Back before the first world war there was a period when many bars in San Francisco gave away free food to customers. The only catch was that the food was heavily salted, with the intention that the diners would become thirsty and order plenty of drinks to wash the food down. I understand that this may be the origin of the observation that ‘there ain’t no such thing as a free lunch’, sometimes shortened to TANSTAAFL.
Any decent outcome tends to require a risk, and that’s particularly true in traded markets. There is never any certain outcome to a trade, the best that can be done is to trade when the odds favor one outcome over another.
Looking at the swing short trade here, the odds look decent and the risk/reward favorable. Taking ES at the current 1582.50, if we do see a decent retracement then the obvious target is some 120 to 130 points lower. If the current candidate double-top isn’t going to play out then that should be obvious by the time ES reaches 1602.50, so the risk is 20 or perhaps 30 points depending on the desired stop level.
In terms of whether we are gong to see a decent retracement here, we are coming to the end of the ideal six week period to see that high, and we have seen a high during this period in each of the last three years. There is negative RSI divergence on the daily charts across multiple equity indices, and trendline support breaks and mostly formed reversal patterns on all of those, that need only a strong reversal near here to complete, and a break below the lows made the week before last to confirm.
Will it happen? There’s no way to know for sure but the odds favor it in my view.
On ES a promising looking short term H&S has now mostly formed and requires a reversal soon to complete forming. A possible rising channel was established at Friday’s low but if ES can get back near Friday’s lows then the channel will be broken. Channel support is in the 1578.25 area, and the 50 hour MA is in the 1579 area:
A small H&S is also part-formed on the SPX 15min chart. The target is in the 1562 area on a break below Friday’s lows:
On the SPX 60min chart the high last week was high enough to count as the second high of a double top, but SPX could yet go a bit high and exceed the current 1597.35 first high by a few points. If we see SPX over 1603 then I’ll be increasingly doubtful about this setup:
On the daily chart SPX has tested the upper bollinger band on Thursday and pulled well back on Friday, which is promising. The upper band closed at 1597 on Friday and middle bollinger band support is in the 1568 area:
On CL there was a retracement on Friday that found support in the 92 area which may now be strong support again. CL may just continue up from here to the next significant resistance level in the 95 area, or it could make the second high of a double-top and retrace into rising support from the low in the 90.5 area:
EURUSD is still a tough read here, but if GBPUSD can be used as a proxy for the anti-USD trade, then a retracement looks likely here with a hit of trendline resistance on negative RSI divergence:
One reason I haven’t mentioned for leaning bearish on equities here is the setup on bonds, but that again is worth a look. On TLT a falling wedge has broken up with a target back at the 2012 highs, and TLT has been consolidating as equities have bounced over the last few days. If we see a strong reversal on equities here we should also see TLT make that target during the the equities retracement:
I’m leaning short here until we see some significant evidence that these topping setups on SPX, Dow, TRAN and RUT are failing.