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SPX put in a sixth day riding the daily lower band yesterday, with a touch of the lower band at the low and a hit of falling megaphone resistance at the high. SPX daily chart: 
Overthrown Falling Megaphones

At the high we saw the test I was expecting of falling megaphone resistance, and that overthrew slightly at the high to test the 50 hour MA. After that the day was mostly downhill. So what does this mean?


Well it means that until we see a break up, we need to assume that the downtrend is ongoing, and that SPX is starting a move towards megaphone support, which is now close to the double-top target in the 1937 area. Furthermore the overthrow means that whichever megaphone trendline we test next, either the upper today, or the lower soon, is likely to break at that test. That's something to bear in mind, as the target for this megaphone on a break down would currently be in the 1860 area, well below main double top support at 1904. SPX 60min chart:

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Another whippy day yesterday, but one that, unlike the more superficially bullish Wednesday and Friday rallies last week, leaves the bulls in a very good position for a break up today. The daily lower band was tested in the morning, so that was either day three or day five of this sideways lower band ride, depending on how the second day with tests of both lower and middle bands is counted. The candle was a 60% bullish reversal hammer, and there are now possible bottoming setups across all the main US equity indices as well as some broken declining resistance trendlines. SPX daily chart:

Possible Change of Plan

Now one thing that I dislike seeing when I have open downside targets is a marginal new low that is strongly rejected. There was one yesterday of those on SPX (and NYA and WLSH). That has set up a possible double bottom that would target the 2008.50 area on a sustained break over Friday's high at 1986.27. That level is the centre of a resistance zone that starts with falling megaphone resistance in the 1985 area, continues with double bottom resistance at 1986.27, and ends with the 50 hour MA at 1987.74. if we see a break over the 50 hour MA that will be a break that should be respected, though if bulls want to make the full double bottom target they will also of course need to take out the daily middle band, currently at 1994. SPX 60min chart:

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Another whiplash day on Friday with a strong rally to 1986. That looked more bullish than it should have done because, rather than rally in the morning and close weak, the rally was in the afternoon and closed strong. Nonetheless the high was in the 1980-9 target range I gave in the morning, and anyone buying that high on Friday afternoon is very heavily down so far this morning. SPX daily chart:

Whiplash Decline

However the high on Friday afternoon didn't hit the obvious trendline target, which was at falling megaphone resistance. Surprises are likely to be on the downside in a move like this, but we may well see SPX return to test that megaphone resistance trendline today or tomorrow. SPX 60min chart:

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There were three significant technical landmarks for me yesterday. The first that double top support on SPX broke down, breaking the third and last support level I gave last Friday morning. The second was that the daily RSI 5 closed under 30, so the daily RSI 5 / NYMO sell signal I've been following has now unambiguously made target, though the historic stats on these nonetheless further support that the SPX double-top that has just broken down should make the pattern target in the 1937.70 area. The third was that a daily lower band ride was confirmed with the strong punch below the daily lower band.

So what now? Well the odds favor a lower close today, but not another trend day down. We may see a modest rally close or perhaps a flat close as a less likely but possible alternative. SPX should test the lower band at some point today, and that is currently at 1975. Yesterday's low is very unlikely to hold and all longs should be counter-trend now until the double top target is hit. SPX daily chart:

SPX Double Top Breaks Down

Looking closer the decline yesterday was stopped by a declining support trendline that was tested three times without breaking. The chances are that trendline will hold today and a decent bounce should be brewing. Hard to say where that bounce might top out, but if SPX can recover over the daily lower band and 50 DMA at 1975/6, then I have possible targets in the 1980-9 area. Wherever a significant bounce tops out should give us the decline pattern for the current move. I've marked a couple of options on the chart but these are just educated guesses. SPX 60min chart:

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That was a strong rally yesterday, and the long bull move over the last few years has left many of us with a very strongly conditioned response to any strong move up, to jump on the long train in the confident expectation that it wouldn't be turning back down anytime soon. Don't get me wrong, that conditioned response has served everyone well in this long long long bull run, but in this particular case it needs to be suppressed until we see some actual evidence of a bullish break, and we haven't seen that yet. 
 
