It’s been a month since our last update on bonds [see: Sep 24 update.]  At the time, TNX had just reached our initial target: the 1.618 extension of the plunge from 23.97 to 13.94 from April to July 2012.

It was also the .618 retracement of the drop from 40.13 in April 2010 to 13.94.  It also happened to mark the top of an important channel (in purple) and an important psychological threshhold: the 3% mark.  So, we had no trouble expecting a reversal.

But, there was some question as to the importance of an alternate channel (white) which held open the possibility of a move to 3.2% before the next big reversal.  It all came down to what changes the Fed had up its sleeve with respect to tapering.

Turns out, not much.  They didn’t taper in September and yesterday’s FOMC announcement came and went with nary a hint of a return to central bank sanity.

Since then, rates have continued to tick lower, heading ominously towards the yellow target in the 2.14 range the charts suggested (and, I dutifully charted.)  Why “ominously?”  Each of the previous plunges (except the last) corresponded with a meaningful dive in equities prices.

The forecast is anything but settled. TNX has slipped below the midline of the rising white channel and the .786 line of the rising yellow channel; but, it has paused above the midline of the rising red channel.

stay tuned…

ES has another wave down to go before we can consider the red channel fleshed out.  It reached our  target zone, but a little faster than expected.

And, it looks further along in doing so than SPX.

The point in arresting SPX above the 1.618 fib level at 1759.97 (of the drop from 1709 on Aug 2) is so the drop can be characterized as a small backtest rather than an important top of any kind.

Yet, the rising red channel continues to show plenty of downside potential if TPTB should decide to allow it.

Remember, chart patterns occupy space and time; this one looks like it has unfinished business.

Key price levels are 1752.50 for SPX and 1749.33 for ES. If those don’t hold, there’s potential for more downside — an intra-day overshoot of the channel bottom or a new channel as discussed yesterday afternoon.

I’m going to take a few minutes and update the bond outlook, as there are some interesting developments taking place there.

SPX poked up past our 1770.97 target in the last 3 minutes of trading yesterday.

While, the e-minis reached our 1767.63 target around 3:59:30.  It’s clinging to a 1.5 pt gain at the moment.  Can it hold?

There are two ways to play a leak past a natural turning point:

1. dig your heels in, argue that it shouldn’t go higher and short like crazy;
2. listen to what the market is saying and play along (with trailing stops in case it’s a trap.)

Those who have followed this site for any length of time know how I feel about such things.

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Yesterday’s caveat has become today’s reality:

The only caveat is that ES only reached 1762.25 — above the white 1.618, but a few points shy of the yellow 1.618 (1767.63.)  So, there’s a possibility that it will slide a little higher overnight.

If SPX were so inclined, it could tag along either intra-day or on tomorrow’s opening to 1770.97.  But, I wouldn’t consider a long position to capture those last 6 points unless I had the means to hedge overnight.

ES did, indeed, slide a little higher overnight, putting in another burst at the opening bell.  SPX has little choice but to tag along on the opening, reaching 1768.68 so far and with 1770.97 square in its sights.

UPDATE:  1:05 PM

SPX is almost to 1770.97, and ES is nearing 1767.63.  This should be about the extent of today’s rally.

The markets are ready for a breakout or breakdown — best illustrated by the pennant we’ve been watching in USDJPY.

The dollar index:

The e-mini completed a reasonably well-formed Butterfly Pattern to the purple 1.272.   But, as we discussed last week, the yellow/purple 1.618 intersection at 1767 is very much still on the table.

If the small purple pattern breaks down, the red channel should get some fleshing out.  The key will obviously be the ability of the red midline to hold.

SPX completed the white Crab Pattern Friday, but could still have its sights set on the purple 1.618 (1764.50) from May.

UPDATE:  2:30 PM

SPX just reached the purple 1.618.  Great level to try a short position — with stops, as always.

The only caveat is that ES only reached 1762.25 — above the white 1.618, but a few points shy of the yellow 1.618 (1767.63.)  So, there’s a possibility that it will slide a little higher overnight.

If SPX were so inclined, it could tag along either intra-day or on tomorrow’s opening to 1770.97.  But, I wouldn’t consider a long position to capture those last 6 points unless I had the means to hedge overnight.

GLTA.

UPDATE:  3:00 AM

The futures rallied nearly to the .886 retracement of the drop from 1754 to 1734 and are backing off a bit.  It remains to be seen whether 1754.50 will hold or not.  Recall, 1767 is the next higher Fib — the 1.618 of the plunge from 1685 to 1583 that began May 22.

The little purple pattern tracing out gets to 1766 at its 1.618, so there’s some logic to it.  However, we’re long overdue for a trip to the bottom of the red channel.

The level to watch is 1755.  If ES clears it, 1766 is in play.  Otherwise, our forecast for a quick, steep drop is still on the table.

