Two Obvious Paths to 1956

The first thing to say today is that even on the bear rally scenario, the chances that the rally high was made yesterday are small. That's because of the seventeen similar buy signals from the start of 2007, only two failed to reach the 70 level on the RSI 5, and both of those failed just over 60. The RSI 5 closed at 51.85 area yesterday and I am therefore assuming that SPX will test main resistance at the 50 DMA and the daily middle band sometime in the next three days. Those are both currently at 1956. SPX daily vs NYMO and RSI 5:

There is a slightly lower target as well at broken rising wedge support in the 1950 area, but I'd expect SPX to go through that to test the 50 DMA and daily middle band. SPX daily chart:

So how does SPX get there? Well the first option is that yesterday's high was a reversal at the obvious IHS neckline. If we are running that scenario then SPX should retrace for much of the day and then break up. This is the more bullish option as the target would be in the 1985 area, well above resistance in the 1956 area. The second option is that SPX moves directly to test key resistance in the 1956 area, with added resistance there at the moment from rising resistance from the high in the same area. This option gives the bears a better setup for failure there, though in any case we might well see a retracement from that area, and a failure of this buy signal there unless the RSI 5 makes target at 70 is a relative long shot historically. SPX 60min chart:

The levels on RUT match well, though in both cases on RUT the resistance levels are possible IHS necklines. I have sketched out possible paths for both options on the chart. RUT 60min chart:

ES has been weak overnight and has made a short term lower high and low. At the moment that is favoring the case for a fairly weak day today to form the right shoulders on those IHS patterns. Bigger picture I am leaning bullish here and expecting a retest of the late July high, though most likely that would be setting up a larger decline after that.

Buy Signals Triggered

The long setup I was looking at on Friday morning triggered on Friday so the daily lower band ride should be over and I'm looking at upside targets. The main target I'm watching is not an SPX level but the 70 level on the daily RSI 5. The RSI 5 closed on Friday at 47, and I'd expect to see a rally of at absolute minimum to the 50 DMA to make this target. Of the last seventeen of these from the start of 2007, only three retested the lows before making my RSI 5 target at 70, and two failed in the 60 area before going on to new lows. This is a strong buy signal. SPX daily vs RSI 5 & NYMO:

On my standard daily chart I have the obvious first resistance levels at broken wedge support in the 1950 area, and then the 50 DMA and 1955 with the daily middle band at 1958. My feeling is that we will at minimum test that 1955-8 target, and will most likely retest the highs after that. Only nine of the last seventeen signals went directly to new highs, but that is nine of the last twelve signals since the 2009 low once I strip out the previous five, and one of those three tested the previous high and failed there making the second high of a double top. SPX daily chart:

The falling wedge on RUT broke up and I have a slightly dubious looking IHS with a target in the 1150 area. As it happens the next serious support/resistance level above is also at the 1150 level so it is the obvious next target in any case. RUT 60min chart:

I posted this TNX chart late last week showing the test of falling wedge support. if this breaks down we could well see a major further bond rally that would erase most or all of the losses on bonds from the 2012 highs. That could obviously have implications in the equity and currency markets. Watching with great interest. TNX daily chart:

I have decent support today at the 50 hour MA at 1926 and am doubtful about SPX breaking lower than that. ES is looking very overbought short term and I'm thinking that we may well see the opening gap fill. If we are going to new lows soon then the current setup strongly favors a move to at least test the 50 DMA (1955) and the daily middle band (1958) before turning back down. Three of the last seventeen of these setups retested the lows before making target so that's possible here, but not statistically that likely.