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Friday, 22 May 2015

Chop Top

I've been doing more work on the series of bearish reversal candles over the last twenty years and have combed through 90% or so of the intervening period. I'll finish that at the weekend and may do a dedicated post on these. The ones I have found so far are:

1999 Feb - From 2nd candle into 5% decline
2002 Dec - From 2nd candle into 17.3% decline
2004 Dec - From 2nd candle into 4.46% decline, then marginal higher high, then 7.56% decline
2005 Oct - From 2nd candle into 2.08% decline
2005 Nov - Failed and resumed uptrend into December interim high
2005 Dec - From 2nd candle into 4.44% decline
2007 Oct - From 3rd candle into 57.4% decline
2014 May - From 2nd candle into 1.66% decline
2014 Sept - From 2nd candle into 1.65% decline, then marginal higher high, then 9.83% decline
2015 May - To be determined

Now the first thing that really springs to the eye here is that the only two of these series of two bearish reversal candles made a new high short term, and one of those was the September 2014 series of three. 8 of the 9 resolved down effectively immediately. If we should beat Wednesday's high at 2134.72 before a decline to at minimum a test of 2099.5 then this time would be a rarity, and that could happen, but the odds are against it, and if seen that would most likely be because of tiny holiday volume. . I would note that the SPX high yesterday was 0.44 handles under Wednesday's new all time high. This setup is highly bearish short term and the median decline from it has been in the 4/5% area.

All indices on my optic run list have now broken short term support including SPX, which tested rising wedge support at the open yesterday, and broke wedge support slightly at the open today. A possible double top is in place which would target the 2111 area on a break below 2123.  For obvious historical reasons I would be looking for continuation down to at least test the 2100 area. Scan 3x 15min SPX INDU TRAN charts:
Scan 3x 15min NDX RUT NYA charts:
I was asked about Dow Theory non-confirmations yesterday and here is the monthly/20yr chart of Dow and TRAN showing all divergences over that period where a Dow all time high was not confirmed by TRAN. This chart is suggesting a possible major top here but that's my alternate scenario, with my main scenario just being a 15-20% correction. Only one way to find out for sure though :-) Dow Theory Divergences Monthly 20Yr chart:
At the risk of USD making the chart below irrelevant by breaking up through 96.1 area resistance with confidence now on the strength of this morning's inflation numbers, these are the two most likely scenarios in my view if that resistance holds. USD daily chart:
I posted this falling wedge recently calling for a rally on TLT into falling wedge resistance in the 128 area. That looks even more likely with the bottoming action since then. It's possible that TLT could run all the way back to test the 137 high on the strength of this setup. TLT 60min chart:
I haven't entirely finished collating these bearish reversal series stats but they are really very bearish. The last time I posted stats this mono-directional was in early Feb 2014 and that played out exactly as the stats expected. You can see that post here. We'll see what happens here, but any new high today is likely to be down to holiday volume. The bearish pattern setups here also lean very bearish short term. Trade safe and watch your risk over the long weekend. :-)

Thursday, 21 May 2015

Denial is NOT a River in Africa

I've been reading a lot of talk this morning about how there is no real chance that SPX will make any kind of high in the easily foreseeable future and that's natural. This wave up from October 2011 has been so long and so powerful that it has left many with the strong impression that TA is valueless and that the only possible road to success is buying the dip and holding on at all costs. An extended wave 3 up will breed bullish complacency.

In all honesty that may well be the case for another two or three years, depending on the individual trader's tolerance for pain, and over a timescale of decades the long side always wins through. However the current setup on equities looks VERY toppy, and the level of denial that I've been seeing from some quarters about this just beggars belief.

We have seen two consecutive bearish reversal candles in the last two days. A bearish reversal candle is one where a new high is made and then the day closes red. These candles are common enough, and if you look through the SPX chart you will see many of these both at tops and smaller reversals. Series of this type of candle are rare however. My friend Cobra found seven on SPY in the last 12 years that he posted last night, all of which resolved bearishly, and I've had a quick look this morning at past series of these on SPX.

I found three series on SPX since the start of 2004, though I'll be going through in more detail over the next few days to see if I missed any. The first instance was a series of two in late December 2004 at the first high of a (failed) double top. There was an immediate 4.46% decline, then a marginal higher high, then a 7.56% decline. SPX daily BRC Series 2004/5:
The second instance, again a series of two was at the 2007 top, and I'm going to assume that people remember what happened after that one well enough that I don't need to post the stats for it.

The third instance was a series of three at the first high of a double top in September 2014. There was an immediate 1.65% decline, then a marginal higher high, then a 9.83% decline into the October low last year. SPX daily BRC Series 2014:
These are not bull-friendly stats, and any candle aware traders are getting rightly cautious here. The stats suggest strongly that either the high yesterday was the short term high, and that a significant high has been made or is forming with minimal further upside. If we see a new all time high today, bulls really need to close it over the current highs to inspire any confidence at all.

On my optic run indices they all look toppy with the exception of TRAN, which made new lows in an ongoing decline that started last November. Scan 15min 3x SPX INDU TRAN charts:
NDX is forming a fairly rare right-angled broadening formation rather than a double top. These are 66% bearish as well of course. Scan 15min 3x NDX RUT NYA charts:
People ignore history at their peril, as the massive consensus expecting a big decline on bonds found out last year when there was a huge rally instead. The history was clear, as I pointed out at the time, and what happened before went ahead and happened again. History can't tell you everything, and it can't actually predict the future, but if an axe has been dropped on your foot three times in the past, and on each occasion that was swiftly followed by a visit to the hospital, then at the least that should make us have that outcome as our preferred scenario in the event that it ever happens again.

We'll see how it goes today but if bulls can break through to new highs today and hold them, then they are beating the historical odds by a wide margin. It is much more likely that they will fail. I am now leaning strongly bearish today, and over the next few weeks. In the unlikely event that we see a new all time high today, I'll be treating it as a strong selling opportunity.