I tried to get fund documents out to everyone tonight, but would really like to get one last sign-off (it wouldn’t hurt to get a few hours of sleep, either.)

Please bear with me until the morning, when 100 pages of legalese will be winging its way to your inbox.

As I wrote earlier this afternoon, I will send docs to everyone who asked to be on the mailing list and completed an accredited questionnaire.  It will take most of the morning, so I won’t be able to follow the markets very closely.  But, yesterday’s post is full of cool charts that should provide plenty of guidance.

Trade safe.

UPDATE:  11:45 AM

50:50 between the purple or red targets, but tagging SPX 1764 first probably means a higher subsequent low, perhaps 1729 instead of 1720.  Watch for a reversal at the .786 of 1755.30, just to set up the white 1.272 (1764.45) where it intersects with the purple 1.618.

At this point, I wouldn’t be surprised to see the move postponed till Monday morning in order to stick traders with that lovely dilemma of holding over the weekend.

FUND UPDATE: 

All the fund’s accounts are open. I’m going through documents one last time and will send them out before the end of the day.  If you’ve already completed a accredited investor questionnaire and added yourself to the mailing list, look for an email later today.  With any luck, the first closing will be next Friday, Nov 1.

I’ll post more information tonight on the new website (not yet live) for those who haven’t yet signed up. Market posts will be “bare bones” for the next several days as I focus on answering questions and putting the final pieces in place.  Thanks, everyone, for your patience! 

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ES came within .09 of our interim target from Monday [see: CIW Oct 21] and is reversing nicely, though we’re a day behind the schedule discussed on the 17th.

The implications are that this sell-off might be a little less deep than I originally thought. Still, as we discussed yesterday, it should be steep enough to flesh out the red channel within a few days.

The dollar reverted to the pale blue .886 before falling back to a higher low, having been rebuffed by the falling wedge’s lower bound.  It’ll be interesting to see whether the equity plunge is frightening enough to produce a real dollar rally — or merely slow the bleeding.

SPX’s 90-pt plunge in late June (1654 to 1560, in yellow on the chart above) produced a dramatic spike in DX — which then continued to rally with stocks until they had recovered their losses.  For now, at least, the dip below the critical 78.725 has been averted.

I’m often asked why, if the larger harmonic patterns are so clear, one should muck around with the smaller patterns, channels, etc.  The rally from 1640 to 1754 demonstrates the value quite well.

The 110 points, alone, would have been a 6.7% return — not shabby for a 12-session holding period.   Yet, as the chart below shows, there were several reversals that were fairly “by the numbers.”  The purple .786 (yellow .618) provided a 20-pt reversal, and the purple .886 another 11 points.

Adding in those extra 62 points alone (the reversals and their retracements) would have boosted the 6.7% return to about 10.5%.  But, more importantly, the harmonics alone don’t tell the whole story.

Consider our forecast from July 15, when SPX was about to register a new all-time high.  Based on harmonics, I expected a reversal at 1712 (it came at 1709) and subsequent rally to 1765, followed by a 45-point retracement on the way to 1823 — all by late August.

A buy-and-hold investor would have done reasonably well with that forecast.  SPX came within 6 points of that 1765 target before reversing yesterday — a modest 4.6% gain from 1682.  There’s nothing wrong with 4.6% for three months (about 18% annualized.)

However, by simply paying attention to the channels, we were able to spot the trend shift in early August that signaled a deeper dip than originally anticipated.  That deviation provided an additional opportunity of 54 points (27 X 2.)  The September dip from 1729 to 1646 provided another 166 points of potential return.

Suddenly, a 77-pt or 4.6% potential return becomes a 297-pt or 17.7% return (about 70% annualized) — from simply tossing channel analysis into the equation.  By considering many other chart patterns, coincident developments in other securities and currencies, analogs, RSI channels and other, more traditional technical analysis, we’ve been able to do even better.

Let’s be clear on one thing: it is highly unusual for anyone to catch the absolute top and bottom of every major move.  We’ve done better than most, but I still miss a lot more than I care to admit.  But, that’s not important…because, it’s not our goal.

Our goal is simply to catch “most of the moves most of the time.”  This means developing the very best forecast we can and following it until it stops working.  Sometimes, it works for days or even weeks.  And, sometimes it works for all of five minutes.

The key is acknowledging when it’s not working — which means (1) having a discrete price level or chart pattern that provides a clear signal, and (2) setting aside one’s ego and admitting that the forecast was hogwash in the first place (by far the harder of the two!)

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FUND NEWS: Houston, we have a bank account.  With any luck, we’ll also have our brokerage account open today.  I’m taking the morning off to wrap up the remaining paperwork.  With any luck, we’ll have documents posted later today.  Watch this space and your inbox for an update.

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The dollar tagged the secondary .886 (79.436) we mapped out last Friday [see: The Dollar’s New Digs]…

…as the EURUSD topped its Feb 1 highs on the way to a reversal at 1.3832…

…and, the USDJPY continued tracing out a pennant that is bursting at the seams.

