The Full Monty

If you read my Friday post then you recall that I questioned the credibility of that little sell off over in equities. Despite my suspicions I should however point out that we need to see a reversal here either Monday or Tuesday as we are currently below important support levels crucial for a smooth continuation higher:

Here’s my Net-Lines chart which shows us below a daily NLSL and more importantly below the 100-day SMA. Obviously a low volume holiday drop below support does not automatically condemn equities into a large scale sell off. However, what happens here next – not in the medium term future but right now and here – will most likely be an inflection point for the rest of this summer. As a matter of fact, if we push higher then we may just get what I call the ‘Full Monty’. I do have some rather interesting charts to back up my lofty claims, so please step into my Mediterranean summer lair:
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Here are the daily spoos and a simple volume panel. As you can see I have taken the liberty to point out an inverse H&S formation that seems to be in the process of maturing. Truth be told I thought it was done a few weeks ago but as it stands now it more resembles what you would usually see in your textbooks. A point of contention may be a rather steep neckline but in my experience that does not necessarily invalidate the setup. Or in other words it does not seem to affect the odds, which by the way are rather good compared with other traditional technical patterns.

Besides the basic pattern, which again I find rather pronounced, we also have a technically supportive volume profile. I would have preferred to see a bit more juice on the left shoulder but the way it stands I think it still holds up. We also have pretty fast candles on both the down and upside, promising that a resolution of this pattern may be rather violent. The little dip we find ourselves in right now may be the obligatory ‘fake out dip’ – always to be expected and I have written about that subject in the past.

What of course makes this particular formation difficult is the rather steep neckline – and that’s something that will throw off a lot of traders as buying the official trigger point may feel a bit like chasing the tape up. As it stands right now a breach of 1380 is necessary to lead us higher – and as of the Friday close that’s 30 handles away. Instead I think we should use that 100-day SMA and the daily NLSL as our line in the sand. It’s a good setup in its own right and obviously a reversal of that NLSL breach as well as a push above the SMA will be key before we should even think about going long here. Which brings me to the bearish side:

I would do a disservice to my stainless steel rats would I not point out where this setup may break down. Always remember, a setup is nothing but a mental construct until it actually resolves. And that’s fine as we would be happy to trade the downside in case of a failure. Besides the 100-day SMA and NLSL shown on the spoos the more longer term point and figure SPX chart shows us a first warning at 1335 – which is where we would trigger a high pole reversal warning. Of course a drop through 1310 would completely wipe out the 1390 bullish PO.

In case we do continue higher I would however like to point out that this PO may be on the conservative side. As a matter of fact a resolution of the inverted H&S may get us as far as 1460 – given the height of the head in the center (which technically suggests the target range).

The 1380ish trigger range is also where we are looking at a bit of volume profile weakness. And there apparently is sufficient volume right above to take us to at least the P&F price objective of 1390 (I know – big deal) and possibly higher. Assuming of course we breach 1380. The way we get there may also affect if this formation resolves and when. A slow painful ascend may get us all the way to 1380 to the trigger point and then collapse like a French soufflé. What I really would like to see is a confident spike higher starting Monday/Tuesday.

Market makers seem to be positive about the current direction as I don’t see anything suspicious. You may also recall my SPX:VIX ratio chart from Friday which was lagging the SPX on the way down.

In other news we have silver looking pretty bearish here and basically creeping along medium term support. Things could get pretty ugly once we drop through 26.5. So keep an eye on this one. Gold is also looking lackluster and as the formation is slightly stronger I think silver would lead to the downside here.

Also worth highlighting is what happened over on crude – that was a nice stab higher but it was immediately followed by a high pole reversal warning (if you were wondering how that looks like from my SPX chart above – here’s a good example). The bullish price objective is still in place but that will change once we drop through 82. May just have been a holiday shake out and I think this chart is also well worth watching in the context of that H&S on the SPX. Ideally we would want to see crude continue higher here – a push back above 89 would be very supportive.

Cheers,