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Obviously my falling channel broke down on Friday and the 2019 support area was broken with very high conviction, with SPX close to a test of the 50 DMA at the close. Both SPX and ES hit the 3 SD (standard deviation) daily lower band at the lows (the normal bands are 2 SD bands), and I've been compiling stats for those at the weekend. I'm not all the way through that as there is a lot of data to crunch through, but I have a good feel for the historical probabilities for today from that.

First though I would note that the SPX low on Friday was at 2002.33, just above the November low at 2001.01. SPX has only broken the November low in December in nine years since 1970, mostly in bear markets, and hasn't managed it at all in the last ten years, so that is strong support until it is broken in trading hours. If that support holds then we won't see more than a test of the SPX low today before the Xmas rally begins.

The remainder of the stats today depend on that Nov low support being broken, and if it is then there are strong stats from the historical hits of the 3 SD daily lower band that I've been compiling on ES (March).
I've written up more that 70 of these so far, and by the time I have run this all the way back to 2000 I'll most likely have over 90. Of those hits all but one rallied the next day to at least test the 2 SD daily lower band, and that one exception was in any case the short term low before a rally back over the middle band. I posted that stat on twitter last night and we have already since seen that rally.

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It can be difficult to identify the pattern for an advance or decline, though at the least it is usually clear in retrospect. Sometimes, as with the move up from 1820, it can be hard to identify even then. This retrace hasn't been as hard as that, but has been a tough road to identify with these fast whiplash moves and a total of three decent falling channel candidates having established so far. The first that I posted yesterday broke up in the morning, the second had me looking for another two handle move up from the intraday high that never came. The third one however was clear by the end of the day, and with the quality of the trendline anchors and fit so far I'm very confident this is the correct one.

I have channel support in the 2013 area at the moment, declining obviously, and we have see channel support hit this morning. if we see a break below then I'll be treating that as this channel breaking down, possibly evolving into a falling megaphone, and I'm not sure where the next support above 1998 (50 DMA) might be. Unless we see that break I'm a buyer at channel support, though we may well see a bounce before a hit there. SPX 60min chart:

Whiplashed

Bigger picture, yesterday was the second day of a daily lower band ride. As long as that lasts then every day should touch the lower band and anything more 20 points below the lower band should be a decent buy. The lower band closed yesterday at 2028 and the lower band isn't breaking down hard yet so that level isn't declining fast yet. SPX 60min chart:

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It was refreshing to see the bears deliver a decent decline yesterday, with a clear fail at the retest of the daily middle band. SPX is now into the higher part of my target zone and there is now a very nice falling channel from the highs that should define the retracement. as and when this channel breaks up, this retracement should be over or ending. SPX 60min chart:

Bears Can Occasionally Deliver

Now that the downtrend is more than just the bare minimum I would like to talk about the two main target zones here. I have two target areas within my target range, though I'll expand that range slightly from 1995-2033 to 1990-2033.

The first range is around 2019. That is the retest of the September high, the double top target from the current highs, with the 50 day EMA now at 2020. I'm expecting a test of this area and it may hold. If so we may see a retracement low this morning, which would be within the Tuesday to Thursday bottoming window I gave on Tuesday morning.

The second range is 1990-5, with the 50 DMA at 1998, the Japanese QE announcement gap at 1994.65, and the weekly middle band at 1992. SPX daily chart:

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Another classic V shaped day with a very strong gap down where the gap was filled by the close. Pretty much par for the course for the feeble bears of 2014 and unlike the low on Monday last week, the low yesterday is a decent candidate for a post 5 DMA run retracement low.

Yesterday morning I gave my target range on SPX for this retracement as 1995-2033, with a likely retracement low time area between yesterday and tomorrow with an ideal low made today. Yesterday's low was at 2034.17, so that was effectively a hit of the target range, within the target time window. I'm counting that stat as played out now, and any further downside is a bonus before the continuation upward that I am expecting.

On the daily chart the low yesterday was two points above the lower band, which I count as a hit, and the close was two points above the middle band, which I count as a hit of the middle band rather than a break back above it. We may see a reversal back down here at the middle band, but if we see a close (3+ points) back above that today the break back up should be respected. There are still open daily sell signals, but they won't be invalidated unless RSI breaks back above the higher of the divergent RSI highs, and after this retrace we could run up to over 2100 without invalidating these. SPX daily chart:

Bears Will Be Bears

That's not to say that we can't retest yesterday's lows and we could see that happen. A rising megaphone formed from the low yesterday and these break down about 70% of the time. If it breaks down at the open then there is a double top setup here that would target the 2042 area on a break below 2051. We may well see that this morning, and regardless there are very decent odds that we see at least some retracement today. That may extend into a full retest of yesterdays lows, but I'm doubtful about seeing much more. SPX 1min chart:

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SPX had a strong decline yesterday that broke below the 50 hour MA with confidence and made the low of the day at the daily middle support at 2055 that I had mentioned in the morning. The retracement I have been looking for after the break of the daily run above the 5 DMA appears to have started, and SPX seems likely to gap below daily middle band support at the open. What should we expect next?

The smaller of the two directly comparable post 5 DMA run retracements was 2.2% in 1991, which would target the 2033 area here. The larger of the two retracements was 45 in 1979, which would target the 1996 area here. I'll be using these two numbers as the top and bottom of the likely target range here, though obviously with a sample size of only two the range is just a working hypothesis rather than a firm target. Here is the 1979 chart which was a strong move down that only took a couple of days. SPX 5 DMA chart 1979:

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The next two days are important on the 5 DMA stats that I've been watching over the last few days. The previous two examples that retested the high before the break below the 5 DMA then retraced on the sixth and seventh days after the break. The break was six days ago so we shall see whether that repeats here.

