We stopped just shy of a new high on SPX on Thursday, but that was no surprise. As soon as we reached 1140 and most of the other indices made new highs, a new high on SPX looked almost certain.

What we are waiting for is the push to the next interim top to be completed, and that doesn’t look at all far away now.

As I suggested it might before the open yesterday, ES hit the bottom trendline of the rising channel yesterday and bounced off it, though not before poking a pinocchio nose through the trendline:

Much to my surprise EURUSD finally reached the top trendline of the declining channel, and punched right through it. I had a close look at it and have identified a potential new rising channel that looks tradeable:

http://www.screencast.com/users/springheel_jack/folders/1003/media/b2ecd22f-92f8-47ef-b32d-18b1ed7792c2

After having a very good look again at USD this morning I see that I have been relying too much on EURUSD as a proxy for USD. The USD (DXM0/June) rising channel is still very much unbroken and looking at the confirmed and still resolving H&S pattern within that channel, a hit of the bottom of the USD channel soon looks extremely likely from here. DXM0 looks likely to hit the bottom of the rising channel somewhere between 79.5 and 79.6, depending on how long it takes to get there. I’ve marked the previous channel touches and their close proximity to the equities interim tops and bottoms of recent months:

This could well push oil up a bit further, though there really isn’t much room left in oil’s rising wedge, which will very likely break down and start playing out in the next few days. A new high on oil looks unlikely from here, and a fall back into the early 70s after the next interim top is made is very much on the cards:

http://www.screencast.com/users/springheel_jack/folders/1003/media/33bf489d-3db0-4e0d-a907-00fac98cb1b2

Now there is a lot of talk from discouraged bears at the moment that we are breaking through equities resistance so hard that we will melt upwards into the 1200s without a significant correction first. I think that a move into the 1200s is very much on the cards, and we will most likely see that in the next few months unless the SPX main rising channel is broken on the next retracement. However we have very solid resistance just above at the 1160 level, and while I wouldn’t be surprised to see us peak this time a little higher than that, I would be very surprised to see that broken with conviction without a significant retracement first. I have marked the SPX main channel and the key support and resistance levels on this SPX daily chart:

http://www.screencast.com/users/springheel_jack/folders/1003/media/c63a2108-766a-4f8d-bf45-afdf4effdd80

That isn’t the only strong resistance just above us here though. mmTesla showed me a very interesting long term chart the other day that I hope he won’t mind me reposting it for everyone to see here:

I’m expecting to see the interim top put in today or Monday, and to see a very significant decline after that. It is worth noting that current pain on SPY is 111, and next week is opex week. After the interim top is in, any bears still left standing after this amazing wave up should then have a very pleasant rest of the month shorting the correction.

However this will only be a top of real significance if the bottom trendline of the main SPX rising channel, currently at 1080 and rising, is broken on the way down. Unless that is broken, this retracement will just be a short scalp opportunity and dip-buying long setup.

I don’t think anything of great interest will happen today as we wait for the next interim top to be made. I do think we are likely to see a touch of the lower rising channel trendline on ES, probably before the open. That should be at just under 1140ES. That would be a good entry point to go long with a stop at 1137.5.

If we should make it to 1137.5ES then the channel will be breaking downwards and that would be a good opportunity to go short. I’d be surprised if that happens today though:

The rising wedge on the SPX 60min continues to narrow but there’s still room for some more upside in there:

http://www.screencast.com/users/springheel_jack/folders/1003/media/be37a897-5163-4925-978a-0394ac3d49a1

Gold was very interesting yesterday and broke the first rising trendline support. Overnight it has approached the second support trendline and if that breaks too we may well see a retest of the recent lows under 1050:

http://www.screencast.com/users/springheel_jack/folders/1003/media/94d7ab67-c8b2-4d3a-943a-9f21ffdd7d1f

I think that we are approaching a very significant interim top in equities, but I don’t think we’ll make it today, and I’m doubtful about making it on Friday. I think that there is a very good chance indeed that this top will be signalled by two key indicators. The first is $BPNYA, the NYSE Bullish Percent Index, which has been in a gently declining channel since September. Since then it has been signalling the key interim tops and bottoms very well. It is close to the top of the channel now, but still looks at least one push up away from hitting it:

http://www.screencast.com/users/springheel_jack/folders/1003/media/dba7fa24-75f7-48c7-81dd-7844da9a1ac5

The other indicator is EURUSD, which has been in a steep declining channel since December. It isn’t the strong positive indicator for equities that it used to be, nowadays when it trends down strongly then equities still tend to follow, but when it is trading sideways, as it has been over the last few weeks, equities have been rallying strongly.

Nonetheless, the last bottom on equities was signalled by EURUSD touching the bottom of the declining channel, and I think that there is a very good chance that the next interim top will be signalled by a touch of the top of the channel. EURUSD has been trading sideways for so long now that the top channel trendline has fallen to meet it, and it is now within easy striking distance at 1.376 and falling:

http://www.screencast.com/users/springheel_jack/folders/1003/media/ceaff196-3552-4144-9452-88678347a572

My favorite trading setups are trading channels with the channel trend. EURUSD in recent weeks is a good example of why counter-trend channel plays are much riskier propositions. I chart and trade patterns as well, rectangles, triangles and wedges mostly. I am watching two interesting rectangles at the moment, and one is the very longstanding weekly rectangle on XLF, which is testing the top border of the rectangle at the moment. I am expecting this to pull back within the rectangle for the close on Friday and will be concerned about the bullish implications if it doesn’t:

The other rectangle that I am watching with great interest is the daily rectangle on TLT, which is approaching the lower trendline at the moment. It looks like a strong buy at 88.25 with a stop at 87.25. A daily close at or below 88 would be a signal to exit the trade as it would be a close below the rectangle, indicating to a target at 84.5. Long setups on rectangles are safer than short setups as they are mostly a bullish pattern, breaking upwards 69% of the time:

Have a great day’s trading everyone!

Well, there was no correction on SPX today, after the pullbacks last night and late afternoon failed to go  anywhere. Equities still look ripe for a correction here, but the chance that there will be a strong one before opex is diminishing as we approach opex week.

There really isn’t much room left in the rising wedge on SPX, but they do resolve upwards 31% of the time:

ES is still in a strong rising channel, and we have not yet touched the bottom trendline of that channel since last touching the top trendline. The chances are that we will touch the bottom again before returning to the top, but that will be a buying opportunity until we see a break of that trendline:

The IHS on the SPX daily is still very much in play, and the closer we get to a new high, the more likely that it will play out before we see a significant pullback. By my reckoning the target of the IHS is 1172, which would be close to where the mid-channel trendline is on the main SPX rising channel:

Oil is showing definite signs of weakness now. USO broke the lower trendline of that rising wedge on the 60min chart in the closing hours yesterday.

http://www.screencast.com/users/springheel_jack/folders/1003/media/54858cc6-cbe7-4b49-ae90-6eac6d0ad9ba

However we still need confirmation in my view from a break of the rising wedge on the oil futures. That looks close, but we could see a little more upside first:

http://www.screencast.com/users/springheel_jack/folders/Jing/media/e326bef2-4136-4e79-a513-2be149408b41

The potential wild card here is USD as ever. While USD was last rising strongly, equities fell while it rose, and it appeared that the inverse correlation with USD was back. Since it peaked and then moved into a sideways trading range equities have recovered strongly. It may well be that when EURUSD hits the top trendline of the declining channel then USD will start another wave up, and equities will then pull back:

http://www.screencast.com/users/springheel_jack/folders/Jing/media/37b1e970-6b1c-4601-85d5-6e2a67645867

EURUSD has now been trading in this range so long that the top of the declining channel could be hit at 1.375 or so, or lower, depending on the time taken to hit it. If we hit it at the end of opex week, that could well signal a significant correction.

A lot of charts are looking toppy here though. Oil particularly looks very ripe for a correction, and one of the best other indicators of a significant top in recent months hit target yesterday, and that is the very longstanding rectangle on the XLF weekly chart:

http://www.screencast.com/users/springheel_jack/folders/1003/media/f72c0777-63bd-4379-8406-1c598746d056

Unless that rectangle is finally breaking upwards, that is a strong signal that equities will be pulling back in the near future.

Another very strong sign that a significant interim top is close is the CPC chart, which dipped below 70 yesterday. Every time it has done that in recent months, it has signalled that complacency is at a high, and that we are therefore at or near a top:

http://www.screencast.com/users/springheel_jack/folders/1003/media/fa05e4e2-b893-4979-b2f0-ecaefb17ea76

Well, equities have had one hell of a run and the chances are strong that there are new highs coming on those indices that haven’t seen them yet, notably SPX, Dow and the Transports.

Nothing goes up in a straight line though and there’s a rising wedge on the SPX 60min that suggests that we may be retracing in the near future:

The rising wedge indicates to 1085, though that looks a very long way down from here and a retest of 1112 is probably a better target. A break with confidence of 1135 SPX during trading hours should signal that the wedge is breaking downwards.

It looks somewhat different on ES however, where there is a perfect rising channel. We’ll need to see a break of the lower trendline at 1127 (and rising) to be confident that we will see a significant retracement.

Oil also looks toppy here, with USO in another rising wedge without much room for further movement:

We’re likely to have a bullish week next week as we rise into opex, but there’s definitely some room for a retracement this week, now that the recently almost invariably bullish Monday is out of the way.

One thing that has been very notable in the last few days has been the absence of volume during this very strong surge upwards in equities. It is very visible on this 60min chart of the QQQQs where we can also see that the Qs have been scraping the top trendline of the likely channel, while developing significant negative divergence on MACD, flat RSI, and stochs that look as though they are turning down:

http://www.screencast.com/users/springheel_jack/folders/1003/media/0cdc7e4d-53ba-4780-bc7f-94c3739e9451

The rise in equities has been powerful, but there hasn’t been much volume conviction behind it.

There’s room in the SPX rising wedge for a tag of 1145 tomorrow morning, but not much more I think. I’m short a half position from 1139. if we do tag 1145 tomorrow morning I’ll be doubling up.

Good trading everyone.

Pre-open notes:

It looks as though we may gap down out of yesterday’s range before the open, and we are well below 1136.77 at the time of writing. If we do, then historically we are very likely to keep running in the direction of the gap and the bears will have a good day.

The key is the rising channel on ES. The lower trendline is at 1129.5 ES now, and should be over 1130 ES by the open. If we bounce at the lower trendline we could see another visit to the top of the channel before we correct. If it breaks then that will be unlikely:

http://www.screencast.com/users/springheel_jack/folders/Jing/media/22daca03-420c-4b6f-82f2-af1b02f6c231

While the SPX has been chopping around uncertainly for the last three months, USD has been having a very significant rally.

Much to the bear community’s disappointment given the longstanding inverse correlation between USD and equities, USD has taken back all of the losses since the beginning of July while SPX has yet to surrender any gains.

What does this mean? Well it means that it has been much more fun trading USD lately than it has been to trade equities, and it also means that USD can no longer be relied upon to give much away on the direction of equities. There is a strong inverse correlation still when equities are trending downwards, but no longer when equities are pushing up.

That said I think that there is a significant possibility that USD hitting the bottom of the current channel will signal another push downwards in equities, just as the recent bottom on SPX was signalled by EURUSD hitting the bottom trendline of its declining channel at the same time.

First, and most importantly given the large trade weighting, EURUSD is in a strong downtrend channel. Since hitting the bottom of that declining channel EUR has been chopping around uncertainly, but made it to 1.375 yesterday before falling back. If it can make it back to the top of the declining channel at about 138.5, that will present an outstanding risk/reward short opportunity and may signal the end of the current upwards chop on SPX:

GBP has been falling hard and recently fell through fan support to reach as low as 1.478. It has recovered somewhat since and looks as though it may rise to retest that broken support at about 1.53:

http://www.screencast.com/users/springheel_jack/folders/1003/media/aed3e091-97b7-4594-bd1d-df6e93538377

The Swiss Franc has, like the Euro, been falling in a strongly declining channel. After hitting the bottom of that channel, it slid down the lower trendline for over two weeks before recovering strongly this week. It is currently paused at a significant resistance level but if it can break through should make it to the top of the channel at about 96.

http://www.screencast.com/users/springheel_jack/folders/1003/media/42e896dd-2fe8-4325-ac75-2835c960917e

Those three currencies are all in strong and well established declines against USD, but that isn’t the case throughout. The Australian Dollar has only just broken out of a strong rising channel and may be forming a broadening descending wedge. Regardless though, it is rising at the moment and the next obvious target is the strong double resistance just under 92.5.

http://www.screencast.com/users/springheel_jack/folders/1003/media/44e8a9b6-909c-49fc-a3f2-636fc3efadb5

The Canadian Dollar is still in  strong rising channel, though it appeared a couple of weeks ago that it might be about to break downwards from it. If it can push through rsistance to make a new high, the next obvious target is the top of the rising channel at about 103.5. It is possible that it has been forming a bullish rectangle in recent weeks however, and may turn back down here:

http://www.screencast.com/users/springheel_jack/folders/1003/media/1c046e3f-aed1-4392-b298-ff373ed53632

The Australian and Canadian Dollars have been relatively strong because they are commodity currencies, and commodities have been insulating their economies to a large degree from the financial turbulence elsewhere. More mystifying is the Japanese Yen’s status as a ’safe haven’ currency, given that that the national debt there is on a scale that if reached elsewhere, would prompt credit downgrades and serious discussion of sovereign default.

Nonetheless, the Yen (JPYUSD) is still in a broadening ascending wedge in an uptrend from July 2008. That wedge has two strong internal support/resistance trendlines and the Yen has now pushed back up from the bottom of the wedge to the first internal trendline. There is strong resistance there and the Yen may turn back, but if not then the next target is in the 118 area.

http://www.screencast.com/users/springheel_jack/folders/1003/media/bec07788-72bb-46c5-8d5b-4ceeae9c50bd

All of these are trending against USD of course, and the USD rally has reached an interesting point. After reaching the top of the rising channel a month ago it has continued rising and has touched but failed to take and hold the 38% fib retracement of the previous decline. It now appears to be declining back to the bottom of the rising channel which on UUP is at about 23.4.

There is a significant risk here of course that the USD rally may be over. It has touched the 38% fib and has failed there so far. It could now resume declining. Given the parlous state of the Euro, and the fact that in PPP terms the Euro is still over 25% overvalued relative to USD that seems unlikely, but the risk is nonetheless there.

I won’t be around much today though I might be checking in a couple of times. Everyone have a profitable day.

I was shocked to find a beautiful channel on the SPX daily chart last night that encompasses the entire rally since March 2009, with the top and bottom trendlines traced from the November 2008 and March 2009 lows respectively.

It has only become obvious with the recent low at 1044, as that provided the second touch to define the lower channel trendline:

I was shocked because I thought that the SPX had broken all key uptrend support trendlines, and it is now clear that just isn’t the case. The uptrend channel is still intact.

On the plus side we now have a very powerful indicator for when this uptrend does finish, as confirmation will come with a break with confidence of the lower trendline. In the interim the centre trendline should provide significant resistance in the event that another substantial wave up gets going. I couldn’t help noticing that by the time we would reach it in the 1180 – 1200 area, it would be in the region the potential  IHS on SPX is indicating to.

Not a cheery read for bears I know.

On the other hand all channels do break, and this one could break soon. it is a rising channel and a retest of 1044 would more than accomplish that now.

I do have something more cheering for bears to read as we are coming up to the pivot cycle date for my version of Joe8888’s 40 day pivot cycle. My (slightly modified) version runs 41 days with the 42nd day not counted, and on my chart the 41st day is next Monday 7th March. Unless we have a major selloff between now and then, this should be a pivot high like the last one in early January:

In the very short term we almost made it on Tuesday to my next upswing resistance line at the broken blue dotted trendline on the top SPX chart. I’m not expecting that resistance line to be broken before the next swing down, but we could spend a few days testing that (rising) trendline before the next swing down begins.

Well, after the failed bear breakout last week, the downtrend trendline since the January top and the recent broadening descending wedge were both broken in listless trading on Friday:

The broken wedge only indicates back to the formidable resistance in the 1112 to 1115 area, which was retested again in overnight trading.

In the event that resistance is broken, the obvious next resistance is at the blue dotted trendline on this SPX daily chart:

EURUSD looks as though it has now broken up out of the broadening ascending wedge that has confined it in recent weeks. The obvious target if that can be sustained is the top of the main declining channel at 1.39 and falling. EURUSD has weakened overnight though and looks so fragile that it seems doubtful that it could make it that far:

I’m doubtful about significant upside this week. The bears had their chance last week and now we’ll see if the bulls can do better. As it is Monday, their best chance is today. We shall see.

I suspect that the coming week will be good to the bears given that we are the top of the current rising SPX channel, but I was saying on Friday morning that I was doubtful about a significant fall on opex Friday, and that Mondays had also been very unkind to bears lately.

I didn’t see anything to change my opinion on Friday, and still have serious doubts about downside on Monday, particularly as there seems to be an IHS building on SPX, and the obvious point for the head to finish is at about 1120.

Here’s the SPX daily chart with trendlines and support / resistance levels:

The possible IHS seems to be forming along the blue dotted trendline, and if that continues, we will break strong resistance at the Friday HOD and touch that trendline again to finish forming the head.

On the SPX 60 min chart, we are crawling up the underside of the upper trendline of the rising channel since the February 5th low:

There are some interesting points to note on this chart. There is very definite negative divergence on RSI and MACD, and also, less importantly, on the stochs. What is more interesting on the stochs is the small broadening wedges that have formed since SPX first hit the top of that channel.  If these don’t break quickly on Monday, then it would be reasonable to infer likely initial weakness followed by a fresh push over the Friday HOD. The obvious target would be the blue dotted trendline which should be in the 1120 – 1122 area.

There is some support for this from the EURUSD action as it seems to be midway from the bottom to the top of a recent shallowly declining channel. This could signal a move back up over 1.37 on Monday:

Equally however, it could be that the breakout from that broadening descending wedge we saw last week was a false breakout, and that EURUSD will turn down at 1.361, but more short-term upside does look very possible.

EURUSD has now broken the broadening descending wedge that had confined it for the last three weeks and is returning to the top of the declining channel:

Given that this channel was already steep enough to bring EUR to parity with USD within six to eight months, it always seemed more than likely than not that that when this channel ultimately breaks, it will break to the upside. The channel is declining by about half a cent per week, so if we reach the top of the channel at the end of next week, the target would be between 1.395 and 1.40.

As well as the broken and now resolving wedge we also have clear IHS patterns on both RSI and MACD. These generally play out as you can see from the others I have marked.

In the short term the stochs look toppy and we may well see a retracement. An obvious target for that would be the broken wedge trendline at between 1.37 and 1.371.

The SPX is also looking toppy on the 60min and I have marked in a possible new channel and significant interior trendline that both suggest that we may soon fall back to the bottom trendline of that channel from the circa 1100 level:

If we take a day or two to do that, then we may well fall back to test the strong resistance now turned support level at 1080, though if it happens faster, we could still fill Tuesday’s opening gap at the 1075.51 level.

Now there is some talk that we might be starting a new major wave up on SPX, which would be wave 5 of a bull market sequence. I don’t buy it. Quite apart from the doubtful economic and earnings prospects, and the increasingly poor medium term outlook for the Euro, the wave 4 looks rather small to me for a wave 4 retracement, and I am looking at many patterns that look as though they have much more downside coming.

It is worth noting though that if this is a bull market five wave sequence, then that wave 4 did make a perfect 38.2% fib retracement of wave 3 since July, and if that EURUSD channel breaks to the upside I may have to reconsider my view, but in the interim this just looks like a wave 2 retracement to me with an obvious target at 1110 for the 61.8% fib retracement.

It is well worth remembering however that a wave 2 can and often does retrace most of wave 1, the start of the EURUSD decline being a classic example. SPX could go considerably higher than 1110, and Fujisan was putting forward a compelling scenario suggesting 1130 last weekend at slope which is well worth a look IMO.

I will be next shorting SPX again seriously only when EURUSD reaches the top of the declining channel, or when it becomes clear that it won’t reach it.

Another interesting chart that is well worth a look is gold:

Gold is in a strong declining channel and is rising fast towards the channel top, and also the broken neckline of a sloping H&S indicating to the 960 level. The upswing target is about 1140, and that should see gold start back towards the bottom of the channel. It should reach it on the next EURUSD push upwards and it looks a good short from there.

IF THIS RALLY EVER DOES END …….

Some thought provoking charts today. First off there is the updated range topping chart after an amazing twelve closes in this range. If we don’t break to the upside soon, and there is little sign of that happening before a retracement IMO, then we will break down from here, most likely next week:

The next chart is of BGU, the Direxion Daily Large Cap Bull 3x ETF mapped against the SPX over the last few months. See how very well it has followed the SPX up. As it is a 3x ETF, it has almost quadrupled while the SPX has rallied 65%:

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/338d40b5-b4e2-4e32-9d0b-043fb9b1cdef

The last chart is of BGZ, the Direxion Daily Large Cap Bear 3x ETF, the mirror twin of BGU mapped against the SPX over the last few months:

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/2b07a88f-1fc9-4163-ab4a-b1bb7834d42c

Now BGZ has fallen by a factor of seven while BGZ has risen by a factor of four, but compared to most leveraged ETFs, these two have mirrored their indices very faithfully. If this is a rally and not a bull market, and as and when the rally finishes, BGZ will look like a very good buy and would seem likely to quadruple on the path down to a new low on SPX.

Thought for the day…….

NOTES FOR TODAY:

It looks very much as though we will gap up on SPX today, and if the gap up is over yesterday’s range of max 1108 on SPX cash, as seems likely at the time of writing, then the SPX is likely to continue to run in the direction of the gap. We may get a quick rise of several points into and shortly after the open.

Backing this up is the action on USD, which has made a new low at 74.44 overnight, against the previous low of 74.68. The next serious support is at 74 and we could reach that today:

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/5a7159fd-5936-4da8-bba6-4396243d6ee8

Vix was testing the previous low at 20.1 yesterday and looks likely to breach it or make a double low there today.

My feeling is still that we are making an important interim top this week, prior to correcting signficantly next week. That said, Thanksgiving week has thrown a serious spanner into the usual cycle, and the next swing down may be shorter as a result. Here is an ES forecast of how that decline might go from Alex Grant at www.AMBGTrading.com:

http://2.bp.blogspot.com/_Q9FmRy5wUIs/SwyqWqJlL_I/AAAAAAAABRs/nBvFGEdRL9Y/s1600/ES+Forecast.bmp

I always keep half an eye on Alex’s ES forecast. It has been more accurate than not in recent months.

If we rise steeply after that decline, as suggested by Alex’s forecast, then we may be putting in the RS on the large potential H&S pattern that I was pointing out yesterday on the SPX 60 min. That could see a return to the 1090 – 1110 level by the end of December (depending on the level we top at this week):

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/a3a3bcd6-eebb-4e41-b8c9-15b00910d045

Good luck today everyone!