Choices Choices

After the violent rally on Thursday and Friday next week the real question here is whether a significant low has been made. There are some signs that might be the case.

On the SPX daily chart the low saw a spike down through the 3sd lower band, generally a good indicator for at least a strong rally, there are possible weekly RSI 5 buy signals brewing on SPX and Dow, a decent looking falling wedge on Dow that looks like a bull flag. That amounts to a definite maybe, though even if the all time high on SPX is retested next, the odds favor at least some more downside afterwards, but I'll be looking at that in my next post.

SPX weekly chart:

In the short term SPX broke back over the 5dma, so SPX is back on the Three Day Rule. The Three Day Rule states that on a break back over the 5dma after a decline of more than 2%, the SPX must hold above the 5dma on the next two daily closes or there should then be a retest of the preceding low (4114.65 here) before there is a full reversal of the retracement back into the prior high (at the all time high here).

Today would be day two, and a daily close back below the 5dma, currently at 4310.50, would have to be strong enough to be an obvious break below rather than just a close on the 5dma. On that basis this stat has not seen a fail since 2007, apart from two very marginal higher lows when triangles were forming, and has delivered twice already since the all time high at the start of 2022.

SPX daily 5dma chart:

On the SPX hourly chart there is a possible falling wedge established that would be confirmed as a likely bull flag wedge on a break back over declining resistance in the 4500 area.

If SPX goes lower then there is a better (likely still bull flag) channel support now in the 4000-10 area.

SPX 60min chart:

There is a very similar setup on NDX with trendline resistance now in the 14400 area and possible channel support now in the 12350 area.

On the Dow chart there is already a very decent looking falling wedge established and the low may already be in.

INDU 60min chart:

The Dow futures hourly chart is showing something very interesting though, with a high quality IHS that may be forming, having made an ideal right shoulder low overnight. If YM breaks over and converts the neckline to support that would be a significant indicator that the low may already be in.

YM Mar 60min chart:

I'm keeping an open mind as to whether a significant low has been made on equity indices, but I would say that if a lower low is coming next, there is a good chance that we will see SPX deliver a clear daily close back below the 5dma today or tomorrow, and that the lower low would likely be delivered before Tuesday next week.

We are doing our Monthly free public Chart Chat at theartofchart.net at 4pm EST next Sunday 6th March, covering equity indices, commodities, bonds etc. If you'd like to attend you can register for that here or on our March Free Webinars page.

Our high end options service Paragon Options started the year strong with a $47,000 profit trading ES in January. We are looking at taking on up to ten new subscribers this month and if you'd like to sign up for a free trial you can do that here.

Back In the USSR

Putin revealed his thinking in a speech last week where he stated (incorrectly) that Ukraine had always been part of Russia historically, and has now followed through on that with what looks increasingly like a full occupation of Ukraine. If he meant what he said in that speech then Ukraine's time as an independent country may well have ended for the time being, in what is also a harsh warning to any other ex USSR states bordering Russia that are thinking of seeking closer ties with the West, and looser ties with their scary imperial neighbour. Russia may have started to reconstruct the Soviet Union's old empire, and a new Cold War may be starting here that would align the democratic west against the undemocratic East. That may of course have serious consequences on trade with China in due course.

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 in the first few months of this year.

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 2022 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 4047, which is now getting close, and not too far above 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 overall 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, with NDX already crossing that line at the lows yesterday. 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 unless SPX makes a sustained break back below that rising support trendline in the 3880 area.

SPX monthly chart:

On the daily chart SPX broke significantly below the 3sd lower band at the open yesterday and, rallied strongly from there, as tends to be the case whenever that level is breached. Main short term resistance is at the daily middle band, now at 4439, and SPX could be starting a move here to backtest that.

SPX daily BBs chart:

On the hourly chart SPX broke briefly below the neckline on the H&S that has been forming, and broke the first candidate support trendline I had drawn in. If that wasn't a bullish underthrow, which it probably wasn't, then that opens a test of the possible falling channel support trendline, now in the 4030 area, and a decent match with the monthly middle band.

