Holding short this morning.  The currencies are poised for a reversal, and the overnight ramp job isn’t sticking.

The USDJPY, in particular, appears to be in real trouble.

UPDATE:  9:32 AM

We’re closing in on our original target of 1653-1655.   It’s two days later than we originally expected (the red circle) but it represents the purple 1.618, white .886 and the latest H&S target — significant enough that we should get a meaningful bounce.

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Finally!  After many fits and starts, we’re finally getting some follow through on the downturn we’ve been expecting.  There shouldn’t be any question about the H&S Patterns, now.  Our forecast from Aug 12 [see: Major Channels]:

Look for the smallest Crab Pattern to complete at 1673 for starters.  The initial bounce could come at the white .618 at 1671.23 — roughly the location of the grey midline.  But, there’s likely more in store.  The purple 1.618/pink .886 at 1655 is our first real target.

Keep an eye on DX, which backtested the .382 and channel midline as expected and has shot back up in anticipation of a decent sell off.  Initial target: the red .886 at 82.414.

The USDJPY looks positively cooked after one last attempt at breaking out of the falling white channel.

Even though things are unfolding according to plan, there are a couple of tripwires we should watch out for.  And, I’m not just talking about Cramer’s cheerleading or the inevitable Fed leak to Hilsenblabber.

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The dollar is digesting its gains of the past three sessions and could backtest the midline of the potential channel at 81.55ish.  Note the small scale .618 tag, clearing the way for the next interim target at 82.243 (red .786 and white .618) or 82.414  (red .886 and the purple .382.)

The USDJPY has completed the backtest of the white channel and the purple channel midline as expected and should head back down now.  Next target 95.44 or 94.66 — and, soon.  The last such drop — from Aug 2 — accompanied a 27-pt drop for SPX.

The eminis are trying to turn positive by the opening on very little positive news, but are running into resistance from two different channel lines.  We could see a breakout, but for now the trend remains down.  I’ll remain short.

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The dollar’s falling wedge is breaking out as expected.

The USDJPY is backtesting the broken white channel.

The EURUSD continues to fade after completing a very deep retracement.

The eminis shot up 7 points overnight, but have given most of it back.

The retail sales number was disappointing, but not so much that the Fed should abandon plans to taper.  In sum, I see no reason not to continue to hold short.

SPX will likely take a run at the .886 at 1693.92 on the opening, but should fall back just as quickly.  I don’t believe it’s worth chasing unless it breaks above 1700.

UPDATE:  9:45 AM

So far, so good.

UPDATE: 10:25 AM

Interesting development on XLF…  A few days ago, we discussed the test of a key channel and another larger channel’s midline as well as the approach of some key Fib levels.

XLF reached two key harmonic levels in the past month, and nearly completed the 1.618 Fib (21.06) of a large Crab Pattern set up by its 2011 decline.

XLF didn’t quite reach 21.06 (yet), but it did fall beneath the channel midline (purple) and, this morning, it lost channel support (red) and horizontal support (the 20.35 high from May 22.)

If it doesn’t find some help in the 199.97-20.15 range, it could easily drop to the bottom of the purple channel — a correction of nearly 8%.

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It’s sometimes difficult to keep track of the various channel lines appearing on charts — especially in close-up views.  To help with the big picture, here are a few of the key channel systems I’m tracking.

Given their size and scope, there’s plenty of room for error when it comes to whether or not prices have crossed a particular line on any given day.  But, smaller channels that can be more precisely drawn almost always tend toward the same slope over time — often nesting, for example, between the 0-.236 or .236-.500 lines.

I’ll update this page from time to time, but the whole point is that these channels don’t change a lot.  The market moves in accordance with them rather than the other way around.  I’ve layered them to better illustrate which has come into play at various key moments.  And, each chart is presented in log scale.

Last, there are usually many ways to draw a channel.  The only way to know for sure whether or not a a particular placement is precisely correct is to look at it in hindsight.  But, like other chart patterns, they give us important clues as to what to expect.

Channels indicate the prevailing direction and the magnitude of “normal” deviations.  And, they point towards something; i.e., they provide a sense of future prices in specific time frames.

Importantly, they tell us when something has changed.  If prices shoot above or dip below a well-established channel line, it usually signals a change in direction.  Combined with other chart patterns and harmonics, they are an excellent tool with which prices can be forecast.

Enjoy.

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The purple channel system depicts potential resistance at the .382 line which, given its influence, could just as easily be drawn as a midline.  Either way, it’s obviously important.

The yellow channel, on the other hand, depicts ongoing support.  The entire recovery since 2009 has been contained within a channel (the yellow 0.00 -.146 lines) featuring the same slope as the 1993-2000 bull market (.886 – 1.000.)   Note that any time a yellow support line has been crossed, the market suffered — sometimes dramatically.

The white channel is easier to see in isolation.  The move since mid-2009 has been largely contained within the .146-.236 lines.  Like the yellow channel, this system depicts support and drops through key lines have often led to large losses.

Putting all the systems together, the chart starts to look a little crowded.  But, it’s pretty clear that they’ve defined most of the major rallies and corrections.

Major channels’ intersections frequently signal key turning points.  Prices have to “choose” one course or the other, which means a continuation of the current price trend or a change in direction.  SPX faces such a situation at the present time.

So, what does it all tell us regarding the rest of the year?

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My apologies for the late post this morning.  My wife is having some health issues that made for a late night.  Probably nothing…but, it left me a little groggy.  Given the markets’ current state of flux, it makes picking an initial stance a little more challenging than usual.

So, we’ll pick up this morning where we left off yesterday — completing a very deep retrace of yesterday’s .618 opening pop, or angling for a .786 or .886 retrace of the move down from 1709?  I’ll play along on the downside at the opening, but will watch for a reversal at the white .500 (1694.28) or .382 (1692.89.)

The USDJPY broke out of the very narrow channel it’s been in since establishing the latest right shoulder last Friday — a pretty decent bounce at the midline of the falling white channel.

We should see a backtest of the neckline and broken rising white channel, which we’d normally associate with a rising equity market.  However, a deepening equity sell-off as I’ve been discussing could also provoke a more meaningful reversal in the USD’s fortunes.

It certainly looks primed to rebound — at the bottom of a channel and falling wedge and .886 retrace.

UPDATE:  9:33 AM

I’ll try going long here at 1695.14, stops at 1694.  As yesterday, the key remains breaking 1700.18.

There’s also the matter of a potential falling channel with a (current) top around 1699 — increasing the importance of this price level.

UPDATE:  10:15 AM

The channel is holding so far, and the 15-min RSI looks like it’s running into resistance.

I’m going to get stopped out at 1694, so will play the short side. Stops at 1697ish.

There’s a high probability of being whipsawed here, though, as there’s plenty of support at 1688-1690, and the neckline of the potential H&S (yellow) at 1686.  Charts in a few…

UPDATE:  10:25 AM

I still favor the downside case we discussed yesterday, though it’ll take a break below 1684.90 to confirm. Yesterday’s rally to within 4 cents of the 1700.18 high sure didn’t clarify things.

So, in the meantime, 1704-1706 remains on the table. This is definitely one of those times when it might be better to step aside and let the markets decide.

UPDATE:  11:00 AM

Getting some momentum going on the downside, but we’ll likely run into that support mentioned above — probably at the intersection of the falling white channel midline and .886 at 1689.72.

UPDATE: 11:08 AM

I’ll try a long position here at the channel midline — 1689.54.  Stops at 1688ish, though that just sets up more whipsawing with the intersection of the .886 (of the rise from 1684.91) and neckline at 1686.65.

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I’m back from vacation, refreshed and rejuvenated after 5 days in heavenly Lake Tahoe.  It’s exactly what I needed after a tremulous last few months in the markets.

IMHO, Tahoe is every bit the equal of Como, Louise or Lugano and belongs on your list — especially if you can avoid tourist season.

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Yesterday’s finish…  SPX reached our proposed Point B and, based on the eminis, should tag our proposed Point C in the opening minutes.

DX has reached our target of 81.111.  Also bodes well for a pop and drop…

UPDATE:  9:36 AM

I’m shorting here at 1700 — likely the full extent of a 2nd/B wave.  But, if not, the pullback should still be playable.

The USDJPY still shows more potential downside, but should get a bounce here at a channel midline and smaller scale Crab Pattern completion.

If the support doesn’t hold, however, the pair should reach our 95.44 target ahead of schedule, and could easily race down to the .886 at 94.66.  As we’ve discussed many times, the yellow midline should get a test — particularly now that the white channel has committed hara-kiri.

Over the past year, the pair’s moves have been highly correlated with the SPX (the light purple line.)

But, note the divergence since Jul 8.  Can SPX continue to ignore the pair’s demise?

UPDATE:  10:15 AM

So far, so good…

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The red channel obviously broke down yesterday, so SPX will have to reestablish a new basis for any further upside.

The next potential support is the purple channel line at about 1684 — marked with a red B.  This is nearly a .786 retrace, so could be all the downside this correction has in store. But, it looks to me more like an A wave than the whole shebang.

If it fails, potentially more substantial support waits at the red .886 (1679.86) — also the intersection of two channel lines — probably late in the session or early Thursday morning.

The red .886 may not hold.  The 1687 former high has already fallen, which is a sign of much greater weakness than we’ve seen of late.  If so, we’re very likely to see an extension of the red pattern to the 1.618 (1655) at the bottom of the grey channel.

As we discussed on Jul 30, 1654 is key:

If the 1654 level doesn’t hold, the bottom of the purple channel (and 2007 high) is still waiting down there at 1576.  Even the bulls could cheer such a development, as it would constitute a marvelously bullish back test and a nice AB = CD flat on the way to SPX 1823.

the chart from Jul 30

I’ve been a fan of this scenario for several weeks, as it fits nicely with the larger channels as well as the currencies.  The dollar, for instance, is closing in on the target (the red circle) we set on Jul 26 [see: Hard to Get.]  I believe a break of 1654 would likely resuscitate DX and restore it to its more traditional role of safe haven.

The USDJPY is also closing in on our Jul 26 target.  The white channel is officially broken, and the yellow midline — which also serves as the neckline for a large H&S pattern targeting the white 1.618 at 85.66 — is the next line of defense.

I’ll be back from vacation tomorrow and will write more then.

GLTA.