The Worm May Be Turning

By -

At the close last night there was an excellent bull setup that targeted the 1817 area and was as solid as any I have seen in the last few years. SPX had broken back above the daily lower bollinger band with conviction, I had clear RSI buy signals on the daily RSI 5 and the 60min RSI 14, and a double-bottom that has broken up targeting the 1817 area. All this from a bounce at major support with a newly established rising channel.I posted this SPX 60min chart on twitter last night showing the bull setup there and it was a sweet one. SPX 60min chart:

140131 SPX 60min Double Bottom within Poss HS Forming

All the major US indices broke up yesterday except Dow, and even there the possible H&S neckline bounce was perfect and the obvious next move most definitely to make a right shoulder for the H&S over the next few weeks, again on very clear positive RSI divergence. Dow 60min:

140131 INDU 60min Poss HS Forming

Overnight however ES has entirely given up yesterday’s gains and made a new low. There hasn’t been a strong break further down as yet, and the bulls are still in the game as long as the SPX rising channel survives into the open but if we see that break then I have the next support level on ES at the December low at 1754, and I would expect that to hold on a closing basis at least for today for reasons I’ll explain on the next chart. ES 60min chart:

140131 ES 60min Lows Retest

The key chart for today is the SPX daily chart. As long as the rising channel holds then the bulls are still in the game, albeit wounded. Once that channel breaks down a lot of potential downside opens up. However the daily bollinger band setup is important here. SPX broke back up hard over the daily lower band after trading below it for days, but did not test any major MAs or the middle band. The daily lower band should therefore now be good as daily closing support for any further downside in this move. The last time that wasn’t true was in September 2008 as the market was crashing, so that has been very reliable indeed. I wouldn’t expect to see the SPX daily lower bollinger band close under 1770 today so that means I would expect ES today to close at or above the current level as I write at 1765 ES. SPX daily chart:

140131 SPX Daily Patterns BBs MAs

If we see support hold at the open and a decent recovery today then the bull scenario into 1817 SPX is still very much in play, though I would now give the bearish H&S forming scenario more weight than I would otherwise have done.