by Springheel Jack

The chart I posted on twitter after the close yesterday showed the 69% bearish rising wedge that has formed from the last low on the SPX 15min.

The W bottom broke up yesterday and is now at the usual point where these patterns can fail, which is just above the breakout level. If this bullish setup forming over the last few days is going to fail, this is the most likely place. If the rising wedge breaks up today, we will then have a triangle, W bottom and rising wedge pointing back above the current highs. At the least I would then expect to see a hit of the SPX daily upper bollinger band in the 1672 area and most likely a retest of the highs. SPX 15min chart:

All three patterns are also visible on the ES chart, with the double-bottom there being stronger and clearer negative divergence on the 60min RSI. The double-bottom breakout was retested overnight and held, that is main support today with secondary support at the 50 hour MA in the 1640 area, and some support below at the triangle breakout level in the 1630 area. If we see 1630 break with any confidence I'll be looking for a test of the June lows. ES 60min chart:

On the SPX daily chart the close yesterday was six points above the daily middle bollinger band at 1640, and if that holds today the next obvious target is the daily upper bollinger band at 1671. The weekly upper bollinger band is now at 1685. SPX daily chart:

by Springheel Jack

It seems that Ben Bernanke's term as head at the Fed is coming to an end and that he will most likely be replaced in January 2014.

That brought to my mind Isaac Newton's famous comment that 'if I have seen further than others it is because I have stood on the shoulders of giants'. In defense of Ben Bernanke's record at the helm of the Fed, he was standing on the shoulders of his pygmy predecessor Alan Greenspan, and perhaps he would have seemed less of a pygmy himself had he not followed one of the least farsighted and most reckless Fed Chairman in history. We'll never know now, but I won't be celebrating Bernanke's retirement until we see who will succeed him. Looking at Bloomberg this morning Paul Volcker, Greenspan's predecessor and perhaps the only past Fed Chairman who would deserve to be described as a giant, does not seem to be on the current shortlist.

On to the markets. I posted an ES chart on twitter last night showing ES testing the trigger level on the possible double-bottom that I showed last week. The descending triangle that broke up yesterday obviously supports a break upwards, though the 60min RSI looks less encouraging, and I should mention that if ES reverses here back into the current retracement lows, then we would have a very nice looking rectangle bottom formed in June to date. Despite the name these patterns are actually 55% bearish and the target on a break downwards would be broken resistance at the 2000 top. Not much has changed overnight, so the chart below is the one I posted on twitter last night. ES 60min chart:

How strong is this resistance level? Pretty strong actually, as it is backed up by resistance at the daily middle bollinger bands which are being tested on multiple equity indices. SPX closed a point under the daily middle bollinger band last night. If we do see a break up the daily upper bollinger band is now at 1673 and the weekly upper bollinger band is currently at 1681. SPX daily chart:

by Springheel Jack

I posted a couple of charts on twitter after the close on Friday, and the first was the direction neutral symmetrical triangle that is now clearly forming on the SPX 15min chart:

The second chart I posted was the triangle forming on ES, but in this case the triangle is a 64% bearish descending triangle, though obviously these do break upwards 36% of the time. After seeing some strength overnight ES is now poised between strong short term bull and bear scenarios.

The bear scenario is that the nice looking short term double-top breaks down and ES moves towards a test of triangle support in the 1591.5 area. The bull scenario is that ES breaks over triangle resistance and the triangle target would then be slightly over 1680, supporting the larger double-bottom setup targeting the 1692 area. ES 60min chart:

by Springheel Jack

Brave New World Series

1. Secular Cycles on Equities

For those who aren't familiar with them there are two types of overall market trend. The first is the primary or cyclical market, and these are bull or bear markets lasting between a few months to (more usually for primary bull markets) two to five years with a move in excess of 20%, and on this basis since 2009 we have seen a primary bull market from March 2009 to May 2011, a primary bear market from May to October 2011, and another primary bull market from October 2011.

These primary or cyclical markets fit within larger trends called secular bull and bear markets and it's those I'm going to be looking at today. Definitions of these primary and secular trend periods are available here at Investopedia and Wikipedia.Unlike the analyses of these that I have read in the past however, I'll be considering these here from a trendline and pattern perspective.

A secular bear market cycle is a retracement or consolidation period within the long term rising trend on equity indices. It's hard to precisely define these as there have only been three reasonably clear secular bear market cycles in the last century, and no modern index goes back much further than that. That's not actually a large enough sample to make very firm rules about these cycles. As I can't wait two or three centuries to provide a larger sample to work with, I'll be deriving the rules I use from these last three secular bear markets on Dow Industrial Average (INDU - founded 1896), Dow Transportation Average (TRAN - founded 1884 but using data here from 1896) and the S&P 500 (SPX - founded 1957 but with data on Bloomberg extending back to 1928).

