Of all the things I expected to see on Friday, I'll confess a strong rally at Bernanke's failure to announce QE3 wasn't one of the them, but that's what we saw. The bullish engulfing candle on Friday was even more impressive than the (almost) bullish engulfing candle on Thursday. Will there be more? Maybe, but for a number of reasons the place where SPX closed on Friday was extremely significant, and it may be that that this rally will fail there.
The first thing to note was that both bonds and precious metals rose strongly on Friday, and this was odd as both have been moving inversely against equities in recent weeks on the flight to safety trade. Copper rise slightly and while EURUSD had a strong day, it didn't break triangle resistance. There's nothing from any of these to support Friday's rally or to suggest that there may be more coming.
SPX closed right at the top of the daily candle range of the last few days and also closed at the daily 20 SMA, which is also the middle bollinger band. A break of this level would look significant and an open above Friday's close would suggest at least a test of the top of the next range up at 1204.5. You can see from my daily chart how well SPX has been respecting the range support and resistance levels on an opening and closing basis:
On the Vix the recent support trendline was tested and pinocchioed on Friday, but Vix closed back well above it and on the middle bollinger band there. An open below the support trendline and the middle BB would suggest that this rally has more legs:
Just two charts today, as I'm writing this late on Saturday and I'm away until Monday's open, but I think they say it all. If SPX gaps up on Monday then I'd expect to see a further run up to 1204.5 with a high degree of probability. A Vix break with confidence of the support trendline and the middle BBs would suggest that this rally might even take us up into the next range up between 1204.5 and 1258. Equally if SPX doesn't gap up on Monday, then this rally might well fail right here, as bonds and PMs particularly are suggesting might be the case.
As I've mentioned before, I'm on holiday for the next three weeks and during that time I will be doing some posts on an ad hoc basis, but I won't be doing my daily posts. Everyone trade safe. 🙂
