Eurostoxx 50 - approaching critical level

The Eurostoxx is at a very important juncture. The index is retesting the 2009 and 2011 tops at 3100. A successful weekly close above this level would argue for a move to 3500 or even 3700.

Analysis

-          The weekly chart (chart1) shows a supportive MACD, with no divergences and higher highs confirming the move in price

-          Breadth (red line) is very positive , posting new highs in line with price. Volume is supportive as well (bottom panel, chart2)

-          The monthly chart (chart3) shows a bullish breakout of the macd above its long term resistance. We have seen similar moves in other market at the beginning of the year (S&P, FTSE etc) and as you know this is a signal which I rely quite a bit on because it has a great track record. As you can see from the monthly chart the 2  channels cross around 3500-3700 and as of today this is the only target I could find. Price action will give us more hints going forward

Chart1

 

Chart2

 

Chart3

S&P - update

Conclusion

The S&P so far is collaborating with my December rally scenario. Moreover, the index is tracing patterns that allow us to identify pivot points, ie levels at which a certain movement has to be considered exhausted.

These levels can be exploited in many ways, depending on the type of trading one employs. I think that the best way of using them is in conjunction with options. More specifically put options bought today should have a strike around 1740-1780.

Please see below for full analysis.

Analysis

The wedge pattern

As you know from the middle of this year I’ve highlighted multiple times the appearance of “wedge” patterns, where the market oscillates in shorter and shorter cycles with higher highs and higher lows.

This pattern normally signals *distribution*, ie a period when larger investors (or strong hands) slowly exit their positions. Buyers are retail investors (or weak hands) who are relatively undercapitalised and therefore unable to keep their positions if the market rolls over. This is why a break from a wedge on the downside is normally a sharp retracement to the base of the pattern.

This is obviously what has not happened this year since wedges have actually been *accumulation* periods. This is relatively more common in commodities but quite rare in equities. The end result is an acceleration on the upside, ie an increase in the rate of ascent that creates the long term parabolic rise that is evident from the chart.

Implication

The most important implication of these bullish breakouts is that we can use the breakout level as a pivot/threshold level. As you can observe from the chart below, every time there is a break, the market spends some time consolidating above and then starts a new pattern.

 The levels I’ve identified are :

-          1740-1780: a break of this level would imply that the latest move (3^rd wedge) is now over and argues for a full retracement of the 2^nd wedge. This implies a move down to the lower pivot point at 1530-1600

-          1530-1600: this level should offer more resistance than the one above: the pattern is much larger (and therefore more time and volume has been spent here to accumulate a position) and also coincides with the 2000 and 2007 tops. A break of this level would be highly significant but it is not something that we should be worried about in the short term (1-3 months).

Given what I said above,  I would use the 1740-1780 area as a strike for our put options, so that our exposure is reduced if the market corrects once this parabolic move will stop.

S&P500 - end of the year rally scenario

Yellen said that she sees no bubble, so maybe she want to show the world that she can create one! ;-)

More seriously, yesterday price action in the S&P500 and some of the underlying sectors has increased significantly the probability of a blow off top. The move from February to the intermediate top in May is a perfect example of what I would expect to happen.

Some people have tried to build models of parabolic moves and this is probably the best model around for the more mathematically inclined: http://www.hussmanfunds.com/wmc/wmc130415.htm

This is what these models look like, they point to a top in late dec/early jan:

 

In my charts below you can find:

-          The move up in May

-          My  target area for the movement: between 2040 and 2200. Big caveat: it is very difficult to project in advance a target for a parabolic move and indicators/oscillators become meaningless. Volume is probably the only input that we can use, in the sense that we should see an higher than average volume at the end of the move (silver in 2011 is probably the best example)

-          Charts of staples and discretionary (but you can look at industrials, healthcare or materials, they all show the same behaviour) that shows clearly how we have broken consolidations area on the upside

 

Analysis

 

The technical reason is a breakout on the upside of a wedge pattern. A wedge is a  reversal pattern and price is “expected” to break on the downside. If it breaks on the upside, it signals an increase in acceleration and it is even more reliable because of the low probability of this occurring ( a bit convoluted I admit)

 

May 2013

 

  

S&p500

 

 

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DISCRETIONARY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

European Basic Materials

Bottom line

This sector has created a (potentially) bullish chart pattern.

