Butterfly Warning

While much of my trading is driven by swings lasting only days or hours, occasionally we arrive at one of those critical junctions that’s been years in the making.  For the S&P 500, 1823 is one of those levels.

This is the culmination of a huge Butterfly Pattern, the 1.272 extension of the drop from 1576 in Oct 2007 to 666 in March 2009.  I’ve been watching it for months, as has anyone who takes Harmonics seriously.

The previous significant reversals on the harmonic scale charted above ranged from mild to severe.  And, note that 2 of the 3 came up 10-11 points shy of their projected turning point.

  • 17% drop from the .618 Fib level in April 2010
  • 22% drop from the .786 Fib level in May 2011
  • 9% drop from the .886 Fib level in September 2012

Butterfly Patterns require a significant reversal at the .786 Fib level, and the 22% drop from May – Oct 2011 certainly qualifies.  However, they can extend to either the 1.272 or the 1.618 Fib level.  In other words, the real damage might await us at SPX 2138.

In a heavily manipulated market such as we now have, this turn of events would surprise no one.  Take a nominal breakthrough in the budget deal, pour a little more QE on it, sprinkle in an overnight ramp job or two and we could slice right through 1823 as we did 1576 (the potential double-top.)

If the market does react, however, the implications range from minor (off 5-6% to 1700 or so) to huge.  How huge?

Many investors have seen the comparisons between the current market and 1929.  But, the last major sell-off after completing a Butterfly Pattern was in 1973.  The S&P 500 dropped 48% between January 1973 and October 1974.

While we wait for 1823 to show its colors, I’ll look more closely at the strengths and weakness of this potential analog (see more on analogs and their effectiveness HERE.)

Stay tuned.

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