Reprinted from our weekly Chart Junkie submission at Wall St. Cheat Sheet.

The anchored VWAP line in blue provided good support over the years, including the 2002 low after the tech bubble crash (8).  However, price clearly broke through the line at times, most recently in March 2009 (9).  The lower panel plots the percentage deviation of price from the VWAP line, beginning from the July 1932 low.  Interestingly, the % deviation to the down side has never exceeded the -16% to -24% support area, the lower end of which was precisely hit this March (-22%).  This support level also caught the major low in 1974 (5) as well as some early lows in the 1930’s (1, 2 & 3). 

Just as the yellow horizontal lines can act as support or resistance, so can the green trendlines.  The 1966 top came after a break through major trendline support (4) and retest of the 110% level.  On the 2000 top (7), there was no upward retest and this did mark the high.  Eventually, the current rally will peter a bit, and we would expect a long period of sideways action until the far right green downward trendline is finally broken.  Unfortunately, this could take years (points 5 to 6 span eight years). 

What will be the high of this rally?  We would expect it to come on a test of one of the two far right green trend lines.  If price were to continue up at the same pace, this would be at Dow 10,700 or 12,500.  However, if the trend slows or stops altogether, these figures will be less of course.  We will definitely be keeping an eye on this indicator for some time.  For background on the powerful support that anchored VWAP can provide (a component of the Paul Levine MIDAS method), please see our Free Resources page (includes free TradeStation indicator).

10:01 am EDT:  Though the ES opened in our buy zone, it has not been able to advance and Consumer Sentiment disappointed a bit.  If the ES takes out the 1080.50 by more than one point or cannot rise above 1086.00 by 10:30 am, we do not want to stick around long.  Nor are we interested at shorting these levels.  If lows break, 1075.00 to 1076.00 needs to hold because there is nothing major until 1068.00.

9:20 am EDT:  Yesterday’s low of 1080.50 held to the tick and the two reports this morning have aided support.  We will look to buy between 1082.50 to 1084.50 near the open with a play for the daily pivots between 1087.75 and 1088.50, where we may reverse short depending on market internals (possibly up to 1090.25).  We do not want to be short above 1090.25.

The Precise Take – Overnight weakness yielding to end of day strength

Leaders Analysis:   30 Year T-Bond futures are still at long term VWAP support; however, the TIC report at 9:00 am could start a directional move.  Traders will look for support from China et al at the long end of the Treasury curve.  The EuroYen forex cross screamed higher yesterday and is up marginally overnight, looking as though it will test the 138-139 resistance level.  If and when it gets there, it should coincide with T-Bonds finding support at a materially lower level, which will necessitate some sideways to down action in equities to avoid long term yields becoming too great again.

Medium Term Analysis:  The headline above is important today because that’s what we expect to see in a solid rally—buying coming in at the end of the day, signifying institutional support.  Next week will focus on housing reports.  Unless they are dire, they should not impede the rally.  The final week of October features some major reports and Treasury auctions that will likely bring in the new shorts.  At that point, we expect to have had a new material highs, a slight correction and a retest attempt.  As an aside, the third Monday of October is upon us, and veteran trader longs could be quick to cover on any weakness with memories of the 1987 Black Monday in their heads.  We do not expect a crash, but would be careful to protect profits on longs should the market gap down Monday materially.

Trading Today:  The ES has traded down to yesterday’s low as we write, and there are two major reports before the open (and after publication of this report).  Our tentative strategy is to buy the area bounded by yesterday’s low and combined session S1 at 1080.50 to 1082.50; however, we will update just before the open (free subscription) to confirm… 

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