pebblewriter

Month: March 2013

  • Close Encounters

    Will today be the day?  Five years since the market finally accepted the reality of the financial crisis, we’re almost back to where we started.

    We had a reversal at the .618 Fib, the .786 Fib (for a Gartley Pattern), the .886 Fib (for a Bat Pattern) and are now approaching a double-top triple-top.

    What will the market find when it gets there?  Will it have scaled its own Devil’s Tower, only to find that the other side falls away just as steeply?  Or, will a giant mother ship with an awesome sound system swoop down and carry it to another universe where debt is irrelevant and short-selling is prohibited?

    Stay tuned.

    The Crab Pattern that begun with the May 2 peak (in white) is only 5 points away from completing.  After that, the double-top looms at 1586.75.

    Just how close are we?

    UPDATE:  10:00 AM

    The markets opened slightly higher, waiting for economic news that came in mixed.  Beating estimates: GDP, personal income, spending.  Missing: Chicago PMI, initial claims.

    Re the PMI, ISM says:  BUSINESS ACTIVITY:  NEW ORDERS: fell sharply after three months of solid gains; PRODUCTION: lowest since Sep 2009; ORDER BACKLOGS: ninth month of contraction in the last year; INVENTORIES: fourth contraction in the last six months; SUPPLIER DELIVERIES: longest in 15 months. BUYING POLICY: CAPITAL EQUIPMENT longest since September 2012; MRO SUPPLIES longest since May 2012.

    Crummy report like that, should be good for SPX 1571 or so. Needless to say, we remain long.

    The big picture for SPX…

    A whole cluster of harmonic targets have been tagged without reaction — so far.

    A close-up…

    UPDATE:  10:35 AM

    I updated the COMP page last night.  EURUSD and RUT coming up.

    Here’s an overview of the patterns at work in SPX.  I realize there’s a lot going on there, but the important completed patterns are:

    • completed Crab Pattern from 1370-1074 (red) at 1553.39
    • completed Crab Pattern from 1474-1343 (yellow) at 1555.57
    • completed Crab Pattern from 1530-1485 (white) at 1559.32
    • tagged LT trend line (yellow, dashed) from 1994
    • tagged IH&S target from Feb 13-Mar 4 (red) at 1565.69
    • tagged the previous closing high at 1565.15

    The as-yet uncompleted patterns are:

    • the small purple Crab Pattern 1.618 at 1579.10
    • the small red Crab Pattern 1.618 at 1576.46
    • the IH&S target from Mar 18-Mar 25 at 1583.17
    • previous all-time high of 1576.09

    Of all of those, 1576.09 is the one that matters.

    The RSI charts are giving higher prices the go-ahead.

    UPDATE:  12:20 PM

    SPX reached 1568.30, in excess of the previous closing high, and is tang a pause here. Look for a backtest of the 1564.90 high and/or the yellow trend line.  I’d use the little red channel as a guide for any intra-day trading.

    It’s currently around 1564.65 and rising at a slope of 8-9 points per session. As drawn, its upper bound crosses 1576.09 at the closing bell.  Would we have it any other way?

    UPDATE:  3:15 PM

    SPX’s steady advance has had all the drama of a flossing exhibition.   We just got the first little dip outside the channel I drew over 5 hours ago.   This, along with a couple of members’ questions, prompts me to discuss my game plan.

    continued for members...

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  • Charts I’m Watching: Mar 27, 2013

    Note:  I updated the charts for NDX and NYSE last night.  I’ll post EURUSD, DJIA and RUT later today.

    *  *  *  *  *  *  *  *

    Another day, another gap opening…

    As we discussed late in the session yesterday, SPX was smacking into resistance on the 60-min RSI chart.

    The futures are off big on more fears out of the eurozone and euro weakness.

    But, I wouldn’t necessarily chase the downside here.  For those who shorted on the close yesterday, I’d take profits at around 1550-1551.

    UPDATE:  9:45 AM

    SPX bounced at 1551.90, good enough for me.

    But, keep an eye on the 15-min RSI.  This TL should be a good guide.  It was slightly broken a few minutes ago, but the bounce off of 1551.90 brought it back in line.

