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One reason I do my optic run views on my seven main US equity indices is because while SPX is often the technical leader, by which I mean not that it moves fastest, but that it is delivering the cleanest trendlines/patterns and fibonacci retracements, that is not always the case. That leader at the moment is the Dow Industrials, and my first two charts will illustrate why that is.

The rising wedge on SPX that I tweeted on Tuesday night hit the very well defined wedge resistance (tweeted at the high yesterday) and then broke down on the frankly very predictable not really news that QE3 had ended in October as planned, and the usual assurances that the Fed would be fighting hard to keep interest rates near zero until the stars fall from the sky. Now those of you who have been looking at my work closely for a while might have wondered why I was giving strong weight to a pattern on SPX that was mediocre due to the poorly defined support trendline, and the answer to that question is of course that .......... SPX 15min chart:

The Flagging Dow Industrials

....... it was supported by a far better and directly equivalent pattern on the current technical leader index, which is the Dow. The pattern on Dow is very well formed, overthrew slightly at the high yesterday, and then broke down and retested broken wedge support at the close. At least the main part of this move up from the 1820 SPX low is over, and that overall move may well have topped out, though if so then we may well retrace, retest highs, then retrace more as part of the usual formation of a decent sized H&S or double top.  Dow 15min chart:

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SPX broke strong resistance levels at the 50 DMA and the 1976-8 levels yesterday to close at a very impressive 1985. That break up over the 50 DMA opens up the daily upper band as a target and that closed yesterday at 2003. With FOMC today it seems unlikely that Yellen can say a great deal to cheer the markets, QE3 has ended and is unlikely to be even temporarily revived, and the Fed has made so many soothing noises about future interest rate rises already that it's hard to see what they could add to that. Nonetheless some more soothing noises today might just get SPX to that target at the upper band. SPX daily chart:

USD Dollar and FOMC Today

The structure of this move up has been unclear since 1950, when the initial rising wedge from the low broke down but failed to deliver more than a small reversal. SPX finally established a new support trendline yesterday morning and so I now have a larger rising wedge from the low. We could see an overthrow as high as the daily upper band today if Yellen manages to come up with something to say to give SPX a boost. SPX 60min chart:

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I was talking yesterday about the 1976 SPX target and the trendline resistance that may well be there. SPX is likely to gap up today and we will see whether that target is hit today and if so, whether the trendline holds. SPX daily chart:

1976 and Bust?

Supporting that 1976 SPX target is a triangle that formed on the SPX 1min chart yesterday. It made a false break down, as triangles often do, and is now resolving up towards the target, which is also at 1976. SPX 1min chart:

1976 and Bust?

What will happen at that 1976 SPX test? Hard to say but a look at foreign indices suggests strongly that there may be another strong wave down starting shortly. Whether that would have the strength to carry SPX past the 1820 low from here is debatable of course. DAX weekly chart:

1976 and Bust?

I haven't posted a USD chart in a few days. The obvious next target is still a retest of the current high before a larger pullback. USD daily chart:

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SPX closed the week on the weekly middle band at 1964. This is a very significant resistance level and the key thing that bulls would like to do this week is to break back above it. Only the weekly close matters for this so we could see SPX trading above it intra-week without that being a bullish break. SPX weekly chart:

Flags and Double Reversals

I've been giving some thought to the circumstances in which we could see the IHS target in the 1976 area made this week, and it would be very close indeed to possible falling channel resistance from the high. On the bigger picture this would be a bull flag channel of course, SPX daily chart:

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SPX broke above the daily middle band yesterday and tested the 100 DMA. More importantly though, the high yesterday was within a couple of points of testing the weekly middle band. Given that today is Friday that may well be formidable resistance today, and while I'd quite like to see a test of yesterday's high today, I'm very doubtful about seeing a move significantly higher. This is closing resistance, so only the closing price today is important for that. We could see a move somewhat higher intraday. SPX weekly chart:

The Air Is Getting Thin

So what about all the patterns that broke down on Wednesday? They are all still in play here, and I'm showing the patterns from the lows for SPX, Dow, TRAN, RUT and NDX below to show where they all stand as at the close yesterday.

SPX formed a rising wedge that broke down on Wednesday and brutally retested broken rising wedge support yesterday. There is a decent looking double top setup here, and if we can see enough confirming weakness today the strong negative divergence on all the 60min RSIs on these five indices may trigger strong sell signals. This is not a chart I would see as in any way an attractive long here. SPX 15min chart:

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At the point where SPX broke hard through the 50% fib retrace the overall trend shifted from bear to unknown in my mind, and it's still in unknown territory now. I'm not assuming that this will resolve in either direction until I see some stronger evidence, but I'll be calling the shorter term likely moves, which at the moment look a decent fit with either bull or bear overall trend.

Looking at the pattern setup at the close yesterday, and the recovery overnight, I have a new educated guess for the direction on SPX over the next few days. I'll lay that down here and we'll see how that goes.