When secular cycles begin and end is counted in a different way from the clear highs and lows of primary cycles, and this is because in all of these three secular bear markets to date there has been one primary or cyclical bear market that has contained both the nominal terms high and the low of the secular cycle. However in all three cases the initial high is clear, and the end of a secular bear market cycle and the start of the new secular bull market cycle is counted from the break up from the secular bear market resistance trendline. While the low of the current secular bear market cycle was most likely in March 2009, the end of that secular bear market would therefore be considered as being from the break above the secular bear market resistance level.

The two most important indices to consider for secular cycles are INDU and TRAN, as they are the oldest modern equity indices, and I'll look first at TRAN as it is the older of the two.

On the Dow Transportation Average (TRAN) the beginning of the first secular bear market was at the 1929 high, and that started a declining resistance trendline that was confirmed in the late 30s and broke up towards the end of World War Two. The second secular bear market was under a resistance level established in the highs of the mid to late 60s and that resistance level was broken at the start of the 80s. The beginning of the third secular bear market was at the 2000 high and since then TRAN has been forming either a broadening ascending wedge or an atypical broadening top (direction neutral despite the name). The end of the secular bear market would come at the break above long term channel resistance and current wedge or broadening top resistance, currently in the 6850-7000 area. TRAN monthly (LOG) chart from 1897:

The obvious question looking at the TRAN chart is whether TRAN has been in a secular bear market at all, but I think it's fairly clear looking at the Dow Industrials and S&P 500 charts that there has been a secular bear market there, so I'm treating this setup on TRAN as a secular bear market as well. There is also an alternate secular bear market pattern on TRAN in the possible broadening top that can be seen more clearly on the shorter term chart below.

On the chart below, which is TRAN from 1980 on the weekly (LOG) scale, the alternate pattern to the broadening ascending wedge is an broadening top. Either way the resistance trendline should currently be in the 6850-7000 area and is also the long term channel resistance trendline with the first touch on the trendline back in the 1890s. This is therefore a very major technical level on TRAN. TRAN weekly (LOG) chart from 1980:

by Springheel Jack

Well I was really expecting the SPX broadening wedge to break down yesterday or today but after yesterday's strong reversal that's now unlikely.

On the SPX 60min chart there is a potential double-bottom that triggers a target in the 1700 area on a break over 1649. It's worth noting that broadening ascending wedge resistance is now in the 1720 area. SPX 60min chart:

Looking at the SPX 15min chart, revised declining resistance was broken at the highs yesterday,and the pattern setup is a declining channel that has broken up. That broken channel doesn't trigger any target but that double-bottom is obviously in play on a break over 1649. SPX 15min chart:

I've taken the opportunity with switching ES over to the September contract this morning of redrawing all the trendlines on the chart from scratch.

As with SPX the basic setup on ES a declining channel that has broken up and that's bullish without any set target. The double-bottom setup is very clean on ES however and on a clear break over 1643 the pattern target is in the 1694/5 area. I would also note that the action overnight so far looks like a bullish pennant. ES 60min chart:

by Springheel Jack

ES tried and failed to break back and hold above the 50 hour MA near the open yesterday and it was all downhill from there.

The IHS patterns have obviously failed to complete and SPX is now close to another test of broadening wedge support. I think that wedge is going to break and this therefore looks like a formality, but it's an important formality and more bullish scenarios are still on the table until we see the wedge broken. Here's the chart I posted on twitter yesterday night with the updated wedge. SPX 60min chart:

On the SPX daily chart the close was just above the daily lower bollinger band. That is some support here and most of the time any further moves down without retracements would be incremental moves of five to ten points per day. As you can see looking back to 2011 on the chart below however, that isn't always the case. SPX daily chart:

I don't think we have seen a bull market high here and I'm not expecting that before the end of the year at the earliest, but I have talked about the likelihood that we would see the 200 DMA tested this year more than once. To illustrate the likelihood of that with another support level, I have looked at hits of the weekly lower bollinger band since 1980. That's currently at 1480 (and rising) and the last time that the weekly lower bollinger band was not either exactly hit or penetrated in a full calendar year was in 1997. That year, 1993 and 1988 all came close enough to the lower BB that I would count them as technical hits, 1989 was a near miss, and only in 1995 of the full thirty three completed calendar years since the start of 1980 was there a year where the low was only as low as the weekly middle bollinger band, now at 1577. If the broadening wedge breaks on SPX then there is therefore every reason historically to expect that we will see a sharp further decline. SPX weekly chart:

Until the wedge is broken there are still some bullish options however.