    Stops around 1550 ought to do it for a long position here.  Thankfully for the bulls, the NAR reports pending home sales at 10:00AM.  I can’t remember the last time the world’s most optimistic economists delivered bad news.

    UPDATE:  10:05 AM

    Pending home sales were off 0.4% from last month (versus Briefing.com’s +2.0% estimate), but up 8.4% from Feb 2012.  The slowdown is being blamed on lack of inventory and capital for builders.  The market is hanging in there so far, so I guess we’re focusing on the 8.4% number….

    UPDATE:  10:25 AM

    EURUSD should get at least a bounce here, lending support to a last spurt for SPX.  Note it has reached the .886 retracement of the run up from Nov-Feb (1.266 to 1.3710.)

    UPDATE:  11:55 AM

    The 1551.90 low held nicely, and SPX is off only a little over 3 points at present.  We should get a little pullback here, as we’ve reached the .786 retracement from yesterday’s high (small white pattern.)

    Just noticed that each of the recent bottoms, when taken as the starting point of a measured move, points to the same place: 1566-1569.  A measured move is essentially an A-B-C move where the C wave is the same as the A wave.

    In most cases, the B wave is a Fibonacci retracement of the A wave (.382, .500, .618, etc.)  In a wildly gyrating market such as we’ve had since Mar 15, the retracements run bigger (.786 and .886.)

    UPDATE:  3:30 PM

    SPX continues to go our way, could turn positive any minute.  Will it finally push through today, or is this another fake out?

    continued for members… (more…)

  • Charts I’m Watching: Mar 26, 2013

    Big Picture for the USD:

    Daily RSI fell back into the channel recently broken out of, and is backtesting the white midline in the midst of a fairly steep decline — seen better in the closeup below.  All this, while DX has been rising.

    RSI and price are finally on the same path — a moderate correction before taking a shot at the midline of the big white channel at the intersection of the purple 1.272 and the white .786 at 85.4-85.7.

    This all fits well with our equity forecast.  continued for members… (more…)

  • Charts I’m Watching: Mar 25, 2013

    With Cyprus saved, the sanctity of the EU intact, and a US budget deal passed, we can all go back to watching the market ratchet up 10 points/day, right?

    Here’s the fundamental problem.

    continued for members… (more…)

  • Happy Birthday to Us

    Today marks one year since pebblewriter.com opened its cyber doors for business.  Over that year, I’ve written 351 posts with around 526,500 words (War and Peace has 560,000) which is the equivalent of about 2,100 double-spaced pages.  I’ve saved 5,976 charts (1.05 GB) of the 9,375 constructed. ThinkorSwim is thinking about naming a server after me for the thousands of drawing sets I’ve saved.

    There have been some great calls and some not so great calls.  I almost always get the direction, price or timing right.  Once in a while, I get all three (I’m usually happy with two out of three.)  And, once in a while, I really stink up the joint.  My goal is to get most of the points most of the time, which we’ve done reasonably well.

    SPX major moves since Mar 22, 2012:  715 points (1422 down to 1266, 1266 up to 1474, 1474 down to 1343, 1343 up to 1563.)  It’s worth about 9.91% plus dividends for someone who bought and held.  Total pebblewriter.com results:  1,573 points for 113% (thru Feb 28.)

    I had no idea when I first started down this path where it would lead. In 30 years of following the markets, I never thought it possible to time the daily ups and downs, much less the major moves.  Then, I stumbled across Harmonics and came up with the idea of combining them with Chart Patterns and technical analysis and… here we are!

    It’s been a lot of hard work, but a lot of fun, too. I’m excited about the managed fund in the works and am working hard to make it a reality. Thanks to all of you who have written to express your interest.  I will have some updates for you next week.

    And, thanks to all those who have completed their questionnaires already.  If you haven’t, please take the time this weekend.  As a 1 year-old, we have plenty of room to improve.  I know about some of the needed improvements, but I’m picking up a lot of great ideas from perusing your comments.

    Finally, this site wouldn’t exist without you and your support of my research.  To all who have been a part of the journey, thank you.