  1. We see a retest of yesterday's high or a marginal new high today to make the second high of a short term double top
  2. SPX then (38.2% fib) retraces to retest the 1900 area and the 200 DMA just above at 1907
  3. SPX then moves up further to retest the 50 DMA in the 1967 area and possibly make an IHS target at 1976
  4. At the test of the 50 DMA we see whether SPX fails hard there into at least a retest of the recent lows, or breaks higher into new all time highs


SPX daily chart:

Another Educated WAG

Every one of my seven US optic run indices broke rising support from the lows yesterday. I'm looking for reversal patterns to form and then fib retracements of this move up from the lows across the board. The stall at this area on SPX is close to the 61.8% fib retrace target. SPX 60min chart:

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Yesterday went pretty much as I expected, except for the direction of course, which was up rather than down. There were an impressive list of bullish breaks over the course of the day, starting with the gap back over the 200 DMA, then a break over the 50% fib retracement level at 1920, the daily middle band (closed at 1933), and the day closed at the test of the 61.8% fib retracement level at 1943.

There is one more big resistance level above, and that is the very important 50 DMA at 1967, but in practical terms any sustained break over the 61.8% fib retracement level at 1943 will greatly increase the chances that the retracement low was made at 1820, and on a sustained break over the 50 DMA, there would be a clear target back at a test of the 2020 highs. SPX daily chart:

Advantage Bulls

Also worth noting is that declining resistance from the highs on SPX was also broken yesterday. That's not unusual in a B wave, but adds another significant card to the hand the bulls are holding after yesterday. My personal feeling here, backed up by the obvious (not marked up on the chart below) IHS that formed at the 1896 neckline, is that this move is targeting a test of the 50 DMA area around 1967, and that we will be seeing that test soon. SPX 60min chart:

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Last Wednesday night, after some seriously wild action had settled down a bit after hours, I made some educated guesses about what ES/SPX might do over the next few days. Some of these I also talked about on twitter then and the next morning, and reviewed the status of all of these on Friday morning. They were as follows from ES 1842-3 at the time:

  1. ES was making the second low of a double bottom targeting the 1855 area (topped at 1857)
  2. That move should make the second high of a double top (target 1821 area) (bottomed 1815)
  3. An (Thursday) AM low would be made on SPX in the 1830-40 ES area (low was 1828)
  4. SPX would then break up from an IHS with a target in the 1920 area (to be hit today?)
  5. That 1920 area would be reached on Thurs/Fri this (now last) week (rally too slow)
  6. SPX would reverse back down hard to hit the 1789 double top target (pending) 
  7. That double-top target would be hit Tues - Thurs next (now this) week (ambitious)

Janet Yellen wasn't as much help as I had hoped on Friday morning and while it seems very likely that my 1920 SPX will be hit in trading hours today, this is obvious a solid two days later than I had expected. Does that make the outlook here more bullish? Possibly yes. I'm looking for a test of my 1920 SPX target in trading hours this morning and then I would like to see a very hard rejection from that high. We'll see whether I get that.

I gave three levels to watch on the upside in my Friday morning post. The first was the 38.2% fib at 1898 SPX, and that was the high on Friday. The second was the 200 DMA at 1905/6, and that was the high yesterday. The third is the 50% fib retracement at 1920 and that should be hit today. If SPX breaks that target with confidence there is a fourth level to bear in mind, and that is the daily middle band that closed at 1936 last night and that I'm expecting to close in the 1932 SPX area today. SPX daily chart:

1920 SPX Rally Target In Sight

I'm posting the SPX 60min chart just to show the fib retracement levels and to show also that SPX converted the 50 hour MA into support yesterday. That closed yesterday at 1886 and if we see a strong reversal at my 1920 SPX target, then that will be an important level to break on the way back down. SPX 60min chart:

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SPX moved away from the daily lower band on Friday and the rally I was looking at is on. The obvious targets on the daily chart are the 200 DMA at 1906 and the daily middle band at 1940. SPX daily chart:

In Between Days

I mentioned the possibility that this rally might fail at the 1898 SPX area on Friday morning, and we have seen a reversal there. I'm a bit concerned about that, as that was a reversal at the 50 hour MA, and a possible IHS neckline. The double bottom target is still the 1920 area, but on a decent break above 1900 there may be an argument for an IHS target in the 1956 area. SPX 60min chart:

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On Wednesday night, after some seriously wild action had settled down a bit after hours, I made some educated guesses about what ES/SPX might do over the next few days. Some of these I also talked about on twitter then and yesterday morning. They were as follows from ES 1842-3 at the time:

  1. ES was making the second low of a double bottom targeting the 1855 area (Topped at 1857)
  2. That move should make the second high of a double top (target 1821 area) (bottomed 1815)
  3. An (Thursday) AM low would be made on SPX in the 1830-40 ES area (low was 1828)
  4. SPX would then break up from an IHS with a target in the 1920 area (pending)
  5. That 1920 area would be reached on Thurs/Fri this week (pending)
  6. SPX would reverse back down hard to hit the 1789 double top target (pending) 
  7. That double-top target would be hit Tues - Thurs next week (pending)

So far those predictions have been doing ok, and we shall see whether SPX can hit the 1920 area and reverse there today. Assisting me in moving SPX to that (50% fibonacci retracement) target today may be my gnome assistant Janet Yellen, who will be making a statement an hour before the open today. That target would need to be reached in trading hours, and is supported by a double bottom target on ES in the 1913 area.

I posted the possible IHS forming on SPX yesterday morning, but the move yesterday was ambiguous, with a rising wedge having formed from Wednesday's low. There are three main options here and I have listed those on the chart, but my preferred option is still that rally to the 1920 area and failure there. We shall see how that goes today. SPX 5min:

The Shadow of 1987

There are a couple of possible speed bumps on the way to that target. The first is Tuesday's high at 1898.71 SPX, a whisker above the 38.2% fib retracement target at 1897. The second is broken support at the 200 DMA, now at 1906, but I'd be expecting any move back above the 200 DMA to be an intraday move only in any case, and no major technical damage to my scenario above would be done by a close today at or near that level. A hard fail into the close today would of course be better however. SPX daily chart:

The Shadow of 1987

If everything goes to plan,then where should the next (most likely final retracement) low be? Well my preferred target is the 1789 area, and on the weekly chart below you can see that as well as being the double-top target, it is also very close to rising megaphone support from the October 2011 low, and the 23.6% fib retracement of the move from that low. There is strong support in that area. If that support fails then there is strong support at the January low in the 1737 area and that would have a very good chance of holding. SPX weekly chart 2009-date:

The Shadow of 1987

Both of these targets would be defined by the current rising megaphone from October 2011. In the first case SPX would be bouncing at megaphone support and heading back to megaphone resistance, now in the 2050 area and rising. In the second case the megaphone would break, and we would most likely then see a retest of the highs to form a larger double top before declining further. Both of these targets should be fairly easily made, but would most likely result in the next move up being limited by megaphone resistance, and therefore fairly boring.

There is a more interesting option that I've been looking at for a few months, but haven't mentioned here before because I was concerned that the men in white coats might then show up at my door, put me in a straitjacket, and take me away to spend some quality time gibbering and drooling with the other deranged unfortunates who have publicly expressed doubts about the existence of an omniscient and omnipotent supreme being ..... that runs the Federal Reserve and will never allow a significant decline in equities to happen again.

This is just an option, and most likely won't happen, but something similar has happened before in another October long ago, and the similarities with the setup here are at least thought-provoking. Now that we have seen enough market turbulence that people have started to remember that markets can sometimes go down rather than up, here is my chart of the 1980-7 period so that I can point out the areas of similarity with the setup today. SPX chart 1980-7:

The Shadow of 1987

The points of similarity with the setup in early October 1987 here are as follows:

  1. A five year strong bull run during which time the SPX more than tripled - CHECK
  2. A extreme level of complacency at the highs - CHECK
  3. Two main patterns in that 5 year run, first a rising wedge and second a rising megaphone - CHECK
  4. An established support trendline at a 50% fib retracement level - CHECK
  5. A clear weekly RSI 14 sell signal that was still far short of the 30 level target as megaphone support was approached - CHECK
  6. A double top with a target at megaphone support that has broken down but has not quite hit megaphone support - CHECK
Why that last one? Because SPX never did hit that megaphone support trendline in 1987. SPX almost made it, so close that I dare say that some traders had already started scaling in long in anticipation of the next move up. We most likely won't see a repeat of the 1987 'crash' (just a fast bullish retracement  really) here but the resemblance between these two setups is eerily close, and at the least I would suggest waiting to reverse long until megaphone support is actually hit, and definitely not rushing to buy the dip on a gap below megaphone support. 
 
That 1550 area target is also attractive because it would do two other important things. It would break the current rising megaphone, which looks like comforting support now, but would quickly become confining resistance if we see a retracement low there. It would also retest massive broken resistance at the 2000 and 2007 highs, and the secular bear market pattern, for which those two highs defined the resistance trendline, that broke up in the first part of 2013. The target for that pattern is the 2450 area, and I posted that in June 2013. You can see that chart here. Again I was fairly quiet about that target then as I was already getting strange looks about the more modest 1965 wedge target that I announced with more fanfare then as well. If we were to see that 50% fib retrace and pattern retest, the obvious pattern target for the next move up would then be that 2450 SPX target, which would be a lot of fun. 

Back to the situation this morning I'm disappointed to see that this current small correction after SPX has tripled in five years has failed to panic Yellen into action this morning, so if SPX is going to make 1920 today, it will most likely need to manage that without Fed assistance. The current 25 point gap up from the close yesterday looks cautiously encouraging, and we'll see whether that can be done. I would warn that any longs are still counter-trend here in my view.

Source: Springheel Jack

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