Testing The Weekly Middle Band

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On to the markets.

I was saying before the test of 3800 that if it broke then the next big resistance level was in the 3900 area. That is at the weekly middle band of course, and SPX closed at 3901 on Friday, slightly over the weekly middle band which closed at 3899. I wouldn’t count that as a break up of course, as it was less than 0.1% above and, for daily middle band breaks I’d be looking for a clear visible break which would be larger.

So SPX is back at major resistance, and this is a significant inflection point for market direction.

If we are to see a fail here, then the usual drill is either that SPX fails directly at the inflection point, so the high is being made now, or we see a clear break above this week that would generally then be rejected with a clear break back below next week.

If we are to see a bullish break up here then we see a clear break above the weekly middle band, which then converts to support and then clears the way to higher targets. I’ve been reading quite a few calls for a major rally here or even new highs and, if that is on the table, then this is where the bulls demonstrate that to be a possibility by breaking this resistance. Until we see that the likely overall lean here is down.

SPX weekly chart:

When the high at 3886 was made I said that a good way to close out this rally, if of course it is just a rally, would be to retrace enough to deliver a significant decline on the daily RSI 5, then retest the high to deliver a divergent RSI high and both get a possible RSI 5 sell signal brewing and set up a small double top, then SPX would break back down, fixing the daily sell signal and likely ending the rally. So far, that has been forming as expected and, if we are going to see this rally end here, then this is a good setup to do that.

A sustained break back below last week’s low at 3803.79 would now look for a target in the 3705-20 area.

SPX daily chart:

SPX hit the daily upper band again on Friday and the middle band closed at 3718. If we do see a reversal back down on SPX then the daily middle band is the next big support level, currently a strong match with that small double top target.

SPX daily BBs chart:

On the hourly chart SPX is still on an RSI 14 sell signal. I also drew in a possible resistance trendline a few days ago that is currently in the 3920 area. That is currently an entirely theoretical potential trendline of course, but if SPX tested it and found resistance there then that would establish a declining channel from the 4325 rally high, with that channel support trendline on course to converge with main falling channel support from the all time highs, currently in the 3350 area, sometime in late November.

This theoretical channel resistance trendline doesn’t need to be hit, but would improve the odds of getting down to 3350 if it is hit and establishes the shorter term channel down from the 4325 high.

SPX 60min chart:

Are there any pattern setups here that could be a harbinger of a great bull run to come? Well there is one that looks interesting and that is the setup here on NDX.

NDX has been trailing the other indices this year as some of the main players there have been thoroughly eviscerated, so any serious bull run here would likely require that to reverse, but if it were to do that there is a high quality IHS setup here that on a sustained break above 11685 would look for the 12925 area. There is also a possible larger double bottom here that on a sustained break up over 13721 would look for a retest of the all time highs.

Of course either of these large bullish patterns, on a break up and hard fail, is also a possible bear flag setting up subsequent low retests, but that is one reason they call bull runs a wall of worry. As ever we should take this one inflection point at a time and see how it goes. If the low is in, and a big new bull run is starting, as some are saying here, then this is a pattern setup that I will be watching very closely.

NDX 60min chart:

This is a strong topping setup at a major resistance level and I’m favoring the downside. That being the case, the obvious place for this rally to end is at this inflection point. We’ll see how that goes.

I’m not yet sure whether we are doing our monthly free public Chart Chat at theartofchart.net on the coming Sunday or the one after so once I know I’ll mention it on my twitter.

If today is particularly interesting then I may do another post tomorrow morning. Otherwise my next post should be on Thursday or Friday before the open.

Written by:

Richard Chappell

Jack is a 20 year retail trading veteran and co-founder of The Art Of Chart. He started his blog at channelsandpatterns.net in 2010 and since has published tens of thousands of charts looking at hundreds of trading instruments across most tradeable markets, doing original work mainly in the areas of trendlines, patterns and divergences. At The Art Of Chart Jack has taught trading skills, technical analysis, and the discipline and trader psychology that allow those to be used effectively in trading.

31st Oct 2022

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