    Michael

    *  *  *  *  *  *  *  *

    ORIGINAL POST: 9:35 EDT

    SPX has bounced back nicely and is facing its first important test of the day here at the intersection of the top of the falling channel formed yesterday and the rising purple channel .25.  We remain long from Wednesday.

    Don’t be surprised if we see some hesitation here.  Bulls obviously need to see a break out in order to fulfill the promise of the purple Crab Pattern.  Bears would just as soon see the rally fail here and now.

    As I’ve detailed already, there are many reasons for the market to take a big ol’ dump.  SPX has barely reacted since completing several large, important Harmonic Patterns.  But, it seems to be positioning itself for a run at 1576.

    Either way, I’m fairly certain we’re in for lots of volatility.  I’d advise anyone with a weak stomach or without the ability to closely monitor their portfolio to consider tight stops and/or hedging.

    continued for members… (more…)

  • Anatomy of a Top: 2000

    The 2000 top shows just how “messy” tops can be.  Here’s the finished picture in perfect hind-sight.  It’s a very crowded chart, but every single pattern had a say in how the top unfolded.

    SPX had zoomed from 442 to 1478 in about 5 years, a not-too-shabby 234% gain for an annually compounded 27%.

    Once SPX broke out of the falling purple channel, it had “permission” to pursue several harmonic patterns in the works.  SPX shot up 66 points in that one day — blowing through every Fib level between .618 and 1.000.

    It finally came to rest at 1458, completing a Bat Pattern at the purple .886.  But, the small white 1.272 was just above at 1477, as was the rising purple channel midline and the 1.272 from a much larger pattern seen below.  An IH&S target waited at 1497 – tantalizingly close to a nice round number of 1500.  And, the all-time high of 1478 from two months earlier beckoned.

    SPX got up to 1477.33 before reacting, falling to 1466 over the next two days.  Close, but not quite.  Someone watching closely might have noticed the Flag Pattern it constructed, targeting 1562.  Someone else probably pointed out the biggest Crab Pattern target of all — the 1.618 extension of the 13% correction from 1420 to 1233 from Jul-Oct 1999.

    On Mar 21, 2000 SPX shot up through the channel midline, the cluster of Fibs around 1477 and, importantly, the 1478 high and raced up toward those higher targets.

    On Mar 24, it reached 1552.87, which cleared the IH&S target at 1497, the purple 1.272 at 1519 and the last remaining Crab Pattern at 1535.  What ultimately stopped it?  The .75 line from the big purple channel dating back to Jul 1999 — almost to the penny.

    Total move: 17% and 227 points in 20 sessions.  Can it happen again?  Stay tuned.

  • Charts I’m Watching: Mar 21, 2013

    ORIGINAL POST:  9:25 AM

    The EURUSD is still trying to change trajectories (purple channel to red), but hasn’t been able to break out yet.

    The dollar is similarly facing a change in direction if the red channel can hold.

    Judging from the futures, SPX is set to react off the neckline and TL we’ve been talking about for several days. Though, daily RSI still shows a little more upside potential.

    I’ll play along on the downside, but will be looking to see if it gains support at the purple channel midline.

    UPDATE:  09:23 AM

    That should do it for the short side, going full long again here at 1550.7 with stops at 1548ish.  Always fun, trying to catch a falling knife…

    The 15 min RSI shows support with SPX here at the .500 Fib.

    Fresh charts in a few…

    UPDATE:  9:50 AM

    If SPX reverses here, it leaves a much nicer right shoulder for the IH&S we discussed yesterday.  And, the revised purple channel looks more sustainable.

    Existing home sales, Philly Fed and Leading Economic Indicators are due out at 10 EDT.

    UPDATE:  10:01 AM

    Data better than expected on Philly Fed and Conference Board Leading Indicators, a miss on NAR existing home sales.

    The leading indicators look a lot more positive than the current, which barely moved.

    No charts for the NAR, but sales came in at 4.98 million vs expectations of 5.0 million.  Inventory increased from 4.3 to 4.7 months, which flies in the face of the most commonly heard argument that a shortage of product was driving prices higher.

    There are no doubt pockets of actual product shortages, just as there are many with a huge excess.  But, the price increases have more to do with math than with supply and demand at the moment.

