In my post a week ago entitled Cave Taurus (Beware of the Bull), I was looking at the possibility of a strong rally last week and how that might unfold. Obviously we have now seen that rally, and this post today entitled Cave Ursum (Beware of the Bear) explains why I think that the rally most likely topped out on Friday and looks at the next round of downside targets, and the possibility that may lead to a very significant further decline that could last into 2014.
I’ll start with the SPX 60min chart that I posted last Sunday, where I was looking at two main targets, possible falling megaphone resistance, and the possible IHS neckline at 1669/70. These two could have been tested at the same time had the rally been faster, but in the event the high on Friday confirmed the falling megaphone on SPX and fell slightly short of 1669/70. The target for the double-bottom I was looking at last Sunday was 1665.35 and Friday’s high was at 1664.83, close enough to count that double-bottom target as made. SPX 60min chart (from 1st Sept):
So where does that leave the SPX 60min chart now? Well if this has indeed been just a rally then the rally high is most likely in. Any move up from here is either a break up or a bearish overthrow suggesting that the falling megaphone would break down after reaching the megaphone support trendline, currently in the 1600-5 area. If we are going to see a move towards megaphone support next then I would view a break below Friday’s low at 1640.62 as a strong bearish signal, but in the absence of a break over megaphone resistance that is the next obvious target. SPX 60min chart:
Why have I been expecting a bearish resolution at the top of this week’s rally? Partly the answer is in the historical statistics. We are now in mid-September and if we see a break up here I’d expect the bull move to last into 2014. There has not been a test so far this year of either the 200 DMA, currently at 1568, or the weekly lower bollinger band, currently at 1580, and in the vast majority of years both are tested at some point during the year.
For the 200 DMA, if I exclude the near misses in 1964 and 1974 (full year below with near miss on rally), then in the last 50 years the only two years without a test of the 200 DMA were 1989 and 1963. For the weekly lower bollinger band, excluding the near misses in 1963, 1988 and 1993, the only two years that never broke much below the weekly middle bollinger band were 1964 and 1995. There have therefore been no calendar years in the last 50 years that did not test one or the other, except for 2013 so far. It may be that we will see a first instance of that happening this year, but that would obviously be a very rare outcome historically, and it’s generally best not to rely on those happening. One last statistic to note is that the only two full calendar years since 1996 that did not see at least two tests of the weekly lower bollinger band were 2003 and 2009, both at major bear market lows.
If we are to see the decline resume from the high on Friday, then on the SPX daily chart the main support level to watch is rising support from 1343 which was tested on the last trading day of August. A break below that trendline eliminates a number of the more bullish pattern scenarios I have running into 2014, and opens up the next downside targets at the 200 DMA and the June low at 1560. I would also note that 1560 is both a possible H&S neckline and and possible double-top trigger level. In both case the downside target would be 1410 area on a significant break below it. SPX daily chart:
Is there any particular reason to expect a break below 1560? Yes, as there is clear and strong negative RSI divergence on the SPX weekly chart. This is one of the signals for possible bull market highs and you can see the strong similarity to the negative divergence at the 2011 top. As long as 1560 holds I’m leaning long into 2014 after making a low in the next few weeks, and that’s on the basis of the rising wedge from the 2011 low that broke up earlier this year, but if the 1560 area fails to hold as support, that’s a whole new technical ballgame, and 1410 would then be a reasonable target. SPX weekly chart:
What do the other US indices show here? None of them are looking like a bullish breakout here, and four have clearly reached pattern resistance levels. Dow didn’t make it to the possible IHS neckline there, but peaked on Friday at a level which has established a new and larger falling channel. Dow has fallen the hardest of the US Indices and channel support is now at the June low (and declining rapidly). I’ll be looking more at the Dow daily chart next week. Dow 60min chart:
I drew a falling channel on my RUT 60min chart a couple of weeks ago and the high on Friday confirmed that falling channel perfectly. The next target at channel support would be close to the 61.8% retracement of the move from the June low in the 989 area. RUT 60min chart:
The last two charts are the Nasdaq 100 (NDX) and broad Nasdaq (COMPQ), which have held up the best so far (due in large part to AAPL I suspect), and both closed Friday near the highs for the year. The pattern forming on NDX is a (direction neutral) broadening formation, right-angled and descending (BFRAD), which hit pattern resistance on Friday. If NDX turns down here I’m looking at the possibility that NDX will hit all three of the 38.2% fib retracement, a possible H&S neckline and pattern support in the 3025 area on the next swing down. That would be powerful combined support. NDX 60min chart:
COMPQ has been a little weaker than NDX and has formed a shallow falling megaphone. That also hit pattern resistance on Friday and the next downside target is also near the 38.2% fib retracement and breakaway gap support in the 3540 area. COMPQ 60min chart:
Of the eight US equity indices that I track, five of them all clearly hit pattern resistance for the decline from the highs so far at the highs on Friday. That means firstly that any significant break above the highs made on Friday would be a bullish break until demonstrated otherwise. That means secondly that the natural next targets on all those five indices are lower than the retracement lows so far, and without a single full calendar year in the last half century that has failed to test either or both of the 200 DMA or the weekly lower bollinger band on SPX, the assumption here has to be in the absence of any bullish breaks up that SPX and all these other indices will soon make new retracement lows. With a following wind these declines might develop into much larger declines and I’ll be writing more about that in the coming days.