US EQUITIES

 Equity indices have reached key levels. The SP500 index is running into 1130/1132 key resistance band, I favour the first shot at this area as likely to see an initial failure, however I have to consider that there is a risk we could see it burst through here leading to heavy stop action, or we could see a small stop induced break and failure.  Bigger picture however, I think there are increasing bullish signs and a successful break over 1132, either now or after an initial setback, will I believe be a signal for further gains in the weeks and months ahead. I do however consider all options open, and can not rule out that a failure here could be the beginning of a sharp decline which could accelerate below 1090. 

My view that we may be heading higher eventually relates to the price action and the pattern formed over recent months. - I posted an article back on the 3rd August (can be seen by clicking here.) where I suggested that the larger formation occurring could be a Falling Wedge pattern which may have a bullish outcome. In support of that I posted the following chart, where I identified different types of Falling Wedge patterns (This is a repeat of earlier exercises I have carried out in Fixed Income markets).

A list of the four types of 'Falling Wedge' can be seen by clicking here. At the time I identified the pattern forming as a 'Type 2 - Falling Wedge', though I did add the following caveat - 'Just to add a layer of confusion (The market does not like to make it too easy). Though I have labeled the recent wedge as a 'Type 2', it is not out the question that it is a 'Type 3' or even part of a larger non-wedge pattern.'  - Price action since then has if anything re-enforced my belief that we have a 'Type 2' pattern, if this turns out to be the case, this would suggest that we should have a bullish resumption, with a strong possibility that we are heading back to the highs of April at a minimum. - By the way though my confidence in the 'Type 2' call is increased, the above caveat still remains. - The chart below show the current pattern labeled as a 'Type 2 Wedge', I have also shown below that the two previous 'Type 2 wedges' from 1998 and 2006.  - Note the 2006 example bears a stronger resemblance to the current pattern.

Further to the above this Type 2 Falling Wedge pattern can be seen across a host of US Equity Indices. The following charts shows the Dow Industrials, Nasdaq and NYSE index.

 

The Bank Index (See Chart Below), did start to follow its own path on the last low, however it appears that this may have moved back to becoming a 'Type 2' set-up, this is one to be watched...

The Dow Transports Index also shows a similar set-up, however price action created a Type 1 rather than a Type 2 Falling Wedge, this also tends to have a Bullish Resolution (See chart below).

At present none of the above indices have yet made a break above the previous high from early August. This should be watched, since a clear and sustained break over these levels are likely to be the confirmation needed to suggests higher levels ahead, a failure (which I think is most likely short-term) will be lead to further consolidation for now or possibly a deeper decline (which I favour as least likely).

Elsewhere there are other signs which I believe continue to point to an eventual favourable resolution for US equities. The chart below shows the VIX Index v the SP500 index over the past few years, the VIX index continues to trend lower in a similar way to how it moved in early 2009.

Finally a number of key FX markets, which have been strong barometers of Risk-on versus Risk-off over the past few months continue to shows signs of potential bullishness suggesting a return to Risk-on may be on the cards. The top chart below is the EURCHF, the trend remains lower, however there is strong bullish momentum divergence between the low of July and the September lows, as well as within the recent September low. This may be flagging up a risk of a correction higher in the EURCHF cross. The lower chart shows the AUDJPY cross, this has been one of my favoured risk barometers, this has made a decent breakout of the symmetrical triangle, suggesting further gains ahead.

 

 

Finally the AUDUSD has a potentially very Bullish 'Big Picture' pattern, this can be seen on the chart below the Pattern is a 'Right Angled Expanding Triangle'. This suggests a strong bullish move eventually for the AUDUSD.  A rising AUDUSD, is something I equate with 'Risk-on'. - However, short-term, it is up against strong and significant resistance, in the same way as the SP500 and other US equity indices. I would be very surprised if the AUDUSD was to make a successful break over this resistance on a first attempt for many months, particularly in light of the 6+ big figure rally over the past three weeks, without any real consolidation or correction.

 

 - To summarise. I feel that the technical outlook for US equity is starting to look brighter, I am seeing what I consider increasing signs of an eventual Bullish resumption for the next several months (though I still feel that this will be a precursor to a much more severe eventual bearish move). In the short-term I still feel a corrective setback may occur, though possibly on a failure at 1132 or on a stop induced breakout above 1132.

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.

Equities Topping Patterns - Everywhere

My post yesterday highlighted the risk of a short-term bounce, everything was setting up for a 'key-day reversal'. Well the bounce as it happened was very very short-term, the indices made it to the neckline of the Head & Shoulders pattern which broke last week before falling away. Though the S+P futures, did manage to complete a weak 'key-day reversal', this was not confirmed on the S+P500 index itself. Looking ahead some of the conditions still exist for this bounce to re-occur, however I think the odds have become remote for now. Looking at the bigger picture, though recent days' price action has show indecision, refering back to some of my earlier posts, I feel we may head lower soon, and possibly much lower.

Beyond that, I have decided to see how the bigger picture looks across a wide variety of markets. One of the maim tenet's of Charles Dow's original 'Dow Theory' was that of confirmation. Dow believed that a directional move or trend in the Dow Industrials Index could not occur unless the Railway's average (The Dow Transports Index) was moving in the same direction. If they diverged, then this called in to question the sustainability of the trending move. - The world has moved on since then, there are far more markets, covering specific sectors, or different size of market capitalisation. To that end I have looked as charts across a broad spectrum of indices, these can be seen below. All charts have a similar topping formation and each one has recently broken to the downside. To me this is strong confirming evidence, which adds weight to the major topping pattern, the Head & Shoulders, which should portend significant lower levels in the weeks and months ahead.
Beyond the US markets, it is also worth looking at global markets. The following charts show a selection of major G7 markets. What is clear here is once again we have similar topping patterns, though the German DAX offered a variant of the Head & Shoulders and has not yet made a new low for the recent phase (nor have a number of other markets within the EURO bloc).

The next set of charts move beyond the US and G7 countries and look at a variety of markets symbolic of Asia, South America and Commodity countries. Once again the major topping pattern is evident in all three charts. The Hong Kong markets has produced another variant of the Head & Shoulders pattern, this is probably because of the strong Chinese influence, - Chinese stocks indices seem to march to a very different beat. - As was the case with the German market, these have yet to make new lows for the recent move, however they all appear to have a strong downward bias.