It all plays well with our forecast.  The tell would be the sharp interim reversal by ES (today or tomorrow) at 1750-1755 that we mapped out yesterday.  The equivalent range for SPX: 1752-1760.

There’s no requirement that this reversal take place, but it fits our medium range forecast much better.  We often look to the USDJPY for confirmation, but today it’s the EURUSD that’s the most helpful.

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The dollar is reacting to the .886 and 1.618 Fibs we discussed at length Friday.

While a significant rebound could be in store, the USDJPY suggests a limited move.   Note the continued coiling of the pair — never able to break out but never breaking down.  The apex of the resulting pennant pattern is fast approaching.

To anyone watching the Charlie Evans interview on CNBC this morning, it would seem pretty obvious which way the dollar is going.  The Fed will continue to play the dangerous game of pumping inflation and asset prices at the expense of the dollar and the country’s long-term fiscal viability.

In the economy, there never has been such thing as a free lunch.  Can rapidly expanding debt can coexist with abnormally low interest rates forever?  As we’re recently witnessed, there’s no reason to believe our elected officials can balance the budget anytime soon.

So, the Fed will go on monetizing the deficit, buying whatever amount of debt is necessary to keep rates low, praying for a deus ex machina resolution.  The poor and retirees will continued to get squeezed; the bankers will cheer; and, the markets will continue to rally.  It will work indefinitely — until it doesn’t.

Speaking of markets, let’s take a fresh look at key levels on the way to our next targets for the major indices.

The ES continues to bump along the top of the proposed red channel.  At some point, it should revert to the midline — currently around 1718 (versus 1738 trading level.)  That’s the trouble with steep channels — they’re steep on the way down, too.

But, the next key level for ES is the white 1.618 extension at 1754.59.  So, I expect we’ll tag that before any serious deflating occurs.  Timing is tricky, but a good possibility is the intersection of the white channel midline and the Fib later tonight.

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The dollar finally reached our 79.60 target [see: Sep 20 Update] overnight and should see a bit of a technical bounce here at a large scale .886 (white) and medium scale 1.618 (purple.)

But, as we’ve discussed the past few days, there is plenty more downside after the bounce.  For starters, an alternate .886 at 79.436 based on 78.725 as Point X is a possibility (light blue.)

Based on fact that SPX just broke out of a rising wedge, I’d say it’s a very good possibility (watch for a potential channel top at 1741.)

And, then there’s the rising red channel (dating back to May 2011), which broke down on Sep 18. It’s seen its share of equity highs and lows (SPX values in yellow below.)

But, it’s managed to stay on an upswing ever since — until the Fed announced no tapering last month. Now, with no tapering and no budgetary discipline, the market is correctly wondering what — if anything — might provide a floor.

While a declining dollar can be positive for US exporters, we’re a net importer.  Anyone who buys food, clothing, electronics, gas, automobiles feels the pinch right away.  But, it also shows up in raw materials, affecting almost all capital and consumer goods one way or another.

The chart below shows how a declining dollar typically leads to an increase in CPI.  When the dollar broke down in 2002 (the red trend line), it touched off a six year increase in CPI.

Inflation plunged in 2006 when it appeared the dollar had found its bottom (the yellow channel.)  But, when that channel broke down, CPI soared from 1.3% to 5.6% until 2008, when DX finally did bottom.

Inflation plunged in 2008 as the global economic meltdown took hold and buyers disappeared from the scene, eventually sinking into negative growth (deflation) for much of 2009.

Central bankers came to the rescue.  The first round of quantitative easing in 2009 did, in fact, bring inflation back from the dead.  CPI spiked from -2.1% in Aug 2009 to +2.7% in December 2009.  Gold soared 33% from 900 to 1200 in the same period (already up from 681 in Oct 08.)  The S&P 500, which had bottomed in Mar 09 at 666, managed its own 33% rise from 869-1150.

By early 2010, the dollar was on the rise again – accompanied by a slump in annual inflation to only 1%.   When the dollar peaked in June 2010, inflation leveled off.  It spiked in November, however, when QE2 was announced.  The dollar held on valiantly, but the purple channel broke down in Mar 2011 and CPI ran up to nearly 4% again.

This time, it was a market crash that saved the dollar.  The dollar bottomed as SPX topped in May 2011, and gained dramatically between August and October as the market melted down.

It was enough to kick start another dollar rally that lasted until QE3 in Sep 2012 — which might have remained the peak had it not been for two factors that sent the index skitting higher:

• Abenomics — the Japanese, outdoing the Fed at QE
• the market scare in June 2013

Since then, it’s been all downhill for the dollar.  As mentioned back in January, if 78.725 doesn’t hold, look out below.  The next downside support isn’t until 77.48 and then 75.45.  If our equity forecast is accurate, we’ll find out very soon.