Risk Off Again

Last week I was talking about most likely seeing more consolidation on SPX into the 1430-5 area, and the possible double-top on SPX  that would trigger a double-top target in the 1380.5 area on a break below both SPX rising channel support and the late September low at 1430.35.  There was a perfect touch and reversal on Wednesday at channel support but on Friday SPX broke below the rising channel and closed at 1428.59, slightly below the late September low. Obviously this looks bearish and it seems likely that the expected QE Infinity (QEX) bull move into Xmas that I was expecting from Wednesday’s low is either going to be delayed or possibly even cancelled altogether.

SPX is obviously oversold here and we could see a bounce, but looking at the SPY (SPX ETF) daily chart SPY is hugging the lower bollinger  band as it moves down. This is only the second time since the June low that the lower bollinger band has been tested at all, and only the third time in the last twelve months that SPY has started to ride the lower bollinger band down in this way. It’s worth noting that from the equivalent stage on the last two occasions this happened in November 2011 and May 2012, SPY fell a further 4 points (approx 40 SPX points) over the next few trading sessions before reversing back up. That would take SPY to a likely low next Wednesday or Thursday near the 138.6 double-top target and SPY would be a good speculative buy there if we see that happen for a likely bounce afterwards:

How credible is a plunge like that here? Fairly credible actually. Supporting it is a toxic looking head and shoulder top on the mighty and market-moving AAPL that has broken down, the bearish setup on CCI that I posted last weekend, the possible double-top within a triangle on the Australian Dollar (AUDUSD) that I also posted last weekend, and traditional weakness in October on precious metals, which have a strong positive correlation with equities and are poised on the brink of a likely short term move down here.

Longer term there is a lovely bullish setup on gold that I have mentioned before here, and which indicates to new highs over the next few months, so any retracement here will look like a good buying opportunity for both gold and silver. There’s no particular short term reversal pattern setup on gold here yet, other than the failure so far at strong resistance in the 1800 that I suggested was likely several weeks ago, but on silver there is a very promising looking double-top setup that just needs a break below pattern support to trigger the retracement.

I’ve charted that on the silver ETF SLV this week and I’ve done that on the 4 year chart to show the very strong trendline support from the late 2008 low that SLV bounced at in June. It also shows the possible double-bottom setup on SLV that will trigger a double-bottom target in the 47.5 area on a break above 36.44, and I think that break above 36.44 is likely in the next few months given the bullish setup on gold.

Short term I’m looking for a break below 32.4 to trigger a short term double-top target in the 30.7 area, with decent support not far below at the 200 day moving average in the 30 area. If this plays out as I expect it to then I would be buying SLV at 30.7 with a target at 47.5 that I may well move upwards when we are reaching it. My stop will be under main trendline support in the 26.7 area though more conservative stops could be placed either under the 200 DMA at 29.7 or under the 100 DMA at 28.7. A risk vs reward of 4 against a target gain of 16.8 doesn’t seem unreasonable however and main uptrend support on silver is at that trendline:

Some of my longer term readers will read this article and wonder why I have started charting ETFs here rather than indices and also suggesting trade entry and exit levels, which is something that I have rarely done in the past. The answer is that this newsletter is aimed at an audience who have not necessarily read much Technical Analysis and who are very interested in practical trade suggestions. Precious metals have the best looking setup of any index, commodity or currency pair over the next few months, so I’m leading with silver.

If we do see a meltdown on SPY to 138.6 in the next few days that would also be an attractive long entry for at least a bounce. One other thing to note about this immediately very bearish looking bollinger band setup is that SPY made a low both times a few days later that was then followed by a bull run lasting over three months and rising over 15% from that low. It’s still far to soon to dismiss the possibility of the usual bull run that follows a QE announcement by the Fed.

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