Butterflies and Crabapples: February 1, 2012

UPDATE:  12:30PM

We’ve popped up above the 1326.41 Gartley target, only to stop right at the 1.272 target (1329.11) of the much larger Butterfly.  It’s also a stone’s throw from the .886 (1329.71) of what I presumed was a Gartley pattern.  Remember, Gartley’s Point B is at the .618 Fib level — which was 1320.87.

We hit 1321.41, which is generally close enough to work.  Gartley’s are also expected to reverse at their .786 Fib level, which was the 1326.41 level I posted this morning.  Prices dawdled at that level for three hours before popping up as high as 1329.1 a few minutes ago. 

The number we care most about, of course, is 1333.47.  It should present tough horizontal resistance, along with the Butterfly target (1329.11) and the Fan Line from 2007 which we just hit.  Here’s the updated big picture of our fan lines, trend lines, channels and harmonics.

And, a close up…

Recapping:  current prices are right at the fan line from 2007 and are at the completion of the bearish Butterfly pattern (1.272 of 1292 – 1158) and the .886 of both the 1370-1074 drop and the last significant move (1333 – 1300), not to mention back testing the rising wedge that recently broke.

There’s also pretty decent negative divergence across the board.

All in all,  an excellent case for 1333 as the top.  Does this guarantee it won’t go higher?  Absolutely not.  Experienced traders know that $&#@ happens.  That’s why they use stops — as I always, always recommend.  Even when I’m positive about a call, I still use stops.

If you don’t, you will lose money to the x-factor stuff that always crops up when you least expect it.  If the past few months has taught us anything, it’s how precarious the markets are — whether you’re a bull, a bear or neutral.

UPDATE:  10:10 AM

The ISM Chicago’s PMI numbers aren’t bad — from 53.1 in Dec to 54.1 in Jan.  Only fly in the ointment is that production and employment show declines, and inventories show a slower rate of growth.  These are the indices you want to see accelerating if a recovery is really in the works.

The inventory number is odd, because it shows a higher index but contracting direction and slowing rate of change.  This is especially troubling for the economy, since the lion’s share of GDP growth last quarter was in inventories.  I believe the real growth ex-inventories was only 0.8%.

UPDATE:  9:35 AM

This morning’s pop should not hold, as it is completing a bearish Gartley at 1326.41 that also back tests (for the third time) a fan line (dashed, purple.)  In my experience, rallies based on perennially inaccurate ADP numbers almost always fail.


Apple’s high yesterday was only 7.63 from completing a bearish Crab pattern at 465.87 — a price that would also exceed the channel that’s guided AAPL’s upside for many moons.  Check out the negative divergence on the hourly and daily charts.

This makes eleventy-some-odd Crab patterns I’m following in different stocks, indices and currencies, but that’s another story.  Can the market (especially post AMZN earnings) keep it together long enough for the Facebook IPO to officially mark the top?

Wait, you say, NDX is bulletproof!  It just made a new 12-year high!  Yes, but it also made its fourth touch on a trend line (also a fan line from Oct 07), the previous three touches of which resulted in 8.9%, 9.8% and 16.6% plunges (7.1%, 8.2% and 18.2% on SPX) respectively.

NDX is also 2.22 away from completing a Butterfly pattern that calls for a sharp reversal.  The Bat completion on Oct 27 produced a 10.8% decline, and Butterflies usually reverse farther and faster.   And, lastly, Wave C up from Nov 08 has equaled Wave A in price and is barely over a Fibonacci .618 in time.

It occurs to me we’ve had this kind of setup before.  On September 16, I noticed AAPL was completing a Crab pattern whilst SPX was completing a Bat pattern and NDX a Gartley.  All three were screaming REVERSAL at the top of their lungs, so I wrote about it [see: Bats and Crabapples.] 

I didn’t know it at the time, but it was the day before Wave 5 really got going.  Apple tacked on 11 more points the next day… then collapsed 16%.  SPX plummeted 12% and NDX plunged 12.6% collapse.

Technical analysts live for forecasts like that.  September was a very, very good month for my trading account — second only to July/August.  This interminable Wave 2 has been difficult, what with several false alarms.  Even with stops, it’s taken a toll both financially and emotionally.   I’m heartened to see we’re back in a position to reap some nice profits over the next few days.

As always, good luck and keep the faith.


Butterflies and Crabapples: February 1, 2012 — 19 Comments

  1. If the 30 yr ever dare to get to 3.5%, the FED will almost certainly sacrifice equity at the altar. Just to scare everyone back to treasuries. Flash crash No. 2, anyone?

  2. Hi Curious,

    Everything you said makes sense. So you must be feeling nearly as batty in the head as I do right about now.

    Everything you said is true. The only reason, literally the 'only reason', that equities and bonds are rising at the same time is because the FED is providing the funding for both and told their dogs to "go git 'em". When I complain about it, the trolls accuse me of being a whiner. But that's just because they're stupid and I'm not, lol. So how much longer is the FED going to provide liquidity for both? How much further can that elastic band be stretched? It appears that the bond market is 'never' going to collapse because the FED can't afford to let it collapse. Rising rates are surely going to end it all and they simply can't let that happen.

    But at the same time, it appears that equities are 'never' going to collapse because, well, because they 'don't want 'em to' collapse. How much longer can they pull this horsecrap off? Maybe until the day that evil institution is burned to the ground and its leaders are hanging from lamp posts on the street in front of the Eccles Building. Well, if that's what it's gonna take…..

  3. Looked like a helluva lot of distribution going on today. No higher highs in the SPX or DOW and if it wasn't for FB I doubt the Naz would have either.

