(Click On Charts To Enlarge)
Chart #1: After a smackdown of 62% from the spring high, a Bullish Morning Star showed up at the July low. That pattern probably is the most bullish and one of the most reliable of the Japanese candlestick patterns.
Pretending for a moment that we don't know what happened after that, what kind of rally would we expect off that 14.08 low? We can see that 28.47-28.48 was the neckline of a H&S Top, so that's serious resistance, and that 24.01-24.28 was next horizontal support. We know that "former support 'should be' resistance on any retest." Let's see how we did.
Chart #2: Off the Bullish Morning Star low of 14.08, the UYG rallied smartly, right into that 24.01-24.28 resistance, getting to 24.79 on the first rally bid for a quick gain of 76%, consistent with Bear Market rallies which notoriously are sharp in terms of both time and percentage gain. That big percentage move occurred over only six days' time.
From there, the UYG traded sideways, essentially. It made a nominal new high at 25.03, then broke decisively below the Ascending Triangle (pattern in purple) on September 15. On September 18, the UYG was headed to the first target of 14.01 (the Bullish Morning Star low), but it stopped and reversed at 14.50, then closed at 18.77 for a gain of 29% off the 14.50 low.
Okay, maybe that rally "might have been" for a retest of the bottom of the broken Ascending Triangle, but when the news came out after the closing bell that no shorting of the financials would be allowed until October 2 (later extended to October 8), I had to conclude that "sumbuddy knew sumpthin" that spawned that 29% rally on September 18. LOL. Regardless, we have to play it as it lies when something fundamental trumps the techincals in the charts, and it did.
Instead of finding resistance at the bottom of the Ascending Triangle, which it "should have," the UYG had a HUGE gap up at the open on September 19 to the top of the Ascending Triangle, squeezing the shorts half to death (LOL), but look where the rally stopped. 24.88, right below the Ascending Triangle high of 25.03, which many players would use as their stop. If they had nerves of steel and held their short positions based on the technical stop, they were alright. Not only alright, the UYG tanked 70% over the next three weeks and the 14.01 and 9.60 Ascending Triangle targets got MADE in the process.
So, where from here? Let's do again what we did at the Bullish Morning Star low of 14.01 in Chart #1. Where was it "likely" that the UYG would attempt to rally from that low? First horizontal resistance, at 24.01-24.28. Did it get there? Yep. It got a little higher than that: 25.03.
Let's look at Chart #2. Where is horizontal resistance? 14.01-14.50 (the horizonal dotted blue line). What else have we got? So far, we've had a 64% rally from the 7.31 low to 13.00, then a pullback to 8.80. We know that after a break of 14.01-14.50 support, a retest after a low is put in is a very possible. If we get it, expect that "former support 'should be' resistance." Or, at least "some" resistance. A lot of longs who are trapped above that level would like to get out at a break even after having a paper loss of roughly 50% or more at the 7.31 low.
If we continue higher here, it will have the look of a Bear Flag rally: (higher highs and higher lows) that will end somewhere at Red #4, in the 14's/ high 13's. The first leg of the rally was 5.69 points, from 7.31 to 13.00. If we get a rally of equal length, we add the 5.69 points to the October 16 low of 8.80, and that would put us at 14.49, right in that 14.01-14.50 resistance area.
If the UYG can rally from here and do anything more than that, the next resistance is the 15.81-15.95 gap.
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