Technical Picture - H&S Breakout

Markets traded lower overnight following a disappointing FOMC statement yesterday. We gapped wide and grinded lower for much of the session. From the daily chart of the SPY above we see that our H&S pattern has finally broken out successfully with volume. We are oversold and I am expecting a dead cat bounce soon.

Big picture, if we fail to hold the 61.8% Fib retracement of the 2010 low to the 2011 breakdown low as depicted on the SPX chart below, a full retracement is likely.


Update on the copper futures chart I posted over the weekend. H&S top within a big double top. The H&S measured move is close to target. Here again, I would expect dead cat bounce soon.

Technical Picture - SPY 50 SMA Holds as Resistance

Markets gapped up and filled the gap from the previous day close before rallying to retest Friday's highs and the downsloping, daily 50 SMA. Price consolidated for several hours in the top of the range before selling off one day ahead of the FOMC statement. Selling was aggressive leaving us with a tweezer top reversal pattern and shooting star.

Part of the problem was lack of resolution concerning the Greece/Troika dealings. Last I read, they have agreed to meet again in October.

As I was watching the price action on the 5 minute chart above, I thought we could have one of two scenarios:

1. Failed BO which could shorted.
2. The 50 SMA crossing above the 20 EMA and price breaks support.

The latter played out perfectly for a nice short into the close.

On the 15 minute timeframe below, we see the possibility of a double top forming. A double top breakdown would result in a fast move to the downside.

Technical Picture - Rally Extended

Equities closed the week with a string of five consecutive daily gains resulting in a 5.4% gain on the week, the best weekly performance since late June, but only the second weekly gain since the markets rolled over.

The week started on a low note as Europeon debt fears spilled over to Monday's open, but in the afternoon attention turned to rumors that a sovereign wealth fund from China was talking with Italy about a bond purchase. That news helped stocks stage a rally, which gained traction as short sellers were squeezed out of their positions. Later in the week another boost in confidence came on news that the European Central Bank had coordinated with other central banks, including the Fed, to make dollar loans available to European banks. These measures trumped poor economic data and by week's end traders felt compelled to chase the markets higher.

Watch the 50 SMA and top of channel for resistance if we make it that far.

An update of the chart I posted Wednesday, shows that the QQQ has leaped even farther ahead than the broader markets on the strength of AAPL (BO of symmetrical triangle) and leadership provided by the SMH, which has staged a sharp recovery after bottoming on August 19th. Notice how the IWM and SPY are starting to flatten out. Non-confirmation of new recovery highs in the QQQ by the broader markets is a red flag - caution going into next week.

As we can see from the chart below, the SMH has retraced almost 62% of the last leg down. Friday's stick is a bearish spinning top in the ambush zone and I expect a retracement to kick in early this week.

The chart below shows some leading names in the SMH that I follow. SNDK has been ripping higher since the beginning of Sept., up over 30% since Aug. 19.

Copper futures don't look very healthy. Copper is generally considered as a leading indicator for the broader markets and it has carved out a bearish H&S pattern within a double top. If it breaks out successfully, look for a $0.60 drop as targeted on the chart below.

Gold futures appear to be forming an ascending triangle.

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.