Charts I’m Watching: Jul 18, 2013

No change from yesterday’s forecast. We’ll be watching to see whether SPX can break 1687.18 and ES can break 1685.75.  All in all, the market response to Bernanke’s testimony was quite muted — the first non-event in recent memory.

The e-minis are up a few points, but are still lurking in the harmonic waffle zone of .886-1.000.

This morning’s initial claims number was much better than expected — 334K versus consensus of 348K and prior of 358K — leading some to speculate that tapering might come sooner than expected.

This one of those times when the usual seasonal adjustment nonsense (unadjusted was 409K, up 25K) might work against TPTB.  I guess someone didn’t get the memo…

The important Philly Fed survey and the Conference Board LEI are due out at 10AM EDT.  As we discussed yesterday, a big miss on either or both could be especially damaging to the markets in light of the positive initial claims print.

A scenario where the economy continued to show weakness but unemployment remained stable might tie [Bernanke’s] hands in terms of tapering the tapering.

Briefing.com is forecasting a big miss on the Fed survey.   Stay tuned.

UPDATE:  10:03 AM

Philly Fed survey general business conditions printed a big beat: 19.8 versus prior of 12.5 and consensus of 5.3.

I’ll go long on the push through 1687.  Tight stops are warranted, as SPX has only now completed a double top.

 

Given the lack of a meaningful response at the .886 Fib on the 11th and the relatively small reaction at 1684 on Monday, there is still an elevated risk of a larger pullback here — especially since tomorrow is OPEX, which tends to prop up markets that are otherwise ready to fall.

Yesterday, we looked at both bullish and (short-term) bearish scenarios.  Though the push above 1687.18 is indicative of a continued bull market rally, a 5-pt rally isn’t exactly “proof.”

Last week, we examined the 14 large apparent Bat Patterns since the Oct 2007 high of 1576 [see: Time’s Up.]

  • 14 previous large Bat Patterns — or at least what looked like one — since Oct 2007
  • 4 met the precise definition: most significant reversal at B < .618
  • of the 14, avg .886 overshoot was 0.13% (range:  -0.6 to 0.5%)
  • of the 4, avg .886 overshoot was .38% (range: 0 to 0.9%)
  • of the 14, avg reaction at .886 was -2.1% (range: -0.4 to -5.1%)
  • of the 4, avg reaction was -2.5% (range: -0.8 to -3.6%)
  • 13 of 14 provided a “2nd chance,” reacting at the double top to below the .886
  • 3 of the 4 did the same, average retrace at double top = -4.5%

It’s this last data point that catches my eye, as 4.5% of 1687 is 76 points, or about SPX 1611 — which is almost exactly a .618 retrace of the 1560–1687 rally.

Going back to the data I put together for the Bat study, 12 of the (now) 15 Bat Patterns studied went on to make a double top reasonably soon after hitting their .886 (average = 5.92 sessions, range: 1-11.)

The average price at which the double top completed was 0.32% higher than the previous top (range -0.18% to +1.31%.)  The reactions that occurred after the double top ranged from nil to -19.7%, with an average drop of -4.3%.

Now, again, all this is not to say it will happen this time.  But, an average response after reaching the 1687.18 top would be a 0.32% overshoot (or 1692.57) about 6 sessions after the .886 (it’s been 5 so far) that is followed by a 4.5% decline (1611, the .618 of the 1560 to 1687 rally.

Just saying…

SPX is about to complete a small Crab Pattern at 1692.34, so keep your stops where you’re comfortable.

UPDATE:  11:23 AM

We’re getting a small reaction here at 1692.  I’ll take a short position and see if we get merely a backtest of 1687 or something more.  Stops at 1694ish.

UPDATE:  1:24 PM

SPX just tagged 1687.18, so I’ll take profits on the short position and revert to long — with tight stops in case there’s more to come.

There’s no evidence yet of lower prices to come. This has been a very orderly backtest.  But, you never know (OPEX and all.)  Bulls will need a break back above 1689.25 to break the little falling channel from 1693.12.

Bears will want the bounce to fail there and drop through 1687 — which is where I’ll entertain a short again.  Note that the .886 of the drop from 1693.12 to 1687.1 is 1692.44 — which is also the 1.618 that triggered the short position earlier.  It makes a nice target for a bounce, no?  Just need to get through the red .786 channel line at 1691ish.

UPDATE:  2:50 PM

Shorting SPX here at 1691.

It probably seems a little wishy-washy, but we just completed a backtest of the red .786 channel line discussed above — and a backtest of the .75 of the little channel I hadn’t shown before (above in purple.)

It’s not that I’m worried about bagging the whopping 4-pt gain on our last long position; but, consider today’s move in the context of the data presented earlier:

  • today’s high = 1693.12, a 0.35% overshoot versus 0.32% average
  • today’s high came 5 sessions after the .886 versus average of 5.91
  • almost every double top has retraced back to the .886 (1672) or more, especially if — as is the case here — there was very little response there in the first place
  • the red channel midline is currently crossing the .886 at 1672
  • the 50-period SMA on the 60-min chart is at 1672
  • the average drop for big double tops is 4.5% or 1611
  • the .618 retrace of 1560-1693 is 1611
  • the SMA 100 should reach 1611 around next Tuesday
  • the broken falling white channel intersects with the purple channel .236 on Tuesday
  • someone please explain to me why we should make new highs after tapering — the single biggest threat to the bull market — has been confirmed multiple times

There’s more, but you get the picture.  I’ll gladly suffer the told-you-so’s next week if SPX is trading at 1772 rather than 1672 or 1811 instead of 1611.  I’ll close my short on any thrust through 1695, no harm done.

UPDATE:  3:45 PM

Chances are nothing will happen until after OPEX this Friday.  But, of course, a drop back through 1687 would be short-term bearish.

While I’m thinking about it, I will be out of commission after the close today and again Monday after about 11am EDT, back in the saddle on Tuesday.  Here’s a peek at the current 60-min chart.

Though I might regret it, I’m riding my shorts into the close — not recommended for those who can’t trade and/or hedge after-hours.  Stops around 1695 probably make sense.

GLTA.

 

 

 

 

 

 

 

 

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