Amazingly, the deal got done.  Predictably, the deal buys us only a few months before we get to do it all over again.

From a market perspective, the crisis is averted (for now.) And, given the .50% hit to GDP, the Fed has even less reason to taper anytime soon.

Our upside forecast updated yesterday should be in pretty good shape going forward — though there will be plenty of bumps in the road.  First stop: the smaller IH&S target at ES 1722.50.

The white channel is too steep, so another backtest of the red midline (1704-1705) isn’t out of the question.  And, remember, ES did just complete a Bat Pattern at the purple .886.  So, a dip to the .707 or .618 is always a possibility.

The dollar isn’t exactly loving this turn of events.  It looks likely to reach our 79.6 target later today.  Whether or not it can reverse there at the white .886 is anyone’s guess.

A failure to reverse in that area opens up 78.913 by early November and 75.45 in the month or two following.  While I’ve had the falling white channel seen above as a placeholder for the past month or so, I suspect the top of the falling wedge will probably act as the top of a new falling channel I’ve labelled below in yellow.

Not to worry.  It will only affect those who buy electronics, cars, gasoline, clothes or food.  On second thought, maybe it’s best not to delay that week in Tuscany or luxury import you’ve had your eye on.

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The dollar backtested the broken white channel midline again, but has failed so far to break back above.

Even with the overnight ramp job, E-minis are contained at this level…

But, the structure suggests a Bat Pattern rather than Gartley, so 1716.86 will remain on the table until ES dips back below the purple channel — currently 1680ish.  If it happens, look for a tag of the red “S” later today.

The cheerleaders have worked hard to establish another IH&S, this one targeting 1722.

And, given the support TPTB are lending, it certainly isn’t out of the question — even though the headlines hardly justify it.  Even though the US won’t really run out of money until the end of the month, when social security, welfare, military payroll, etc. checks go out, the deadline of the 17th will clearly pass without a deal by both houses of Congress.

It will likely take the dip we’re forecasting for them to get their act together and do the job for which they, at least, are still being paid.  In other words, yesterday’s forecast looks just as good to me the day after.  It’ll look even better if we can get the rally over with intra-day.

UPDATE:  11:05 AM

SPX just tagged its .886 on breaking news that the shoe shine guy at 6th and Constitution is confident that a deal will be struck.

ES should tag 1717 any moment.  Excellent time to short.

Needless to say, if the Senate deal can be sold to the House, there’s plenty of upside in the markets.  So, though you probably get tired of hearing me say it, always use stops.

My trading strategy doesn’t hinge on being right all the time (though, it’s always nice when we are.) It hinges on not hesitating to switch sides when it’s apparent that a particular forecast isn’t playing out.

In that light, I’ll review our upside scenario.

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Another day of assurances that everything’s going beautifully, just a few loose ends to tie up, etc.  The talking heads are certain it’s a non-event.  I remain, shall we say…uncertain.

In the meantime, ES tagged the .786 retrace (in purple below) from the all-time high overnight and retreated to the neckline of a rather imposing looking IH&S.  In the past hour, prices have slipped below the neckline.  (SPX came within 0.98 of its .786.)

As discussed yesterday afternoon, the .786 is a great place to try a short [always use stops — especially in highly unpredictable situations!] Besides the channel and harmonic indicators, there is a potential analog in play.  Actually, two of them.

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As we expected, there was no political breakthrough over the weekend.  There is plenty of talk about negotiations going better, but still no deal.  The markets are taking it in stride, with SPX down only 9 points at present.

The charts are a bit of a mess today, as Friday’s close threw a wrench into both the channels and harmonics.  ES clearly broke out of the two most likely falling channels, and closed just shy of the .707 retrace of the 1726-1640 drop.  It was the sort of move that either signals a new direction, or will be written off as a rule-breaker.

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We got a rally yesterday that was either a great harbinger of a political breakthrough — or an amazing head fake.  In either case, it shows the strength of the pent-up bullish fervor.  If D.C. gets it together, we should see some nice follow through.  If not, all that fervor will be instantly transformed to disappointment — and, you don’t want to stand in front of that train wreck.

ES and SPX have obviously bulled their way back into the broken purple channel.  SPX closed there; ES is currently about 4 points above the channel bottom.

My expectations for this rally remain the same as yesterday:

I would short here at ES 1672.50, with the understanding that it could just as easily be a small pullback on the way to 1683.30 (.500 retrace) or even 1693.50 (.618.)

1693.50 is only a few points away and would make for a nifty IH&S, so we’ll go with that assumption for now.

UPDATE:  10:30 AM

Almost to our .618 ES 1693.50 target.  Anyone still long might want to think about stops in the 1683 range.

UPDATE:  12:00 PM

There’s the tags on the .618 for both ES and SPX (which also just tagged the important 1700 level.)  Good place to try a short position — though with tight stops in case the pols actually do make a deal.

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Apologies for the late post this morning.  I’ve been working on the mid-range forecast and the market was moving higher as expected.  I wanted to get the next few weeks mapped out, as we should see some huge volatility and — with some help from our friends in D.C. — some juicy returns.

We’re getting the bounce we’ve been expecting after SPX finally caught up with the E-minis after a tag on the yellow .786 Fib line.

