I didn’t really have time to fall much in love with the possible bull flag channel on SPX yesterday as it broke hard and SPX went directly to the main support level I was expecting to see tested later after a bounce. That level is rising support from the 2022 low in October which I mentioned yesterday morning as being in the 4240 area. The low yesterday was at 4238.63 and that was a solid test and reversal there. The low also established a possible alternate bull flag falling megaphone support trendline from the July high at 4606.097. So where does that leave SPX?
There is a clear choice here. Assuming we don’t get yet another leg down now to break that rising support trendline, the bull scenario is that SPX has just made a swing low, heads up to break flag resistance in the 4495 area, then invalidates the H&S with a break over the right shoulder high at 4541.45, at which point the next obvious target would be main trendline resistance currently in the 4750 area, but rising steadily towards a level where a retest of the all time high at 4818.62 could be done within the channel. Channel resistance will be over the all time high by the end of November.
My main bear scenario is that we see a strong bounce here, with the obvious resistance for that bounce at a test of the weekly middle band, currently at 4397 and which needs to hold as resistance on a weekly close basis. The rally might go as high as a backtest of the daily middle band, currently at 4431 but falling fairly quickly, so by the time the weekly middle band is tested these two resistance levels may in effect be the same target in the 4400 area. After a fail at that resistance SPX breaks the channel support that held yesterday, and heads down to the H&S target and 50% retracement target both in the 4050 area.
There is a mountain of 15min, hourly and now daily positive RSI 14 divergence supporting the rally here, and most or all of that would be played out by a rally on SPX here back into the 4400 area.
SPX 60min chart:
On the SPX daily chart below you can see the clear positive divergence (and weak RSI 5 buy signal brewing) on the SPX chart. You can also see the new bull flag pattern option and the daily middle band now at 4430.83.
SPX daily BBs chart:
On the SPX weekly chart below you can see weekly middle band resistance now at 4397.28 (and still rising gently), and I would also point out the weekly 3sd lower band, currently at 4078.54 and close to the H&S target in the 4050 area. That may well be a match with that 4050 target if that is hit, and a hit of the weekly 3sd lower band at minimum tends to signal a strong rally, though in a crash situation like 2020 it can break hard and stay below for a couple of weeks before that rally.
I would also draw your attention to the larger pattern setup here. The move down from the late 2021 high to the October 2022 low was an almost perfect 50% retracement of the move up from the 2020 low to that late 2021 high. These retracements happen a lot in most tradeable markets. That retracement formed a clear bull flag falling wedge which has broken up with a target at a retest of the all time high at 4818.62. If yesterday’s support at the rising support from the 2022 low holds then that retest target at the retest of the all time high can now be hit within the rising channel from the 2022 low. If the channel breaks and SPX reaches the 4050 H&S target then that too would be an almost perfect 50% retracement of the move up from the 2022 low at 3491.58 to the July 2023 high at 4607.07, and that is again a very natural area to find support. We’d have to see then whether there was still a viable bull flag setup from the 4607.07 high, but that 50% retracement, if held, would have natural next targets at either a retest of the 4607.07 high, or continuation to that flag target at the retest of the all time high. We’ll see.
SPX weekly chart:
The flag channel on SPX broke yesterday, and the one on Dow too, and when channels break they can evolve into alternate patterns as the one on SPX has, but the channel, once broken, stays broken. No high quality alternate established on Dow as yet.
The survivor though was the channel on IWM, which made it through the day just fine.
IWM 60min chart:
There is also a decent bull flag option on NDX that didn’t look quite cooked yesterday morning, but it looks good today. That’s a high quality falling wedge flag that underthrew slightly at the low yesterday.
NDX 60min chart:
I’m showing a rare sixth chart today, and that’s to show what developed on SPX in the short term yesterday. On the (possibly mistaken) assumption that yesterday’s low will hold for now and the expected rally back up into the 4400 area has finally started, there is a high quality setup for another leg up today that formed on SPX yesterday. If that breaks up this morning the IHS target would be in the 4345 area, (about 4390 on ES).
SPX 1min chart:
The short term low is probably in and we should have started the rally back up into the 4400 area as the next inflection point. On the bull scenario we would then see a break back up over the SPX daily and weekly middle bands, and then an obvious path back up that I’d expect to deliver a return to the retest of the all time high. I’m assigning this a probability of 35% to 40%. On the bear scenario the rally would fail in the 4400 area and SPX would return to break the main rising support that held yesterday and head to the H&S target in the 4050 area. I’m assigning that option a probability of 60% to 65%. If that 4050 target is reached there would be another big inflection point there.
I may well 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, depending on how this rally develops and the patterns that form and we’ll see how this plays out over the next few days and weeks.
TNX broke over channel resistance yesterday and the long on bonds doesn’t look cooked yet. I’m thinking that may well change over the next few weeks as SPX heads to the 4050 target, and I’ll be watching it carefully. If that sets up right I’d be planning a model trade there too for what should be an impressive rally on bonds.
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28th Sep 2023