I would also note that the H&S target is in the 3600 area. I'm not expecting that target to be reached, but if there is a sustained break below the main support trendline in the 3880 area then that target will be on the table, with established support below in the 3500-3600 area.

SPX 60min chart:

On the NDX hourly chart the first support trendline I drew in was also broken briefly at the low yesterday. Again there is a possible falling channel support trendline below in the 12500 area.

There is a possible daily RSI 14 buy signal now brewing on NDX, and fixed on IWM, but nothing on SPX or INDU as yet.

NDX 60min chart:

On the IWM chart there is an existing, and good quality H&S target below in the 172 area, and not much here yet to suggest that target won't be reached. short term though there is a decent double bottom setup here, and on a sustained break back above the last short term high at 209.05 the target for that would be in the 230 area.

IWM 60min chart:

We'll be doing our free monthly chart chat at theartofchart.net on Sunday 6th March, but it hasn't been set up yet. I'll be posting the link to register for that in another post and on my twitter once that has been done.

Our high end options service Paragon Options started the year strong with a $47,000 profit trading ES in January. We are looking at taking on up to ten new subscribers this month and if you'd like to sign up for a free trial you can do that here.

Everyone have a great weekend. :-)

Bear Necessities

Unfortunately the week has become dominated by the news relating to the possible imminent invasion of Ukraine by Russia. At the time of writing there has been no invasion, and the consensus view this morning seems to be that there is no credible sign that Russia is backing down yet either. We'll see, but news could move this tape a long way in either direction.

At the close yesterday SPX closed slightly back over the daily middle band, currently at 4465. Only a slight break, more of a close on the band than over it, but a follow through today would open a possible test of the monthly pivot at 4519.

SPX daily BBs chart:

On a break back over the monthly pivot, which only seems likely on news of peace breaking out in Ukraine, then we could see a third test of main resistance at the weekly middle band, currently at 4574.

SPX weekly chart:

In the short term there is resistance on the SPX hourly chart at the 50 hour MA, currently at 4493, and declining resistance from the high, currently in the 4560 area. On the downside trendline support is currently in the 4080 area.

SPX 60min chart:

On the 15min chart the double top setup there broke down with a target in the 4310 area, and on a decent quality reversal pattern like this that target will either be reached, or SPX will reject back up into the prior high at 4595. There is a short term high quality support trendline on SPX from the low this week and that is suggesting that on the next high a matching resistance trendline for a pattern will be established. If SPX heads straight up then that trendline may already be there, as bull flag megaphone resistance, currently in the 4587 area.

SPX 15min chart:

The double top setup on Dow also broke down with alternate targets in the 33750 and 33900 areas. As with SPX, that target area should either be reached or Dow should reject back up into the prior high at 35.8k.

INDU 15min chart:

There is still a lot of news risk this week and whether Russia invades or not the news may deliver a large move in either direction on equity indices, as well as delivering further large moves in currency, bond and energy markets. This is still very much a week to be wary.

We are doing a free public webinar at theartofchart.net an hour after the RTH close tomorrow on FAANG Stocks and Key Sector ETFs. If you'd like to attend you can register for that here or on our February Free Webinars page.

Our high end options service Paragon Options started the year strong with a $47,000 profit trading ES in January. We are looking at taking on up to ten new subscribers this month and if you'd like to sign up for a free trial you can do that here.

A Valentine's Day News Massacre

Equity indices failed as I was expecting on Friday, but not necessarily for the reason that I was expecting, as it may have been primarily a news reaction to the alert from the US government that Russia is preparing to invade Ukraine within the next few days.

These came as unexpected news to many, possibly including the Russian government, which has requested that the US expand on this news further, and it may not be true of course, but either way there is a huge two-way news risk that will hang over the next few days and could deliver large moves in either direction.

How trustworthy are the Russians? Well in 1994, in return for Ukraine giving up the nuclear weapons it had inherited on the collapse of the USSR, Russia, the US and the UK signed the Helsinki Declaration guaranteeing Ukraine's borders, so perhaps we should treat Russian denials here with some scepticism.

In the short term though SPX has broken back hard below the daily middle band, which closed Friday at 4483, and as long as that confirms today with another close below it the obvious next move would be a retest of the 2022 low at 4222.62.

SPX daily BBs chart:

Main downtrend resistance at the weekly middle band, currently at 4575, has been tested and held as resistance at the high for both of the last two weekly candles. That's a solid rejection, also looking for that SPX 2022 low retest.

SPX weekly chart:

On NDX the high last week was at a test of triple resistance at the 200dma at 15054, the monthly pivot at 15056, and the annual pivot at 15098. A very solid high at at formidable resistance and the next obvious target there is also a retest of the NDX 2022 low at 13724.85.

NDX daily chart:

In terms of downside targets the immediate targets on ES and SPX are the fixed double top targets in the 4300 area, then a retest of the 2022 low and then, if this is a large H&S forming on SPX as I have mentioned in previous posts, the H&S neckline in the 4200 area.

SPX daily chart:

On a hard break below 4200 I have a possible support trendline now in the 4100 SPX area and falling.

SPX 60min chart:

There is a lot of news risk this week and whether Russia invades or not the news could deliver a large move in either direction on equity indices, as well as delivering large moves in currency, bond and energy markets. This is very much a week to be wary.

We are doing a free public webinar at theartofchart.net an hour after the RTH close on Thursday on FAANG Stocks and Key Sector ETFs. If you'd like to attend you can register for that here or on our February Free Webinars page.

Our high end options service Paragon Options started the year strong with a $47,000 profit trading ES in January. We are looking at taking on up to ten new subscribers this month and if you'd like to sign up for a free trial you can do that here.

Testing The Weekly Middle Band Again

I was saying in my last post before the open on Tuesday that if SPX kept testing the daily middle band as resistance every day then another attempt to break back above it was likely and we saw a modest close back over the daily middle band at the close on Tuesday. That followed through to the upside yesterday and yesterday's close was a confirming close back over the daily middle band, now in the 4506 area, and a test of main resistance at the weekly middle band, now in the 4583 area.

SPX daily BBs chart:

This is an important inflection point, as a sustained break back over the weekly middle band would open a possible retest of the all time high on SPX. There is a chance to close the week above the weekly middle band at the close tomorrow of course, and a confirming close above it next week would set up a possible all time high retest.

SPX weekly chart:

There is one other resistance level worth mentioning here, and it is a double resistance level currently at 4611-17. That comprises the 50dma, now at 4611, and the 45dma, now at 4617. That is the last strong resistance level below a retest of the all time high on SPX.

SPX daily vs 45dma chart:

There is already some short term negative divergence here, with a 15min RSI 14 sell signal fixed on SPX and an hourly RSI 5 sell signal fixed on ES. If we are to see failure here I'd be leaning towards seeing a full retest in regular trading hours of the current rally high at 4595.31.

That would set up a clear double top here that on a subsequent sustained break below 4451.53 would look for the 4305 area and a probable retest of the current retracement low at 4222.62.

SPX 15min chart:

The possible IHS I was watching on IWM has completed forming and broken up with a target in the 220 area. At this point there are two main options here, either that the IHS makes that target, or that IWM fails into a retest of the lows. We are very likely to see one of those two options deliver directly from here, and a break below the right shoulder low at 194.92 fails that IHS and sets up the low retest as the target.

IWM 15min chart:

This inflection point still likely resolves downwards but if that doesn't happen today we may well see SPX close over the weekly middle band tomorrow. I'd note tomorrow leans historically 66.7% bullish.

