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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:
Read more...

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:

Read more...

SPX made my target area at 1965-70 and rejected hard there. A candidate significant high for a 10%+ correction is in place but we're going to need to see some follow through here first to open up the obvious downside targets for that correction. On the SPX 60min chart the 50 hour MA was broken near the close yesterday and SPX closed below it. I'd like to see that established as resistance today and after that any significant break back above it would be a warning that this retracement might be over. 

 
Assuming we see some follow through today the next serious support is at the daily middle bollinger band, currently at 1940, and if the bears are to have a shot at a decent retracement here then it will need to break. That would open up a test of double top support at 1926, and a sustained break below that would trigger a double-top target at 1884. If that target were to be made, that would break a cluster of important support levels between 1895-1910, with the daily lower band at 1910, the 50 DMA at 1903, and rising wedge support from 1737 currently in the 1895 area. If these levels are broken and the target at 1884 is reached then more significant downside targets would open up. SPX daily chart:
A Road to 1884
On the SPX 60min chart the trendline support levels are rising channel support from 1814, currently in the 1915 area, and rising wedge support from 1737, currently in the 1937 area. Bears need to hold the 50 hour MA above and aim to break down from this wedge. SPX 60min chart:
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On the FOMC stats I was looking at last week, of the four similar instances since the start of 2010, and of the three of those that topped in the next few days, one topped on the Monday afterwards, and the other two topped on the Tuesday. If we are to see that intraday high today my target range is in the 1965-70 area and that would respect resistance on the primary rising channel on my weekly chart below. SPX weekly chart:

One Last Push

The daily upper band is now at 1970. With the close yesterday at 1962 that shouldn't close higher than 1973 today and we might see a close enough intraday hit to be a visual hit of the upper band. SPX daily chart:

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SPX punched over the weekly upper band again on Friday for the second punch above the band in the last three weeks,. I don't want to overemphasize this as a topping signal, but it goes without saying that these punches tend to happen when SPX is looking rather overbought, and on the four previous examples that I have marked on the chart below from the 2011 low, none rose significantly further before a consolidation or retracement period lasting four weeks or more. This would not generally be a place to look for a strong push upwards.

In terms of the primary rising channel, the high on Friday at 1963.91 was just short of my 1965 wedge targets, and was a test of primary rising channel resistance. I had a look at this using the thinnest possible trendlines over the weekend and there is very little play left in the trendline. Even a move to 1970 now would risk breaking it. SPX weekly chart:

The One That Got Away

So what if the primary rising channel does break up? It's rare but it happens, and I'll be showing you a very good example where it has happened before at the bottom of today's post. If it breaks up then my conservative target for SPX will be the wedge turns channel resistance trendline that is currently in the 2010 area. If that doesn't hold then the full target for the rising wedge from 1737 breaking up would be the 2160 area. SPX daily chart:

Read more...

I just wanted to talk for a moment about conviction bulls and bears today. I'm not one to disparage anyone's religious convictions, but that being said, it is a firm rule that any genuine chartist will consider the price data before forming any conclusions from that data, and those conclusions will always be a matter of relative probabilities, never absolutes. Any chartist who doesn't do that isn't a chartist at all. What they are is something between preachers and public entertainers, without either the long term incentives offered by the first, or the amusing antics of the second. There are a couple of quotes that say this better than I can:

'The fundamental cause of the trouble is that in the modern world the stupid are cocksure while the intelligent are full of doubt' - Bertrand Russell

'The best lack all conviction, while the worst are full of passionate intensity' - WB Yeats

Reasoned analysis can generate opinions, but never faith. Very strong convictions in financial analysis are warning signals that you are reading something written by either a charlatan or a fool. For those suggesting that I am a permabear here, and also those suggesting that I was a permabull a year ago, I offer the following wisdom attributed to Denis Thatcher :-)

'Better keep your mouth shut and be thought a fool, than open it and remove all doubt'

On to the markets where the +3 close yesterday has lined up this week's FOMC stats with the only three other examples going back to 2011 where there was a decent gain on FOMC day followed by a green close of more than a few ticks the next day. As I mentioned yesterday all three previous examples were no more than three days before each of the only three retracements over that period that exceeded 10% from intraday high to low.

