Charts I’m Watching: May 24, 2013

Staying short this morning. The short-term and longer-term pictures are turning more negative, and aside from bounces and/or Bernanke going on CNBC and yelling “psych!  It’s QE forever!” this slide could gain even more momentum today.

In looking at some of the bigger picture charts, the daily and weekly RSI picture is rather gloomy.  The weekly RSI has downside momentum and won’t find channel support for quite some time.

While the daily RSI has lost channel and TL support.

Even the 15-min RSI promises at least another leg down.

Note that SPX completed all the H&S Patterns we were watching yesterday, but which didn’t complete by the close — inserting just enough uncertainty into the equation to make me too nervous to stay short overnight.

Ordinary market?  Sure.  No problem.  A market where even a hint of amping up Fed action could turn things on a dime…not so excited about that.  Naturally, that’s what the market makers were after by propping things up in the last few minutes.  The latest pattern actually completed, but quickly got bounced back above the neckline.

All we need this morning is a push below 1635.53 to loosen things up a bit.

DX tested the large white channel midline again.  Remember it broke out on May 13, and has now back-tested it three times.  It’s also reached the bottom of the rising purple channel.

The large white channel is incredibly important, as it dates back to 2007-2008.  The peaks and valleys in the stock market are easily identifiable based on whether DX approached or exceeded its midline.  It’s in the lower right corner of the 20yr chart below:

UPDATE:  11:07 AM

SPX just nudged above the purple channel midline.  I’ll take a protective interim long position here at 1642, tight trailing stops.

Note there have been many midline incursions, so this could be just another one.  Tight stops are very important on this position — with the key being not a price, but the midline itself.

The purple channel is young, so there’s a possibility it’s not the operative channel at all.  I speculated yesterday that the corrective move might backtest the red channel up at the point marked “C?”  But, that point is no longer achievable within the falling purple channel.

So, either the purple channel is wrong, or the rally is headed towards the purple .75 line (where it intersects with our falling purple channel) at 1660, or the rally is over and just doesn’t know it yet.

This morning’s low pushed below the big purple channel’s midline momentarily, and has since bounced 6-7 points.  So, we can’t ignore the possibility that it will respect that support going forward.

There are two basic possibilities for the corrective wave: (a) it ended at the purple C yesterday afternoon and this morning’s low was wave 1 of the next impulse down (which would be a 3rd wave); or, (b) we’ve only completed waves A and B, with C still to come — probably up at 1660, the intersection of the top of the falling purple channel and the rising purple .75 line (the white A-B-C.)

If the falling channel is right, the white C has only till about 12:15 ET to play out.  After that, the top of the falling channel starts forcing the upside lower.  There’s a fan line that comes from the 1687 top (dashed pink, below) that, if broken, could open up that 1660 level in a hurry.)

UPDATE:  1:05 PM

Still walking it up… 1648.39 looks good for a short-term target (the next 10 minutes or so.) It could also be the full extent of this corrective wave, so I’ll likely revert to full short there.

UPDATE:  1:38 PM

That’s close enough.  Full short here, stops around 1649ish.

Just went back and studied the previous purple channel midline tags in the previous corrections over the past six months.

In Dec 2012, note it was 2 bounces, followed by a .618 retrace of the second, then the drop through the midline in the 11th hour.  The total 4.4% correction went from the top of the purple channel to the very bottom — and, in fact, established the bottom going forward.

The smaller 3.1% correction in Feb 2013 went from the .75 line to the .25 line of the purple channel.  It got a big .786 bounce at the channel midline, then fell straight through to the .25 line.  It then retraced that entire move, dropped back .618 to establish a right shoulder, then polished off an inverted H&S pattern that kicked off the next leg of the rally.

The last correction, at 3.9%, took SPX from the .75 channel line to the bottom in 6 sessions.  Its passage through the midline was quick and painless, though it took several tries and an overnight ramp job to break back above it on May 3.

Of these three corrections, the closest in form and size to SPX’s current travails was the one in December: two bounces, 11 hours over 3 sessions, a .382 retrace of the initial drop to the midline from near the top of the channel.  It occurred over Christmas week, with Christmas day right in the middle, and the other shoe dropping on the 26th.

UPDATE: 2:20 PM

SPX just moved up through the .618 Fib and our 1649 stop level.  It might be a little overshoot designed to trigger stops, or it could be going to the .786 at 1651.52.

The purple TL from 1994/2002 is also right there.  Adding a long for the extra 2 points seems kinda silly.  I’ll just sit tight with the short.

UPDATE:  2:28 PM

Looks like the .618 is backtesting, so I’ll try another interim long at 1648.43 and see if it can get up to 1655 by the close.  Stops at 1648.30.

UPDATE:  2:34 PM

SPX just ticked down below the stop, but the better place would the bottom of the little red channel.  Will hold the interim long until that’s broken.

UPDATE:  2:46 PM

That was a smart move, as the bottom of the red channel held without any trouble. I’ve added an alternative channel higher, shown below in white.  Its top and the red midline intersect at the .886 at 1653.38 on Tuesday morning, so I’m going to go with that scenario for now.

It also provides a place for SPX to go if it pushes through the red channel bottom.  If it occurs around 3:05-3:10, it would make for a nice backtest of the falling purple channel .75 line around 1645, stopping out a few longs before the last push higher.