ES tested the low overnight and that leaves a possibility that ES has formed a double-bottom rather than an IHS and may now rally to test the current highs. I don't think that's at all likely, but if ES can break back over the 50 hour MA in the 1620 area I'll start taking this possibility more seriously. ES 60min chart:

On other markets I have remarkably similar setups here on USD and CL, though on different scales and at different stages.

Both involve a pair of double-tops, nested like russian matryoshka dolls, and on USD the smaller double-top has now broken down with a target in the 78.3 area. There is some channel support in the 80.2 area on the way, and on a conviction break below 78.60 the larger double-top target is in the 72.8 area. I need hardly add that the overall uptrend on USD is now in very serious doubt. USD daily chart:

There is a similar setup on CL, but at an early stage where CL has not yet started sliding down the technical snakes.

A break below rising support in the 95 area should deliver a test of the 94 area. A break below 94 triggers the first double-top target in the 91.5 area. A break below 91 triggers the larger double-top target in the 86 area. A hit of 86 would be a lower low confirming that the overall trend is still down. As yet though CL has not broken below 95 so this is a potential bearish setup like the one I posted on USD a couple of weeks ago, and which has since started breaking down. CL 60min chart:

The key resistance level this morning is the 50 hour MA on ES in the 1620 area, and the key support level today is broadening wedge support on SPX in the 1605 area. I'm expecting a downward resolution here but I could be mistaken. A close today below broadening wedge support would look very bearish.

Source: Springheel Jack

by Springheel Jack

I want to have a good look at bonds today but first I'll look at the IHS patterns that we've been watching develop since I posted the first chart looking at this possibility on SPX last Friday.

On ES the IHS is forming nicely, with the next obvious step being to recover over the 50 hour MA, which was intraday resistance yesterday.

The IHS shoulders look balanced so for good symmetry this IHS should ideally break up today, and no later than tomorrow. ES 60min chart:

I posted the SPX 15min IHS on twitter last night and here it is again. As with ES, the shoulders are well balanced and this IHS is ready to break up soon if it's going to break up at all. SPX 15min chart:

The IHS on the TRAN 60min chart has also been forming a decent right shoulder. TRAN 60min chart:

On other markets DX has been weak overnight but looks as though it may reverse back up very soon.

CL reversed back up somewhat below the break yesterday and I have marked in a new rising support trendline accordingly. Someone is going to mention the IHS type pattern on CL soon so I will mention that myself now and make my usual observation that this is not a true IHS, as every H&S pattern must be a reversal pattern, and this one isn't. Have I seen these form and play out to 'target' regularly? Yes, though I've also seen them fail more often than their legitimate cousins. Something to bear in mind. CL 60min chart:

On to bonds. On 25th August last year I posted a TYX chart showing bottoming options for 30yr Treasury Yields.

I was forecasting a rise in 30yr Yields to the 3.5% area as the head formed on a possible IHS that was part of a much larger double-bottom to break the (now) 28 year old declining channel on 30yr Treasury Yields. Here is that chart I posted then. TYX monthly chart (from 120825):

It takes a while for much of interest to happen on these long term bonds charts, so almost a year later TYX has traded over 34 (3.4%) yesterday and is now within striking distance of the IHS neckline that I was looking at then. There is therefore a significant possibility that, just as everyone is now writing off USTs as a lost cause, we may well see a major UST rally into the end of the year and perhaps beyond to form the right shoulder on this possible IHS. TYX daily chart:

There is a similar setup on the TNX chart (10yr Treasury Yields), though TNX is further away from the possible IHS neckline. TNX daily chart:

I've been forecasting a similar (mirror image) H&S to form on TLT, but actually corporate bonds have been considerably outperforming USTs, which I hadn't considered, so it may well be that if USTs reverse at the IHS necklines, then TLT will also reverse without reaching the obvious neckline there. That brings me back to the alternate bullish scenario I put together on TLT a few days ago. This scenario comes apart if TLT trades below 110, but until then I have a candidate rising channel and a scenario that could deliver the second high of a double-top on TLT for a nice technical finish to TLT's bull market since 2009. Something to bear in mind. TLT daily chart:

Will these IHS patterns on SPX/ES and TRAN play out? The next step is for ES to recover over the 50 hour MA, now at 1635.50, which will improve the odds considerably. After that there should be a fairly clear run to trendline resistance in the 1650-2 area, and on a break with confidence above there, the next big resistance is the daily upper bollinger band in the 1675 area. A failure to recover over the 50 hour MA would look bearish, a significant break below yesterday's 1621.50 low at this stage would put the IHS in serious doubt, and on a break below 1615 ES I would be inclined to write off this IHS scenario.

