Technical Picture - Retest of Last Week's High

The retest of last week's highs sold off sharply into the close with continued weakness in index futures as I write this post. Investors are reluctant to hold overnight especially on the third day of a rally.

The QQQ is far outperforming the broader markets as depicted in the chart below. However, unless we start to see some rotation, the broader markets are going to dominate and that is likely to lead us back down to retest support.

Also, keep a close eye on the $USD which has broken to the upside. We are consolidating the move, but once the next leg up gets underway, it will hurt stocks.

Technical Picture - Gap Fill and Fade

Markets gapped down on the open and the gap was immediately faded. Price retested the lows before extending yesterday's rally. As we can see from the 15 minute chart below, we filled the bearish gap from Friday's jobs data and immediately faded. Note the negative divergence of the RSI to today's higher high, foreshadowing the end of the move. Now we have support from the bullish island gap which occurred on yesterday's opening gap up.

From the daily chart above, we see a possible H&S pattern developing within the consolidation channel.

On the 60 minute chart below, we see a lot of gaps, but only the unfilled gaps, highlighted in color are important. If the bulls are going to do something, now is the time to show their strength with the bullish island as support. Overall, the bears still have the upper hand, but they need to own it on the next test of the lower channel line.

Futures sold off during the President Obama's speech, but have since recovered to pre-speech levels. Chinese CPI and PPI data seeing further upticks in ES futures.

Technical Picture - Bearish Island Reversal Within a Bear Flag Pattern

Technically, we have a bearish island reversal on the SPY following Friday's action, because, if we remove the bad tick from Wednesday, there's a portion of the gap that remains unfilled. For the daily timeframe, I'm focusing on the S&P futures chart just above as opposed to the SPY chart daily at the top of this post, because as you may have noticed, the SPY daily ETF is now being smoothed or filtered eliminating unfilled opening gaps. For accurate, raw data you need to look at the lower timeframes such as the 60 minute below. Hopefully the ETFs will end this new filtering process so that the SPY daily chart can become useful again.







Narrowing the view to the 15 minute timeframe below, we can see that negative divergence of the RSI to higher prices started on Wednesday, following which prices started printing lower highs and lower lows. Friday's jobs number was the nail in the coffin as prices gapped wide and bulls could not push prices above S2. After the third attempt at S2 failed, it was time to get short. A minor attempt EOD to thrust off the bottom failed, as Emini S&P futures prices closed on the lows of the day.



The bears are firmly back in control, and I doubt we will be able to fill the gaps in the short-term.





GLD is back near all time highs. After retracing from the initial impulse move lower, GLD consolidated in a sideways box play. Overnight Thursday to Friday, GC futures rallied some 30 points (goodnight gold trade). When this happens you want to get long gold miners as these need to do some catching up.



Looking at the pre-market action of a few large cap gold miners, I decided to go with my usual suspect, ABX. Long on the open, Lock in some profit on the 10:00 turn and reload on the Fib. retracement. Avoid trading GLD in these instances because it gaps too wide as it follows the gold spot prices too closely.

Technical Picture - Bulls and Bears Battle for Domination - Symmetrical Triangle

Big Picture - After breaking the H&S top on high volume, bears pushed prices lower, beyond the full measured move of the pattern. Now the SPY chart has carved out a textbook symmetrical continuation pattern.



Drilling down to the 60 minute chart, we note that after filling the gap on Thursday morning, bears stepped in to push prices lower. Following the Bernanke speech, bulls stepped in for another relief rally.



The upper blue dotted lines are areas where I expect that bears to add pressure, and the lower blue dotted lines are areas where the bulls will play defense. This pattern could play out for quite some time before one side becomes victorious. In fact, it may not look like a perfect symmetrical triangle when the breakout finally occurs.



