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Friday, 23 May 2014

Push Up or Shut Up

I'm a reversals specialist, and on a multi-timeframe basis I chart trendline, pattern and RSI reversal setups that work well. I'm good at what I do. However on an intraday basis the first question of the day is always whether it might be a trend day. On a trend day all reversal setups become worthless, bearish patterns deliver tiny declines if they deliver at all, every counter-trend reversal setup, however good on other days, stops working, and there will generally be no setups in the direction of the trend because the retracements are too small to form them. That is the power of a strong trend.

On larger timescales these trends can last months or even years, and while in the grip of these strong impulse waves my smaller reversal setups and intraday reversal setups work just fine, as they are too small relative to the trend to be strongly affected. However I then get the same problem with my daily, 60min and 15min charts as I get with my intraday charts on trend days. Time after time very nice reversal setups will setup and the trend steamroller will squash them flat. A strong impulse wave up will roll straight over anything in its path until it ends, and must be respected.

So what's my point? Well we are now at a crossroads on SPX, and other indices as well of course. I called the highs yesterday on twitter with a very nice little rising wedge that broke down in the afternoon and you can see that wedge in thin lines on my SPX 15min  chart below. The chart covers the last month as SPX has chopped around in the current range and you can see nice clear patterns, and a string of RSI 14 divergences that formed and marked the start of significant reversals. If we are still trading that range, and are not in a new impulse wave upwards, then the short term high was made yesterday, or might be slightly exceeded today before a decline that should take SPX to rising megaphone support, currently in the 1872.5 area but obviously rising. You can see that I have marked in the last six 15min RSI divergences from overbought/sold and all six made the target at the 30 or 70 level on RSI respectively. If we are not in a new impulse trend up then I would expect this reversal to do the same.

If we are in a new impulse trend up then this powerful reversal setup will be bulldozed, and making a sustained new high will confirm the break up from the range. If we do see a break up then the alternate scenario I showed yesterday will become my primary scenario. We reached the point of decision yesterday afternoon, and now we will see what happens there. SPX 15min chart:
On the 60min chart the 50 hour MA is now at 1882, and bulls need to hold that while bears need to break down through it towards the test of broadening wedge support. I was asked why the 50 hour MA is important, and the answer is that an impulse move will generally break over the 50 hour MA and then hold it as support until near the end of that move. If we see a decent break back below it now then the chances that we are in a new impulse wave up drop dramatically, and in that case we would very possibly be in a new impulse wave down, in which case the 50 hour MA would be important resistance. SPX 60min chart:
On the daily chart SPX came close to testing the upper band yesterday, and that is now at 1899. Given the strong reversal setup at the high yesterday a hit of 1899 now might well be a break upwards. If we see that test I'd give even odds that would be the start of a band ride upwards. SPX daily chart:
I was being chided yesterday for ignoring the obvious break up on NDX, but as ever I'm seeing the setup here differently to most. On my NDX chart we are seeing what is either a bullish break upwards from a rising wedge that will most likely evolve into a rising channel if that break is sustained, or a bearish wedge overthrow that on a break back below broken wedge resistance would be looking for a test of the April low at 3414. That would complete the huge H&S that has been forming on NDX over the last few months, and might therefore just be the first half of a longer journey south. I'm watching this setup with great interest but it isn't a compelling long yet in my view. NDX 60min chart:
This is a very important inflection point and what happens here should set direction for weeks on a break up, or months on a break down. This could go either way though the bull case here is helped by the holiday weekend, as these low vol periods around them tend to favor the bulls in my experience.

Just as I finish today I'd like to give a shout out to another classical chartist called Bouraq. I had a good look at his blog yesterday and I was very impressed by his feel for good trendlines. This is a surprisingly rare skill and I have added him to my daily reading list, which really isn't a long list. For anyone else who enjoys quality trendline/channel chartwork his blog is at www.tradingchannels.co.uk, and you can find him on twitter at https://twitter.com/Tradingchannels.

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