marked on the SPX hourly chart may also be a bull flag forming of course.

NDX 60min chart:

So what next? I'm looking for the target area on SPX to be tested in two to four days, and given that the SPX 3sd lower band is currently at 4512, I'd expect that support to hold for at least a strong rally. On SPX the target for that rally would either be for an H&S right shoulder high, ideally in the 4734 area, or if these are bull flags forming on SPX and NDX, retests of the all time highs on both, possibly to make the second highs on large double tops.

We are doing our free public Big Five and Key Sector ETFs webinar at theartofchart.net an hour after the close on Thursday, and if you would like to attend you can register for that here, or on our January Free Webinars page.

A Big Picture Review

 In my post on Friday 6th August I was looking at a possible backtest scenario on SPX that could be setting up and I'd like to review how that is looking on my first post this year, as I think that backtest may well be delivered over the next few weeks.

That backtest would be of a huge resistance trendline on SPX that broke at the end of 2021 / start of 2021, and is currently in the 3850 - 3900 area. The break over that trendline may have been a break up over a rising megaphone resistance trendline with a target in the mid 6000s on SPX , but if that is the case, to confirm that target, the trendline would need to be backtested and hold into new all time highs on SPX.

SPX monthly chart:

What here could be setting up such a large move to the upside on SPX? The state of the economy isn't great, the Fed is tapering QE here and there are four interest rate rises scheduled for next year.

Well the Fed is still crazy doveish here of course, and the US government has been spending money on a frankly epic scale, but the main reason I'm thinking we could see this move is the emergence of persistent inflation.

This inflation is making bonds look much less attractive as a safe place to park money, and that matters.

Over the last three decades bonds have shifted gradually from being a risk free return to being a return free risk, with bonds yielding very little or even nothing, even as the creditworthiness of most western governments has declined as their borrowings have increased to scary levels. In a low inflation environment though, bonds have still been seen as a safe place to park unused funds. Inflation changes the math on that calculation as in addition to yielding very little, the value of money is now also declining significantly from inflation every year.

That should also have an impact on bond prices of course, and that is what we are seeing here. I've been watching an IHS form on TNX (ten year treasury yields) for months and was saying in a webinar just a couple of weeks ago that if TNX were to break up from that IHS and make target then 10 year bond yields would double from 1.6% to 3.2%. Since then TNX has broken up from that IHS, as ZB has fallen from 164 to 154, and I think TNX may well reach that target. Depending in significant part on inflation, it may well go higher, as the market tries to match bond yields better to a higher inflation environment. We'll see how that develops.

TNX daily chart:

I've mentioned a few times on various media that the main support on NDX in this long uptrend has been the weekly middle band, and while that has been tested regularly since the March 2020 low, there has been no significant close below that since that March 2020 low. You can see from my comments on the chart below that I'm noting that any more serious decline on NDX would need to start with a break and conversion of that level to resistance.

On Friday NDX closed significantly below the weekly middle band, and has continued down from there this morning. That is a significant technical break and, if NDX can sustain that break, opens up that larger retracement that I've been looking for. At minimum it is a very promising start.

NDX weekly chart:

The weekly middle band on SPX is also very important support, and I was saying in my premarket video this morning at theartofchart.net that the next significant support on SPX was there in the 4575-80 area. I was a bit surprised to see that tested today and the LOD today was just above that at 4582. We've seen a decent rally from there but ideally we would go a bit lower first and then see a larger rally.

If you're interested, you can see my premarket video today here.

SPX weekly chart:

Where would the ideal next low be on SPX? Well if you look at the SPX hourly chart below, you can see that there is a possible H&S neckline in the 4500 area. Ideally SPX would go there and then deliver a strong rally into the 4700-50 area, setting up an H&S that on a subsequent break below 4500 would look for the 4175 area. That wouldn't get SPX all the way back to my backtest target in the 3850-3900 area, but it could get SPX to within credible striking distance of it.

SPX 60min chart:

My next post will be on the shorter term setups but I think my backtest scenario may well deliver in the first quarter this year, particularly after the key support break on NDX that we saw on Friday, so this post is intended as a bigger picture review to refer back to over coming weeks and months.

We did our monthly free public Chart Chat webinar at theartofchart.net yesterday and if you missed that you can see it here or on our January Free Webinars page. We were looking at the prospects for this year across a wide range of markets including equities.