Risk Off Again

Risk Off Again

Courtesy of Springheel Jack

Last week we discussed seeing consolidation on SPX into the 1430-5 area, and the possible double-top forming 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 around 1430.

There was a perfect touch and reversal on Wednesday at channel support but on Friday, SPX broke below the rising channel and closed at 1428.6, slightly below the late September low. This looks bearish. It seems likely that the expected QE Infinity (QEX) bull move into the holidays that I was expecting from Wednesday’s low might be delayed or cancelled altogether.

SPX is oversold and could bounce, but looking at the SPY (SPX ETF) daily chart, SPY is hugging the lower Bollinger band as it moves down. This is 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. 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. SPY would be a good speculative buy there for a likely bounce afterwards:

 

 

A plunge like that here is not unlikely. There is a toxic looking head and shoulder top on the mighty and market-moving AAPL that has broken down. There is also a bearish setup on CCI (posted last weekend) and a possible double-top within a triangle on the Australian Dollar (AUDUSD). October is traditionally weak for precious metals, which have a strong positive correlation with equities and are on the brink of a likely short-term move down.

If we see a meltdown on SPY to 138.6 in the next few days, that might be an attractive long entry for at least a bounce. While the SPY chart has a bearish Bollinger band setup, previously such set ups were followed by bull runs lasting for months. It’s also too soon to dismiss the possibility of the usual bull run that follows a QE announcement by the Fed.

Longer-term, there is a bullish setup on gold which indicates to new highs over the next few months. Any retracement in gold might be a good buying opportunity for both gold and silver.

While there is no particular short-term reversal pattern setup on gold yet, other than the failure at resistance in the 1800 area, on silver, there is a promising looking double-top setup. Silver needs a break below pattern support to trigger a retracement.

Note a “double top set up” means the target is lower, whereas a “double bottom set up” means the target is higher. Short-term, I’m expecting silver to go lower (double top set up), longer term, I’m expecting it to go higher (double bottom on a longer term chart).

I’ve charted a double bottom set up on the silver ETF SLV on the 4 year chart to show the strong trendline support from the late 2008 low that SLV bounced off of in June. The chart shows the possible double-bottom setup on SLV that will trigger a double-bottom target (i.e. higher) in the 47.5 area on a break above 36.4. I think a break above 36.4 is likely in the next few months given the bullish setup on gold.

Shorter term, on silver, I’m looking for a break below 32.4 to trigger a short-term double-top target in the 30.7 area (lower). There is decent support for silver not far below at the 200 day moving average in the 30 area. If this plays out, I would be buying SLV at 30.7 with a target at 47.5 or higher. My stop would be under the main trendline support in the 26.7 area. 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 over 16 seems reasonable:

 

 

Some of my old-time readers might be wondering why I have started charting ETFs here rather than indices, and also noting my trade entry and exit levels. One reason is that right now precious metals have good looking, potentially tradable setups. Another reason is that I believe this approach might be helpful for traders who are interested in adding my form of technical analysis to their tool chests.

 

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  1. [...] decline last week has almost reached my entry level at 585, and the SLV decline I was expecting the week before reached my entry level at 30.7 last [...]

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