A Modest Proposal

On Thursday night last week I posted a public model trade on my twitter taking a short on ES at 4561.75 looking for the 4350 area. That trade was in thirds, I posted all entries and exits in real time on twitter, and I took the last two thirds at 4399 yesterday for an average gain of 142.5 handles per third. It was a nice trade, and I picked the high area using the SPX 5min chart below on an impressively sweet setup shown below. This move was only a part of the overall scenario here however.

SPX 5min chart (from 14th Sept):

On the bigger picture SPX hourly chart a decent quality H&S has been forming for a few weeks now, and I was looking for the move back to the neckline, which we saw broken slightly at the low yesterday looking for a target in the 4050 SPX area. I think this H&S may well play out to that target over the next few weeks, ideally into a mid to late October low.

There is some decent support to be broken on the way and the H&S could fail of course, but the target area is a very attractive one, almost exactly a 50% retracement of the move up from the low last year. If that target were to be reached then that might also set up a very nice long, potentially into the open bull flag target on SPX at a retest of the all time highs. This setup may therefore be setting a sequence of moves that could take SPX far into 2024.

SPX 60min chart:

The H&S on IWM broke down a little earlier and has therefore broken down harder with a target in the 164.30 area. I can see no obvious reason at the moment to think that won’t make target so that is supporting the H&S on SPX, broken down slightly at the low yesterday, and NDX, which hasn’t broken down yet.

IWM 60min chart:

In the shorter term the FOMC high was at the backtest of the daily middle band, now at 4456.21, and I’d expect that to hold on any rally here. There are good odds of seeing a rally, which is a fairly normal thing to see just after an H&S breaks down, backed up by a lot of short term positive divergence here and the near miss of the daily 3sd lower band at the lows yesterday.

I would note though that a very strong trend can run through divergence and that if a strong daily lower band ride is starting then SPX might just rally back to backtest the daily 2sd lower band, currently at 4354, being tested as I write this.

SPX Daily BBs charts:

The main support on the SPX weekly chart was the weekly middle band, currently at 4391, broken hard yesterday and a better target for a stronger rally here. I’d like to see SPX close at least a few handles below that today to deliver a weekly break below to start establishing that as strong resistance.

SPX Weekly BBs chart:

There were some strong 15min RSI 14 buy signals brewing on SPX, NDX, IWM and Dow at the close last night and, at the time of writing, the ones on SPX, NDX and IWM have all fixed. These would normally all make it to the targets (minimum 63-66 on the RSI 14) and are strongly supporting a rally here.

SPX 15min chart:

My modest proposal here is that we see my favorite SPX scenario play out over the next few months. We’d likely start with a rally here into one of the 4390 or 4430 areas, then a strong move down into the H&S target at 4050, ideally bottoming out in the 4000-50 area in mid to late October, then a new leg up to make the fixed bull flag target at a retest of the all time high at 4818.62. That high would be an important inflection point that would of course set up a potential double top that could then retrace the entire move up from the COVID crash low in 2020, but that’s something I’d be looking at harder as a possibility if SPX makes it that far. We’ll see how that goes.

I may be starting another model trade at the high of this rally, but I only generally do those when the setup is really nice. I’ll be planning a short there regardless and we’ll see how this plays out over the next few weeks.

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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.

22nd Sep 2023

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