A quick peek at the SPX daily chart for past 9 months shows that all retracements to the downside have ended at the prior swing highs. Since nothing much has changed, the expectation is for the prior swing high of 1040 to provide nice support area.There is a small caveat though: As SPX has progressed upwards, the topping around each swing high is becoming smaller and smaller in duration, which means that the support provided by each prior swing high is becoming weaker and weaker.
And one of these days, the prior swing high WILL NOT provide the expected support, which should lead to much significant downside. The most recent swing high around 1070 lasted only 2-3 days. Whenever this region gets tested on the move down, IMO, it will crack.
First test of ES 1000 on Monday morning was rejected – the level held. As I type this, ES is again looking to test the morning lows. I believe that we should see an ES sub-1000 this time and then bounce around between ES 998 (= SPX 1000) and ES 1000 for remainder of the day, with a move lower coming into close.
Most people are looking to go long on the next 10 – 15 point move down. This is when one should be short. IMO, the next move down will be more than a mere 10 – 15 points. First stop should be around 970 and then 935, most likely before August Opex.
The inverse correlation between the US dollar and the US equities has been a bit out of whack for past couple of days. These correlations are not universal and work until they stop working. One must keep an eye out for the fact that this correlation that has existed for such a long time might now be coming to an end.
At the same time, I am not assuming that it has come to an end. I will let the market tell me. I will once again reiterate “Wise is not the one know what is coming. Wise is the one know whats that he CANNOT know what is coming and keeps his mind, eyes and ears open”.
The chart that I will be watching a close eye on tonight is the EUR/USD chart. Euro currency fell in a waterfall fashion all day long only to reverse slightly – it has bounced back up from 1.3900 mark. I expect this bounce to be short lived and the downdraft to resume. Usually the trend of Euro is set for the night soon after the European markets open at 3AM ET.
I am sorry to disappoint you that I don’t have any bold forecasts here. I will however say that I am positioned for a downside move tomorrow (Thursday) and possibly a test of May lows either tomorrow or on Friday. Should we start moving down, I will close 50% of my short positions at Monday’s lows and the remaining 50% at SPX 875-880 region.
Even those who have been trading since eons might not have seen the kind of volatility we saw last fall. Just to highlight how crazy things were, I will use two examples.
Oct 9, 2008 to Oct 10, 2008: SPX range was 167 points (highlighted in GREEN)
Nov 21, 2008 (Friday) to Nov 24, 2008 (Monday): SPX range was 124 points (highlighted in BLUE) – Note that the two shaded regions overlap
To put the craziness of volatility in perspective, I have posted 12 year daily chart of SPX. One can see that the SPX ranges that took almost a year to traverse were covered in period of 2 trading days – crazy isn’t it. This is not the norm – this was the exception AND will be an exception going forward as well.
A normal trading day looks more like what can be seen in the intra-day 5 min ES chart for Jun 17, 2009. How does one trade this – after seeing what we saw last fall, this just looks like random chop. Once you put on the Cumulative VWAP study onto this chart, things do not look that random anymore. One can see that for most part the ES price bounces between VWAP +/- 2 standard deviations. And the best way to trade this is to fade the moves to the extremes.
Now, the key question is when the price hits the outer envelope (VWAP + 2dev or VWAP – 2dev), when does one enter the trade. I have paper traded this for a while and have found that as the price approaches the outer envelope, if the volume declines, then the price will bounce back towards VWAP. On the other hand if the volume is not declining (as in example labeled 2 in the figure), then the price might not come back to VWAP. The exact entry timing and stop loss setting is based on personal risk profile and comfort level. Now that you are done reading this, how about some good love shared
Most recently, you must have heard a lot of chatter about the Golden Cross. What in the world is Golden Cross?
Well, Golden Cross happens when 200dma crosses the 50dma which is moving up. Occurance of this is being touted as a very bullish event. There may in fact be some truth to the fact that this Golden Cross does trigger some buying by hedge funds and mutual fund managers.
However, before we even get to debating if Golden Cross is something of significance or not, we first have to settle whether to use “simple moving averages” OR “exponential moving averages”. While doing search on the internet, I found this article that illustrates that historically trading the Golden Cross of SMAs has outperformed trading the Golden Cross of EMAs.
In any case, whether or not you are a believer, it is worth while to see where the major indices are w.r.t. Golden Cross. And please… don’t forget to share some love
UPDATE Jun 19, 2009: The Golden Cross on RUT did materialize today. I don’t see anything happen today because of it. The only thing different today is that it has started raining again.. but I won’t credit the Golden Cross with that because rain is supposed to be the norm in Seattle
Flashback: Nov 2008 – Feb 2009: From Nov 10, 2008, SPX formed a technical pattern, what is known as Penant OR the Symmetric Triangle. This technical pattern is a CONTINUATION pattern. It resolves in the direction in which the penant was enetered.
