Charts I’m Watching: Mar 12, 2013

We tagged the two largest Crab Pattern targets on the charts yesterday: the 1.618 extensions of the 1370-1074 decline in 2011 and the 1474-1343 decline in 2012.

At this point, we’re waiting to see if SPX has the juice to also snag the white 1.618 at 1559.32 and/or the IH&S pattern target of 1565.  Both are perfectly legit, though they are of a much smaller scale and thus not as important in the scheme of things.

I’ll spend most of the morning laying out the downside scenario.  For now, support should be expected around the key channel lines such as the bottom of the white channel (currently at 1545), the purple channel midline (currently around 1540), and the small channel that’s guided prices since the breakout on Mar 5 (around 1549) that we’re just now reaching.

Note that the first two price levels are in the vicinity of significant Fib levels: the white 1.272 and the red 1.618.  A reversal down to a previously topped Fib level can be viewed as a backtest on the way higher, so the bounces are often significant.

The bounce off the bottom of the small white channel should provide a backtest of that channel’s broken .25 or midline but should fail by 1553.40.  When the little white channel fails, the yellow one should go quickly.

UPDATE:  1:55 PM

As expected, SPX bounced at the little white channel bottom and backtested its midline.  SPX is now testing the little white channel bottom.   The yellow channel bottom is just below at 1548ish and the purple midline is around 1541.50.  Each can be expected to provide a playable bounce, but we’ll decide when we get there.

Okay, back to the big picture…

First, let’s take a look at the Fibonacci Fans for SPX.  Over the years, they’ve done a reasonably good job of providing price warnings.  That is, prices tend to bounce along between neighboring lines until some catalyst — often a competing Fan Line — forces prices higher or lower.

At that point, prices tend to backtest the just-broken fan line and continue bouncing between the next higher or lower pair.

When the Fib Fan lines from 1994 were broken, for instance, prices typically fell to the next lower line — unless they fell two lines.  In either case, a break of one of those lines should have been taken seriously.

And, note how SPX has repeatedly bumped up against resistance from the very same line that finally provided support for bottoms in Oct 02 and Mar 03.  I presented it yesterday afternoon as a factor in our decision to go full short at 1555.15.

Looking at a close-up of the chart, we can see how the next couple of weeks might play out.

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