    The NAR, like everyone else, reports average (median) prices.  The entire market could remain at a standstill, but if the bottom 5-10% (in price) of houses are bid up, the average price increases.  It wouldn’t affect the average house, just the average price of all houses.

    That’s why many average homeowners remain underwater and unable to sell their houses for the asking price despite the “good news” from the NAR/MSM.  So, what’s happening to bid up prices on the low end?  Enter our friends at the Fed.

    As Bloomberg reported a few days ago, big institutional money is chasing single-family homes.  With the stock market at all-time highs, bonds at 2% and much of the rest of the world in questionable economic condition, the new bubblicious investment is housing.

    Blackstone, which put $3.5 billion to work buying 20,000 houses, just increased its credit line by another $1.5 billion.  Colony Capital owns 7,000 units and is raising another $2.2 billion.  American Homes-4-Rent owns 10,000, and is buying up more.

    Institutions represent a large percentage of the buyers in many markets which have rebounded the most:  Miami (30%), Phoenix (23%), Charlotte (21%), Las Vegas (19%.)   But, will the dead cat bounce translate into profits for investors?

    As fools rush in, rents are falling in many of the markets in play — making it tough to derive much cash flow.  Colony Capital will be buying another $2.2 billion worth of houses, even though their current portfolio occupancy is only 53%.  In an environment of 2% 10-year treasuries, the 4-5% cash-on-cash yield might look pretty good — especially coupled with some degree of inflation protection.

    I can’t help but think this is another big bubble in the making — courtesy of the Fed’s ZIRP.  Even after 5,000,000 foreclosures since the 2006 peak, new delinquencies continue to surface — including a steady contingent of older, more seasoned loans as this LPS chart shows:

    Global Economic Intersection ran a nice piece Tuesday posing a thought-provoking idea:

    “The housing market is therefore the hostage of economic growth and not the signal of economic growth.”

    The evidence of yet another liquidity-fueled, lack-of-any-better-alternatives bubble is here.  Investors must decide whether to button their chin straps and get in the game, or watch from the sidelines as the greater fools slug it out the red zone.  Stay tuned.

    UPDATE:  2:05 PM

    With the move down through 1548, I gave SPX a little more wiggle room to the .618 of the last move up at 1547.35.  It bounced, but couldn’t hold, prompting me to take a short-term short to cover my core long position.

    I’m closing the short here at the .786 of 1543.75 for a small gain.  More charts, revised channels coming up.

    The bullish case needs 1546.27 to hold firm.

    UPDATE:  2:30 PM

    Hard to keep up with charting this morning, with things moving rather quickly and dropping a little further than I expected.  Looks like the .786 will hold, but let’s make that the new stop.

    The 60 min RSI has found midline support at a potential falling channel (purple) and a rising channel which isn’t as convincing as I’d like (yellow.)

    UPDATE:  5:30 PM

    Weakness everywhere around the close.  I’m going to lay out the bullish and bearish scenarios, but from a chart pattern standpoint, this is a toss-up.

    Taking a look around the indices, I see a lot of indices at make or break points.  I just revisited RUT, a great case in point.  Drawn from the 98 and 02 lows, one channel makes a great case for the upside being done.

    The daily chart CU shows just how precisely we’ve tagged the top of that channel and the TL’s the make up the rising wedges.

    Drawing the channels off the 98 and 09 lows, however, shows RUT has already pushed above and backtested the channel top (in purple.)

    Throw in some Harmonic Patterns and things get really interesting…

    There was a big reversal at the .786 of the 2007-2009 crash, so we should expect a Butterfly Pattern to play out at the 1.272 of 996.26, right?

    But, look at all the TL’s of resistance we’d have to push through first…

    Besides the trend lines, the purple 1.618 hasn’t really caused a reaction yet.  The white 1.618 has, but not much of one.  And, note that the yellow pattern calls for a run to the 1.618 at 1033.  Mixed signals, to say the least.

    More in the morning…

     

     

  • Charts I’m Watching: Mar 20, 2012

    The ECB will do “whatever it takes”, which I guess now translates into strong-arming the Russians into bailing out Cyprus.  Still no break out on the EURUSD, though.

    It makes sense to play along with the upside, but keep stops close.  It’s questionable whether this rally will have any legs. The dollar looks like it’s finding support here.

    UPDATE:  09:33 AM

    Looks like a pop and drop by SPX standards.  That was the .786 of the move down from 1563.62 (purple) and the .886 of our proposed path to 1576 (white.)  Full short again, stops at 1561ish.  Revised charts in a few minutes…

    UPDATE:  09:55 AM

    The daily chart tells the picture well.  I need to redraw some channels, but the prominent features are:

    • large 1474-1343 Crab Pattern completion at 1555.57 (yellow)
    • large 1370-1074 Crab Pattern completion at 1553.39 (red)
    • small 1530-1485 Crab Pattern completion at 1559.32 (white)
    • small rising wedge broken at 1563 top
    • long-term TL and channel top at 1560

    UPDATE:  11:10 AM

    SPX continues to position itself for a run at 1576.  The 5-min chart shows a small potential Crab Pattern with a 1.618 at 1577 and a Flag Pattern targeting 1576.

    It has broken back above and backtested the purple channel midline and retraced nearly .886 of its drop from 1562 and a little more than .786 of the drop from 1563.62.

    While it’s positioned for 1576, there is no more certainty than when we first broke 1555 on the Mar 14 overnight ramp job.  The large, bearish patterns listed above have still not produced the kind of sell-off they normally do.

    And, it’s all because of the cheerleaders’ determination to be able to tout a new all-time high for the S&P 500.

    In addition to the little Crab Pattern (purple) that targets 1577 and the flag pattern targeting 1576, there’s an obvious effort to construct an IH&S pattern targeting 1580.  It could benefit from a lower right shoulder, but bulls must beware of crossing back beneath the purple channel midline.

    The S2 shoulder isn’t quite legit, BTW, as the neckline doesn’t quite connect on the left side.  But, the S1 shoulder is quite a ways down there.  So, if the pattern plays out, be prepared for some serious chop.

    UPDATE:  1:00 PM

    With the FOMC announcement a little over an hour away, let’s resume our chat about the big picture.  If it seems like we’re “lost in the reeds” as one reader so aptly put it, it’s because we are.

    The large Crab Pattern completions promised a good-sized dump last week at 1553/1555.  Instead we’ve inched higher.  Why?  These patterns completed in the middle of harmonic no-man’s land: the gap between an .886 retracement and a double-top.

    The .886 retracement (of the 1576-666 crash) produced a 9% reversal back on Sep 14.  Since then, SPX came screaming back to retake the 1576 all-time high — but slammed into the Crab Patterns and a very important channel line along the way.

    Now, it doesn’t know what to do.

    Double tops usually produce reversals, too — sometimes meaningful ones as we found out on October 11, 2007, when SPX scooted up past the 1552 top from 2000 by a whopping 24 points before dropping 58%.

    The 2000 top itself shows just how “messy” tops can be.  Here’s the finished picture in perfect hind-sight.  It’s a very crowded chart, but every pattern on there had a say in how the top unfolded.

    Once SPX broke out of the falling purple channel, it had “permission” to pursue several harmonic patterns in the works.  SPX shot up 66 points in that one day — blowing through every Fib level between .618 and 1.000.

    It finally came to rest at 1458, completing a Bat Pattern at the purple .886.  But, the small white 1.272 was just above at 1477, as was the rising purple channel midline and the 1.272 from a much larger pattern seen below.  An IH&S target waited at 1497 – tantalizingly close to a nice round number of 1500.  The all-time high of 1478 from two months earlier beckoned.

    SPX got up to 1477.33 before reacting, falling to 1466 over the next two days.  Close, but not quite.  Someone watching closely might have noticed the Flag Pattern it constructed, targeting 1562.  Someone else probably pointed out the biggest Crab Pattern target of all — the 1.618 extension of the 13% correction from 1420 to 1233 from Jul-Oct 1999.

    I don’t know what the catalyst was, but on Mar 21, 2000 (that date sounds awfully familiar) SPX shot up through the channel midline, the cluster of Fibs around 1477 and, importantly, the 1478 high and raced up toward those higher targets.

    On Mar 24, it reached 1552.87, which cleared the IH&S target at 1497, the purple 1.272 at 1519 and the last remaining Crab Pattern at 1535.  What ultimately stopped it?  The .75 line from the big purple channel dating back to Jul 1999 — almost to the penny.

    Total move: 17% and 227 points in 20 sessions.  Could it happen again?

    continued for members… (more…)

  • Containment and other Fairy Tales

    Friday marks the one-year anniversary of the new pebblewriter.com (I can finally stop calling it that!)  Despite all the twists and turns, it’s been a pretty successful year [see: RESULTS.]

    But, I’m always on the lookout for ways to make it better.  So, please take a moment to share your thoughts when the 1st annual pebblewriter survey hits your inbox. 

    It’s just a few quick quick questions regarding pebblewriter.com and a managed fund under consideration.  If you’d like to be on the mailing list once information becomes available, just CONTACT ME and tell me “put me on the list.” 

    *  *  *  *  *  *  *  *

    Just how top heavy is the market?  According to a study posted by Albertarocks, complacency is at an all-time high.  The SPX:VIX ratio just tagged 138.37, topping even 2007’s peak.  To give you an idea how big a deal this is, that’s almost 3 standard deviations above the 30-month moving average.

    This is the lap into which the Cyprus mess was dropped. With exquisite timing, the euro-bumblers have unwound all the feel-good kumbaya momo generated by Draghi who, we were promised, would do “whatever it takes.”

    Never fear, though.  According to a note Goldman Sachs put out earlier: “…assuming the package is passed, the direct ramifications from Cyprus will likely be contained.”

    Containment.  Didn’t we hear that word a lot when the Fukushima reactors were melting down… and when the London Whale was blowing up?  It reminds me of language back in late 2007, this from The Guardian:

    The Wall Street bank Lehman Brothers dodged the worst of the credit crunch to achieve a 5% rise in annual profits to $4.2bn (£2.06bn), driven by tight risk control and impressive earnings from global equity trading.  A strong performance in the first nine months offset a 12% drop in profits in the quarter to November, when fears over the sub-prime crisis returned.

    Chris O’Meara, the bank’s global head of risk management, said: “Although we have not emerged unscathed from the recent market turmoil, we believe we have done a good job in managing our risks.”

    An analyst…said: “For many investors, it is not necessarily about beating expectations but the lack of skeletons in the closet of fixed income. Lehman seems to have fewer skeletons.”

    The dollar is consolidating at the target level identified last Friday and is struggling with whether to continue in lock step with US equities or revert to its more traditional role (of late) as the risk-off instrument of choice.

    While, the EURUSD — which had made a valiant effort to break out of a rapidly declining channel — is again testing its recent lows.

    Not to worry, though; the FOMC meets today and tomorrow and is certain to have the situation, well, contained.

    SPX almost reached the .786 retracement of the drop from 1563.62 yesterday before falling back to support at the purple channel midline.  Bulls need a strong move above 1553-1555; bears need a drop through that midline — currently around 1550.

    Anyone playing the bounce from yesterday’s 1545 low would do well to keep an eye on the  channels for signs of a breakdown.  I remain short from 1561, but won’t rest easy until we can score some lower lows.

    Yesterday’s reversal just shy of the .786 opens up the possibility of a Butterfly Pattern to the 1.272 or 1.618 extension of the recent 1563 – 1545 drop.  The 1.272 Fib is at 1568.65 and the 1.618 is at 1575.05 — one point below SPX’s all-time high.

    It’s not that the market should trade through 1576, but the opportunity might prove fleeting and the target too irresistible for TPTB.

    UPDATE:  12:00 PM

    Finally getting some action — SPX just broke beneath yesterday’s 1545 low.  We’re seeing a bounce on the 1.272 of the drop from 1530 to 1485, but it will probably only reach 1545 as the market continues to drop.

    Now that things are loosening up, I’ll hazard some more specific downside targets.

    continued for members… (more…)

  • Mad Men, Liars and Thieves

    The surveys are coming!  Check your inbox later tonight for a survey regarding pebblewriter.com and a new managed fund under consideration.  Not yet on the mailing list?  CLICK HERE.

    Friday marks one-year anniversary of the new pebblewriter.com (I can finally stop calling it that.)  Despite all the twists and turns, it’s been a pretty successful year [see: RESULTS.]

    But, I’m always on the lookout for ways to make it better.  So, please take a moment to share your thoughts when the survey hits your inbox.  Thanks.

    *  *  *  *  *  *  *  *

    It’s hard to believe the folks running the big show in the euro zone could be so stark-raving mad.  Raising taxes on countries with 25% unemployment seems positively brilliant compared to the idea of confiscating 10% of bank deposits — especially those that are supposedly insured.

    Get ready for the media interpreters who assure us “it’s only Cyprus” —  which reminds me an awful lot of “it’s only Bear Stearns” or “it’s only Lehman.”

    The issue, of course, isn’t the size of the depositor base in Cyprus banks.  It’s the effect this action will have on depositors in Portugal, Spain and Italy.

    By now, even the most clueless depositors have to be wondering just how safe their deposits are.  The smart ones already know.  And, the brilliant ones moved their money a long time ago.

    This bone-headed action also calls into question the ECB’s willingness and/or ability to support troubled nations/banks.  If they can’t float a lousy $13 billion to bail out Cyprus, how will they react when other, larger systemic risks pop back up?

    And, last but certainly not least, what effect will this action have on the $700+ trillion derivatives market?  It’s a spiders nest of complicated agreements whereby one party guarantees another that credit quality/interest rates/etc. won’t slip past a certain level.

    These private contracts are bought and sold countless times, to the point where no one usually knows the true exposure of any given player until it’s too late.  When a bank fails, it’s very difficult to discern how many counterparties will be affected.  It quite rightly shakes confidence in the entire system.

    Cyprus is a reminder that the euro zone is not “fixed.”  It’s a reminder that much more is needed to fulfill the promise of “whatever it takes.”  And, it’s a reminder that the Fed and the ECB either don’t have as much control as they’d like us to think, or are losing interest in preventing every little hiccup along the way.

    *  *  *  *  *  *  *  *

    The dollar may have just completed the transformation we discussed at length Friday — reverting back to the risk-off safe haven to which we’re accustomed.

    The smallest rising wedge on SPX has clearly broken down and should now try to establish a channel something like the one drawn below. Look for a playable bounce here around the midline between 1543.43 and 1546.

    UPDATE:  10:10 AM

    We got the bounce at 1545.13.  If the bears can keep the trend going, it should fail before the next higher channel line — currently around 1558 — or the yellow TL up at 1560.  But, of course, there’s no reason it has to be more than 1553.39 (the 1.618 extension of the 1370-1074 correction in 2011) or 1552.19 (the .382 retracement of the move down from 1563.32.)

    As legitimate as the little white channel above appears, it’s merely a conjecture.  A pitch.  If Cramer & Co. can convince the average small investor to ignore the implications of Cyprus and embrace a market selling near all-time highs, the channel is proof of the absence of risk in the markets.

    It coincides nicely with the midline of the larger purple channel that’s guided SPX’s upside since November.  This morning’s dip looks like nothing more than a successful test of the midline.

    Here’s a close-up, showing the tag of the .236 Fib (red) and slight push below the purple midline.  Important for the bullish case: (1)  the white 1.272 is even still intact, and (2) prices are re-testing the 1.618 Fib at 1553.39.

    If SPX pushes higher than 1553.39, it reinforces the idea that the Crab Pattern set up by 2011’s plunge from 1370 to 1074 is going to fail (8 points would be a failure.)  If it drops below, then the push up to 1563 can be characterized as a momentary blip of irrational exuberance.

    The technical elephant in the room, of course, is whether or not SPX will continue to take a run at the previous high of 1576.  It’s not as though bulls will throw in the towel over Cyprus.  Take the move down from 1563, for instance.

    If this bounce from 1545 retraces all the way to the .786 at 1559.66, it will have set up a potential Butterfly Pattern that targets 1575.   Look for the little white channel to turn by the .500 (1554.38)  in order to construct another leg up.

    UPDATE:  1:25 PM

    Where does this morning’s dump fit in with yesterday’s LT charts from the last post [see: Do or Die]?

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