I want to wish everyone a happy, prosperous and peaceful New Year. The year ahead looks to be at least as “interesting” as 2011. With the markets closed today, I thought I’d review a few of the patterns I’m watching.
First, an overview of the harmonic picture, starting with the biggest picture:
On the monthly chart, we just completed a potential right shoulder to a very large Head & Shoulder pattern that started with the 2000/1 top (the left shoulder). Consider how the pattern aligns with the largest harmonic pattern (in purple, I’ll call it a Butterfly for now.)
The neckline, which tagged the .786 retrace in Mar 09 at 666, passes through the .886 at 565 in late 2016. By drawing a parallel trend line across the shoulders, we can also construct a midline — currently around 1031.
I find this level interesting, because it’s reasonably close to the .500 Fibonacci level (1006) of the Butterfly pattern as well as the .500 Fib (1018) of a somewhat smaller Bat or Crab (in red) that began at the 666 level. Also, note that reaching the 1006-1018 price level will complete a smaller H&S; pattern that features 1370 as the head and targets 773. As we’ll see below, the smaller H&S; target is a stone’s throw from a Bat pattern target of 747.
The channel that’s formed by this H&S; pattern is aesthetically pleasing, but obviously portends a dismal economic picture — a double-dip recession (for optimists) or potential depression. Without getting into a protracted discourse on economics, this is consistent with my outlook on the economics picture.
Closer in, the picture is equally bearish. Nestled within the large Bat or Crab pattern that’s been forming since 666 is a Crab pattern (in red) that began in August 2010. It put in a Point B at the 1074 low in October, and would complete its 1.618 extension at 835 — just above the H&S; target of 773.
Please note I’ve made no effort to put these targets in proper time perspective, but am just showing price targets for now.
Closing in a bit more, a couple of Gartley patterns are forming. The larger purple pattern is the better formed of the two, as the yellow pattern Point C exceeded Point A by 2 points. This is not technically permissible, though I chart it anyway because these patterns often defy the odds and work out.
I’ve also charted some Bat and Crab alternatives. The key is Point B, which for a Bat must be less than a .618 retracement and for a Crab can be anywhere up to the .886 Fib level. Note that the yellow Crab completion at 1091 also completes the H&S; pattern that targets 735, so this is a very significant target. It also coincides with the larger (purple) pattern’s .886 Fib level at 1099.
Put all these targets together, and you get a boatload of significant price targets:
By themselves, not a lot of help. But, with these in hand, we can construct a model that attempts to align significant price levels with significant time levels by using channels and the analog I’ve been tracking since May and the fractal since November. More later on that.
Last, just a quick observation on the Euro. Note how the fast lane we talked about last week is marked by a series of decisive breaks of parallel trend lines. A reminder, this channel is exactly the same slope as the past three two, so I’m inclined to give it the benefit of the doubt.
These are worth watching, as lately they are highly correlated with breaks in the US equity markets. EURUSD seems to have established a new on on the 29th at 1.2857. It has since rebounded somewhat, and could be tracing out a Gartley whose .786 Fib is at 1.3032 — right up against the channel boundary.
Whether it rebounds higher or not, a break of the dashed trend line is a great indicator of a bigger downdraft to come. In the end, I expect EURUSD to fall faster than its sub-channel, crossing into the next one down at an accelerated rate as occurred in the last wave down in September.
The ideal spot would be tomorrow, Jan 3, as that’s the peak of channel as it intersects with the trend line just broken. A full back test to the above-mentioned .786 Fib would be the perfect fit for a robust reversal.
I’m still expecting completion of the Crab pattern (in purple) at 1.2464 sometime around mid-January — a 3.5%+ move that would correlate with a 10%+ move in SPX.