In Nov 2008, the penant was entered going down. As a result the expected outcome was that the penant will resolve to the downside – which is exactly what happened on Feb 16, 2009 (in hindsight, the fate was sealed on Feb 10th, even before our much adored Timmy (Geithner) opened his mouth to speak about the “Bank Plan”. I still remember “tape gazing” that morning and watched the indices plummed 2 to 3% as the CNBC anchors laid out of the summary of the plan. Those were the day – right
Fast Forward to May 29, 2009: What was bestowed upon was YAP (Yet Another Penant). The difference being that the penant was entered going up. So, the expected resolution was to the upside.
Which is exactly what happened in the last few minutes of May 29, 2009 – S&P futures ripped through the upside of the penant, spiking more than 20 handles in matter of minutes. The markets gapped open big time on Monday June 1, 2009 and left a gaping wide gap that is yet to be filled.
Fast Forward to June 14, 2009: What has happened since the penant resolution is quite bullish IMO.
SPX has consolidated nicely in a more or less sideways fashion putting in higher lows and higher highs. In fact the leading index for this rally, QQQQs have also put in higher lows and higher highs.
Coming Attractions: More upside! SPX should test 975-980 this coming week. What is an even exciting prospect is that if 1000 level on SPX is taken out, then there is a region of 100 points to the upside where there is virtually no resistance and whenever we get there “WE WILL RIP THROUGH THAT 100 POINT REGION IN LESS THAN A WEEK”. I am not suggesting that we will get there because it is some ways out in the future and it will be arrogant of me to even try and think that I can predict that. However, what I feel comfortable predicting and putting my money on is that we have more upside in this coming week – we will, in all probability see new highs for this rally on SPX. As always, if you got something out of what you read, please do share some love. Also, I have enabled DISQUS here – so additionally feel free to leave any thoughts/comments/criticism (always welcome)/suggestions/contrary ideas – whatever – everything welcome
Continuation of my previous post, where I talk about very short-term target of 1.4000 in tonights Globex session, here I am exploring short-term, intermeidate-term and longer-term targets for EUR/USD. Down-trending Line3, which marked the top in September and December, gets tested again in next few days, taking it back up to 1.4300. This should coincide with SPX high of 970 or so.
After that I foresee a quick retracement to 1.3500 to the underside of the upward channel, Channel3. This should take SPX down to 880 region. A more severe, but less likely scenario is going all the way back to 1.2500 coinciding with a much larger retracement on SPX down to 790 – 820 region. I believe that given the amount of optimism, a 10% retracement from 970 to 880 is all we will get.
I will talk about more longer term outlook in another post tonight. My longer term outlook is some more inflation followed by severe deflation. As always, if you found something useful in this post, please feel free to share some love.
In the currency update, posted yesterday, I stated that we will bust through 1.4100 AND that 1.4100 – 1.4150 area (see blue tint in the chart below) will pose some resistance. Over the past 4 days, EUR/USD has developed a nice upward channel. At this point, I am expecting a retrace down to 1.4000 in the Globex session tonight, which should coincide with ES coming down to SPX 934 levels.
Failure to bust through 1.4100 – 1.4150 region is closely related to why SPX got rejected at 955 levels. The currency action suggests that the upmove in the indices is not finished yet. SPX will touch 934 and then start to move back up again.
If you liked what you read, don’t forget to share some love.
In my prior posting on Friday, June 5, 1.3750 – 1.3800 was posted as the most probable downside target for EUR/USD. This target was achieved with a great precision on June 8, 2009. The chart below shows that EUR/USD bounced back up from 1.3805. The same chart also shows what has happened since that dip. EUR/USD is now back up above 1.4000.
In the chart below, we can see that 1.4100 acted as strong support initially. Once busted, the move to 1.4000 came very quickly. Now on the way up 1.4100 is acting as a resistance. The first attempt to bust to the upside was rejected on Wednesday morning. In the Globex session, EUR/USD has started to move up again and should challenge 1.4100 overnight or Thursday morning. If busted, the initial target will be 1.4300, which should take SPX to 960-970 region.
As always if you like what you see, please share some love.
Let us look at the monthly chart for EUR/USD. This shows a very clean trendline that is supported by corrections in late 2005 and late 2008. Below that is the daily chart, which shows two more support lines, Line3 and Line1. Line3 is a horizontal support line at around 1.3750 – 1.3800. Line1 is the line that has supported EUR/USD in this rally from March lows. And finally Line2 is the longer term support time. We will definitely visit 1.3800, which will take us to SPX 900-910. Visit to Line1, around 1.3500 should take us to 880, and finally if we make a visit to the longer term line, Line2 (which is VERY UNLIKELY IMO), then we will get to 790-820.
There is a small caveat though: As SPX has progressed upwards, the topping around each swing high is becoming smaller and smaller in duration, which means that the support provided by each prior swing high is becoming weaker and weaker. 