We had been aiming for a reversal at ES 1646/SPX 1649, so the markets overshot that just a little — but not so much that it derails any of the patterns we’ve been watching.

Both have reached our initial target area — a back test of the purple channel and tag of the top of their respective falling white channels.  I would short here at ES 1672.50, with the understanding that it could just as easily be a small pullback on the way to 1683 (.500 retrace) or even 1693 (.618.)

I show the actual purple channel bottom at 1675.50 or so, and the yellow .500 is at 1675.75.  So, don’t get nervous if it leaks a little higher.

Recall that when we adjusted our initial downside target to 1646.58 on Oct 3 [CIW: Oct 3] we didn’t specify a price level for the subsequent bounce.

Just dropped through ES 1666.75.  Next stop is the .618 at 1663.71 — though there’s no real good channel support there.  There are lots of other potential turning points, including my favorite from the 30th at 1657 and my new favorite of the yellow .786 at 1646.58.

Having the purple channel break down was obviously key to the the downside of the past several days.  We almost always get a backtest of broken channels, so we’ve satisfied that requirement.  And, the falling white channel was due for another tag on its upper bound.  So, the intersection of the two was the logical spot for this rebound.

But, it isn’t a great spot from a harmonic standpoint.

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ES reached our 1646 target from Oct 3 (the yellow .786 retracement) yesterday — but an hour after the cash market closed.

SPX missed out, so it’ll need to run down to 1649 or so to play catch up before the bounce can get started in earnest.

Obviously, the House and the President remain locked in a high-stakes poker game that could turn the market on its head quite quickly.  So, always use stops.

The last FOMC meeting minutes come out at 2PM EST, so look for some action around that time.

UPDATE:  11:11 AM

SPX just tagged the .786 at 1649.38.  ES at 1643 — off 3 from yesterday’s lows and theoretically not a Butterfly Pattern killer.  We should see a turn here, or else there’s 10 more points of downside until the SPX .886 (9 for ES.)

UPDATE:  EOD

So far, so good.

The market saw quite a reversal yesterday afternoon.  After heading toward the usual last minute buy-the-dip stick save and an apparent Gartley Pattern, ES plunged below the Oct 3 low, likely confirming the red Crab Pattern.

It remains to be seen whether ES will flesh out the expanded channel I proposed yesterday, but the odds are increased with yesterday’s solid reversal.

SPX closed on the purple channel bottom.  And, while a drop to the .786 at 1675.04 or .886 at 1672.89 is clearly in today’s game plan, that’s not all the downside the market has in store.

First, a drop below SPX 1670 kills off the IH&S Pattern that looked so promising.  We’ll watch to see if the bulls defend that level.

And, of course, SPX already put in a reversal at the red .786.  So, while a stop at the .886 isn’t out of the question (the Plunge Protection Team has definitely not been furloughed) the greater likelihood is an extension to the 1.272 at 1664.59 for a Butterfly Pattern.

Remember, 1666.58 is the .618 retracement of the rise from 1627 to 1729. So, as we discussed yesterday, a completion of the red Butterfly establishes a likely Point B in either a Gartley, Bat or Crab Pattern on that larger (white) grid.

In other words, a reversal at 1666.58 opens the door to the white channel tag I’m expecting.  Does it mean the market will reverse at 1666?  Of course not. Breaking below 1670 would embolden the bears, and we could see some real momentum build.  A plunge to 1649 (the .786, a close 2nd in probability) or 1639 (the .886) wouldn’t surprise anyone.

There’s also the ever-present possibility that the market will suddenly spike higher on real or rumoured improvements in budget negotiations (always use stops.)

But, a reversal at 1666 is the most likely path if we’re ultimately going to see lower prices.  Why the italicized “if”?  From a harmonic standpoint, it’s anything but certain.

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SPX almost broke out Friday…a pretty convincing move.

But, the futures  — currently down 15.25 — have done a number on anyone taking the bait.  Look for at least a .786 retrace of the move up from the purple channel: SPX 1675.

ES followed our script pretty precisely on Friday:

The key is what ES does if/when it reaches the top of the falling white channel (currently around 1679.50.)  If it breaks out, it should have legs — at least to 1687-1700.  If it reverses or stalls there, then the downside case is still a good possibility.

After reaching 1681 early Friday, ES backpedaled 8 points before topping out at 1686.  It’s safe to say that ES is now reversing and has the .886 at 1665.84 in its sights.

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For those of you waiting for fund documentation, it should go out this evening or tomorrow.  I underestimated the amount of time necessary to get all the accounts open (bank, administration, brokerage, etc.)  Thanks for your patience!

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ES tagged yesterday’s target pretty precisely, bottoming out at 1663.25 and bouncing as high as 1677.50 before soccer moms began attacking the Capitol.

A dip below 1666.75 might normally be expected to open up a small Crab Pattern to 1650.99.  But, the larger pattern .618 is at 1663.71 (below in yellow), only a slight breech of the purple channel bottom.  It could prove to be strong support — depending on what sound bytes are being delivered by CNBC at the moment.

The positive sound byte at the time was Boehner saying something conciliatory.  Even after the “new face of terrorism” was revealed, ES managed to close above the purple channel bottom and remains there this morning.

The dollar is also rebounding a bit, backtesting the channel midline — and probably at least the purple .786/red 1.272 at 80.217.

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