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I was a bit cagey on twitter last night about whether the low was in, as the bounce was looking a lot like a bear flag, and I said as long as bulls could hold 1971.5 SPX tomorrow morning we should be on the way back up. ES broke down hard overnight and clearly that isn't going to happen. This is good news. SPX has been butting up against the weekly upper band and needs some headroom for the next move up.

The key thing to watch today is the SPX daily middle band at 1959. If that breaks with any conviction today then my target would usually be the daily lower band or any major daily MA (50, 100, 200) higher than the lower band. As they are all currently below the lower band that would leave the daily lower band in the 1930 area as the target, and very possibly then a test of the 1926 low. The overall uptrend is not in any real trouble unless we see a break below rising wedge support from 1737, and that's now in the 1910 area. SPX daily chart:

Battle of the Bands

You can see on the ES 60min chart that the retracement was a decent 61.8% fib retrace and I'm working a possible falling channel. If that holds then I'd be looking for the low today in the 1945-7 ES area, so low 1950s on SPX. You can see that the 60min RSI is extremely oversold. I'd be surprised to see much lower than that today. ES 60min chart:

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Bears put a strong day together yesterday and broke down below the 50 hour MA. Shortly before the low I tweeted a confluence of strong support levels in the 1957-60 range, and the low was at 1959.46. The key support level here is the SPX daily middle band at 1957, and only a closing break below that would open up lower targets at the daily lower band in the 1930 area and the 50 DMA at 1921. The last two significant lows were at 1945 and 1926 and both of those are potential H&S necklines of course. SPX daily chart:

Testing the Daily Middle Band

I've redrawn the resistance trendline on the rising wedge from 1737 as I think the revised trendline is better quality. That support is now in the 1948-50 area and if this wedge is really breaking upwards I'd be expecting that resistance should hold now. SPX 60min chart:

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Now that primary channel resistance has been broken. I've been considering the upside targets that are now in range as a result of that break. The first one is rising channel resistance from the 1814 low, and I have that currently in the 1995-2000 area. That looks like the obvious next candidate for a short term high area as I can't see any reason here to think that the current high might hold more than a couple of days.

Over the longer term there is obviously the issue that the rising wedge from 1737 appears so far to have broken up, though it's still just about possible that this action above it could be a wedge overthrow. The break of primary channel resistance suggests otherwise however. There are two obvious targets for this wedge breaking up. The first is the full technical target for the wedge, which is in the 2160 area, and that will be my primary target if my other target is taken out. The other target, as wedges often evolve into channels, is possible rising channel resistance from 1737, currently in the 2030 area, with a possible alternate option currently in the 2050 area. I am therefore assuming that the current overall uptrend should be good to at least 2030, though we might well see a strong retracement into the 1940-60 area from shorter term channel resistance in the 1995-2000 area.

SPX retraced a bit yesterday as expected, and we may see some more retracement today. If so I have very strong support in the 1966 area at the intersection of broken rising wedge resistance, rising support from 1926, and the 50 hour MA. That should be a solid floor, and a break below that would look significantly bearish. SPX 60min chart:

Revised Upside Targets

On the daily chart SPX closed seven points below the upper band yesterday. If we see a strong day today the daily upper band could close as high as the 1995-2000 area. SPX daily chart:

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Thursday was a strong day on SPX and NDX, and at the close, all three of the significant resistance trendlines that I was looking at in my Thursday morning post were broken. The most important of those was primary channel resistance from the October 2011, which had been tested and held in all four of the preceding weeks but has now finally been broken. I would expect another pattern to form and am considering the likely options, but at the least I'd be looking for a further move to the 2040 area now. SPX weekly chart:

Broken Trendlines

Rising channel resistance from the 1926 SPX low also broke up. There's not much to suggest reversal on the 15min or 60min RSIs, and I now have my eye on rising megaphone resistance from 1814, currently in the 1995-2000 area. SPX 15min chart:

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I don't know how long it will last, but yesterday was recognisably the second day of a band ride on the SPX daily upper band. ES looks as though SPX should open near the upper band,so whichever way it goes, this should be a third day for that band ride. There may be no more than that as quite a few band rides fail after the third day. If SPX has a strong day then I'd expect the upper band to close in the 1981-3 range today. SPX daily chart:

The Day Before

There's some decent looking resistance not far above on both SPX and NDX, and I'm wondering whether we might see a marginal new high today followed by a retracement early next week. On SPX I'd be looking for possible resistance in the 1982.5 to 1985 area today. SPX 15min chart:

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Unlike the bears last week, the bulls took full advantage of a favorable day yesterday and made an impressive new high. My primary channel resistance on the weekly chart isn't yet broken with any conviction, and yesterday closed back on it, but it's in trouble, and I'm upgrading the odds that we will see a further break above to 70%. Here's the chart I posted intraday on twitter yesterday. SPX weekly chart:

Q3 Day 2 - Bearish

SPX pulled back a bit at the close yesterday to close on the daily upper band. We may be seeing the start of a ride of the daily upper band. We could see a retracement day today without that being an issue, but if so I'd expect a return to at least touch the upper band again tomorrow. SPX daily chart:

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The first trading day of the third quarter is historically bullish. The Stock Trader's Almanac has this as down as 76.2% bullish on Dow and 81% bullish on SPX. Looking back over the last ten years the points to note are:

  • Eight green closes and two red closes
  • The two red closes were -3 (2010) and -12 (2004)
  • The eight green closes were +3, +3, +4, +5, +8, +10, +16, +19
  • The second day of Q3 leans bearish
I'm leaning bullish today and looking for a retest of the 1968 SPX high from last week. If strong primary resistance overhead is respected there is still headroom to run up as high as the SPX daily upper band, currently at 1972. SPX daily chart:
Q3 Day 1 - Bullish
The TNX chart is still in the balance here. TNX has been trying to break down from the double top but there is no conviction break below double top support as yet, and as I have noted many times before, when these patterns fail it tends to be just under the break.  TNX 60min chart:
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SPX had a decent day yesterday, closing on the key resistance level at 1861 that I flagged as an important bull/bear level in the morning. That may hold tomorrow, as the stats for the last day of the second quarter are bearish, with Dow showing 33% positive closes over the last twenty years or so and SPX at 38%. I looked at the last ten years of these on SPX in detail and pulled out the following interesting points:

  • Six out of ten red closes
  • Seven closes less than ten points either way
  • Biggest red close -11 (2010)
  • Biggest green close +33 (2012)
The +32 close is an outlier as all the other closes were at 12 or less, but it's worth noting that the two largest moves, the +32 and the +12, were both upwards. We could see a retest of the highs tomorrow on this history, and if SPX takes the obvious red close option, there's no historical reason to expect a close under 1950 SPX.
 
So where does this leave the immediate case for a move to retest 1926? Not in a great place next week. After we made the 1968 high on Tuesday I was looking at the period from there through to the close tomorrow as the window of opportunity to see that retracement, and unless we see an almost 2% move down tomorrow, that window will close without the bears having managed anything more than a test of my first support level at the daily middle bollinger band. SPX daily chart:
Bear Window Closing
I was also watching the SPX 50 hour MA all week and SPX just couldn't hold below it, despite it helpfully rising ten points to 1957 over the course of the week. A strong downtrend tends to hold below that as resistance, consolidations and weak retracements do not. This was a weak retracement that isn't showing any obvious sign of expanding. 
 
After the close on Monday we are into the last three trading days before the holiday weekend and the stats for those, and indeed generally for trading weeks into holiday weekends, lean bullish. We may well just see more consolidation, but the best chance for a significant retracement before the holiday weekend has already been lost, and the bulls should get another shot at breaking very strong resistance at the SPX weekly primary rising channel from the 2011 low, though I would repeat that really is strong resistance, and after two punches over the weekly upper bollinger band during the last four weeks, the historical odds strongly favor correction or at minimum another couple of weeks of sideways consolidation. SPX weekly chart:
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SPX tested the daily middle bollinger band yesterday and as with Wednesday, there was then a sustained rally to a lower high (so far). The SPX daily middle band is obviously a significant support level, but there should be more downside coming if the bears can put a whole day together. SPX daily chart:

Two Main Options Today

For today there are two main options. The first is that if yesterday's low can be taken out, then the 1,2 - 1,2 setup of the last two days should deliver a more sustained move with a chance of breaking the daily middle band and making my 1926 target to test larger double top support there. The second option, if SPX can break back over 1960.83, is that the 1968 high should then be tested. SPX 15min chart:

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I've had quite a few new readers in the last few months and it struck me yesterday from a couple of comments that at least some of these were obviously still hazy on the distinction between technical analysis and fortune telling. It can be an easy mistake to confuse the first with the second, as a good analyst can sometimes make calls that seem almost supernatural. Some of my past calls have been amazingly and rapidly accurate, and some offhand examples I'd pick would be:

  1. My June 2010 call of the low area on BP just before the end of the wild decline after the oil spill, 
  2. My February 2011 call of the inflection point area on TYX (30yr Treasury Yields), days before TYX reversed at channel resistance and started a decline halving the long term bond yield over the next 18 months
  3. My November 2012 call to short the Yen just before it declined over 20% over the next six months
  4. My June 2013 call for SPX to rise to 1965


There are many others that I should really list on a page on my blog at some point, but my point here is that while this sometimes may appear to be magic, it's actually just good technical analysis. I don't have any supernatural powers, and I cannot see into the future. Any setup I show, however impressive the historical precedents, can go the other way, taking a lower probability path. I have no magical power to see into the future. No technical analyst does.

At school I used to supplement my pocket money by counting cards while playing blackjack for money. It's not an easy skill to learn, but if you can do it you can tilt the odds into your favor to a degree where over a period, and on average, you can win reliably. That's why they watch out for card counters in Las Vegas, and ban them for life from casinos as soon as they are identified. Casinos don't want customers who can turn a game of chance into a game of skill. That's because they don't like losing money, which is fair enough.

Technical analysis is akin to counting cards at blackjack. You can never know what the next card dealt will be, but it is a skill that can tilt the odds in your favor to a significant enough degree that you can beat the market with a reasonable degree of consistency. Unlike casinos you don't get banned from exchanges for using it, which is why trading the markets can be a game of skill in a way that playing blackjack in a casino can't.

When I was looking at the setup yesterday morning I warned that the bears might collapse at the open, that a break back over the the SPX 50 hour MA would badly damage the chances of more short term downside. I flagged a break below the rising channel on TRAN as important for opening up the downside. I tweeted after the bullish open that we might see a retest of the highs. Nonetheless some readers seem to have condensed everything I said into 'market-go-down-now', and were disappointed that didn't happen. Alas, that just isn't the way it works.

Equally the strong recovery yesterday doesn't actually change much, and those who have concluded from it that the market will power up directly through 2000 from here over the next few days are just as likely to be disappointed as they were at the start of the week. Not only are significant tops often signalled by declines just beforehand that are quickly reversed amid premature celebration parties thrown by bullish ignoramuses, but neither a 61.8% fib retracement of a decline nor a retest of the highs are inherently bullish, and are both frequently part of a topping process.

The main obstacle for the bull side here remains the same, and that is very strong resistance at the primary rising channel resistance trendline slightly above the current highs. That could break of course, but until it does it is rising at about 15 points per month, and potential upside is limited to that. The SPX weekly chart:

Counting Cards

Are we definitely going to make a significant high here? No, anyone with a guaranteed forecast can be reasonably assumed to be a fool or a liar. There are no guarantees. What I would show today though, in addition to all the other various historical precedents that I've looked at over the last week, is the daily SPX chart with the marked divergences against the daily NYMO, and the SPX daily RSI 14 and RSI 5.

I think we can all agree that the period from the start of 2013 has been unusually bullish by historical standards, so I've started this chart there, and the eight shaded areas on the chart are the areas where SPX has positively diverged from NYMO and either or both of the RSI 14 and RSI 5. There are seven previous instances over this very bullish period and the smallest retracement after these previous seven instances was about 2.2%, which if we were to see that minimal retrace here, would target 1926 SPX, a key retracement target that I've been looking at and also the target on the possible double-top that would form if we were to see a retest of the 1968 high. No guarantees but just sayin'. SPX daily chart vs NYMO and RSI:

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