I ran this back to the start of 2010 and picked a fourth example that was from the FOMC meeting before the fourth 10%+ retracement this decade, but in that case SPX ran up another fifty points over five weeks weeks to make that high just before the next FOMC meeting. I'd take this signal as strongly bearish and a signal that a significant top is close, but there are no certain outcomes and no family farms should be mortgaged to position short here.

I was asked yesterday what the obvious target would be for a retracement here and the obvious target would be primary channel support on my weekly chart below ...... as long as that channel remains unbroken. That is currently in the area of the 1737 low, which is also a possible larger H&S neckline area. To open up any lower targets the channel would obviously then need to break down, but I wouldn't be assuming that would happen.

The close yesterday was 3 points over the weekly upper bollinger band. That weekly candle fixes today as it is the end of the week, and if we can close at or over 1965 today that would both make the two wedge targets there, and should also deliver a punch close above the weekly band, which would be another decent topping signal.

SPX weekly chart:

The Importance of Not Being Earnest

On the daily chart I have a possible target above at the daily upper band, which on a strong day today I'd expect to close in the 1970-3 area. SPX daily chart:

Read more...

I've been hearing a lot this week, and particularly with the break up yesterday that we have moved beyond an area where TA can help forecast the markets. I have to say the evidence for that right here looks pretty thin. I said in my post last Friday that SPX might well retest the highs unless the 50 hour MA held as resistance. In my post yesterday morning I noted that SPX had broken back over the 50 hour MA and showed a rising wedge from the 1925 low, giving my reasons why I thought that wedge might well break up with a target in the 1960-5 area rather than break down. Yesterday that wedge broke up with a target in the 1965 area, and that joins the 1965 target that I gave almost a year ago in my weekend post on on 30th June 2013 after the break up from a much larger rising wedge. So far at least we have not demonstrably moved out of predictable territory.

Nonetheless I was much cheered to read this, and watch the hugely bullish comments on twitter. It seems likely that complacency about equities has now reached even beyond the high levels achieved at the 2010 and 2011 tops, which is really very impressive. Any charts or comments I post on twitter suggesting that this market might retrace anyway soon are losing me followers and that's just as it should be here.
Of course massive complacency of itself isn't enough to signal an imminent top. I posted a checklist on twitter last night that covered a few more important things that I like to see and we have them all here now:

The Sheep Look Up

Now this doesn't mean that there must be an imminent high here and this could still break up. Overhead resistance looks very strong though and I have that in the 1965-70 area today, possibly getting as far as 1975 on a stretch. As long as SPX stays under that we should be making the second high of a double-top here:

The Sheep Look Up

Only the one chart today as I was crunching numbers last night and will devote the rest of the post to the results of my research. What I was looking at was FOMC days since the start of 2011 and what happened the following day. I was looking particularly at FOMC days with decent green closes, which I took as a close more than five points up.
There were ten previous examples of these since the start of 2011 and the results from those were as follows:

Read more...

The first chart I posted on twitter yesterday afternoon, and it shows the rising wedge on the SPX 5min chart. This overthrew twice before the close and although this is a 70% bearish pattern targeting a retest of the lows on a break down, it may be that this one is going to take the 30% odds route and break up with a target in the  1960-5 area. SPX 5min chart (Tuesday PM):

Can't Get The Help

There is a matching rising wedge on ES, with the support trendline in the 1927/8 area this morning, and one way or the other I suspect strongly that this wedge will break out today. ES 60min chart:

Read more...

Yesterday was another day just chopping around while we wait for this consolidation to finish. We have been seeing higher highs and lows, which seems bullish until you remember that a typical bear flag forms against the trend, and trends sideways to up. Both SPX and NDX have been doing that under their respective 50 hour MAs and until the break back up over those my working assumption is that we have been watching bear flags forming.There is a decent chance that we will see a break either way today from this consolidation. SPX 60min chart:

Looking at Bond Yields

There's really not much else to say on equities today so I'm going to look at other things. Firstly on TNX I have two nested double-tops in play short term and if we see a break below 25.79 then I'd be expecting those to carry TNX down to test falling wedge support, currently in the 23.70 area. TNX 60min chart:

Read more...

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