By the end of Friday it was clear that the pattern from last last Monday's low at 2049 is a rising wedge. That leans 70% bearish as and when it breaks of course, and could take SPX back to what would now be double-top support at 2049, targeting 2019 on a sustained break below that. That would be a retracement near the lower end of what we would expect to see after the end of a 20+ day 5 DMA run. A clear break below (wedge support and then) the 50 hour MA, now at 2068, should signal that a retracement has started. SPX 60min chart:

Currency Wars - The Sauerkraut Conundrum

On the daily chart SPX is still on the RSI5/NYMO sell signal that triggered a week ago. First support on a break down of the short term rising wedge is at the daily middle band, currently at 2055, and resistance in the event that SPX makes more new all time highs is at the daily upper band, which closed Friday at 2084. SPX daily chart:

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SPX made yet another marginal new high yesterday making a total of five new all time highs over the last two weeks, all in the 2070s within a total range of less than six points. That's a lot of effort from the bulls to fail to get get over what has so far been extremely stiff resistance. In the event that the bulls are unable to push through this resistance , or spike through but can't sustain trade over the 2070s, there is now a very nicely formed pair of nested double tops lighting a path down to a retest of broken resistance at the 2019 high. SPX 5min chart:

The Way Is (Probably) Shut

If we do see a break up it may be short lived. Resistance at the daily upper band closed yesterday at 2081, and the weekly upper band and strong trendline resistance are in the 2092-5 area. If we see a break up then it may well be rejected quickly. SPX daily chart:

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SPX made a marginal new all time high yesterday and the odds against the bulls on the historical 5 DMA run stats improved in their favor, as only three of the previous five examples returned to make a new high. Two of those still failed at that marginal new high however, and if we should see failure again here then there is now a very nice looking double top setup that would target the 2023 area on a sustained break below Monday's low at 2049. SPX 60min chart:

A Long and Winding Road

Looking at those three past examples, the one in 1979 made a marginal new high (0.15%) on the second day after the break, then chopped around for four days within a 1% range before a two day decline that took SPX down 4% from the high. SPX daily chart 5 DMA run 1979:

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I wasn't looking for the strong rally yesterday but I had mentioned in my posts on both Monday and Tuesday the possibility that the current high might be retested to make the second high of a double top, and that is what we should be looking at here. A lot of people were assuming that the retrace was complete yesterday evening but it's too early to say that, and the historical odds are still stacked against that outcome here.

The reason for that is in part the SPX daily sell signal that triggered on Monday, which has an impressive track record, but is even more so on the historical performance after the break of the five  20+ day runs above the 5 DMA since 1961, and after a close look this morning the stats for these are below:

  • 1979 - Marginal higher high on 2nd day after break, then 4 days tight range, then two day decline 4.1% (high to low)
  • 1986 - Low made day after close below 5DMA - 2.5% decline high to low
  • 1991 - Marginal higher high on 2nd day after break, another marginal higher high on 6th day after the break, then two day decline 2.25% high to low
  • 1996-1 - 3 day 3.8% decline high to low after break, then retest marginal lower high on 6th day after break, then lower low. Decline 5.5% high to low
  • 1996-2 - 10 day 6% high to low decline after break, then retest marginal lower high 18th day after break then 3.9% decline into marginal higher low at end December


In summary the stats for these previous examples tell us that the smallest retracement (high to low) after the break was 2.25%, and the largest was 6%. The current retracement is only half of the smallest previous example at 1.13%, They also tell us that when the high was retested after the first move down on these five examples, two failed at marginal lower highs, two more failed at marginal higher highs, and in only one case (after a 2.5% retracement), did the uptrend resume.  Were any of these in December? Yes, the largest and longest retracement from these five examples was in December.

The short term pattern setup here is also (cautiously) bearish. After the break up yesterday morning the rally formed a rising wedge which broke down near the close. I'd be looking for a retest of yesterday afternoon's high and perhaps a move to test 2070, where I have possible bull flag channel resistance. If SPX goes higher then I'd be looking for a fail slightly above or below the current all time high. SPX 5min:

It Can Always Be Different This Time (But Usually Isn't)

One thing that has caught my eye at the current retrace low is the bounce off broken megaphone resistance on the daily chart. I don't think that level is of great significance but it's definitely interesting that it bounced there. If we do see a resumption of the uptrend I'll be looking at that more closely. SPX daily chart:

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The big news yesterday was that a daily RSI 5 & NYMO sell signal was triggered. This is the thirtieth of these sell signals since the start of 2007 and 20 of the previous 29 made the target at the 30 level on the daily RSI 5. For this and other reasons I am looking lower here, though given the RSI 5 close at 42 yesterday we could see that signal target made in the 2030s or even possibly the low 2040s as long as the low was sustained into the close. SPX daily chart:

Daily RSI5_NYMO Sell Signal

Main uptrend support at the 50 hour MA was broken at the open yesterday and SPX closed below it. Unless we are going to see a retest of the highs to make the second high of as double top I'm expecting that to be respected (currently at 2062) until the end of this retracement. As alternative topping patterns I have possible H&S necklines in the 2040 and 2030 areas. SPX 60min chart:

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