Source: Springheel Jack

by Springheel Jack

I was going to be putting the case again this morning for a retracement to form a right shoulder on the possible IHSes I was looking at yesterday morning on SPX/ES and TRAN, but I see from the strong reversal overnight that there is now no need. On ES the ideal right shoulder low would be in the 1621 area. ES 60min chart:

I posted another SPX 15min chart on twitter yesterday night updating the way that this IHS right shoulder might form there.

A small H&S formed at the highs yesterday and I was looking at the possibility that a larger H&S might form at a 1633ish neckline. That now seems unlikely but the ideal right shoulder low is still obviously at the same level in the 1623 area. SPX 15min chart:

On TRAN the ideal right shoulder low would be in the 6215 area. TRAN 60min chart:

On other markets USD is still holding the key 81.5 level and there's not much to report there. On CL there has been a sharp fall overnight that has broken short term rising support.

It may be however that CL is just establishing a shallower rising support trendline and I'm feeling fairly neutral on CL here. Key trendline support for CL is now in the 92.25 area:

I posted a couple of AAPL charts on twitter yesterday and noted with concern the break below rising support from the 382 low there.

That broken trendline retested and was rejected yesterday which looks bearish short term. That doesn't kill off the overall IHS scenario which could go lower on the right shoulder and take another couple of weeks to form without being weakened. Obviously further downside would need to be limited though:

The last chart of the day is the SPX daily chart, which I want to look at in slightly more detail than usual to consider the merits of the IHS scenario that I've been looking at this week. If we are to see a strong retracement this summer the obvious target would be the 200 DMA, now in the 1496 area but very possibly in the 1510-30 by the time it was reached. If we are to reach that target then breaking down from a large bearish pattern like the broadening ascending wedge from the November low would obviously be a step in the right direction, but ideally, and usually, there would be a large H&S or double-top on SPX at the interim top.

Prospects for a decent H&S forming here look limited but if we were to see these IHSes form and play out to retest the current highs, then a possible double-top would have formed at that stage with a target in the 1510-15 area on a break below the 1598 low made last week. If the current highs were exceeded then further upside is limited by broadening wedge resistance, now in the 1710 area, and that would still be well within the right range for the second high of a double-top. If the move up from here took us into early July that is also a date area where numerous significant highs have been made. Just thinking aloud but you can see why I'm favoring some more upside from here, and that is supported by the breaks of declining resistance trendlines from the high on this rally on SPX/ES, Dow, TRAN, RUT and (since yesterday morning) NDX.

While this would all be technically elegant however it's worth noting that the interim top may already be in, and the rally to test the daily middle bollinger band on SPX may be all the rally that we are going to get. We may see SPX/ES reach the ideal right shoulder lows and just keep on going downwards, and that's worth bearing in mind here. SPX daily chart:

Source: Springheel Jack

by Springheel Jack

SPX made the targets I gave on Friday morning and on the SPX daily chart the highest target was a test from below of the daily middle bollinger band.

That is a natural resistance level and the question this morning is whether equities go higher. SPX daily chart:

Looking across the indices there were quite a number of decent patterns and declining resistance trendlines from the high, and most of those were broken on Friday. I mentioned the possibility on Friday morning of IHS patterns forming on SPX and TRAN, and those are still in play this morning, though we haven't yet see the drop below 1634.50 ES that would suggest that this pattern will form on SPX. On the SPX 15min chart I posted a chart on twitter after the close on Friday showing the path the right shoulder for that pattern might take on SPX. SPX 15min chart:

by Springheel Jack

I gave main support yesterday in the 1595-7 range, which was a little low as the target trendline was hit at 1598.23, though I posted on twitter shortly afterwards that the wedge support trendline had been hit.  

After that SPX bounced strongly and closed back well above the daily lower bollinger band. The next obvious target on the daily chart is the daily middle bollinger band, now in the 1646 area. SPX daily chart:

Looking at the SPX 60min chart the low was a perfect hit of wedge support, which is the rising support trendline from the November low. The next target within the wedge is the wedge resistance trendline, now over 1700, but it may well be that the wedge will break down without reaching that target. SPX 60min chart: