S+P - 'The bounce' and AUDJPY

My post yesterday assumed the bounce I had looked for the prior day had failed, and whilst I stated that the conditions for the bounce were still in place, I considered the possibilities of this bounce occurring remote. - Well yesterday the bounce occurred, leaving me totally bitch-slapped.

Where does this leave my bigger picture analysis and my current bearish bias? As I stated on Tuesday a bounce to around 1060/65, (so far it has just exceeded this at 1067.8) would fit in with the bearish scenarios I had painted. However, in my analysis and my trading, I always like to look at the alternative view, in fact I consider this essential. The chart below presents the S&P futures for the past 16 months. I have emphasised on this chart that we may have a Bullish Falling Wedge Continuation pattern. Often these patterns start off looking like a reversal 'Head & Shoulders' pattern, however the 'Head & Shoulders' fails to follow through after breaking the neckline and the pattern morphs into a Bullish Continuation Wedge. An earlier example of just this can be seen on the same chart during the period from May through to July last year. -- Interestingly this would also imply that the we have a failed 'Head & Shoulders' pattern, a signal which is far more reliable in a predictive and risk/reward sense than an actual 'Head & Shoulders' pattern. The trigger for this would be a move above the top of the Right Shoulder, (Approx 1131 for the S+P500 Index). Note, we also have potential Bullish Divergence on both the RSI and MACD. Note: A break over 1100 would favour the falling wedge pattern.
Personally I still favour the Bearish scenario though I am certainly amenable and open to the above set of circumstances. I will outline why I still favour the bearish scenario with the use of some more charts:

The following charts show the Dow Jones in 1961/62, 1986/87, 2003-2008(weekly) and the current pattern. I think all 4 charts show a similarity in the way they have formed. The grey drop-down columns show similar key inflection points during the set-ups. If the current set-up continues to evolve along similar lines to the other 3 periods, then the odds would favour a sharp bearish move ahead. Just below this is a chart showing the Dow Jones Industrials, 1950 - 2010 on a Log Scale. - This chart shows where each of the 4 charts appears in the bigger scheme of things.
A close look at the charts will show that I have circled on each chart the crucial period of crossing the neckline, in all three prior cases there was hesitation around this time, with some to-ing and fro-ing at this crucial juncture. Below I have posted more charts which look more closely into the crucial phase in each chart at the equivalent period to where the US equity indices are now. - These are highlighted below using the S&P rather than the DOW. (Please bear with me on the ordering of my charts, I had one or two few many beers last night and my head is a bit fuzzy).

What can be clearly seen from the above charts is that in all three prior formations (1962,1987,2008), as well as struggling to clear the key Head & Shoulder Neckline, rather like the earlier chart I posted, they also had potential bullish scenarios in place in the form of potential Bullish Continuation Wedges together with Bullish Divergences on momentum. -- Hence there is a very strong similarity between these set-ups and the current set-up. Of course this time it could be different, after all we are only talking 3 previous data points, and there is no law which says this time it can not be different.

However, I one final point, which slightly throws my main premise into doubt, depending how one looks at it. Referring back to the above charts showing the Dow Industrials on a Log scale back to 1950, I have highlighted with blue boxes where each of my four Dow Charts sits in the greater scheme of things. The three prior patterns which I referred to (1962, 1987 & 2008) started at all-time highs, furthermore after the sharp drops from those highs the next leg of a bull market occurred which took the index to subsequent new all-time highs. On this occasion we have not started at an all-time high, nor has the last drop continued to a new index high. This is just an observation, and I personally do not favour this last argument, however I thought it was worth pointing out.

Summing up, the next few days and week are probably crucial if my current bearish bias is going to be maintained. Above 1075, I think I will have strong doubts, over 1100 I will start shifting to a bullish bias, above 1131 that bullish bias will have a strong conviction...However, if this current move up can stall around current levels, and start to decline through next week, then I think the ultra bearish scenario of a sharp move en-route towards last March's lows becomes a much stronger possibility.

One further point, last week I posted about the strong synchronisation between equities and the AUDJPY, plus the AUDJPY Death-Cross and the AUDJPY bear flag. (The post can be seen here). Today the cross rebounded to the Flag base line and has since rejected this level (See chart below). This was a slightly deeper move than I anticipated, however as long as this caps the cross then this would eventually favour a resumption of a move lower, with a break 71.90 probably being the trigger for a much deeper move.