UPDATE:  3:18 PM

Dropping through the red channel bottom.  Selling the long position here at 1648.60, full short again.  But, watch for the white channel bottom at 1645.50 or 1646.19.

The 60-min RSI shows an inflection point here — the .25 of the white channel and the midline of the yellow.

Unfortunately, it doesn’t tell us whether those channel lines will hold.

UPDATE:  3:48 PM

Going into the final 15 minutes, and SPX just bounced back from beyond the bottom of the white channel.  Fakeout or are they going to close it positive on the day?

I’ll go back to where we started today’s discussion: the dollar.  The white channel midline is still standing.  The USDJPY is also looking positive, and the EURUSD is looking weak.

We might get a little spurt up to 1651 by the close, but I think we have at least 50 points of downside from here.  I’ll hold short over the weekend.

 

Comments

Charts I’m Watching: May 24, 2013 — 20 Comments

  1. what about the possible SPX Gartley formed by the X = 1687.18, A = 1635.53, B = 1655.50 and C = 1636.88 which points to D = 1674 ? Still working out my application of harmonic patterns, but sure would form a nice w2 if this is a larger corrective move than what has occurred so far – and would certainly give the bears a run for their nerves while luring in more bulls. Of course that means this current move up will need to exceed 1655.50 in the near future and meanwhile we’ve vacations and a long weekend…

    • While I’m a total noob at harmonics, I like the way the Bat/wave 2 fits.

      Also watching the 60 min MACD- with it’s initial curl up it would suggest this is still only wave 4, which would work well for a quick whipsaw on Tuesday to finish 4 then 5 down, right in time for the end of month window dressing rally.

      Would enjoy anyone else weighing in as we count-down to a long weekend. 🙂

    • That’s definitely a plausible pattern. But as you may already realize, the predictive power of harmonic patterns comes in the odds of a reversal *at* D – not the odds of *reaching* D.

      In other words, the pattern you mentioned doesn’t say that we’re GOING to hit D at 1681. It says that IF we hit D, then a reversal to the .618 x A-D level (about SPX 1653) is likely.

      • wouldn’t mind some clarification on this point. Earlier, I asked PW about this and was told these patterns complete 70% of the time. That is pretty good odds and definitely something I can trade on when I see it setting up. Of course with stops set and etc. Am posting this AM of Tues 5/28 and it does look like the pattern is carrying through, is 1669.6 current.

        • Yes and no. They actually succeed about 70% of the time, meaning we get a reversal where the pattern suggests. In the case of a Point B < .618, this means a 70% chance of a reversal at the .886 for a Bat Pattern. We can and often do find an intersecting pattern there such as a channel midline or top that suggests the target will be reached, but harmonics by itself doesn't say anything about the likelihood of reaching the .886. Hope that helps.

          • Right, you’ve said the same thing I did.

            I’ve seen quoted success rates in the 70-80% range for harmonic patterns. However, do you have any specific data on this?

            I have done extensive and exhaustive automated backtesting on years of market data across all four primary harmonic patterns on all time scales, and have found drastically lower success rates than claimed (on the order of 20-30% for SPX).

            The success rate for patterns that do reverse at the D target is much closer to 70-80% — that is, IF the market reverses at D, THEN the odds of reaching the .618xAD target are pretty good. But I have found that most of the time the market does not reverse at D in the first place.

  2. Obviously far too early to lay odds on, but nothing whets the appetite of the BTFD’rs than the first good drop. As I’m sitting here playing with channels I can’t help but notice that a nice Bat pattern here for a wave 2 would just about screw more people than anything else I can think of. :O

  3. hey PW, just noticing that you’ve maintained your red rising channel to intersect with the purple declining channel at 1665 at point C. Is that intentional, or would it be better redrawn to include today’s drop with an intersection closer to 1656? Just wondering if I’m missing something. Thanks.

    • I use chart patterns much more often than I do price levels. In this case, we’re bouncing around the midline of what I think is the operative short term channel (the smaller falling purple channel.) If we can stay below the midline, then the decline can resume. If we push above and stay above it, then we’re likely to get another wave higher — what I believe would be corrective. Thus, the protective long position.

  4. No POMO today and the big day next week is Friday so we might have a little room to run to the downside over the next few days. Do you still like your longer term forecast from the other day, Pebble? II lines up with what I see

    • Yes, I do. This feels quite weak to me, yet I recognize the possibility that the Fed, which everyone is blaming for this weakness, steps in and says “just kidding.” End of correction, back to the melt-up.

  5. Staying Short this morning or Going short this morning?? Last post
    yesterday ended with “So, to cash I go” Staying short and Going short are
    quite different.

    • I do believe that he went on to explain what took him to cash last night.

    • I continue to have a bearish bias as this downturn likely has further to go. But, I’ve been nervous lately with the degree of manipulation going on surrounding the last 30 minutes of trading and/or overnight action.

      Yesterday was a prime example. We had several H&S patterns that were due to complete. One even did, and then SPX bounced back up .05 so as not to close with the pattern in play.

      I put out a forecast several days ago suggesting 1600 as a downside target. And, I continue to think it’s quite achievable. I can hedge my positions or trade futures overnight, but the guidance I provide on SPX has to work for those who can’t. I’m wary of leaving them hanging, with the potential for big ON action that seriously damages their short position.