Prices have been falling since 2011 in both absolute and relative terms and have now the possibility  to start moving higher on both terms (absolute and relative).

Another brief correction (ie not a new low) is possible before the index starts its uptrend but a weekly close above the white line in Chart1 would increase significantly the probability of a more sustained move higher.

A break of the lower boundary on the contrary would be very bearish and probably accelerate the speed of the correction.

Analysis

Chart1 shows a potential falling wedge formation, confirmed by the MACD oscillator.

The MACD is showing strong bullish divergence and has also broken its resistance line on the upside, a move that more often than not is a good warning that the same is going to happen to price

Chart 2 shows the relative performance vs the DJ 600: we have another bullish divergence and a retest of the 2009 low. Basically the sector is as hated today as it was in the midst of the 07-09 bear market.

Chart1  - DJ600 Basic Resources

Chart2 - DJ600 Basic Resources RELATIVE CHART (ie relative to broad DJ600)

Topping patterns on FTSE and S&P500

I think it is important to signal that FTSE and S&P are forming topping patterns  on the weekly chart.

Bottom line: monitor support levels closely because a break would mean that the cyclical (bullish) trend that started in 2011 has ended.  

 

analysis

Both indices had weekly divergences with the respective MACD indicator for a while and have recently started to weaken.

The s&P shows a clear rising wedge formation (bearish reversal pattern) while the FTSE has a diamond/head and shoulder (bearish reversal as well).

What I’ve noticed looking at them on a daily basis, is that they have been so far unable to move above previous highs and we have now a sequence of lower highs and lower lows, either intraday (SPX) or on a daily basis (FTSE).

In both cases we have clear support levels which have not been broken yet: 6000 on the FTSE and 1600 on the S&P (see charts below).

FTSE100

S&P500

Similarities between the S&P in early 2009 and gold today

I’ve touched on the subject before but today the similarities have increased even more!

 

1)      In 2009 we had a very large reverse head and shoulder pattern (indications in red) in the S&P500 which signalled a potential bottom after the 2008 bear market. The right shoulder of this pattern was in itself a (normal) head and shoulder (in green). A normal H&S argues for lower prices while a reverse H&S points to higher prices. Obviously one of the 2 has to fail and in that case it was the bearish pattern that failed, giving a clean signal that the trend was up

2)      If you look more closely to the green pattern in the SPX, you can see that prices perforated the neckline and after a couple of internal days they reversed strongly up, triggering a bear trap

3)      Now look at the 2^nd chart, showing gold as of today. You can see exactly the same pattern developing, including a break and the potential failure!

To be more confident that the pattern is going to repeat itself, we have to wait for gold to close above 1400, where the neckline passes but I suggest a close monitoring of price action since gold can move very fast sometimes.

  

SPX                                                                                                                                                                                                                                                       

GOLD

 

Gold mining stocks

After the Fed announcement every single asset (apart from the USD) staged a rally. Some had a jump up and then drifted lower but others are still rallying very hard this morning.

Precious metals are up between 4% and 7% this morning alone and gold miners yesterday had the highest volume day ever (using GDX, the ETF).

Furthermore , the chart shows a potential reversal formation that if confirmed (ie gdx closes above 30) signals a move to 40, ie almost 40% higher from here.

Given the absence of gold mining stocks from almost every portfolio, I wouldn’t be surprised if the short covering/long buying pushes prices very high, very fast.

A failure to hold the 25 level would signal a continuation of the bear market.