In terms of the rally yesterday it followed the roadmap I gave in my post yesterday morning almost exactly. There was a lower low in the morning, with a low just 0.15 above 1978.48 support, then a rally to 1999.79, just 0.21 under the top of my 1995-2000 target zone. The close was 0.68 below the 50 hour MA, and 0.35 above the daily middle band, so a close directly on the main resistance levels I gave in the morning. SPX daily chart:  
The Long Shadow of Pavlov

The rally retested broken rising wedge support from the 1904 low as well as testing the 50 hour MA. SPX 60min chart:

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Last Wednesday I was warning that the odds were better than two to one that SPX would make a marginal new high and then come back to make a lower low, and SPX came within four points of making that lower low yesterday. SPX hasn't made that new low yet, but the RSI 5 / NYMO signal that I was using to make that prediction has now made target as the daily RSI 5 closed at 30.84 yesterday, and there is a visual hit of the 30 level on the chart, so I'm treating that signal as completed to target.

That isn't quite the end of the story though, as there is still the matter of the lower low outstanding, and also the matter of the double top that has now formed on the SPX chart, targeting the 1938 area on a break below the last low at 1978 48.

Looking at the nine previous examples of this sell signal that made a new high and then reversed back down, it's worth noting that all nine made a lower low, so the odds that SPX breaks 1978.48 here are very high. Of those nine though, three went on to make a marginal new high that was the second high of a clear double top setup, as this one has as well, and all three of those went on to break double top support (at 1978.48 here) and then play out to the double-top target, which in this instance is 1937.70, so history is leaning strongly towards a hit of 1937.70 in the near future, albeit from a sample size of only three for this permutation of this sell signal. For the moment therefore I am assuming that we should at least break lower than 1978.48 (very high probability), and then make the double-top target at 1937.7 (high probability)

Looking at yesterday the close was on the daily lower band, and that is supporting the start of a lower band ride down to the 1937.7 target. There is also an obvious target, and possible support, at the 50 DMA, now at 1976. SPX daily chart:

Flogging a Dead Cat

What are we likely to see today? Well the move down from the high has been very fast so far, and I haven't yet managed to identify a decent decline pattern from the high, as I have a decent support trendline, but a weak resistance trendline. I have a tentative falling wedge, and I think we may see a break up from that wedge soon to establish a decent declining resistance trendline for the next leg down.

If that happens then I'd expect the wedge to break up, then a reversal pattern should establish, either a double bottom or IHS, then a break up to a fibonacci retrace target that in this case should be either the 38.2% or 50% retracement.

The target area for that dead cat bounce would be the 1995-2000 SPX area, with both of those fibs close by, and with a confluence of resistance levels there including:

  • 1998 - hourly 50 MA
  • 1998 - daily middle band
  • 1998 - hourly middle band


If we see this hypothetical bounce then that resistance area should not be broken. I'd be leaning towards seeing a lower low today before such a bounce and that bounce would ideally come from a low within  the 1974-81 area. I'd prefer the 1978.48 level to be unbroken before the bounce as that would improve further the odds that overhead resistance would hold. SPX 60min chart:

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SPX broke down hard yesterday and closed near the lows, giving bears their first complete day in a while. SPX broke back below the daily middle band and, as long as we don't see a daily close back above it, the next obvious targets are the daily lower band at 1985 and the 50 DMA at 1976. The band pinch here means that it is very likely that SPX will start an extended band ride in the near future. The bulls had a shot at starting an upper band ride last week and couldn't sustain it. If bears can get SPX to the lower band then they get a shot at starting a lower band ride instead. SPX daily chart:

Two Down, One to Go

The first thing to say about the SPX 60min chart is that my second important support level at the 50 hour MA was broken yesterday and then held as resistance into the close. This might still be a wave 2 move with a wave 3 up starting shortly, but at minimum the uptrend from 1978 broke yesterday. The third and last important support level that I gave on Friday morning is possible double top support at the 1978 low. On a sustained break below the double-top target would be in the 1938 area.

Short term the action late yesterday afternoon looks somewhat like a bear flag, but we may see a bounce to establish a decent falling support trendline or falling trend pattern. Resistance in the SPX 50 hour MA area held overnight on ES and if a strong trend down has now been established then it may well hold again as resistance today. Strong resistance is at the 50 hour MA in the 1998 area and the daily middle band in the 1999 area. SPX 60min chart:

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To the casual eye, nothing of great interest happened on Friday, with a larger than usual dip that was bought, and more than half recovered by the close. Superficially that was just a third day riding the upper band and if we see a very strong recovery into and at the open, it's possible that SPX could put in a fourth upper band ride day today. SPX daily chart:

One Down, Two to Go

But a look under the hood on Friday told a different story, as I mentioned a couple of times on twitter on Friday night. The low on Friday broke the first important support level of the three that I gave on Friday morning, and that level was rising wedge support from the 1978 low.

