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Have we seen the top of US large caps & the FTSE100?


Mercury

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On a previous thread I had 2 scenarios for US large Caps and thought the Dax and Nikkei were in retrace with the FTSE possible doing either.  Now it is looking more and more like the US large Caps have fixed on one of the scenarios and turned on a Head & Shoulders formation and have  broken an ending Triangle.  Although a hard retest of the Triangle (back into the congestion zone within the Triangle) is still possible a break of this nature is a strong bearish signal.  If we get a sustained drop tomorrow then a bearish run down is on the cards and it could go for a 1000 or more points on the Dow before any serious retrace.

 

Looking at the Dow daily chart (S&P showing the same thing) you can see the Triangle and break, not fully clean just yet but as I said tomorrow could deliver that.  So far the breakout was stalled at the Fib 38% off the previous low (wave 4 pink) but that is being retested and RSI/Stochastic have not reached a normal turn back up point.  The EWT count shows an initial 1-2 with a second 1-2 of wave 3 completed and a strong move down to wave 3 of 3 indicated.  At some point this initial run down would complete and retrace significantly (50-62% most likely) before the real Bear gets going.

 

The Nasdaq has not yet broken its Triangle and is running a different EWT set up but the Russell2000 (often a front runner for the large Caps) has broken both Triangle and parallel tramlines after a double top at the Fib 88.8% (creating an effective double top on the Weekly chart too).  The FTSE100 also has not yet broken its Triangle and it looks like it has been held up while the US markets have fallen harder, possibly because of the weakness in GBP but that wont last as a positive factor in the face of a sustained US drop so the FTSE would catch up fast.  The Dax, like the Russell, has a double top on the Daily but like the FTSE has been held up, again possibly on recent Euro weakness.

 

On all of these charts there is strong Negative Momentum Divergence at the top or retrace turning point that does not look like its influence is over with.  All in all this has to represent a strong set up for at a minimum a decent correction and perhaps much more.

 

Charts:



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If it rallies it rallies, I'm stop protected and the down side potential is worth the chance of a popcorn stop out for no loss...

 

Any rally (on US at least) would need to break back through the Triangle line, chances are a rally will retest that line and a failure will spell a big drop.  In some ways a rally back, retest and fail is the best possible outcome as it give a great chance to get short from a low risk resistance line but equally the market could just drop away.  Interestingly there is a possible EWT1-5 count down now so a small retrace is very possible.

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Sorry for the post spray but another thought now that we see US opening down, the next support point, if this early move continues is around the 50% fib (circa 17870), which could offer a wave 1 completion and a roughly 62% fib retrace would bring the market back to the Triangle resistance line.

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Its funny how the minutes said last night stated that as long no external global issues occur, rates are on, only less than 12 hours later Chinese release their data, what a perfect excuse not to raise rates, funny how the markets have now conditioned themselves to this, hence why a dollar sell-of has now occurred. 

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So at face value it looks like US large caps have retraced and retested the Triangle breakout and been repulsed.  This after a Head & Shoulders Top and neckline breakout and failed retest of that neckline.  Can't rule out another retest so will be interesting to see what happens on Monday (or possible even on the over night trading action from Asia and how that might impact the futures markets in Europe and the US).

 

I can't post charts at the moment (IG are working on the issue) but if I could I would post the hourly chart, which shows that the relief rally from Thursday PM to Friday PM retraced to the 62% Fib in A-B-C form on Dow, S&P, Nasdaq and FTSE100.  Only made it to the 38% on Russell2000 (now nearing a lower low) but made the 76% Fib on the Dax (**** Germans!).  Therefore it seems to me that the retest of the Triangle line coincided with an A-B-C retrace as a significant Fib level, which was enough for me to go Short and top up previous shorts from the H&S breakout.  Now the market has dropped back below key resistance points a fresh turn down on Sunday night or Monday morning and new lower lows on the move down from the top are suggestive of a larger scale wave 1 down.  Note some markets have yet to break their Triangles (FTSE and DAX and Nasdaq) so watch out for a breakout on these as a good Short opportunity (or support of course!)

 

The COT data is quite interesting this week with some shift to the short side on the Dow, Nasdaq and Russell with these markets still being Long weighted, particularly the Nasdaq (which has not yet fully broken it's Triangle support - on the cusp thought!).  However if you look at the E-MINI S&P500 COT data you get a very different picture.  On this market the non commercials have shifted from net 208.6k Long (661k long vs 451k short) to net -9k on the short side (502k long vs 511k short).  S&P500 is the biggest and most influential market...  At the same time there was also a shift towards net balanced on 10 year Treasury notes with a 127k move to almost parity (net 17k Long) last week.  So 10 treasury notes AND S&P heading short at the same time...  US T-bonds are also at parity while Ultras (long term) are net short by 111k but they have been at that level for a long time...

 

Not sure what all this really means in truth and as I said we could get another retest rally but with the E-MINIS&P500 COT all time high net Long (219k) having occurred in the last week of August 2016 just before the 10 Sept potential right hand shoulder of the H&S formation followed by a rapid COT unwinding back to parity, I'd have to say this is a bearish outlook.

 

Love to hear from anyone who has an alternative set up to offer. 

 

 

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  • 2 weeks later...

We can see how markets react to good news from the EU and the risk to the beloved QE bond buying program and as well as a clear reaction to the EURO, JCB AND T-bonds as well as a rise in the yield curve. Once the Trump/Clinton saga is over, then the Italian referendum will be on the cards with the possible note of more weak data from China. Although the weak pound has really benefited the index, i am doubtful that this is going to be a forever upward pathway, due to underlying global economic factors such as persistent low inflation and low growth. 

But for now longs still seem the best trade, as they say, the trend is your friend.



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