Charts I’m Watching: January 25, 2012

UPDATE:  11:35 PM

No point in rehashing the Fed news today.  Bottom line, they continue to try to influence the markets with promises of QE.  Actually unleashing more QE is problematic from a lot of standpoints (political fallout, distorted credit markets, etc.)

The bigger problem is that if the Fed whips out their biggest gun (QE3) and it produces even less benefit to the economy than the last two iterations, it would reveal: (1) just how desperate they are; and, (2) how limited are the alternatives.  Zerohedge has been running an interesting series on the race to the bottom between the Fed and the ECB — well worth your time if you’re into macro-econ.

It’s interesting to me that the USD’s weakness these past few days outweighs the Euro’s strength.  But, they’re both at a turning point based on harmonics, fan lines and channels.

Gold was on a tear today, topping 1700 for the first time since Dec 12.  It’s possible it’s breaking off its run to 1357 (or 1200, see Fleeced); I’ve nudged the channel lines just about as far as I think is reasonable to capture today’s rise.

Recall that we’re still north of a long term trend line that, until broken, points the way to a zillion by Christmas.  With today’s Fed action, there are plenty of folks who are more convinced than ever it’ll get there.

But, there’s an interesting little fan line off Jan 2011 that provided the July, September and October bounces (white, dashed.)  We broke through in mid-December and have been beneath it for the past month.  Now, however, we’re tagging it from underneath — a back test — at the upper channel boundary.  GC is also showing negative divergence on every time frame of 60-min or shorter.

(This is the exact same type of back test, by the way, as we’re seeing on BAC.)  If it is going to turn, it’ll need to do it pronto in order to salvage the harmonic patterns.  We’ll watch this one closely. 

Stocks are likewise rapidly running out of fan line resistance options to halt their advance.   As we examined last week, there are a few different ways to draw these, depending on whether you include shadows or not.  Today, we bumped up against the highest of the four.

We’re within .81 of the Butterfly completion at the 1.272 extension — the 1329 target I’ve been eyeing.  We’re also just a few points shy of the .886 retracement of the 1370 – 1074 drop (1336.)  Technically, Wave 2 isn’t toast unless we head higher than 1370.  At only 44 points away, the bear case is starting to run out of room.  The 50 day SMA is only 4.43 below the 200 SMA.

But, many of our technical indicators continue to look bearish.  There’s negative divergence across the board, from 60-min on down.  VIX, which closed below its Bollinger Band yesterday, is also providing nice divergence and is at least 90% of the way towards a falling wedge apex.  It completed a bullish Crab pattern, filled a large gap and tagged the wedge’s lower bound yet again today.

I see sign after sign of a top.  Whether the market chooses to follow those signs right now, however, is anyone’s guess.  But, we’re drawing very near to the point of “now or never.”  I might be a little early, but I opened some short positions today in anticipation of a turn (and, yes, I’m using fairly tight stops.)

The first wave down should stop short of 1267 if it’s going to keep bulls’ hopes alive.  It’ll look bullish from a wave count perspective, and allow the channel promising more upside to take proper shape. 

I’ll leave you all with a chart that illustrates just how overextended this market is.  TZA, a leveraged inverse ETF on small cap stocks, has gone deeper into a falling wedge than I’ve ever seen.   Good luck to all.

UPDATE:  12:15 PM

It’s important to keep a close eye on the potential channels and wedges forming on SPX.   But, given the variety of legitimate interpretations, it might be more valuable to watch the RSI trend lines.  On the hourly chart below, two of the more obvious channels are the light blue and the yellow.  You could also easily form a rising wedge by combining the upper blue line with the lower yellow line.

Rather than agonizing over the right interpretation, focus on the RSI trend line.  It’s repelled each of the dips pretty handily and will be the first sign of a meaningful break to the downside.  Likewise, we can watch for upside breakouts as well.   Consider the 5-min chart RSI:

A breach of the solid yellow line would be a good warning sign.


The Nasdaq 100 futures look to have tagged the fan line off their Oct 2007 highs.  As reported last week and back in July, this has been a very good indicator of a top several times in a row.

EURUSD looks like it’s completing a back test of the last diagonal as well as a trip across its channel.  

There’s a Crab pattern completing on the 60-min chart at the 1.618 extension that should put the brakes on any further upside.

And, gold is also completing a run to its channel boundary, depending on whether you include the shadows.

I’ve probably written those same words (re the shadows) a dozen times in the past week — which, in itself, is probably a sign of how prices have been pushed to extremes.

AAPL’s results might be the catalyst to get SPX up to 1329, completing the Butterfly pattern we’ve been watching.  Keep a close eye on this after the cash markets open, especially if we gap up a little on the open.

More later.


Charts I’m Watching: January 25, 2012 — 9 Comments

  1. With ZIRP to infinity, it is interresting that the banks did not participate in today's rally. It actually went red a few times whike every other asset class was shooting t the moon. Shouldnt the banks be the one who benefit the mos frm today's announcement? PW what do you make of the double bottom in VIX? Many logs were talking about the trigger of the VIX sell signal yesterday, but I guess that is busted now?

  2. PW, it got all the way to 1328.3 today. Do you consider your target hit? What do you expect to happen now? It seems that there is a tendency to reverse the next day of the fed meeting. Hopefully I don't jinx it by saying it out loud. But it seems that everyone is saying we can only go higher now that Monday high was cleared….

  3. PW, you won't see me cracking. Sure I might release some frustration, however I know how to recognise a market that is irrational and ignorant of the real facts.
    And the facts are that S&P; earnings are abysmal and in decline. Secondly Italy has ZERO chance of rolling over its debt in 2012 without some drastic restructuring. They can't even come to agreement on Greece…..what hope Italy?
    This will drag the global economy over the cliff.

    As I said somewhere else, this market is going to be a monumental short.


  4. Today with the FED. Maybe some firework. The market always does a headfake before reversing. Which way will it be today? Up first then down big (I hope), or down first then up big?? Just so the MM can screw with both bulls and bears, run all their stops to take all their money. So they can have all the money to themselves with the real move??

  5. Don't bear market rallies tend to end on good news as well? PW, well said, the lack of follow through here should be concerning to the bulls. We are clearly topping out, while the SPX has been flat the past 4 days, the DJIA makes it easier to see how tired this market is, is putting in a rounded top right now over the past week and has clearly lost momentum.

  6. Beetlejuice,

    I am right with you there. I have been short for awhile waiting for THE TOP, which seems to be pushed higher and higher each day. It seems the market will never drop, all the dips are bought. Maybe when bears like us feel so down, it's a sign that the top is very close?

  7. We have to be close to a top surely?

    Now we have AAPL likely to fire up the market.

    I want to believe that we are in top territory however I'm finding it harder and harder to find reasons to be bearish.