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Short Term Bearish Setup (by Springheel Jack)

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I wouldn't regard myself as a bear on equities on anything other than a very long term basis here and almost everything I'm seeing argues that the traditionally strong period November to April in most annual investing cycles is likely to be strong this time too. I'm not wild about the economic backdrop we're looking at, but I'm expecting equities to rise over the next few months regardless.

That said we would normally expect to see a significant high and retracement in October and right here and right now, the short term setup for a correction from yesterday's high is looking very good. On SPX we hit an important trendline for the second time in recent days and were rejected again. The previous steep rising channel has broken in recent days and we've spent several days making what looks increasingly like an interim top:

  101022 SPX 60min Rising Channel

Strong assistance for a correction looks ready to be provided by USD, which is bouncing within the strong declining channel. The setup looks good for USD to bounce back up over 80 here and while that's happening is the best chance that we're going to see for any correction in equities:

101022 USD Daily Declining Channel

One thing that I look for in a reversal within a big channel like this one is a reversal head and shoulders pattern and I've got one of those forming on USD as well. These tend to be very reliable performers though the target is the other side of the channel in practice rather than the measured target:

101022_USD_60min_HS_Patterns

I did have a nice little declining channel on ES to support my bear scenario today but resistance blew out at 1177 and I don't think that it's in play now. I have two others, one rising and one falling. We'll have to wait to see who wins the battle of the channels today:

101022R_ES_15min_Channels

Other indicators are a mixed bag. The gold:silver ratio is rising, which is promising for a correction. We had a Vix sell signal a few days ago, which was encouraging, though most definitely not definitive. Vix looks flat, which isn't particularly encouraging and treasuries have not bounced with the sharp declines in equities in recent days, which isn't encouraging either though with treasuries trending flat to up during the bull move in recent weeks that may not signify much. It is also a POMO day today which could derail my bearish scenario. We shall see, but unless my declining resistance trendline breaks I'm leaning short today.

One last chart to share on silver where we have a perfect broadening descending wedge from the recent high on the 60nmin chart. The wedge looks very tradeable in both directions:

101022 Silver 60min BD Wedge