We are doing a free public webinar at theartofchart.net an hour after the RTH close tonight on 'Trading Commodities - Setups and Approaches'. We will be looking at at commodities markets and will be designing two options trades that could be used to take advantage of potential moves in two of those markets. If you'd like to attend you can register for that here or on our February Free Webinars page.

Our high end options service Paragon Options started the year strong with a $47,000 profit trading ES in January. We are looking at taking on up to ten new subscribers this month and if you'd like to sign up for a free trial you can do that here.

Knock Knock

We did our monthly free public Chart Chat at theartofchart.net at 4pm EST on Sunday looking at the options on equity indices as well as looking at the usual wide range of other markets. If you'd like to watch the recording that you can do that here or on our February Free Webinars page.

At the closing print of January an RSI 5 sell signal fixed on the SPX monthly chart. There was already an RSI 14 sell signal fixed but the RSI 5 sell signal is a much more reliable and shorter term signal that has much improved the odds that SPX will deliver the ideal backtest of the 3800 - 3900 area that I've been writing about regularly since my August 6th post last year.

I'm still reviewing the past performance of these signals but I'm expecting to do a post on Thursday morning reviewing the performance of these in detail over the last few decades.

SPX monthly chart:

The rally high last week was a decent test of main resistance at the weekly middle band, now at 4576. That is still main resistance but, if broken and converted to support, would open a possible retest of the all time highs. That is the main resistance level that I am watching here.

SPX weekly chart:

Shorter term though support and resistance are mainly about two shorter term moving averages. The first is the daily middle band, which SPX broke back over on Wednesday last week and then rejected the next day. Since then SPX has traded Friday and Monday below it with the daily middle band close to or at the high on Thursday, Friday and Monday.

This is a concern, best expressed by a trader I was chatting with a few years ago who remarked that the longer a market keeps knocking on a door, the more likely it is that the door will open. Bottom line here is that if SPX doesn't break lower soon there will likely be another attempt to break up over the daily middle band, now at 4520.

SPX daily BBs chart:

Support for the last two days has been at important short term resistance at the 50 hour moving average, now at 4489. That was broken at the lows on Friday but not converted to resistance. It was broken slightly yesterday at the close and SPX closed six handles below it. If that can be converted to resistance then the path clears to head lower directly, though I am still watching that possible bullish IHS forming on IWM of course.

SPX 60min chart:

The falling channel on Dow is still looking good, with trendline resistance now in the 35500 area. Rising support from the low was breaking slightly at the close yesterday and if that can follow through as well today then that clears another significant short term support level.

INDU 15min chart:

This inflection point likely resolves downwards but if that doesn't happen today we may well see SPX try to break over resistance again. I'd note that this is a bullish leaning week, with historical stats of green closes over 60% today, tomorrow and Friday.

We are doing public webinar at theartofchart.net on 'Trading Commodities - Setups and Approaches' an hour after the RTH close on Thursday. We will be looking at at commodities markets and will be designing two options trades that could be used to take advantage of potential moves in two of those markets. If you'd like to attend you can register for that here or on our February Free Webinars page.

Break And Rejection

I was saying yesterday that if there is a rejection on the day after a break back up over a middle band, it is generally on the next candle, and we saw that yesterday. I also said that after a rejection there is generally a follow-through to the downside, and we've been seeing that on ES overnight so far.

The only other example of a failed break up over the daily middle band in the last three months is highlighted in blue. That was in January and started the decline into the January low, so that was a good example.

SPX daily BBs chart:

On the daily chart I'm watching the possible H&S forming here, and the rejection yesterday would be at the top of the right shoulder on that. On a break below 4200 the target would be in the 3575 area though, as I said yesterday, I'm not expecting to see SPX much under 3900 this year. If we do see 3575 that would be a serious support break and would kill off my wedge breaking up towards the 6500 area scenario.

SPX daily chart:

On the weekly chart the high this week was a decent test and fail at the weekly middle band, which tends to be a very important support and resistance level.