    Have a close look at Gold. It looks really tired with highs and rapidly declining volume. Bonds are also sending signals.

    This will end badly unfortunately.

  4. Hi AR,

    It's good to hear a voice of reason in this insane market. You are absolutely right. Nothing makes sense in this market due to all these free money sloshing around. SPX is at high but bonds are near low. What the heck? Somehow I feel that the US is so broke that any rise in bond yield will kill them due to the tremendous amount of debt. Yet the CB wants to paint nice picture of the equities. Thus we get contradicting picture of rising equities, and lower bond yield. Keeping 2 completely opposite forces from doing what it is supposed to do, the FED is trying to cover 10 pots with 7 lids. Something is going to break, one way or another, and it's not going to be pretty. It will almost definitely be violent, fast, and destructive.

  5. Sometimes I am at awe at how "criminal" the FED can be, all these backdoor deals, free money to the bankers who gamble as if there is no risk just because they are TBTF…while the regular citizens are getting worse and worse financially, 90% of wealth in the hands of 10% or even 5%, sometimes it just makes you want to turn off the TV when you see all these politicians' faces, the only honest voice seems to be Ron Paul. But then how it the world will he win? We all know that honest people don't thrive, it's the wolves that smile a lot with a knife behind their back that get to the position of power…just ranting

  6. Yes I guess I have to agree. They could keep things afloat for quite a while longer I guess… against all odds, against all common sense, against all logic, and yes… even against my wishes.

    You know, the deflationary argument (to which I subscribe wholeheartedly because it's the only logical outcome) might in fact be averted for another 7 years. I don't see how that's possible, but at this moment it sure looks like that's what's happening. But of course, this is exactly the purpose of a wave 2. To convince us that a new bull market has begun. Only… who knows if this is a wave 2? I'm starting to doubt it very much. I'm starting to think this is the beginning of a new bull market that takes the DOW to 75,000. But then… that's what I'm supposed to do. That's what wave 2s were designed for, lol.

    I just don't freaking know. But either the old highs are going to be taken out or 1267 is going to be taken out. It's gonna take one or the other before I can feel at all comfortable that I know what's going on.

  7. AR,
    I believe we could have a drop, but let's face it this injected money could keep things afloat for weeks/months…
    Any small pull back is quickly eaten up.
    It sucks to be sane, tremendously..

  8. Hey Pebble… just wanted to give you a friendly reminder. If you're feeling a little lonely tonight after today's mindlessness in the markets, don't. I assure you, you're not alone, lol.

    Last night (what was it 4 a.m. for you?) when we were chatting, we both zeroed in on the importance of AAPL. I think you saw the chart of the AAPL:NAS ratio that I posted. Well today's action was 'exactly' the type of day I was talking about. Or at least, what happened today is what, in aggregate, causes the ratio to start to turn lower. And when it turns lower, the NAS has never done anything other than to tank. Here's a much better close-up of the chart I showed you last night.

    As you know, today the NAS climbed 0.82% but AAPL lost 0.06%. The net result is that the ratio turned a bit lower. Once this behavior becomes the norm, the NAS is most likely going to drop like a rock because AAPL would be dropping like two rocks. I almost feel dirty talking about the possibility of a great company like AAPL even falling at all. It's blasphemous. I'll burn in hell for it. But what the hell else can I do? I'm not blind. All 3 charts (NDX, AAPL, and the ratio between the two) are sporting some pretty nice neg. divergences now and they're almost quivering they want to drop so bad.

    To tell you truth, I just feel like barfing tonight. What we're witnessing is the greatest scam the world has ever seen. It's just so wrong for equities markets to be on a rocket ride like this with money supplied 'directly' from central banks. Even the bond market are agreeing with me on that one. They seem hell bent on killing us all… as long as it provides fuel for their yachts. It's gotten to the point where I'm starting to think that when the dam breaks, we're going to be seeing another 90% drop in the Baltic Dry and a 95% drop in equities. That's how far those demons have pushed this thing.

    There… I am done. I feel a little better now.

    Thanks for the lesson re: the crab pattern. I did a bit more reading on it and by golly, now I know what a Wolfe pattern is too, lol. And as always, thanks for your great offerings here.

  9. PW, we are all frustrated with this "bull" market. Does the market need to close below certain level today before any of the pattern (gartley, butterflies, etc) to stay valid? 1326 or 1329?

  10. Well yet again looks like we will hit a harmonic target with significantly overbought indicators, and use sideways chop to burn off it off. This is really getting frustrating.

  11. I'd prefer to see AAPL get up to 465 before considering it ready to flop. Though, if the market swoons first it might not make it that high. VIX's apex looks to me to be around 15. Anecdotally, I'd say lower into the apex might lead to a more eruptive break, but I haven't seen any studies to that effect.

  12. Bearish gartley completed,check!
    AAPL went negative,check!
    ndx tagged trendline and lagging,check!

    PW, VIx is going all the way to the apex of its falling wddge. Is this unusal? When it does breakout, does it usually gives a even more eruptive break than what it would normallly do?

  13. Pebble; thnks for your hard work..I read your posts eagerly. Would you be able to give us a reference to learn the definitions/meanings of the various patterns you refer to, like "crabs", "butterflies', etc.?..Thanks!

  14. PW, Great analysis. You call on Sept 19 was spot on. I wish I had started reading your blog back then. But now I am!! I think you might have gotten the surge you were looking for this morning. Any neg div on the charts? NDX tagged the trendline this morning. Today might be a giant reversal day…we will see