David Tepper was right.  There are only so many places in this world in which one can invest.  That will be true even if the Fed tapers back their $85 billion per month rolling bank bailout.

Tepper’s comments on May 14 helped spark a rally from 1633 to 1687 over the following week — at which point investors decided that it might matter after all.  SPX plunged to 1598 over the next two weeks.

Through yesterday, SPX had recovered a Fibonacci .618 of those losses — despite Bernanke’s apparent confirmation that tapering is coming sooner or later, and President Obama’s apparent announcement that Bernanke’s time is up, and despite turmoil in practically every other market around the world.

With the FOMC statement only 5 hours away, should we fear the taper?  Much of the market’s gains over the past 4 years have come from Fed intervention.  So, simple logic would suggest that the withdrawal of the mechanism that blew the bubble would at least allow the bubble to deflate a bit.

But, where would money go?  It’s not as though there’s an alternate universe with vast stores of undiscovered,  undervalued assets.  That’s the trouble with QE — the money has gone everywhere, and overpriced just about everything.

Even if the Fed disappoints today, money will eventually come back to the markets — at whatever price that may be.  If I were David Tepper, with a $15 billion hedge fund and $7 billion of my own to manage, I would probably view the world the same way.

But, those of us with slightly smaller balance sheets would do well to get out of the way – or even short the market.  It was true when Lehman and AIG went broke.  It was true when S&P downgraded the USofA as SPX was completing an analog.  It was true when SPX completed Harmonic Patterns in April [here] and September [here] of 2012… you get the picture.

UPDATE:  9:34 AM

We remain short from 1653.50 yesterday based solely on the tag of the .618 retracement (of the drop from 1687 to 1598) which happened to intersect with several other channel lines.

SPX completed the Inverted Head & Shoulders Pattern (in red, above) we’ve been expecting by finally closing above the neckline yesterday.  The pattern targets 1673 — near the 1.618 extension of the red harmonic grid and the .886 of the white.

It’s not unusual for IH&S Patterns to backtest their necklines, which in this case is down around 1642 — also the location of the small purple channel’s midline and the next lower Fib line on the white pattern: the .500 at 1642.71.

BTW, several members are fondly remembering Sep 14, 2012 when — the day after the FOMC announced QE3 — SPX ran up and completed a Bat Pattern at the .886 retracement of 1576 to 666.  In addition to raining on Bernanke’s parade, it provided a fabulous shorting opportunity [see: The World According to Ben.]

While a disappointing FOMC release could certainly send the market into a tailspin, there is no comparable harmonic pattern currently in the works other than the aforementioned .618 tag.  Markets often reverse at the .618, but corrective waves more frequently reverse at the .786 or even the .886 Fib levels.

UPDATE:  10:26 AM

Speaking of Fibs, SPX just arrived at the .618 of its drop from 1654.19 to 1646.94 — also backtesting the top of the grey channel.  This, or the .786 at 1652.64, would be a natural place for a reversal of the bounce from 1646.

Of course, there’s no guarantee that the drop to 1646 wasn’t the full extent of the drop.  A push back through 1654.19 would be cause to revert to a long position.

A quick hat tip to Airyk, who asked about the potential Butterfly Pattern at the 1.272 extension on the red grid at 1659.  Please note it would coincide with the white .707 Fib (1661.12.)  What’s even cooler, though, is that it happens to intersect with the purple TL from the 1994/2002 lows at…drumroll please…2pm EDT (as in when the FOMC statement is released.)

 

With a few hours left to go, we’ll resume yesterday’s discussion about the big picture — including a quick look at DX and EURUSD.  I’ll announce on this page when they’re posted.

BTW, one interesting scenario I’m looking at is a drop to the white .382.

It would make for a nice C=A corrective wave — without busting the rising white channel — for the bulls, and would set up a Bat Pattern down to the .886 at 1633.06 (the bottom of the small purple channel) for the bears.

It’s even pretty darned close to the large purple channel .25 line.  Something for everyone!

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Lots of warning signs this morning.  The futures are absolutely flat at the moment.

The USDJPY is backtesting our new yellow channel midline after having completed two large H&S Patterns.

I’ll take a short position on the opening, with stops around 1644.  I’d like to see if SPX can push up through its neckline, or whether it again acts as resistance.

UPDATE:  9:41 AM

I show two small rising channels fighting for control of the near-term results: the white and purple.  Both have room to the upside, but both also offer interim resistance — as does the falling grey channel — which is an excellent fit as a corrective influence.

The small red harmonic grid shows a potential Butterfly or Crab Pattern down to 1617 or 1610, but it would bust at 1646.51.

UPDATE:  10:14 AM

SPX looks like it’s breaking out.  I’ll switch to the long side here at 1643.40 for a likely bump up to 1650-1653 — if it can break through 1646.50.

There’s a very good chance SPX will bounce around in the vicinity of the neckline now that we seem to be caught in the tractor beam of tomorrow’s Fed announcement.

The IHS Pattern is quite bullish, but confirmation requires that SPX close above it.  A break through 1646.50 would be a great start.  The next resistance is at 1648.69, then our interim target of 1650-1653.

UPDATE:  11:40 AM

SPX just breached the 1648.69 high, so there is little in the way of upside resistance from a harmonic standpoint.

We could see a reaction here at 1651-1653 — possibly as far back as the neckline at 1642. So, set your stops accordingly.

I’ll try a short-term trade here with a short position at any break through 1650, tight stops at 1650ish.  This might well be premature, as the white .618 is just above at 1653.20.

I started to review the bigger picture yesterday, but was interrupted by the late session volatility.  Let’s pick up here where we left off.

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Note to members:  I have received responses from almost everyone regarding the mailing list for the new fund in the works.  If you would like to receive an accredited investor questionnaire and future updates on the fund as they come available, please contact me.  I will update the list tonight and do my best to respond to everyone by Tuesday, June 18.

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The futures are pointing up. I’ll go long on the opening, but I’m looking for a reversal at the neckline (about 1641) of the IH&S we’ve been tracking.
For seven months, now, SPX has shot up through a steep channel — tacking on over 300 points since its 1343 low last November.

Including the November reversal itself, SPX has bounced off the bottom or the .25 line of the channel 4 times prior to June 2013.

Each time, the bounce was vigorous — jumping up into not just the next higher level of the channel, but two levels higher, and with little hesitation.

This time, SPX didn’t just hesitate.  It came right back down and bounced off the bottom of the purple channel a second time.  We can characterize that as a successfully passed test.  We could also say it’s a testament to the growing influence of the bears.  But, it was different.

The reversal off the recent top wasn’t terribly difficult to anticipate.  Seemingly every talking head on the boob tube was calling for a 5% correction, and it did have a very “engineered” feeling about it at times.

Before the market opened on May 21 — the day I first called the top [a day early, see: If It’s Tuesday] — I wrote:

…we could be nearing the beginning of the fourth downturn, with a low to come around June 3-4.  Could it be more than a whopping 4%, or is that all that’s programmed in?

• -4.4% over six sessions in late December 2012
• -3.1% over four sessions in February
• -3.9% over five sessions in April 2013

When SPX reached our target later in the day, I posted a forecast showing a drop to 1600.  In the end, we reached 1598 on Jun 6.

Without getting into a metaphysical discussion about greater forces, etc., is the market really that predictable?  Buy and hold types argue that owning a well-diversified portfolio of solid companies with good balance sheets and smart management is a good way to make money in the market.

I can’t argue with that.  In a constantly rising market, it makes perfect sense.  But, is it necessary to ride out every downturn along the way?  Why not profit from them, instead?  Why not keep an eye on moving averages, channels, harmonic patterns, analogs, etc. and manage your exposure accordingly?  It sure hasn’t hurt our results.

Consider the past 20 years.  Wouldn’t it have been nice to reduce exposure or even go short during the crashes of 2000-2002 or 2007-2009?  It’s something to think about the next time someone tells you that shorting is too risky.

Our purple channel looks significant even against the backdrop of past 20 years. It levitated SPX right up through the midline of the yellow channel this past New Years Day, when many patterns called for a reversal (holiday week, low volume ramp job on the fiscal cliff “solution” – don’t get me started!)

It broke the pattern of SPX dropping three rungs on the channel and regaining two (the next drop would have been out of the channel.)  But, note that every single previous move through any of the channel lines was followed by a backtest of some sort.  There were zero clean slices through — up or down — without some sort of reaction.

I can’t imagine that this one will suddenly break the mold.  When it happens, it will announce itself by doing something out of the ordinary, something different.  It will almost certainly involve the breakdown of a channel…maybe even our purple channel.

Stay tuned.

UPDATE:  9:40 AM

Reached the neckline, taking a short position here at 1641, stops at 1642.

It’s not that I don’t expect it to complete, just that these patterns usually struggle at bit at the neckline itself.

UPDATE:  9:45 AM

Just tagged our stop, so I’ll switch back to the long side.  The next serious resistance isn’t until 1650, though we should expect a back test of the neckline at some point.

Our previous resistance — the neckline at 1641 — is now our support.  So, 1640ish stops make sense.  Don’t be surprised if SPX closes just below or at least near the neckline in advance of the Fed policy statement (due out Wednesday at 2pm ET — at which time the neckline should be about 1641.60.)

Recall that the last time Bernanke had anything to say about QE, the market began the 89 point slide discussed above.  See his prepared remarks to the Joint EconomicCommittee here.  There had been plenty of talk about QE ending or tapering before, but this time Bernanke seemed a little more serious about the idea.

This one is pretty easy:  if Wednesday’s news amps up fears of tapering, look for a sell off.  If, instead, Bernanke grins and yells “psych!” then it’s probably off to the races again.  Since the market seems intent on doing nothing until then, we’ll examine what either of those eventualities might mean.

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We started yesterday with a warning about SPX closing below a TL connecting the two previous lows on the channel that’s guided it higher since November 2012.  Apparently, someone got the memo.  Because, the rebound was quite strong.

In rummaging around various investment blogs yesterday, I came across expressions of disbelief, dismay and bewilderment.  How could this be, especially in light of the continuing meltdown on the Nikkei?  Here’s how:

Yes, the channel got tilted just a bit. And, the SMA 50 was tested a second time in a matter of days.  But, we shouldn’t be bewildered over a market’s willingness to simply continue doing what it’s been doing for seven months straight.

What should concern investors is the fact that the channel bottom was tested just three days after the previous test.  There’s no rule that says this spells disaster.  But, it’s a change from the pattern.  And, it’s always smart to be alert to changes.

Combined with the other warning signals we’ve been watching, it means we should maintain heightened awareness — especially as we approach natural turning points such as key fib levels and chart patterns (channel lines, IH&S patterns, etc.)

I also keep an eye on currencies, which haven’t signaled a reversal yet.  We would normally expect to see the dollar break out or the EURUSD break down in the event of a big decline in US equity prices.

And, as we discussed at length yesterday, USDJPY closed back above the H&S Pattern neckline that might have spelled a continuing decline.  Disaster averted…for now.

But there’s a key Fib level and IHS target at 1640 — just above yesterday’s high of 1639.25.  So, we could see a pullback this morning, but perhaps not until after the 1640 tag.

UPDATE:  9:45 AM

SPX just backtested the little red midline.  I’ll dip my toes in the water here at 1635 for what should be a 5-6 point bump up to 1640.

SPX clearly got ahead of itself in yesterday’s final 30 minutes or so. So, I’ll set stops around 1635.  I show the bottom of the red channel around the light blue .618 at 1632.21.

We have to either break out of the red channel again, or wait for 1640 to come back into range.  Shouldn’t take long.

UPDATE: 10:04 AM

Just tagged our target, so will revert to the short side here at 1640.80.  Target: 1620-1627.

From the PPI data released earlier…  We can see that finished goods prices increased substantially in May, especially for the essentials of food and energy.

But, take a look at the increases for food and energy on the intermediate report (+1.1% and +0.5%) and especially the crude report (+2.1% and +5.0%.)  And, these are the seasonally adjusted massaged numbers.  We can only imagine how bad the real data is.

Those whopping increases are either going to squeeze corporate profits or be passed along to consumers who, judging from the decline in Univ of Michigan Consumer Sentiment  (84.5 to 82.7), are probably already feeling the squeeze.

Higher prices — aka inflation — should mean additional pressure for the Fed to taper or end QE.  Just the expectation that it will should be enough to send the market down here as expected.

UPDATE:  10:55 AM

SPX is down about 10 points since we shorted.  Technically, it’s enough of a shoulder to set up the IH&S we expected (in red, yesterday’s 1:45 update.)  So, keep your stops where you’re comfortable. Personally, I’d like to see SPX reach the .500 retracement of yesterday’s rise (1624.35) or backtest the yellow IH&S neckline or red channel top (currently around 1627.)

UPDATE:  11:15 AM

Getting a nice bounce here, which could mean the dip is over.  But, it’s been pretty much a straight shot from 1640.80 — meaning there’s probably a third wave down to come.  Could take a protective long here at 1631, but would probably have to ditch it in a few points.

While we’re waiting for that to play out, let’s look at the longer-term picture.

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The SPX closed below a key channel line yesterday, which is a technical red flag. It’s certainly not a guarantee of further weakness, but it greatly increases the odds.

It wasn’t much of a breach, but it was a breach.

Arguing against that scenario:

• SPX tagged its SMA 50
• USDJPY has reached potential Fib and channel support
• the USD has still not broken out

If the market does find support here, we should get a nice bounce at a deep retracement of the 1598 – 1648 rally. We can call yesterday’s close below 1617 (the purple channel bottom) a momentarily lapse (or market maker fakeout, take your pick) and get on with the bull market.

If not, however, there is much additional weakness to come.  In sum, this is an important inflection point.

We’ll resume our short position on the opening, as we came up a few points short of our targets from yesterday afternoon:  the red .786 at 1609.30 or the .886 at 1603.98.

UPDATE:  9:40 AM

Just tagged the red .786 at 1609, so I’ll switch to the long side with tight stops (@ 1609) in case the .886 comes into focus.

The shape of the downturn from 1648 suggests a Bat Pattern — which would complete at the .886 Fib level.

Of course, at 1603.98 we should assume that the round number of 1600 would be more appealing.

The purple channel with the best fit on the daily chart is shown above.  The solid red TL just below it is drawn off the daily lows of Nov 16 (1343) and Apr 18 (1536.)  And, the dashed red line is the trend line off the 1994 and 2003 lows.

Needless to say, channels get redrawn all the time as markets overshoot by a few points here and there.  This could be one of those times.  But, the first step in a market that’s turning is the establishment of a slightly flatter channel slope.  Stay tuned.

UPDATE:  10:00 AM

SPX has broken through the white channel midline but is coming up on the critical purple channel bottom (previously support, now potential resistance) which is in close proximity to the red .618 Fib level at 1617.51. We’ll watch for any signs of weakness here, as a reversal would likely mean a quick trip to 1600-1604.

UPDATE:  10:06 AM

Running into resistance here just below the intersection mentioned above.  I’ll likely open a short position with any sustained fall through the white channel midline.

It would be a more compelling trade if it came at the top of the white channel or the bottom of the red or purple channels.  But, midlines can make for nice reversals, too.

BTW, here’s the situation with the USDJPY.  We’ve been watching this pair closely for the past couple of weeks as there’s a high positive correlation between it and the US equity markets.

First, the channel picture.  The falling blue channel is a pretty good fit except for the lows in 2010-2012.  Otherwise, its midline accounted for at least a dozen reversals and its top and bottom signaled several highs and lows.  We’ll come back to it in a moment…

We’ve been tracking the purple acceleration channel in the lower right corner of the chart that faithfully guided the pair higher since September 2012.  It failed on Jun 5.

Since then, the pair retraced .886 of the rise from the April low of 92.56 and — just today — bounced off the midline (the dashed line) of that channel from the 90’s.  No guarantee it’ll stay “bounced”, but this is potentially a very big deal and potentially quite bullish for stocks at a time when seemingly the whole world is waiting for a collapse.

UPDATE:  10:46 AM

SPX just reached the bottom of the purple channel where it intersects with the falling white channel.  It will also complete an A-B-C corrective wave where A=C at 1620.77.

I’ll play a short position here at 1618.40 with stops at 1620ish.

This might just be a reaction to the channel bottom, but the red .886 at 1603.98 is still out there.  If we push up through the purple channel, I’ll gladly revert to the long side.

UPDATE:  11:05 AM

Nice reaction so far.  It’s too early to say how far this dip might go — if at all — but even a .786-.886 corrective wave would take SPX back to 1609-1610 and make for a nice 1-1.5% day.  [I like big moves as much as the next guy, but 1% daily, 3-5% weekly is a great return over time.]

The potential Bat Pattern is shown below in red. Note that Point B came at less than a .618 retracement, which is required under the rules for Bat Patterns.  Though, as we’ve pointed out before, a .786 retracement is perfectly normal for corrective waves.

UPDATE:  11:55 AM

We have a nice little rising wedge forming on the 5 min chart.  But, these do break out instead of down about 1/3 of the time.  And SPX is back above the purple channel bottom and white channel top.  So, the odds of a decline are diminishing.

I’ll give the short position a little extra leeway up to 1621, the .886 of the decline from 1622.31, before pulling the plug.  There’s a competing bullish pattern setting up as well: an Inverted Head & Shoulders Pattern (IH&S) targeting 1640 (shown below in yellow.)

UPDATE: 12:35 PM

SPX just exceeded the white .886 and the 100% extension of A-B — not to mention the purple channel bottom and white channel top.

I’m closing my short position and reverting to long here at 1620.

The first hurdle for bulls to overcome is 1622.92 — Tuesday’s low.  And, remember, every reversal at a .786 Fib is a potential Butterfly Pattern.

They complete at the 1.272 or 1.618 extensions, meaning 1584 or 1567.  It’s a possibility that doesn’t go away until SPX clears 1649.

NOTE: I’ll be sending out an update on the Fund after the close to members who have expressed an interest.  If, for whatever reason you don’t receive one, please contact me to be placed on the list.

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ORIGINAL POST

Another overnight ramp job, another failure to break out/down — prime territory for a pop and drop.

The eminis are up 10 points, so I’ll play along on the opening.  But, the dollar still hasn’t broken any new ground to the downside (or broken out).

And, the EURUSD is a hair’s breath from a potential reversal at the .618 Fib on the daily chart.SPX has several hurdles in order to break to the upside: the red channel midline, the grey .75 line, the purple .25 line and the purple .618 Fib.

UPDATE:  9:34 AM

SPX has reached the .red midline and purple .25 line.  I’ll go short here at at 1637.54 and see if it has the juice to push up through.  Stops at 1639ish.

Note that SPX closed Monday having completed a lopsided IH&S that targeted about 1700.  It fell yesterday to a point where it would have formed a more balanced right shoulder — which was about 10 points back below the purple channel .25 line.

After a strong bounce on a channel bottom such as occurred on Thursday and Friday (up 44 points) we would expect such a backtest of a channel line.  But, yesterday’s action established doubt as to whether this larger pattern would complete.

SPX regained the .25 line early in the session, only to turn around and give back most of the gains by the close.  This morning’s spike on the opening regained it momentarily, but in 15 minutes since, it has dropped back below yet again.

UPDATE:  9:45 AM

The red channel I’ve inserted is not well-established, but it is parallel to the red acceleration channel that guided SPX to its 1687 top (see the chart below.)

Looking at a close up, we can see this morning’s high tagged its midline and continued the pattern of lower highs and higher lows — in other words, a triangle.

Following a strong rally as it did, this pattern becomes a potential pennant (target 1673.)  But, the pattern would break down with a drop below 1626.20 or so.

I suspect the bulls will try to keep this pattern alive with a bounce at the red .25 line.  It intersects with the white .382 Fib here at 1627.15.

And, a channel drawn between the bottom and this point (in white, below) features as its midline an intersection with the white .618 (1653.20) at the closing bell — a hallmark of the market lately.

I’ll go long here, with stops just below the previous low of 1625.68.

BTW, there’s a channel on the 60-min RSI chart that is also encouraging.

If this turns into a bounce up to 1653, it will present some very interesting questions about the big picture.  I tried — and struggled — these past two sessions to put together a forecast that I felt confident enough to foist on my loyal readers.

If we get a breakout to 1653, the picture will be somewhat clearer — in the neighborhood of clarity, but not quite crystal clear.

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If it seemed like yesterday’s post was interrupted midstream, it was.  I ran into server/modem issues and had to switch to a backup system.  Fortunately, it worked as it was supposed to, and the market essentially went nowhere for the second half of the day.  We’ll recap the dramatic action of the past 24 hours and try to make some sense of the big picture — if possible.

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The eminis are indicating a big slide this morning, so we’ll play along on the short side.  This comes a little earlier than expected, and the dollar has — as yet — not broken out.  So, I’m inclined to look for a bounce above the previous lows.

But, the market sometimes has a mind of its own.  And, as we began to discuss yesterday, there are substantial risk factors to the upside case.  I just think this is a little premature.

The interesting aspect of a limited downturn here is the potential for an IH&S Pattern that targets new highs.  Taking yesterday’s 1648 high and the 1646 high on Jun 4 as the neckline, I can see a pattern that targets around 1700.

A stop at the .283 of 1622 would leave fairly well-balanced shoulders.  Even a bounce at the bottom of the purple channel (around the .236 at 1613) would work.

UPDATE:  9:40 AM

I’m going to take a stab at a long position here at 1623, stops at 1620.  If the .382 doesn’t hold, the white midline should.

UPDATE:  11:40 AM

It’s a very confusing channel picture this morning. I would have expected a backtest of the broken white .25 line and purple .25 line intersection at the white .382 of 1632.  But, the yen action overnight did a number on the equity markets, and SPX dipped much lower than expected on the opening.

Fortunately, we were able to play it correctly, and we’re none the worse for wear with the SPX likely to head back up and erase most, if not all, of this morning’s losses.  At the very least, we should look for this morning’s gap to be closed.

The IH&S is a wrinkle we’ll have to deal with in terms of the forecast.  But, the currency and bond markets seem to be running the show, so we’ll focus on how their recent action should affect equities.  We’ll also look at one other risk factor at play: the time Fib patterns.

UPDATE:  12:40 PM

BTW, SPX just backtested the purple channel .25 line.  We should see a good bounce here at 1636 (also the SMA 10) if the upside case is still intact.

UPDATE:  1:15 PM

The purple channel line isn’t holding, so I’ll revert to the short side here at 1635.75.  Tight trailing stops, as this is possibly just a backtest of the white channel .75 line at the white .382 of 1632.21 or a redrawn white channel at 1629.49.

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Last week, the S&P 500 successfully completed a carefully controlled trip to the bottom of a price channel dating back to November 16, 2013.  The move was tailor made to alleviate the overbought condition widely recognized by participants, and delivered almost exactly the results the MFM (mainstream financial media) prognosticators said was needed: a 5% correction.

By letting a little air out of the markets in a carefully controlled fashion, TPTB have reduced the odds of a blowout.  The transformation from “brink of disaster” to “humming along nicely” is nearing completion.  But, there are still substantial risks, despite S&P’s revision back to hunkey dorey status for the US.

The markets are pointed higher this morning, so we’ll play along on the upside on the opening bell.  But, beware the risks.

RISK #1

SPX has tagged the purple .786 retracement and is only a few points from tagging the purple channel midline and the .618 retracement from the 1687 top at 1653.  Either would normally be effective at stopping a rally.  Together, they could really do a number on the rally that began Friday.

And, the 60-min RSI channel looks vulnerable.

RISK #2

The USDJPY, which clearly fell out of its own channel last week to retrace 78.6% of its meteoric rise from Apr 1 to May 22, is almost back to the channel’s lower bound.  If the backtest holds and the pair is unable to retake the channel, this doesn’t bode well for a sustained equity bounce.

The US dollar index (DX) is threatening to break out of a price channel best seen on the 60-min chart:

But, if it doesn’t, there is a very good chance it’ll drop just a little further to the channel line we discussed Friday — around 80.88.

GLTA.

 

 

 

 

 

 

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