Bears started off with a great setup today with an H&S breaking down with a target at 2107.5 (approx 2113/4 SPX), and just a bit more work needed in the first hour to deliver a trend down day. They entirely failed to manage that, and ES has drifted up slowly the rest of the day. This may have been the bears’ last decent chance to make lower low on this move as the low window ends on Tuesday. It was very likely the last chance to start a move that could break 2100 with any force. ES Dec 60min chart:
Today is the third day on the three day rule and bears can trigger the rule with a close today at 2134 or below, approximately 2168 on ES. That was tested at the low today and is holding as support so far. Bears have dominated the closes recently, so we may not know for sure until the close. If the rule triggers then a lower low on this retracement before a new ATH is almost certain. If the rule doesn’t trigger I’ll be getting significantly more doubtful about lower lows. With ES at 2135.50 at the time of writing I’m leaning 65/35 in favor of the bear side. SPX daily 5dma chart:
I don’t have a trade for you all in this post, but I just wanted to quickly share the VIX and its tendencies for forecasting the S&P500’s potential. First, I want to point out the uptrend line in the VIX right now. I’ve highlighted the times when VIX has returned to those trendlines in the past year. At most, price has returned to the highs during such declines, but once the VIX trendline is hit, caution is very warranted, especially since sometimes, that touch then launches actual sustained selling periods.
I made a minor mistake on the chart below. You should note to ignore the first decline in each cluster because that was the decline that established the trendline before which none existed. Before these trendlines were broken, there was always a meaningful spike in the VIX first. This doesn’t always happen, but once it does, upside is the path of least resistance.
The rally on SPX was muted yesterday and SPX gapped through main rising wedge support this morning. I’m expecting this to follow though, though today has so far been about retesting that broken wedge support. That’s being retested now and if it holds as resistance then the next leg down should deliver a less brief break through double top support at 2119. SPX daily chart:
The bears did a lot of technical damage yesterday, and managed to both break down from the SPX triangle and briefly break below rising wedge support from the February low. I’m expecting more downside.
When a triangle like this breaks there is a sequence from that break. First there is a backtest of broken triangle support, often going back into the triangle, and we are watching that at the moment. Then the main thrust out of the triangle starts, and after that ends, the thrust is usually fully retraced. So far the backtest is forming a very decent looking shallow rising megaphone that is very likely to be a bear flag on this setup. When that breaks down the main triangle thrust down should be in progress. SPX 1min chart:
Well I won’t say the triangle didn’t have me a bit worried yesterday, with the solid low at triangle support on Friday and the near miss of triangle resistance on SPX. The break down through triangle support this morning however pretty much kills off the bull triangle scenario and this should be the start of the move down that Stan and I have been expecting. SPX 15min chart:
The high window ended at the close on Friday and I’m leaning short into the end of October. Does this mean that SPX cannot make a new all time high in the next few days? No. Bears need to do some damage to support to open up the downside and the Friday low at triangle support wasn’t good enough. That is the key support that needs to be broken, as until that is broken, a triangle may well still be forming. The high so far today on SPX is not far away from triangle resistance. SPX 15min chart: