Mon 6/6/11. Shanghai revisited.

Shanghai Midnight
2 weeks ago, I posted a Shanghai chart with 3 projection paths. Here is the updated chart with lines and annotations untouched.

Thus far, no path has been eliminated, but Shanghai did recognize the lower trend line almost perfectly as expected. Since a Shanghai Midnight signal was triggered at 2.9% below all key weekly MAs, Shanghai has rallied 1%+. Soon after I published my most recent Shanghai Midnight analysis, Tony Caldaro published his own analysis projecting the Shanghai Composite as a bullish triangle ready to break upward. That essentially matches my 3rd scenario (black E and black projection lines), but it's the exact opposite of my preferred scenario (blue ABCDE and blue projection lines). Until the larger triangle lines are broken, we will not definitively know which scenario is operational, but the more bearish scenario should be limited to a backtest of the smaller triangle breakdown in the next couple weeks, so I suspect we'll have a better idea by late June. Keep in mind, this is nearly a 3-year triangle scenario, so the triangle decision should lead to 1+ year of pressure in either direction and a few weeks of patience is needed. You could probably argue that the Shanghai Midnight signal has already been fulfilled after SPX followed with a nearly 5% 4-day drop, but most of the signals were much worse than that. TBD

The System
At Monday's close, daily RSI5 finally joined the other cycle indicators in labeling 1345 as the top of a left-translated cycle. Given that SPX is also in a bearish configuration well below its 20dSMA and 50dSMA with plenty of room down to the 200dSMA having broken its previous 1295 low, all technical indicators are aligning for downside pressure into July. That does not prevent a strong rally in between nor does it necessarily require a lower low, but much evidence points to a test of 1220-1250 where long-term support resides (the bull market uptrend line, previous 1249 cycle low, 200dSMA, 50wSMA, key 2010 pivot tops).

System hourly resistance has fallen to 1293 with daily resistance at 1318. Resistance has not been broken during the entire drop from 1345. The strong 1295 low midway through the last cycle suggested June 8-9 +/- should form an echo low. I cannot predict if that low will be 1285 Monday or 1249 by next week, but it should be followed by a strong rally probably backtesting/piercing the 20dSMA and 50dSMA. More than likely, that rally will fail leading to the July cycle low.

On Monday, NYAD made a small change at a bearish extreme. TRIN closed above 3 on June 1st and 14 of the last 16 instances of TRIN=3+ have led to 20+ pt rallies starting 0-3 days afterward with quite a few of those being dead-cat bounces. Monday was day 3 and TRIN closed above 3 again thus giving high odds for an imminent 20+ pt rally but not necessarily a new daily uptrend. Unfortunately for bulls, the exceptions involved double TRIN spikes like we just got, so the bullish edge is dulled.

I strongly suspect SPX will rally back to the OEW 1303-1313 pivot area and likely above that to the 1317 hourly price pivot and key MAs in the 1320s. I even think it's possible for a test of 1345 (such as 1335-1340) like what happened early in a left-translated cycle at SPX 878/875 in Jan/Feb 2009, and there is still a slim possibility for a megaphone pattern from 1249 or an EDT from 1174. A lot depends on the US Dollar. If it chooses to make a new yearly low, SPX and Shanghai will be supported higher in June. There is cycle confluence around June (Laundry, Eliades, Armstrong, McLaren), so I favor an imminent SPX bottom with a 1-2 week rally with Shanghai backtesting its small triangle breakdown and the USD testing its low. So, I am still keeping the System in long-short mode based on candles and daily reversal indicators. Good luck.