UPDATE:  6:00 PM

NDX is suggesting an imminent plunge in stocks.  I started watching NDX last summer, and found it to be a great confirmation of SPX activity.  On July 25, I wrote about it tagging a trend line of previous highs, and how previous tags had led to market corrections [Tale of Two Tops.]  A few days later, SPX began an 18% plunge.  Here’s the chart from back then:

And, here’s the chart from today, showing us right back at that same trend line — which also happens to be a fan line off the Oct 2007 highs.

There’s a little wiggle room on the precise price level, because the TL connecting all four differs ever so slightly from the fan line.   It allows for another 30 points up to 2471, but it’s already close enough that a turn could come at any minute.

What’s significant about 2471?   Remember, we had that great reversal off a Bat pattern in October.  It then jumped right into another pattern — this time a perfectly shaped Butterfly whose 1.272 extension intersects with the trend line and fan line right at (drum roll please) 2471.

Note also the RSI trend line tag right at 70 — just like the previous tops.   All in all, I’d say we’re getting very, very close.

UPDATE:  3:25 PM

EURUSD has not only tagged the boundary of the channel it’s been following since October, it’s completed a bearish Butterfly at the 1.272 extension.  This should be the end of the run (although an overshoot to the 1.618 is always a possibility – use stops!)

A reminder, we’re shooting for at least 1.2464 (Crab pattern), and the slope of this channel line has been proven time and again over the past few years.  Note the purple channel lines on the weekly and daily charts below.  We’re also backtesting one of our channel lines (yellow, dashed) which have done a nice job of guiding intermediate moves.  A decline to 1.2464 from today’s high is a 3.9% drop.

The AUDUSD has tried to push above its channel boundary to complete the Gartley/Crab, but no joy so far.  A failure to complete it, along with a firm hold here at the boundary would be extremely bearish for it and for equities in general.

More after the close.

ORIGINAL POST:

First, thanks for all the emails yesterday regarding taking this blog private.  I haven’t read all of them yet, but about 80-90% of those I’ve read so far support the idea — particularly if it comes with a steady stream of info on a variety of securities.

I focus primarily on SPX, but I was thinking (updated daily) charts for SPX, RUT, DJI, NDX, COMP, VIX, EURUSD, DX, GC, SI and maybe a few stocks everyone watches like AAPL.  I could run three sets for each:  (1) long term — weekly or monthly, (2) medium term – daily, (3) intra-day.  I would detail the chart and hamonic patterns I see, and provide a guide to finding and understanding harmonic patterns that many of you have been requesting.

I think the guide could help everyone be more knowledgeable about the patterns, so we could use a shorthand that would allow me to increase the volume of info rather than spending time on prose describing what I see.  So, for example:

“rw on SPX, apex @ 1324 intersecting with FL from Oct ’07, May and Jul ’11;  .886 of pseudo-Bat (1370-1074) @ 1331.“

instead of:

“With today’s push, the rising wedge has expanded and points to an apex of around 1325.  Note that 1325 intersects with a fan line coming off the Oct 07 highs and connecting with the May and July 2011 highs.  It’s also with a few points of the Fibonacci .886 (1331) of the distance between the May highs (1370) and the October lows (1074.)  Recall that it’s not technically a Bat pattern because our Point C (1074) is lower than Point A (1101 on Aug 9.)“

I’d also like to establish a more robust commenting capability to increase the communication among readers.  There are at least 2,000 of you on a daily basis now.   But, these emails are the first I’ve heard from most of you, and I’ll bet you have something to say — even if it’s only about how badly I blew a particular call.

And, last, I’d like to set up an email or twitter feed for timely stuff that comes out during the day — maybe my take on a bogus earnings report, a fib target being hit, a trend line broken, etc.

As some of you have pointed out, I announced a few months ago that I’d be scaling back. Well, let’s just say I tried.  I really did.  But, with another big whoosh on the way, it seemed like bad timing.  And, I must admit, I enjoy blogging.  I just have to figure out a way to make it more valuable but require less time… and somehow compensate for the tradeoff between spending time with family and being able to support both said family and my charitable giving.

Right now, the information is spread far and wide and is all too often posted on other sites that charge big bucks for my ideas (if the shoe fits, RP…)  It’s one thing to give away valuable info, but quite another to provide free product to a “competitor.”  It makes more sense to deliver valuable info to those who value it and cut out the middle man.

For those of you who have affordability concerns, rest assured that the cost will be reasonable — about the cost of the commission on a round trip trade on which you stand to make many times the fee.   I might even do a special deal of some sort for current followers.

Please let me know what you think.  This site is for you and I want it to be something you’re excited about.  Again, the address is: pebblescribe at gmail dot com.

Lots of stuff going on today.  I’ll post some charts shortly.  First, thanks to Dillzs99 for this comment on yesterday’s post.  I thought it was important to bring it current for all to see as it raises some good questions:

It looks like SPX may be working on completing a bat pattern at 1336. Using X as the May high and A as the October low, you can make a case that B was hit on 10/12 just below the 50 retracement and C @ the 38.2 was hit on the next day 10/13. The target for D in this case is 1336. 1336 also is almost smack on the descending trend line from the 2007 high.

I also have been watching the harmonics on the RSI. It seems as though the daily RSI is in the last leg of a butterfly. X in this case is the 10/28/11 peak and A is the 11/23/11 low.

Additionally, the RSI weekly looks to be finishing a gartley. X in this case is the 2/14/11 peak and A is the 8/8/11 low.

In my opinion, a final push to 1336 would complete the bat pattern, and finalize the harmonics in the daily and weekly RSI. It also would correspond well with the last push up the harmonics are expecting in the AUD/USD (as you noted above).

Here’s a chart of the relevant Fib levels involved in the Bat he’s suggesting:

I agree with 1370 as a Point X.  It’s right up top, where we like X’s to be — major turning points.  Likewise, Point A is at an important low.  My only concern is Points B and C.  It’s entirely possible these two are the right ones, but I’m not thrilled with using them because it means ignoring some otherwise more remarkable turns.

If we hadn’t seen C go below A, for instance, we might have something like this.  I’d be willing to ignore a point or two and call it a 100% retrace, but not 27.

We could fix the C versus A problem and go with something like this, but then we have a Point B at the .786, which means Butterfly instead of Bat.  That would spell an extension to the 1.272 @ 1433 — which I just don’t see in the cards — for a variety of non-harmonic reasons.

The only pattern that I really like it this one.  It turns right at the .786 so it’s (so far) a perfectly formed Butterfly that calls for a Point D at the 1.272 extension of 1329.   This fits with your RSI harmonics observation, Dillzs, and it’s one I’m really comfortable with.  It also happens to be darned close to your 1336.

I’ve drawn the fan line off Oct 2007 as precisely as TOS allows, and I think 1329 is a little closer to 1325 or 1331 (current values, depending on whether you count the May 2 shadow) than 1336.   Here’s a close up.

Having said all that, we could easily hit 1336.  This rise has a head of steam on it, and Wall Street is pumping the living crap out of it.  I think bears, who have been beat down so many times over the past few months, are licking wounds and picking a place to take a stand.  The fan line from 2007 seems like a good one, and OPEX will no longer be an issue in about 26 hours.

Whether we turn down from here, 1329 or 1336 isn’t terribly important.  It would be downright silly to try to catch the absolute top within pennies when we’re talking about a potential 300+ point drop (if this is, indeed, P3.) 

More later.

UPDATE:  11:40 AM

It’s been a few days since we looked at whether the fractal is still alive or not.  I suspect it, and the analog between 2007/8 and 2011, simply became too well known.   TPTB have very strong vested interest in keeping this crap game afloat, and a July style plunge would be very bad for biz.

I have to accept some of the blame.  Hoping to share the benefit of my discovery, I probably spread the word a little too wide.   I believe I was one of only a handful who saw it coming in July; but, this time around, there were no doubt many, many more.

I’ve seen a huge uptick in the traffic to the site, and many of my charts are ending up on other technical websites — with and without attribution.   I’m considering changing pebblewriter to a member-only site, charging a nominal fee and posting all my short-term and longer-term harmonic set ups, along with a guide to understanding harmonics.

I have a few institutional clients for whom I consult, and I know they would appreciate a tighter circle.  Please drop me a line, let me know what you think.  I can be reached at pebblescribe at gmail dot com.

Now, a look at some charts…

Things were looking pretty good up until about marker #8 on the current (right hand side) chart.  In July, #8 couldn’t push up past #6.  To some of the Ellioticians I follow, this was a truncated C wave.   the ABC also expanded.

Currently, we’ve completed a more traditional zig-zag pattern where C exceeds A in price and is almost equal in length to A.  Rather than expanding, prices have narrowed — forming a rising wedge.  Obviously, time and price comparisons for the fractal have both suffered.

It doesn’t invalidate the fact that we’ve formed a robust rising wedge with growing negative divergence and half a dozen other signs of a top.  It remains to be seen whether we’ll see the same payoff as the Feb-Jul time period; my best guess is that we will.

Regarding the analog between 2007/8 and 2011 that worked so well up until the spike around day 125, it’s also off track.

Again, the culprit is the day 125 spike — as well as the size of the corrective wave in July.  A trend line drawn off the Oct 2007 top through the Dec highs provided great guidance for the May (day 150) Wave 2 peak.

This past July, we overshot the corrective wave I expected.  Still, we had a huge downdraft starting on day 57, only 5 days after the analog predicted.  And, the size of the plunge exceeded the 2008 version.  (I’ve made the analogy before — these moves are like rubber bands; stretch an expected move out and it’ll just snap back faster.)

But, because July was higher, the trend line off the top was tilted upward relative to 2008.  As we’ve discussed before, it ranges from 1303 to 1329, depending on whether one counts shadows or not.  So, although we’re off track in terms of the day count, we’re still very much on track in terms of the chart pattern.

Throw in all the other indicators (the third rail, negative divergence, narrowing leadership, negative divergence both on technical terms and relative to VIX, XLF, RUT, etc.) and I’d say the upside is very, very limited.  I suspect that, years from now, we’ll look back at the obvious similarities and forget all about the several weeks of divergence between the two.

In the meantime, that ol’ rubber band just keeps stretching…

UPDATE:  11:10 AM

VIX, which broke out of the smaller falling wedge (dashed, white) we’ve been tracking for the past month or so, smacked up against the upper boundary of the larger falling wedge (solid, red).  It also works as a back test of the smaller wedge trend line.

I suspect that the Bat pattern we just completed at the .886 on the 60-min chart will constitute a Point B for a larger Crab pattern that breaks VIX out of the larger wedge, too.  If so, look for a completion of the inverse H&S; pattern that’s setting up — with potential to 28-29.

ORIGINAL POST:  10:00 AM

AUDUSD has been a great indicator for the direction of the stock market.  Currently, it’s saying we’re on a precipice, but there’s likely a little more juice left in the market before the downturn gains momentum.

The AUDUSD patterns have followed some pretty clearly discernible paths.  In general, the Aussie has been steadily appreciating versus the USD.  But, stock market plunges in 2008 and 2010 dropped it from the channel it’s been following since 1999.

When the stock market recovered, the AUDUSD regained the channel — always following the same impulse channel slope on the upside, and the same corrective channel slope on corrections.

Over the past few days, we’ve bumped up against the upper boundary of the current corrective channel.  Recall that this trend line correctly forecast the past two steepest plunges: the July 240-pt selloff and the late October 130-pt drop.

So, when we approach the channel line for a third time, we should all pay close attention.  As always, the question is “are we there yet?”  There are two harmonic patterns I’ve been watching, a large Gartley (purple) and a smaller Crab (red) pattern (updated 10:30 am).

The .786 of the Gartley is up ahead at 1.0519 and the 1.618 of the Crab is very close by at 1.0534.  So,  even though we’re pushing that channel line, I think it’s possible AUDUSD has a little more juice in it before the reversal we’ve been waiting for.  If so, I’d expect SPX isn’t quite done yet, either.

More later.

UPDATE:  12:00 PM

There are a few alternatives for the 1307-1313 target we’ve been watching for a while.   I’ve always thought the trend line coming off the May 2 high would be important if the analogs we’ve been watching gave up the ghost. 

And, I’ve always given a range is because it matters whether you include the shadow or not.   The two relevant candles are May 2 and July 7, so there are four possible combinations shown below.  The current values of each TL:  1303, 1315, 1318 and 1331. 

 Obviously we’ve tagged the lowest, marked in white.  It’s been my preferred target because it crossed the .786 Fib line in December — the time frame in which I last expected Wave 2 to be completed if it extended beyond my original expectations (which it obviously has.)   The combination of the TL and the Fib level formed the basis for my target.

It also comes closest to matching the channel lines that have shaped the past year (shown in yellow).  Actually, a TL off the July 7 high to today’s high almost exactly matches the slope of those channels.

So, is this the TL that matters?  Is Wave 2 finally done?  Note that this morning’s high also matches the TL coming off the 2010 pattern which tags the March and June lows (in purple.)  In past topping patterns, there were usually similar TLs winding their way through and dictating Wave 2 turning points.

More later.

ORIGINAL POST:

Looking for clues for the turn…  focused on financials this morning.  Citi just completed a nice little Gartley at the .786 Fib on the 60-min chart.

And, XLF testing last weeks high with a small Bat pattern that should peter out at the .886 (ignore the overnight pricing.)

BTW, WFC reports an increase in earnings of $700 million, with a $600 million reserve release!?  Total garbage.   It overshot its Crab just a bit on the headlines, but this loser should crap out once investors dig a little beneath the surface.

It’s very frustrating to see company after company get away with posting results that deliberately misstate reality.   Shame on them and the complicit “regulators” and “analysts,” and shame on the investors who believe the headlines.

Speaking of  duplicity, Goldman is retesting the trend line that’s rebuffed the past several attempts to break out on the upside.  You could make a falling wedge out of this pattern, which would be potentially bullish.  But, the more likely guiding pattern is the steep channel pointing towards the Bat completion at 64.

And, last, this from Experian, which reports an increase in first mortgage default rates from 1.9% to 2.19% since August, even as credit card defaults fell slightly.  Apparently, the anecdotal stories balancing their budgets by not paying their mortgages are true.

I’m pretty sure the Fed’s bailout efforts (buying toxic mortgage debt from the banks otherwise on life support) will do little to reverse this trend.

More later.

Market schedules for the Martin Luther King Jr. Holiday.

UPDATE:  5:40 PM

We clearly broke a trend line or two today.  I’ll write more this weekend, but while I’m thinking about it…  today’s retrace is not a big deal.  When the July decline got started, the first few days were quite modest.  No idea if it’s analogous or not, but consider the similarities between Jul 25 and today.

Of course, in July there weren’t as many people aware of what the next few days held in store.  And, the PPT was likely not as well prepared.  More later.

UPDATE:  3:20 PM

Fresh look at AUDUSD.  It completed a perfect little Butterfly pattern on the 15-min chart (below in purple).  Note the Point B at the .786 Fib which reverses twice out to a Point D at the 1.272.  We expect a reversal there — usually about .618 of the total pattern (distance of A-D), which is what we’re seeing now.

It’s clear, however, that a larger pattern is in play (seen in yellow.)  The move to the 1.272 extension constitutes a move to the .618 on this larger pattern.  And, a Point B at the .618 makes it either a Gartley, Bat or Crab — meaning it should reverse and return to somewhere between 1.0194 to 1.000.

There are also much bigger patterns to watch, such as the Butterfly that completes at .9014 (shown on the daily chart in red.)

UPDATE:  2:10 PM

Watching the VIX inverse H&S; play out.  The current pattern targets 24, and that starts the ball rolling on a larger pattern that targets 29.

UPDATE:  10:28

France downgraded, waiting for the official announcement.  Hasn’t been this much uncertainty in the air since (sarcasm alert) the LeBron James trade. 

And, while we’re waiting for the end of the world, here’s another one.  I believe that’s French Finance Minister Francois Baroin addressing the S&P; Credit Committee.

ORIGINAL POST:  9:35 AM

Following news of an imminent downgrade of EZ countries and abysmal JPM earnings, we’ve seen a moderate sell off so far.  Even an increase in consumer sentiment hasn’t been enough to stave off the long overdue correction.  This could be the real deal.

More later.

UPDATE:  10:20 PM

Just noticed that AUDUSD just broke its RSI trend line on the 60-min chart.  And, the daily chart shows quite well how the latest rise was most likely just a back test of the recently broken 200 SMA — indicated in red on the second chart below.

UPDATE:  8:40 PM

The AUDUSD has been a very reliable indicator of equity price direction.  Check out the long term chart, then how it matches up to SPX.

The fan line that cuts through Oct 4 makes for a nice neckline, no?  In my opinion, it’s got a day or two at most before its next tumble.  Friday the 13th anyone?

BTW, the very knowledgeable Mitchkeller over at the excellent YAEWAB has a great chart detailing the divergence.  In short, it’s extreme. 

UPDATE:  2:50 PM

Fine piece of writing from Charles Hugh Smith.

Read the rest at Of Two Minds.

UPDATE:  2:20 PM

Another day watching the paint dry on this market.  Although an interesting little tidbit concerning the VIX…  In addition to an apparent break out of the falling wedge (and back test), I see a very small inverse H&S; pattern developing on the hourly chart, indicating a nominal upside to 24 or so.  It’ll take a close at 22 to complete the pattern.

Of course, a close at 24 would portend a larger pattern to 28, which would lead to 40, etc. etc.  In Wall Street’s version of “If You Give a Mouse a Cookie,” there’s the very real possibility that this is only the first of the many more cracks in the dike to come.

We saw the same pattern get the July drop going.  Although, it took about three generations before it produced soaring VIX values.  Something to keep an eye on, especially if the back test holds.  There’s a similar back test occurring on SPX, although that particular rising wedge has expanded three separate times, tossing lower bound touches aside like used Kleenex. 

Perhaps, as we’re positioned a mere 12 points below our secondary 1307 target and nudging the psychologically important 1300 level,  we’ll see a decisive break one way or the other.

UPDATE:  10:20 AM

Yesterday, XLF tagged the .886 of an apparent Bat pattern and is now reversing.   Recall that its Point B slightly exceeded the .618 Fib that’s the limit for both Gartleys and Bats.   But, we had a trend line off the Feb highs that argued for a reversal at the .786 at 13.65.

The rise of the past two days tagged the .886 of 13.89, slightly shifting the TL off the top to exclude the July 7 high.  It’s not quite as good a fit as the other, but it’s still legitimate.

Trend lines don’t have to include every relevant point.  Occasionally, whether through excessive exuberance or good old market maker manipulation, the boundary gets pushed.  It’s a way of clearing out shorts and puts, who set stops at price levels representing important resistance.

A hallmark of this market over the past year has been the ramping up of prices in the futures markets overnight.  For relatively little cost, market makers can create a gap up at the opening of the cash market that, more often than not, carries through into the day.

It’s a manipulation, of course, that always works — until it doesn’t.  When a market is stretched beyond what the underlying fundamentals and economic backdrop support, it has the tendency to snap back violently.  All it typically takes is a catalyst:  downgrade,  default,  ugly employment or earnings report, war, oil shock, etc.

The job of Wave 2’s is to stretch that rubber band as far as possible, shaking out as many bears as possible. As Daneric so eloquently put it in his post last night:

Wave 2’s do not want to be wave 2’s,  no matter what the size. Part of wave 2’s personality is that they wish to be true bull waves.  And true bull waves do not retrace partially – they make multi-year market highs.

This one has been very strong.  It’s made believers of many former bears — witness the record low bearish sentiment among small investors.  But, it will fail — and soon.  And, yes, financials — which are largely responsible for the excesses that led to the financial crisis in the first place — will lead the way.

ORIGINAL POST:

COMP has completed a Bat pattern that hints at a possible extension to a Butterfly at 2838. 

The first pattern, a Gartley, completed at the .786 (on the purple grid) on Oct 27 at 2753.  Since then, however, another pattern (in yellow) has emerged — with a Point B at the .786 and currently approaching the .886 at 2718.  At that level, it lines up nicely with a trend line off the July highs and signals an impending reversal.

The only issue that gives me pause is the RSI, which indicates slight positive divergence and has broken through the TL that ran through the Oct high.  If we give it the benefit of the doubt, it’s not hard to imagine the current pattern extending out to form a Butterfly at 2838 — the 1.272 Fib.

We should get a reversal here at the .886 regardless.  The key will be whether we continue down — by breaking through the TL off the Oct 4 bottom (and the RSI TL) or whether we bounce off the RSI TL to make one last high at 2838.

BTW, 2838 lines up very well with a trend line off the May 2 top and the July highs — the equivalent of the situation in SPX with 1307.  I’d be inclined to go with this as my primary forecast — except for the fact that we have a large rising wedge and striking negative divergence on the 60 min chart.

In short, the situation is very analogous to SPX.  Either the market turns very soon and pays off some of these negative short and medium-term signals, or we could get a last little bump up to the TL off the May 2 highs.  So, if we break through 2718 and the previous high (2753), look for a run up to 2812 (the .886 on the combined patterns) or 2838.

A different picture presents on the Russell 2000 (RUT).  Recall that the COMP is market cap weighted, with the top 5 stocks (AAPL, MSFT, ORCL, GOOG and INTC) representing 25% of the total; the RUT’s biggest stock is only .32% of the index.

This is what the broad small cap market looks like — absent the juicing going on in the ever narrower “leadership” segment.  The daily chart shows very strong negative divergence and a clear touch on the “third rail” which is also the neckline for the H&S; pattern.  In fact, Minor 2 looks like nothing more than a back test of that neckline and — except for the Oct spike — has traced out a very convincing rising wedge.  All in all, it’s a very bearish chart.

More later.

UPDATE:  2:20 PM

ORIGINAL POST:

We have a nearly completed Bat pattern on the Dow.   Counting from the May 2 high, the .886 is at 12,594.

But, the same pattern drawn from the July 7 high is complete.  We reached the .886 of 12,486 yesterday.

Either looks complete from the standpoint of the channel lines and the trend line running through the topping pattern — the intra-pattern third rail.

We also have a clear touch of the RSI trend line from Feb 2011, the start of the topping pattern.  The segment from the October highs represents obvious negative divergence.

Unlike the S&P; 500, the trend line connecting the May 2 high with the July highs leads us to right here, right now.   On the Dow, Minor 2 looks very, very done.

The SPX, on the other hand, touched its .786 Fibonacci retracement — for the second time — yesterday.  That’s from the July 7 high, BTW.  The .786 off the May 2 1370 high is 1307.

Neither really works as a completed Harmonic pattern.  Like the DJIA, Point C is lower than Point A — in this case, much lower.  Not good form.

And, the only pattern that completes at a .786 is a Gartley, which requires a Point B at the .618 (the Aug 31 high of 1230 came within 18 points.)   So, again, not really well formed.

All that being said, should we care?  A .786 retracement is one of the most common corrective wave targets.  The trend line connecting the Feb and July tops is pretty well in place (though not quite a perfect fit).  The trend line (the third rail) running through the pattern has clearly been connected.  And, the RSI trend line just got tagged — with negative divergence since late Oct.

Taken separately, they’re a bunch of interesting little indicators that catch your eye.  Together, they form a beautifully laid out mosaic of a Minor 2 top.

The steps on which EURUSD pauses before each push down are getting shorter and shorter.  Two steps ago, we didn’t even get a right shoulder to the H&S; pattern.  This last step hasn’t even bothered with a head — just a left shoulder and done.

One way of looking at it is that we’re getting that much closer to the floor dropping out from underneath, a rifle shot to the next lower channel as happened in each of the previous two major channels. 

Another interpretation is that we’re tracing out a falling wedge — which necessarily gets narrower as we approach the apex. 

The two options lead to quite different outcomes for the Euro and the equity markets.  We are approaching the end of the Crab pattern I’ve been watching for the past two months.  Its 1.618 extension is just below at 1.2464.  The problem for EUR bears is that 1.2464 also marks the crossing of an important fan line, highlighted in the chart below as the yellow dashed line rising from 2002.

This will be the first test of this particular line, but in tests of previous fan lines we saw bounces ranging from barely noticeable to .08.  The fact that this one coincides with a Crab completion makes me think it could be significant.

Also, there are several other harmonic patterns to consider.  The one starting in June 2010, featuring May 2011 as the Point A, has a .786 Fib level just up ahead at 1.2531.   The Point B didn’t quite reach the .618, so there’s a very good chance it’ll register as a Crab (with a .9983 target!) instead of Gartley, but the .786 should be good for a bounce all the same.

And, last time I checked, there were a slew of short spec positions on the EURUSD; so, a hard bounce could have some legs as short covering commences.  It probably couldn’t break out of the major channel (purple, solid).  But, it might try for 1.30 in a backtest of a channel line (yellow, dashed) and a fan line down from the Jul 08 highs.

But, currency traders are very savvy at harmonics, so most of these targets are well-known; the surprise element might well be muted.  And, I’m not sure how much of an impact a bounce will have on equities.  I realize that sounds a little heretical, but hear me out.

The last major move up by EURUSD was from 1.1876 to 1.4939 over the time span of Jun 7, 2010 to May 4, 2011 — a stunning 25.8% rise.  During that same time, SPX rose from 1050 to 1347, a similarly spectacular 28.3% increase.  We were thus conditioned to see them as moving in lock step.

Since May 4, however, EURUSD has fallen from 1.4939 to 1.2685 — a 15.1% slump.  It represents a 73.6% retracement of the previous rise.  SPX, on the other hand, has fallen a mere 58 points from 1347 to 1289.  That’s only a 4.3% drop for a 19.5% retrace.  Clearly, the step ain’t so locked anymore.

Those who, like me, are of a bearish persuasion, will see this as a negative divergence that will soon be rectified when SPX catches up on the downside.  A 15.3% drop from 1347 would be 1143.   A 73.6% retrace would target 1128.   We could see DX at 82 if the 10-year auction comes in around 1.90%.

Last, remember we’re talking about the Euro’s health vis-a-vis the USD.  If you subscribe to the “least dirty shirt” theory, you’ll see the dollar’s relative strength as a temporary flight to quality that benefits from a lack of good alternatives.   Clearly, the USD has its own issues.  One of these days, the ravenous wolves will notice the other fatted currency barely outrunning its weaker sibling.  

More later.

• MCO moves from a fairly low point (-300) to a fairly high point (225+)
• The backtest is to a fairly high point, say 100 or more
• The pattern develops slowly, over months instead of days
• There’s a converence of patterns in different time frames

In addition, the RSI on the daily chart reached the 61.9 level intraday.  Recall that we were watching for a .886 retracement to complete a Bat pattern as has occurred on each of the previous three big pullbacks.  I’ll be watching to see if it closes at 61.9 or better.

Last, negative divergence — which is almost always present when we get a blow-off top like this — is present in the 60-min time frame, and everything shorter than that, too.

It’s entirely possible we’ll head up to 1307, but even at 1295, we’ve hit all the targets necessary for the alternative Wave 2 formation to be considered complete. 

More later.

ORIGINAL POST:

After several days of virtually no movement, looks like we might finally get a resolution to the pattern.  Recall that since before we labelled the Oct 27 1292 high as the Wave 2 high, we’ve had an alternative high of up to 1307-1313 based on an important trend line that connects May 2 with the July highs.  It’s shown as the red dotted line in the chart below.

It sits at the top of a rising wedge that also happens to coincide with the termination of a bearish Bat pattern playing out on the e-minis.  In the futures, the 1.618 Fib is right at 1307.

We can hit or even slightly exceed 1292 and still see the previously identified harmonic patterns play out.  But, the important issue here is the almost certain reversal with the Crab, the rising wedge, horizontal resistance and the channel midline (red, dashed) all conspiring to put a stop to any further rises.

More later.

We’re bombarded with the gold bugs’ warnings.  If you don’t convert every last cent into the shiny stuff right now, you’ll be ruined.  But, before you run your wheelbarrow of worthless greenbacks down to the local PM dealer, let’s consider the technical picture. 

Many of you have been asking for an update and I haven’t posted about it for a while, so I’m happy to oblige.  Here’s where we left off on September 25:

First, check out the harmonic picture on the daily chart.  GC completed a crab pattern (purple, since 8/25) at the 1.618 extension of the XA leg.  The target was 1570.20, and we just overshot that by 12.

However, there’s a larger Bat pattern (in yellow) at work that started way back on July 1 at 1478.30.  It should extend to at least the .886 Fib level at 1528.40, although it could turn out to also be a crab with a 1.618 extension.  Either is possible with a .50 AB retrace (of the XA leg.)

If I’m crazy enough to try and catch this falling knife (which I’m not) I can look at the RSI for confirmation.  Check the red trend line on the daily chart, just up ahead of the falling RSI.  It would certainly argue for a turn in the very near future.

Since that post, gold did in fact reverse at the .886 reaching 1535 (versus our 1538 target) to complete a Bat pattern (shown in red).  It then completed another Bat pattern (in purple) that is probably going to morph into a Crab.  Here’s the chart:

The point at which one pattern stops and the next begins is actually a Point B in a much larger Crab pattern (in yellow), although it could qualify as a Butterfly if we ignore the dramatic push down on Sep 26.

A Butterfly would extend to the 1.272 or 1.618, at 1358 or 1206 respectively.  A Crab would typically complete at the 1.618 at 1206.  Either would fit with the still-forming Bat pattern (purple) that should complete at the 1.618 at 1368.

There are a couple of other important chart patterns worth noting.  First, GC has been supported by a long-term rising trend line that provided the most recent bounce at year end.

Also,  the July 1 low has acted as the origination point for several fan lines that have heavily influenced GC.  These can be seen as the pink dashed lines below.  Each time one of them was broken, GC fell pretty dramatically.

The back test of this latest break overshot the fan line by a little, tagging the 200 SMA just beyond.  It also nudged the RSI up to a point where it’s hitting serious overhead resistance.

If we bounce off the 200 SMA and RSI trend line and break the long-term price trend line at around 1550 shown on the weekly chart above, we’ll likely complete the Crab pattern — meaning a rapid descent of $250 or even $420/ounce.

 Is the Fed ruining the dollar?  Yes.  Will running the printing presses day and night eventually ratchet up inflation?  Yes.  Will gold be a great way to hedge?  Quite possibly.   But, in the meantime, gold’s not the safe haven you’re looking for.

Good luck to all.

VIX coiling… forming a Bat in a Bat nearing the apex of a falling wedge and the intersection of two major trend lines.  Consider what happened the last time VIX formed a multi-year falling wedge like this — and they weren’t anywhere near as steep.

Financials will lead the way.  They got us into this mess, and they’ll get us right back…into a worse mess.   Unless S&P; comes out and upgrades half of the EZ, XLF is going down.  This is as bearish a setup as I can imagine, with XLF perched in an unbelievably precarious position.

It just completed a Gartley pattern and a rising wedge right at the upper bound of a broadening descending wedge — while also putting in Point C in either a Butterfly or Crab pattern.  Next stop is at least 10.05 — a 25% drop from current prices.

ORIGINAL POST:  12:00 PM

Equities still locked in a tug-o-war, so I’m focused on the EUR this morning  — it completed the latest Butterfly pattern we’ve been watching.   Charting with Harmonics and channels has been incredibly accurate for the past week.  Here’s the short term forecast I posted Monday.

 And, the actual results (I changed the forecast line to red for better visibility.)

So, let’s step back a bit and look at the bigger technical picture.  The following weekly chart shows the history of the Euro – USD relationship.   Euro coins and bills entered circulation in 2002, which just so happens to be a great fan line origination point.  It was trading at the time at around 83 cents.

Over the next six years, EURUSD soared to over 1.60, where it began a huge flag pattern that continues to this day.  Within the flag pattern, distinctive channels have developed.  The impulse moves down have largely been confined to the purple parallel lines, and the corrective moves up have followed the white, dashed lines.

Looking at the current channel down, we can see that it’s been frequently “interrupted” by diagonal corrective waves that follow the exact same slope as the much larger corrective channels.  I’ve called these “diagonals” for purposes of brevity.

It’s happening on a both a large scale and small.  Note that the thin, red diagonals are the same slope as the large, white dashed channels.  If you look closely, you can see what look like little continuation head and shoulder patterns playing out, with the diagonals acting as necklines.  They’ve taken on the appearance of stair steps ever since Oct 27.

Another notable feature of this market is the accuracy of harmonic patterns in predicting future price moves.  The yellow Crab pattern in the middle of the above chart is a great example.  Crabs look like a big “W” and follow a X-A-B-C-D pattern like most harmonics.  Once the X-A leg is established, we look for a reversal (retracement) to a Fibonacci level (indicated by the purple grid in the background.) Here’s a close up.

In this case, the reversal (Point B) came right around the .618 level, which left open the possibility that we’d eventually see either: (1) a Gartley that would extend to the .786 level; (2) a Bat that would extend to the .886 level; or (3) a Crab that typically extends to the 1.618 level.   In this case, that’s 1.2464 — a good 12.5% off the most recent (Oct 27) high.

When harmonic patterns reach their target, we look for a reversal.   Sometimes it’s small, sometimes massive.   In this case, we saw small reversals .01 – .02 back to a previous Fibonacci level (.618), followed by a continuation of the down trend.   Along the C-D leg, however, we’ve seen multiple harmonic patterns unfold, each adding another step to our staircase.

The latest to play out was a Crab or Butterfly that indicated a downside to the 1.618 extension at 1.2723.  We reached that and then some this morning, tagging 1.2696 and an important fan line in the process.

Although we’re still likely heading for the larger Crab target of 1.2464, we should expect a reversal back to a previous Fibonacci level or even back test the diagonal at this point.  A subsequent break of the diagonal — perhaps after forming a little H&S; pattern — should help us on our way to completing the larger pattern at 1.2464.

Note that at that point, we also tag a fan line from 2002.  Remember this chart from above:

Those dashed red lines from 2002 intersect with the lows of our flag pattern and influence what happens going forward.  In previous cases, they provided a bounce of a few cents.  When they were broken afterwards, EURUSD saw a particularly strong downdraft.

So, a bounce at 1.2464 makes perfect sense, as we’ll have completed the large Crab pattern and tagged one of these fan lines.    But, remember, we won’t complete the flag pattern until we reach somewhere around 1.135 — another 10.7% below current prices.  It could happen in a hurry when downgrades are announced for EZ sovereigns and/or the ECB.  

And, of course, there’s no guarantee that we’ll bounce at the bottom of the pattern.  In a vacuum, one would be tempted to see the past six years as the head in a giant H&S; pattern.  But, of course, we’re talking about the Euro in relation to the USD.  And, it’s simply a matter of time before investors notice the smoke coming from that tent as well.

Good luck to all.