Now after a rising wedge breaks down there are two main options. If the uptrend is continuing then a retracement should start that would generally bottom near one of the main fibonacci retracement levels, the 38.2%, or 50%, or 61.8% retracement areas. If the uptrend is over, when that rising wedge is an Elliott Wave ending diagonal, then the retracement should retrace to the bottom of the rising wedge, in this case 1978 and the third of the important support levels that I gave on Friday morning. Either way a topping/reversal pattern should form if it has not already formed, usually a double top of some kind but sometimes an H&S.

After the rising wedge support break I had a look at the break low and saw that the target for a double top or H&S from that low should be in the 1994 area, close to the 61.8% fib retracement level at 1994.19. I was looking for the second high of a double top but SPX went slightly over the ideal H&S right shoulder high and failed hard there.  Looking at ES overnight, SPX may well gap below that H&S neckline at the open, triggering that 1994 area target. To get there it would need to break below the second line of support that I gave on Friday morning, which was the SPX 50 hour MA, now at 1997. SPX 15min chart:

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SPX made a new high yesterday and closed at 2011.36, only 0.13 over the daily upper band which closed the day at 2011.23. The bears had plenty of time to knock the market down after a new all time high was made in the morning, and failed to do so. The odds that we are starting an upper band ride on SPX improved sharply yesterday.

It's a struggle to remain objective at a time like this because the last couple of years have conditioned us all to dismiss any bear case at the first sign of trouble, and I'm struggling not to just do that here. The odds of a bullish resolution here are definitely improving, but that's not a done deal yet, and the stats from my SPX daily RSI5 / NYMO sell signal particularly are warning that we could still see a bearish resolution here, though if we are to see that we would need to see some significant weakness today or at latest on Monday.

For today on the daily chart I'm looking for a third day of riding the upper band. At the time of writing an open above the daily upper band looks likely. I would expect at minimum a touch of the daily upper band at some point during the day. The daily upper band closed yesterday at 2011 and probably won't close the day over 2015. SPX daily chart:

Pavlov and the Three Little Bears

So how should we view the bear case here? Well there is an easy solution, as I have three support levels to watch on SPX here. If SPX fails to break any of them the bear case is dead in the water, and on a break of the third and last SPX will have broken down.

The first of those three support levels is at rising support from the 1978 low, and that is currently at 2004 and rising at about eight points per day. Until this is broken the bears aren't even on the radar really.

The second of those levels is the 50 hour MA, now at 1994. This should remain unbroken until the current uptrend is topping out, so a significant break below would cast very serious doubt about much further upside in the near future.

The third of those support levels is the last low at 1978.48. That is double top support here and a break below would currently target the mid-1940s. If we see that low broken then it should follow through to at least that double top target and possibly a lot lower. SPX 60min chart:

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SPX touched the daily upper band at the high yesterday and also tested the 50 hour MA at the low, so the two key targets that I gave yesterday morning were both made. So what now? Well I'm still looking for a (hopefully) marginal) new all time high, so I'm looking for at least one more test of the upper band, but once there SPX is at a fork in the road and I'm going to talk about the bull and bear scenarios there.

The daily bands are pinching sharply here and that means that there is a very high probability that SPX is shortly going to start either an upper or lower band ride lasting at least three days and possibly much more. I've marked the last four daily band pinches on the chart below. The direction is unknown though the odds I gave yesterday of a downward resolution here at 2 to 1 is where I see the odds of the band ride here as well. What this means in practical terms, given that SPX tested the daily upper band yesterday, is that if we now see a strong new high, then this is most likely resolving upwards.

Resistance on the bull scenario is currently at rising wedge resistance on the daily chart in the 2035 area, larger rising wedge resistance on the weekly chart in the 2030-40 area, and the weekly upper band, currently at 2031.

Downside targets on the bear scenario start at the 1940 area on a break below the 1978 low, then a possible test of the 1904 low, and then on a sustained break below 1904 main double top support, I would have a double top target in the 1795 area. SPX daily chart:

Feeling the Pinch

SPX weekly chart:

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