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