In my post on Tuesday 4th August I was looking at the ambiguous setup on US indices and the Nikkei after the strong rally into the beginning of August, noting the three good quality topping patterns that were still intact on the Philadelphia Semiconductor Index (SOX), QQQ and Nikkei. Since then the Nikkei pattern has failed with a target at a retest of the all time high.
I also noted that SPX was close to the daily 3sd upper band, and said that I was looking for a short term consolidation of a week or so, to allow time for the daily middle bands to go higher, and for the daily outer bands to expand, opening up further possible upside. We have since seen that consolidation last for four weeks so far, the daily middle bands turned up, and the outer bands expanded, but then contracted again before they were hit this week.
In my last post on Friday 28th August before the Warsh Speech I was looking at three IHS patterns that had formed on the 15min charts on SPX, QQQ and DIA, and all three broke up on the Warsh speech before failing with targets at retests of their recent lows. The IHS patterns on SPX and QQQ failed on Friday, with DIA failing on Monday. At the same time an H&S broke down on IWM with a target in the 288.80 area.
That gave these four US equity indices downside targets as follows:
SPX target at 7638.17 - TARGET REACHED
QQQ target at 702.70 - current low 704.66
DIA target at 526.76 - current low 526.84
IWM target at 288.80 - current low 289.97
QQQ, DIA and IWM all came close to their targets this week but those targets were not quite reached. I would generally expect these targets to be hit so my working assumption is that those will be reached before this move completes.
In my (paying subscriber) premarket video this morning I was looking at the hourly buy signals fixed or brewing on ES, NQ, RTY, YM, DAX and ESTX50. These are generally a good indicator for a rally or full reversal and it is that rally that we have seen this morning. That may be topping out at the monthly pivot on ES at 7693, and the ES, RTY and YM hourly buy signals have now all reached their target or possible near miss target.
At this point I am wondering about a low retest that should hit the remaining downside targets and might set up possible double bottoms for a larger rally or full reversal.
Why am I thinking that the current retracement may well be bottoming out here? Well the downside targets I listed above are the only strong current downside targets I have on US equity indices. That is unusual if this retracement is going to get much further and has me wondering about high retests to set up the larger possible retracement patterns that I’m not seeing here yet, apart from a possible double top setup on IWM, and an existing but possibly failing diamond top on QQQ.
There is also this perfect bull flag channel on the SPX 15min chart below. If this channel holds, and there is a matching perfect bull flag channel on ES, then further downside is limited, and the bull flag will likely resolve in due course into a retest of the all time high at 7816.70.
SPX 15min chart:
On the bigger picture the SOX chart is still discouraging for bulls. The H&S on SOX is still intact and looking for 9150. That is a good indicator that it is reasonable to be looking for more downside soon, even if we reverse into high retests in the short term:
SPX reached the daily lower band and has so far formed a bull flag channel from the all time high.
SPX daily chart:
QQQ also reached the daily lower band and still has an overall diamond top target fixed at 642. A retest of the recent high at 734.58 from here could set up a smaller double top that would look for the 668 area. There is an argument that if that double top formed and broke down, and then the 642 target was reached, that might all be part of a larger bull flag forming on QQQ that would then look for an all time high retest.
QQQ daily chart:
DIA also reached the daily lower band and looks like a bull flag forming from the high so far. The bull flag quality would improve considerably with a retest of the 526.76 low and target, and in the short term a decent quality double bottom has formed that on a break up would look for a retest of the all time high:
DIA daily chart:
IWM was leading on the way down and looks somewhat different though this could still be a bull flag forming from the all time high. It wouldn’t be a decent quality flag though and a possible larger double top has already formed.
Against that IWM came very close to a test of the daily 3sd lower band yesterday and that tends to be a good place to see a multi-day rally.
IWM daily chart:
Ideally I would like to see a retest of yesterday’s low on SPX, QQQ, DIA and IWM and then a strong multi-day rally that may look for a retest of the all time highs on SPX, DIA and IWM before a larger pullback.
There is a possible news issue of course with the Iran War heating up as the US and Iran fight for control over the Strait of Hormuz. That has potential to get a lot worse very fast, particularly if Iran takes the obvious step of mounting a major attack on the Omani port of Fujairah, the linchpin of the US route through Hormuz and the primary transit point of the majority of the oil that is still being exported from the Persian Gulf. If that happens and serious damage is caused there, all upside bets on US equities may be off.
Iran issued a red line a few weeks ago where they said that if the US attacked Iranian power or oil infrastructure then they would widen their targets to any and all oil infrastructure in US allies in the Persian Gulf. The US attacked two power plants in Iran on Sunday and two Iranian tankers yesterday. We are still waiting to see if this escalation will elicit that response. If Iran do respond then the obvious target will be Fujairah.
My post on the bigger picture outlook for bonds was delayed but I’m expecting to publish that before the open tomorrow on my The Bigger Picture substack, so watch out for that. I’m planning another on oil in the next few days but am giving the current situation until the weekend to clarify.
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