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I often talk about the need, fairly early in any trend, to establish either a significant rising support trendline (in an uptrend) or a significant declining resistance trendline (in a downtrend).

That is a key reason that I was looking for a strong rally here and I think those key trendlines have now been established on both SPX and RUT. The question now is whether those trendlines will hold or fold. If the downtrend is to continue then the RTH yesterday was the rally high and both SPX and RUT should turn down from there. If the downtrend is to break and open up a retest of the highs and a Santa Rally, then I'd expect those trendlines to break up today or tomorrow.
On the SPX 15min chart there is now a perfect falling channel from the last highs with three trendline hits above and below. This setup was strongly confirmed with two hits yesterday and this trendline is the key resistance here on SPX in my view. SPX 15min chart:

Hold or Fold?

I've been treating the setup on RUT as a rough falling channel, but I think this is most likely instead a perfect but gently narrowing falling wedge. If so then the rally high there was also hit yesterday and a break up from this wedge would also be a strongly bullish signal. RUT 60min chart:

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SPX closed on the daily lower bollinger band for a third straight day on Friday. If we should see the same today then I'd be looking at a closing range in the 1769-72 area. However looking at the overnight action, the bounce that I was looking for late last week may well now be in progress, and resistance is therefore at the middle bollinger band in the 1795 SPX area. SPX daily chart:

Here's the Bounce

The overnight action has been wild, with a spike down to 1754 (March ES) on the disappointing China PMI numbers, and then a wild 25 handle rally up to 1779.50 so far. I have ES testing declining resistance from the high there, and if that is broken then main resistance is the daily middle bollinger band in the 1786 area. ES 60min chart:

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The main ES contract has moved from December to March today and ES (March) is trading 6.25 handles below SPX, which needs to be borne in mind when looking at ES prices. 

Yesterday's close was a cliffhanger, with strong short term bull and bear scenarios that I posted on twitter and was thinking might well be resolved at the open. The bull scenario that I posted yesterday night on twitter was the declining channel on RUT, with the obvious next move being a bounce towards channel resistance, at which point RUT would either break up or turn back down. RUT 60min chart:

Another Inflection Point
The equivalent of this bull setup on the SPX 5min chart is the falling wedge that I posted on twitter yesterday before and after it broke up, and the possible IHS forming after the initial rally from the wedge break. The close yesterday was close to the ideal right shoulder low on that IHS and an open over 1782 would be a gap up over resistance targeting the 1791 area. SPX 5min chart:
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Well I've been saying all week that I would start to take the larger bear scenario here seriously on a break below the weekly pivot at 1796, and here we are.

Who knew that the bears had it in them to deliver a full day of relentless selling? It's been a while since we have seen that.
In the short term the decline on SPX yesterday was within a tight declining channel that was intact at the close. We may see that break up at the open and if so I'll be looking for a short term low to form for a bounce. Until this channel breaks up however, we are in an established and very steep downtrend. SPX 5min chart:

Who Knew? - The Bear Scenario

As the bears showed some real strength yesterday I'll run through the overall bear setup here, and the highest probability path for a strong retracement from the recent highs if we are to see that. On the 60min chart below I have marked up the current double-top that has not not yet broken down but may do so today with a target back in the mid-1740s. If we see that then the obvious target is the possible H&S neckline there, and if we were then to see a right shoulder form to complete that pattern there would then be an H&S targeting the 1680 area. The obvious downside targets for a large retracement would be the SPX 200 DMA, currently at 1662, and the weekly lower bollinger band, currently at 1616. SPX 60min chart:

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Looking at ES the retracement from the high on Monday is most likely still ongoing, though there is clear positive divergence on the 60min RSI warning that it may not go much lower. The reversal at the 50 hour MA overnight kept ES on the bear side of the MA, and if the retracement continues today the obvious target is the weekly pivot at 1796.20, which should be strong support as the daily middle bollinger bands on both ES and SPX are in the same area. I have the retracement pattern as a 70% bullish (ultimately) falling wedge and I have wedge resistance just over 1805. The main bull/bear line for today is at 1808 as that was the overnight high. ES 60min chart:

Ongoing Retracement

On the SPX daily chart the middle bollinger band is currently at 1795.41, and if we see a break up today the upper bollinger band is at 1816. SPX daily chart:

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Yesterday was a tedious day that didn't go far or decide anything. I'm still leaning bullish but short term ES is retracing after established negative 60min RSI divergence yesterday. I have a small double-top target at 1801.5 and have key support around the weekly pivot at 1796.20. This is the level below which the bear case will start to look interesting again. ES 60min chart:

No Firm Direction Yet

In terms of that bear case, in the shorter term the bears have a possible double-top in place now and that would target the 1744 area on a clear break below last week's (valley) low at 1779.09. 65% of possible double-tops never make it back to the valley low (or trigger level), and of those that do, a significant number fail just after breaking below it. We'll see. SPX 60min chart:

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I posted a chart on twitter on Friday evening showing the move up from the lows last week, and showing the strong setup there to retest the highs today. The low on Friday morning retested the break over a double-bottom targeting the 1814 area, and by the close a rising channel from the lows had formed on SPX. While that rising channel holds I'd expect a retest of the highs by lunchtime today, as the channel support trendline is rising an impressive 18 points per trading day. If it breaks down then the double-bottom remains a strong setup as long as Friday's low at 1796.81 holds. SPX 1min chart:

Advantage Santa

On the daily chart Friday's move up was a strong reversal at middle bollinger band support. The next obvious target is the upper bollinger band which is now in the 1816 area. That obviously supports the double-bottom target on the chart above. SPX daily chart:

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The NFP figures this morning were a decent beat and the US unemployment rate is now back down to 7%. Even though the Fed is clearly very gun-shy about tapering they may well feel that if they still don't taper now then they will lose a lot of their remaining credibility.

Will tapering actually matter much? In perception terms perhaps, but if QE is reduced by a few billion per month one has to wonder how much practical difference that would make. There is still likely to be a lot of QE coming into markets for quite a while yet regardless.
For today the bull and bear scenarios that I put forward yesterday are still both in play. On the bear scenario a slightly upsloping H&S is forming and the ideal right shoulder high would be in the 1802.5 SPX area today. On a move over 1805 this scenario would become steadily less likely. SPX 60min chart:

Two Chart Post

The bull scenario is that a sustained break over 1799.80 will trigger a double-bottom target in the 1820 area, and we may well see a gap up over 1799.80 at the open which would be suggestive of a gap and go trend up day setup. SPX 15min chart:

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SPX tested the daily middle bollinger band hard yesterday but closed above it.

My main target support level is at the daily lower bollinger band and to make that is going to require a close below the middle bollinger band, ideally this week but possibly as late as next Monday. Meanwhile this area is an important inflection point and I have both bull and bear scenarios in play here. SPX daily chart:

cp 12-5-13

The bull scenario here is that the low yesterday completed a 50% fib retracement of the move up from 1746. On a sustained break over yesterday's high at 1799.80 SPX a decent falling megaphone would break up with a target back at the highs, and a larger W bottom would break up with a target in the 1820 area, very close to the daily upper bollinger band at 1819.5. This isn't my preferred scenario but it is very much in play and a sustained break back over 1800 should be respected. SPX 15min chart:

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I'm going to have a quick look today at the trendline and bollinger band backdrop to the retracement this week.

At the high last week a tentative rising channel has now been established from the October 2011 low. This is important because as long as this channel lasts the next obvious move will be to test rising channel support, currently in the 1575 area. It is also important because since the October 2011 low two large rising wedges have formed and broken up with targets in the 1930-65 area, but if this larger rising channel holds then both of those patterns and upside targets will be superseded. That's not to say that SPX wouldn't reach those levels later in any case, but those targets would no longer be active pattern targets.

There are two important trendline support levels on the way back to channel support, and the first is at the retest of broken resistance on the rising wedge from the June low at 1560. That is currently in the 1755-60 area and is a decent fit with the daily lower bollinger band, currently at 1754. If that level is taken out with confidence then that rising wedge target will be greatly weakened and a path would open up to the second trendline support level which is rising support from the 1560 low, currently in the 1690 area. SPX daily chart from October 2011:

Trendline Overview

On the shorter term daily chart the low yesterday tested the daily middle bollinger band and it's possible that this retracement could fail there. If so then we would now see a break back up towards the daily upper bollinger band, currently at 1820 but until we see a break back over the weekly pivot on ES at 1805.1 I'm expecting more downside, with the obvious target at the daily lower bollinger band, currently at 1754. SPX daily chart:

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