SP500 - Consolidation continues after the failed breakout.

I am not sure how significant yesterday's failed breakout was, it was so brief and fleeting that I am not sure whether to give it serious consideration or not. Turning to the bigger picture, I think overall things still remain finely balanced, the medium-term trends favour the bulls at the mom, the shorter-term indications are sending some ugly warning signs, whilst the overall longer-term picture and outlook still remain ugly in my opinion. Thus we remain at some sort of Crossroads, I have summarised the various components that I see which contribute to the current outlook below. In the meantime I think that a meaningful and sustained break over 1150 (SP500 Future) will favour continued further upside progress. However the longer this fails to materialise, the increasing chance we see some sort of correction, with breaks of 1132 and a sustained break of 1118 as likely catalysts for a deeper move. 

Just to re-iterate the above points: Medium Term I see some favourable factors which I have pointed to over the weeks and months. Amongst these include:

• Large bullish 'Falling Wedge' on the weekly charts.
• Inverted 'Head+Shoulder' continuation pattern.
• 40 Week moving average (Approx equivalent to 200 Day ma) failed to turn lower (or maintain a turn lower), and price has broken back over this level.
• The SP500 has made a new 20 Week High (though as I write it has failed to maintain it).
• Note, the above is largely true for a number of other key broad indices, including the Dow Industrials, the Dow Transports, the NYSE comp, the Nasdaq comp, the Russell 2000.

The chart below shows some of the above.

In addition to the above points there are one or two other signals which fall outside the realm of less-conventional Techinical Analysis, that I watch:

• The first of these is my own long-term trend following system on the SP500, unlike the 50/200 day moving crossover, this did not give a sell-signal in the summer, and is thus still in buy signal mode. (Click here for more detail of my system). I will add however, that this is a lagging indicator, and has little short-term forecasting ability as an indicator.
• Secondly is a comparison between the charts in the mid-70s and the current chart (Can be seen here). I have been following this from a distance as this is a not a tool to be used in daily decision making.
• In addition, the recent USD weakness, continued ultra-low rates, and strong possibility of a new round of QE, all continue to be favourable short-term developments for US equities. 
• Also, strength in certain currencies, notably the EUR and the AUD suggest that risk aversion is low, although JPY strength does somewhat seem to mitigate this a touch.

The Short-term charts continue to cause me concern however, particularly if a sustained break above 1150 on the SP500 futures does not materialise.

• Firstly I have some short-term patterns which bear watching. I have highlighted these on the chart below. In particular the Broadening/Expanding formation. However, as I have previously pointed out these patterns are erratic and can be misleading, as I have also highlighted on the chart. Nonetheless, this current formation is bearing a close similarity to the pattern which formed in late April, though it also looks like the March pattern which led to one final rally higher.
• I also have a strong rising Pivotal line, which currently resides near 1150, this line is drawn in Purple on the chart below. Previously failed attempts to break above, or indeed to follow though on a break above have led to deep corrections on a number of occasions. Note however, that when this line was successfully broken, it then switched to very strong support.
• Additionally 1150 is also the centre line of an Andrews Pitchfork, and is the high of the market before it topped in January.
• 1150 is also a 2/3rds retracement. Although this is not a Fib level, the 2/3rd retrace can be significant when it stalls the market and is tied with other signals. Also worth noting is that the Nasdaq Composite and the NYSE Comp have both stalled at the 2/3rd retracement, whilst the Dow Industrials has hit the 76.4% retrace. The confluence of these key levels as resistance may yet prove to be significant.
• Finally I have highlighted on the chart that the RSI is showing signs of bearish divergence, though this may be just a correction of the overbought status.

In addition I do have some other concerns.
The Bank Index continues to lag heavily. This may of course be a red herring, as it is only one sector, however it is a key sector.
The VIX is churning and not moving lower, though as the period in Q3 showed last year, this need not hold the market back.
The European Sov Debt Crisis continues to rumble on in the background, though the market has largely ignored this of late, it still has the potential to be the 'Elephant in the Room'.

Finally the very long-term charts. The possiblity of a Large Expanding/Broadening formation in my opinion continues to overhang this market. The chart below shows this, together with the large pattern highlighted from 2007. As I have mentioned before these patterns are extremely difficult to navigate, and I do not feel that right now it is a major feature with regard to the short-term direction.

Finally something for the weekend. It is one of my favourite comedy sketches, it comes from 'the Two Ronnies' ,a British TV series from the 1970s. I hope you enjoy it.  Have a good weekend.

FX update and the SP500 1970s redux revisited.

FX UPDATE

First a quick update on yesterday's FX comments: The inverted 'Head and Shoulders' pattern on the short-term chart of the EURUSD failed to follow through on the upside. It is possible, that the EURUSD is building the right shoulder of more substantial inverted Head and Shoulders pattern on the short-term charts, however, I would caution that trading rooms the world over are littered with the ghosts of traders who tried to anticipate uncompleted Head and Shoulder patterns.  ----  Looking at the USDJPY this posted a small rebound yesterday, however it needs to make something more concrete and larger if my weekly 'Piercing pattern' idea is going to have any chance of being successful. ----- Finally looking at the EURJPY:  I suggested yesterday that this may have some short-term bullish potential. However, I have posted a chart which warns what could happen if the EURJPY rebound fails to materialise, or even makes a small rebound but then fails to follow through.  The chart below shows the 8-hourly EURJPY through 2010.  The two periods of circled price action are from earlier this year and from the past week,  both display very similar set-ups. - Just to add a caveat; this time around the EURJPY has been within a long sideways consolidation phase, with the most recent down-move possibly being a correction from the top towards the base of the consolidation, whereas in the earlier period, the EURJPY was clearly trending lower.

(Click on chart to enlarge)

SP500 1970s REDUX REVISITED


A few weeks ago I posted a blog titled  '1970s redux', the original post can be seen by clicking here.  Today I am posting charts which show a more in-depth look at the two periods being compared.  - The insert below compares the weekly charts of 1967 - 1976 versus 1997 - 2010. Whilst the time frames differ, the overall behaviour of price direction and action has unfolded with a strong similarity. In fact the only period when price direction notably diverged was the period just after the 1973 peak and just before the 2007 peak, when the direction became virtual mirror images. The Blue near-vertical lines are meant to highlight similarities in key turning points, whilst the Blue meandering line (drawn rather badly) is meant to highlight the co-ordinated direction of both charts.

(Click on chart to enlarge)

The next chart takes a closer look at the price action over the past few years, with the comparable period from 1973 - 1976. Once again, the price action is taking a similar course. Further to this, in the past few months the consolidation has unfolded not unlike the consolidation in 1975. Note some other similarities: The rallies of 1975 and 2009-2010 both retraced around 60% of the preceding very sharp declines. The corrections of the late 1975 rally and the recent correction of the 2009-2010 rally, both stopped at around a Fibonacci 38.2% .- I do not tend to use this sort of analysis as my method of predicting future price moves, however I do not dismiss it either, preferring to keep it lurking in the background as a form of reference.- What it does suggest, is that if this similarity in performance were to continue, then a move to the upside would seem more likely in the coming months. Before further consolidation or corrective activity unfolds.

Before I finish, I would just like to re-iterate what I said in my original post: - I am not laying out a case for the current period being a similar economic and political climate to the 70s, particularly when it comes to inflation or interest rates. However what is similar is that the 1970s were a time of extreme economic uncertainty, and the 1974 recession was associated with a very deep bear market, not unlike the 2008 bear market.