How to play the reversals within the bigger pattern. Prior to Jackson Hole, Bernanke tanked the markets on August 9th with his FOMC release. I didn't want to get in front of freight train on Friday, as the markets swooned on the lack of relief measures in his speech, but I did want to participate on any relief rally following the dip. The best way for me to do this is to wait for confirmation of a counter-trend.



I look for the RSI to move quickly from the lower range to above 60 then dip under. When it crosses back above 60, if momentum is above 0, I go long. Negative divergence of the RSI to higher prices signals a short term top and time to take profits. An orderly consolidation such as the symmetrical continuation triangle below, can allow for a second entry.



The same counter-trend setup works after a rally. Look for the RSI to quickly move from higher readings to below 40. If RSI moves back above 40 and crosses below on negative momentum, it sets up a short. It's important that the inital move in the RSI is quite fluid as is the move in price, otherwise, it could be signalling a minor move within a larger consolidation pattern, which is fine if you're nimble, but if you're not, stay on the sidelines.

Click on chart for larger view

As I noted in my last post, GLD had the potential for a 62% Fib. retracement. That target was reached EOD on Friday. Now that hurricane Irene is on its way out with less damage than forecast, the bears might come in and ambush GLD in the ambush zone.

Technical Picture - Short Term Symmetrical Triangle

From the SPY 60 minute timeframe above, we see a symmetrical triangle developing. These are usually continuation patterns, but we won't know for sure until it actually breaks and holds. Today's action was somewhat predictable as we opened right into the gap fill level and faded.



Tomorrow we have GDP data in pre-market and the much anticipated Bernanke speech at 10:00. The speech is intended to quell market fears, but I'm not sure that can be achieved without further stimulus, and that seems unlikely.



The goodnight gold trade was on the short side and GLD opened in the 2nd level support zone. As we can see from the 15 minute chart below, we had positive divergence of the RSI to lower prices. The opening range carved out a hollow red candle which is usually bullish (filled black candles are usually very bearish). Price consolidated the early push in the upper range, setting up a gap fill long.



The SAR in the daily timeframe signals that the parabolic move is over, but how far can we retrace from here. Since GC futures have been very active in the overnight sessions, it is best to study the overnight moves in pre-market before jumping in. A 62% Fib retracement will take us back to $177.50 and perhaps form a H&S top.



BTW, we've read about all the genius traders that have been selling some of their gold holdings near the top - Soros, Sprott, and Doctor Phil, but generally speaking, beyond the well known gurus, gold is held by much stronger hands than silver, so it may not have such a rapid and devastating decent as we saw in silver a few months back.

GLD Sees Some Profit Taking and Markets Bounce

Gold sold off overnight and gapped down on the open. Profit taking in gold was offset by buying in the broad equity markets. Is the correction over and the gold move done? IBD seems to think we are in a confirmed uptrend following today's market action.... We need more evidence. Gold sold off on high volume but has many layers of support as depicted on the GLD chart below. The relief rally in the SPY lacked volume IMO. We seem to be rallying in anticipation of Ben Bernanke's Friday speech, but I doubt he can propel this market back into bull mode.

Longing for a Bear Market Relief Rally

So we're in the midst of a bear market and I'm longing for a robust bear market relief rally, the likes of which we had on October 28, 2008 as depicted on the 5 minute NQ emini futures chart below.



Looking at the daily closes on Friday, I noticed that the QQQ is very close to a retest of the August 9th post FOMC lows, whereas the SPY and DIA have a ways to go. Compare the charts of the SPY and QQQ below.







History doesn't repeat itself, but....if we compare the October 2008 charts of the SPY and QQQ and you'll see what I'm getting at. The SPY held the initial reaction low as support throughout the month of October 2008 and well into November, but the QQQ breached the previous low early on two separate occasions, each time resulting in a reversal and bounce. The second breach preceded that huge parabolic day trade depicted in the upper half of this post.



So be ready if a similar scenario develops next week. I can envision a breach of support in QQQ, but if the SPY and DIA don't confirm, we should get the highly anticipated relief rally.