The Swine Swoon
The futures are down 2% as I’m writing this. I will be watching the volume very closely today to see if this virus is enough to put a dent in the rally. We have still not had a single day of “serious” selling.

From what I’ve read so far, this virus doesn’t seem very serious. Many people have already recovered from it before they even knew what they had. Only Mexicans have died from it, while tourists who caught it in Mexico recovered. Perhaps something about flying on an airplane weakens the virus, and the tourists were cured while they were flying home.

In any case, this should be bad news for companies that make “swine products” such as bacon. If people avoid crowds, retailers should suffer while Amazon benefits, and restaurants might be hard hit, especially rib joints.

Since we don’t yet know how dangerous this virus will really be, I expect traders to sell first and ask questions later. We may have another “trend day” down like last Monday where panicky bulls sell into any little bounce.

Crazy Fed Swings
On Friday, when the Fed released the stress-test report, the market went haywire just like after an FOMC announcement. However, I will have you know that the initial plunge down bottomed at 2:13pm at 856.77, which was only 0.05 points off from the 856.72 Fibonacci level that I calculated over a month ago.

Also, I never posted the chart, but when the FOMC announced its QE policy at the last meeting, the TNX plunged and bottomed at a Fibonacci level that I had on one of my charts. So, if you get good with fibs, they are a fantastic tool for anticipating the extent of the wild swings created by these big government announcements.

Levels

Here is an update of the levels I am using for the SPX. If the market is immune to the Mexican flu, and is able to eventually rally-on later in the week, the January 6th peak is the logical target, and I have calculated the Fibonacci levels that might be resistance on the way up.

943.85 – January 6th peak.
927.40 – Box of Banks Fibonacci projection.
917.18 – Box of Banks Fibonacci projection & Dec peaks.
908.91 – Box of Banks Fibonacci projection.
900.65 – Box of Banks Fibonacci projection.
893.95 – The 127% level of the first chart on this page.
888.89 – Box of Banks Fibonacci projection.
875.63 – Rally peak so far, & February 9th peak.
856.72 – Fib level from Box of Za-Zoom & stress-test low on 4/24.
851.92 – Start of Stress-Test Gap on April 24th.
845.61 – April 2nd peak.
835.48 – Low on April 14 & 23, and gap from April 7.
825.16 – Wells Fargo Gap from April 9th.
811.08 – M2M Gap from April 2nd, and high on March 31st.
804.00 – Important level going back to Nov 19th.
780.00 – Cliff before 666, and low on 3/30.
768.54 – The Geithner Gap from March 23rd.
752.44 – November 20th low close.
741.02 – November intra-day low.

Other Important Levels
800.58 – Weekly low close from 2002 (October).
815.26 – Monthly low close from 2002.

The market has defied my rising-wedge, and my head-and-shoulders, but now it has to deal with “The Gigi Rounding Top.” Here is a 60-minute SPY chart of the rally so far (click to enlarge):

First, look at the blue line. That was the lower edge of the rising-wedge pattern. It provided support three times, and now resistance two times. So, this is an important line to have on your chart.

The red line in the upper panel outlines the rounding pattern. The arc is almost perfect. Such a pattern is created by a slow, steady shift in supply and demand. Demand has declined, and supply has increased.

The purple line in the lower panel is a 32.5 hour moving average of volume, which gives a weekly moving average on the hourly chart since there are 32.5 hours in the trading week. I did that to smooth out the volume bumps better.

In a rounding top, or bottom, volume should generally be the mirror image of price, forming an opposite arc. For a rounding top, volume should decline on the way up, flatten-out at the top, and then increase on the way down. SPY’s volume arc is not so perfect, but it doesn’t have to be. From page 93 of the textbook:

“The volume pattern on Rounding Tops is seldom as clearly defined as at Bottoms. Indeed, it is apt to be rather high and irregular throughout the entire rounding-over movement in prices. …the volume warnings do not become conspicuous in most cases until the downtrend has begun to accelerate toward the vertical.”

The green, dotted, vertical line is drawn through the rally peak so far, and we do have a pick-up in volume since the peak. Also, if you look at the daily chart, you will see that the highest-volume day of the week was on Wednesday, a down day, and then volume tailed off as the market rallied on Thursday and Friday.

Rounding turns can be explosive. From page 88 of the textbook:

“Volume accelerates with the trend until often it reaches a sort of climactic peak in a few days of almost “vertical” price movement on the chart.”

On Friday, the market held its breath until the 2pm “stress test” announcement, and then went berserk – just like it does for an FOMC announcement. So, the market considered the announcement to be a major event. It liked what it heard, rallied up, but then failed to make a new high. The XLF and BKX also failed to make a new highs. Those failures are probably significant events.

So, this rounding-top pattern looks like it has a good chance to survive.

Can the Bears Win the Week?
The SPX closed last week at 869.60. It seems like the market has been rallying on earnings reports, but what if it has only been consolidating Monday’s plunge?

Cringing Dollar?
Is the dollar cringing ahead of next week’s FOMC meeting, and another QE beating? If so, stocks might be expected to stay strong until then.

Not Impressed
The QQQQ was up 1.10% on Thursday, however NADSAQ breadth was bad: advancers-minus-decliners was -640 for the day. Of course, the Q’s are dominated by large stocks like Apple and Microsoft, which had good days. But the weakness underneath the market could be seen in the IWM, which was down 0.58%. NYSE breadth was better than the ‘daq, but it was weaker than it was on Wednesday and Thursday.

Also, Apple printed a hanging man candle on heavy volume right at its TARP Gap left over from September 26th when it closed at $128.24. That’s a very logical way for it to top-out on this run, and that could cool off the Q’s.

Continuing unemployment claims set another record. Bloomberg story here.

The rising wedge pattern on the SPX has morphed into a potential head-and-shoulders top (click chart to enlarge):

The red lines outline the wedge. The H&S is marked in blue.

As Yerk mentioned in the comments, the market back-tested the lower wedge line on Wednesday. As it did so, it created the right shoulder.

Make sure to have the neckline drawn on your charts. If the SPX breaks through that line with a surge of volume, then the potential H&S becomes more real.

If that happens, then we use the purple lines to determine a price target. Line L1 is drawn from the head to the neckline. Line L2 is a copy of L1 and moved down so that it begins at the neckline.

Notice how line L2 extends down to the beginning of the lower red wedge line near 780. That’s the projection for both the wedge and the H&S, so everything works out nice and neat.

As I write this, the futures have taken out the 836 support level. I was surprised to see that drop considering how well the market responded to Ebay’s and Apple’s earnings reports after the bell.

But the SPX futures look very weak, being red while the NDX futures are green. That’s an unusual state of affairs.