SPX weekly chart:

So if we are seeing a fail into a lower low here, what has this high delivered in terms of trendlines? Not as much as I would have liked, but this high on SPX was a solid hit of declining resistance from the high. There isn't a really high quality corresponding support trendline yet but the best option, marked on the chart below, is currently in the 4150 area.

SPX 60min chart:

On Dow there is now a decent quality falling channel, so if Dow is headed down to channel support, that is currently in the 32500 area. Both of these options on SPX and Dow are possible bull flags forming from their all time highs.

INDU 15min chart:

We are doing our monthly free public Chart Chat at theartofchart.net at 4pm EST on Sunday and will be looking at the options here more there, as well as looking at the usual wide range of markets. If you'd like to attend you can register for that here or on our February Free Webinars page.

Everyone have a great weekend :-)

The January Barometer

 I've been promising a post talking about the January Barometer, which is a statistic from the Stock Trader's Almanac, something that I have been buying every year for many years as it has a lot of very useful information for traders and investors.

This statistic looks at all Januarys that have closed down since 1950 and what happened over the rest of the year from there, and on those years overall. The stats for the rest of the year are that 59.7% of them close down for the overall year, and 48.7% close the year lower than that close at the end of January, which was at 4515.55 this year of course.

The  most interesting statistic for me though is that on average the low for those years is 13% below that January close. Now that's only an average, but that would put the average expectation for a low on SPX this year in the 3929 area, and I wrote a post last August looking at a retracement I thought we might well see on SPX this year to backtest a big broken resistance trendline on the SPX monthly chart, a trendline that I currently have just under 3900 and rising. That won't necessarily be tested this year of course, but historically that test is now most definitely on the table as a serious possibility. We'll see how that goes.

I was reviewing the prospects for that possible backtest again in my post on 10th January, and if you'd like to read that you can find that here.

In the shorter term the rally on SPX that I was looking for returned to main daily resistance at the daily middle band and broke back over it yesterday.

If SPX can convert the daily middle band to support, and then the weekly middle band, currently at 4577, back to support, then that would open up a possible retest of the all time highs. Before that really comes into view though those breaks would need to confirm with another close above on the next candle, which they often fail to manage, and when these don't confirm that it tends to fail with a break back below the middle band on the next candle, so for the daily middle band that would be today. With SPX currently back below the daily middle band at the time of writing that looks like a real possibility today so we'll see how that develops over the rest of the day. If it fails to confirm that break today then that fail would usually follow through to the downside.

SPX daily BBs chart:

In the event that we do see SPX go up further from here I would note that above the weekly middle band I have the reversion to the mean level at the 45dma currently in the 4623 area.

SPX daily vs 45dma chart:

On the SPX daily chart there was no positive divergence at the low, and the rally high yesterday was over the 50 level on the daily RSI 14, so there is no prospect of getting good quality positive divergence on a retest of last week's low. I would note the possible H&S forming here on SPX that on a sustained break below 4200 would have a target in the 3550-3600 area. That's lower that I'm expecting to see this year but I'm watching it with interest.

SPX daily chart:

On the SPX weekly chart I'm watching the weekly middle band, currently at 4577 as I mentioned above, and while not many analysts tend to watch this it is nonetheless one of the key support and resistance levels on both SPX and NDX. NDX was testing it as support at every significant low last year. A confirmed break back above, if seen, would be a strong signal for a retest of the all time high.

SPX weekly chart:

The only main US index on daily buy signals is the Russell 2000, shown below on IWM. That's mainly because it has been the weakest index for a while, and therefore delivered the low retest that was missed on the others. There is a possible IHS right shoulder forming there too that I will be keeping an eye on.

IWM daily chart:

We are doing our monthly free public Chart Chat at theartofchart.net at 4pm EST on Sunday and will be looking at the options here more there, as well as looking at the usual wide range of markets. If you'd like to attend you can register for that here or on our February Free Webinars page.