The Big Picture: January 27, 2012

UPDATE:  3:10 PM

SPX has completed most of a head & shoulder pattern that points to 1288ish.  The idealized right shoulder comes in around 1322, although it’s high enough to count as it is.

ORIGINAL POST:

Another quiet day price-wise, even though there’s been plenty of negative news.  Clearly, the bulls aren’t going to give up without a fight.

There are a few different ways to view the past four months price action.  Generally speaking, we have a bearish Butterfly pattern that completed (1.272 ext) at the apex of a rising wedge (in yellow) within a rising wedge (in red.)

I will consider 1333.47 the Wave 2 top until proven wrong.  There are a few scenarios that argue for a slightly higher price, say 1336-1339.  But, I don’t expect them to come to fruition.  Traders should maintain stops, just in case.

The chart above also shows that we’ve violated and are back testing one of the trend lines (yellow, since Dec 19).  But, since we’ve cracked previous TLs on this advance, I don’t put much stock in it.  The more important TLs to break will be the purple line off Nov 28 and the red one off of Oct 4.

But, rather than anguish over which TL will be critical, I suggest keeping an eye on the RSI trend lines.  The hourly RSI TLs (red, dashed) have seen some touches coinciding with instances of meaningful support.  A break of either line would signal a significant drop.  BTW, the yellow RSI TL is great evidence of the negative divergence we’re seeing.

Now, for the big picture.  May’s top at 1370 was 11 points from the .786 retracement of the 1576 to 666 decline.  That means we came back to within 11 points of recovering 78.6% of the loss from the original 1576 starting point.  This was a Gartley pattern — incredibly effective at signalling potential turning points.

Once we top at 1370, we need to focus on Fibonacci level retracements of the 666 to 1370 rise.   The most common Fibonacci retracement levels are .236, .386, .500, .618, .786, .886 and 1.000.  We then go into extensions such as 1.272, 1.618, 2.0, 2.4, 2.618 etc.

There’s a rule of thumb I use to determine post-pattern completion targets: 61.8% of the distance from A to D.  In this case, A is 666 and D is 1370; so, 61.8% of that distance is .618 x (1370-666) or 435.  Subtract 435 from 1370 and you arrive at 935 as the target for the reversal of the big Gartley pattern.  It’s shown on the above chart as the .618 level of the purple pattern.

The big question is how to get there.  As mentioned above, we just completed both a medium-sized Bat and a Butterfly pattern.   Bats are similar to Gartley’s, but retrace .886 instead of .786 of the initial leg.  I use the same .618 reversal target, however, which in this case would yield around 1173.  Nice, but not quite 935.  Let’s look at the Butterfly.

Extension patterns like Butterfly’s and Crabs complete beyond the point of origin — 1.272 or 1.618 being the most common.  So, I typically look for a larger reversal upon completion.   A 1.272 extension/reversal from 1333 gets us to 1110 (1.272) or 1050 (1.618) on the downside.  Closer.

It’s fair to say that reaching 1110 or 1050 would probably involve completion of a H&S; pattern or two.  A casual glance at the chart reveals several potential left shoulders ready for action.  The price level around 1110 also looks like a great spot for a massive H&S; pattern to complete, with the Jun 2010 and Oct 2011 lows as potential neckline points.  Such a pattern would point to 790 or lower.

Reaching 790 isn’t so far-fetched when you consider we’ve completed 3 of 4 legs for a huge Bat pattern that targets 747 as the .886 completion point.  It would work nicely with a H&S; pattern as that described above.

I have about twenty other patterns currently under surveillance.  Let’s see how this week plays out, then I’ll try to string them together in a coherent fashion that also takes into account the other chart patterns at work.  Suffice it to say, there are plenty of ways to skin this bull.

Comments

The Big Picture: January 27, 2012 — 8 Comments

  1. PW,

    I'm casually trying to learn technical analysis, and your work stands out among the 4 or 5 blogs I look at on a daily basis. The Gartley partern and Fibonacci retracement summaries and graph at the end of your original Friday post really pulled a lot together for me, in what was rather abstract concepts to me before.

    I know a lot of these concepts are elementary, but I think it would be very helpful to me and your other novice readers to continue to explain in an extra sentence of two some of your reasoning and how all these concepts tie together with the big picture, when its possible. I know it will help me learn, and I'm sure the other readers will appreciate as well!

    Keep up the great work.

    -Andrew

  2. My post above should indicate 1333.47 (not 1334.47). My point being:

    666.79 x 2 = 1333.58 – 1333.47 = 0.11

    0.11 short of 100%

  3. Even though today is a down day. but how come bears still feel defeated, and fear is still very low? It seems that the market is just churning and down orderly to work off those overbought indicators. With next week the end of the month, are we going to see the usual end of month tape painting? With the facebook IPO there seems to be a lot of enthusiasm out there. Unless Greece default over the weekend, I think the market is probably going higher…to infinity maybe…

  4. PW, great post. From a big picture perspective, I find the 11 points interesting ("May's top at 1370 was 11 points from the .786 retracement of the 1576 to 666 decline."). It is eerie that the 1334.47 is within .11 of an exact 100% extension from 666.79 (the March 2009 low). Coincidence? Maybe. Fibonacci embedded? Maybe.

    Also, it is probably my brain trying to identify a pattern, but today's S&P; action looks like a fractal of the 6 month chart.

    Keep up the great work.

  5. Would you like to share? Just checked out your great blog. Are you still on the other side of the world? I fell in love with Australia years ago, have thought many times about an extended stay.