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.

 

 

 

 

 

 

continuing…

Everything’s pointed up this morning. Best to get long and not question the why’s and wherefore’s.  In retrospect, I shouldn’t have questioned the fact that SPX was completing the patently obvious pattern yesterday.

The USDJPY got a sizable bounce off the .786 overnight…

…and should have room to move.

The S&P futures are nearing the point of exhaustion after a huge ramp in the past hour.

The .786 is just ahead at 1635.21, as is the purple channel .25 line.

UPDATE:  9:32 AM

SPX just tagged its .886 from the 1598 bottom yesterday and should at least backtest the yellow midline.  Good place to short here at 1632.41…

…which is also the .382 of the entire move off the 1687 top.  Stops around 1635.

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The futures have reversed big overnight gains thanks to Draghi’s candor and hesitancy to throw the quantitative kitchen sink at the EZ economic weakness.  The eminis, which were up to 1616.75, have settled back to about flat to slightly negative.

The EURUSD hit our target of the white .786 at 1.3148 with ease and is bumping up against the white channel .25 line fairly deep in a rising wedge.  Further gains to the .886 or higher might be in store, but might not be as easy to come by.

The dollar has pushed below key support at the purple channel bottom and red channel .25 line and its own rising wedge is in danger of breaking down.

We covered our short position near the close yesterday after SPX reached our primary target of 1608, but noted the distinct possibility of a drop to 1593.

I’ll play along with any weakness on the opening, as that possibility has not diminished in the least.

But, the line in the sand is about 1605, and I do expect at least a bounce if not an outright reversal.

More in a few…

UPDATE:  9:33 AM

I’ll revert back to the long side here at the channel bottom (1606), with stops at 1605.  Charts in a moment…

UPDATE:  9:45 AM

That was a very quick tag at 1605.19 — close enough.  The key to the upside will be breaking out of the falling wedge, while support is well-defined by the intersection of the two channel bottoms.

I’ll leave the grey harmonic grid up until the coast is clear.  It is motivated by the larger purple grid’s .618 (from 1536 to 1687) which would be expected to provide a substantial bounce if reached intraday.

The 15-min RSI shows the resistance to be expected (white midline) at the wedge’s upper bound….

…while the 60-min RSI supports the idea of a bottom here — with slight positive divergence indicated.  I won’t consider SPX out of the woods, though, until it can break through the dashed, red trend line emanating from the 1687 high.

It’s the daily RSI that should make the bulls nervous.  A break of the white channel midline (dating from Oct 2008) would have dire consequences, as there’s very little channel support until the bottom of the rising purple channel.

The three previous times that RSI dropped through the purple channel’s .25 line signaled the biggest downturns of the past two years:

• the July – August, 2011 plunge from 1343 to 1101
• the April – June 2012 drop from 1422 to 1266
• the September – November correction from 1474 to 1343

SPX has tagged the purple price channel that began at the Nov 2012 1343 bottom three times since then.  Each mini-correction’s rebound was marked by a tag on the purple RSI channel’s .25 line.

This current correction — while about the same magnitude as the others — is the first to show negative divergence.  That is, this morning’s 1605 low is higher than the previous 1536 low, but came with a lower RSI value.

That, coupled with the fact that it already broke down below the .25 line that supported its cousins, should have bulls on edge.

UPDATE:  10:45 AM

From the big picture to the small…SPX has formed several small H&S Patterns that point in various directions. The first two busted, but the latest hasn’t yet.

Suffice it to say the picture remains muddled, and will until a break above the dashed yellow TL (the falling wedge) or below 1605.

But, the harmonic picture points to a test of 1600 (a Butterfly Pattern), so I’ll take an interim short position here at 1610 and see if it plays out.  Stops at the yellow TL (about 1612-1613) ought to do it.

The pattern would bust at 1614.64, though the TL provides an earlier exit.  So there’s 4.64 max points of downside risk versus 20 points of upside (down & back.)  Even at 50:50 odds, I like those numbers.

UPDATE:  11:18 AM

Though SPX is creeping up on our stops, DX just completed a Bat Pattern at the bottom of a well-defined channel.

I’m inclined to give our little short position a little leeway and see how the rising wedge breaks.

I’ll close the long position and go full short here at 1612.64, stops at 1614.65.

UPDATE:  11:45 AM

Here’s an even better entry point — the .886 of the drop from A to B, with stops at 1614.65 just above.

UPDATE:  12:05 PM

So far, so good.  We should get at least a bounce here at the former low, but things are looking good for 1600.  Of course, there is an alternative which I find very appealing.  Butterfly Patterns typically complete at the 1.272 or 1.618 extension.

But, like Crab Patterns, they can extend even further… for instance, the 2.24.  If the 1593.47 price point there doesn’t ring a bell, please see this morning’s first post.

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The market continues to play Let’s Make a Deal with the Fed: keep pumping $85 billion into the banking system every month and we’ll keep pumping prices higher.  Ben Bernanke realized long ago that the game is rigged.  He should know.  He rigged it.

The contestants (the banks) can’t help but win, while the studio audience (the rest of us) squirms in their seats, waiting for their shot.  Enough of them remain hopeful that no one noticed the air conditioning had pooped out, the snack bar ran out of food and the punch bowl was getting dangerously low — until now.

Now, the word is getting out.  And, the audience is very, very focused on that punch bowl.  When it runs dry, we know the contestants will pack up their winnings and sneak out the back door — leaving an untenable situation out front.  What will Monty do then?  Can he risk letting that happen?  What would happen if the entire audience rushed the door?

Stay tuned.

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The futures are pointing south, so we’ll play along on the opening.  But, this morning’s subpar economic news reassures us that the punch bowl isn’t yet dry.  Services PMI comes out at 10:00AM.

The picture was much gloomier overnight, when the USDJPY once again flirted with losing its channel.

The RSI tells the same precarious story:

DX came very close to breaking out…but hasn’t.  It very likely will complete a Bat Pattern first, even if it means another dip below the channel support later tonight.

Even the EURUSD is doing its part…hinting at a Bat Pattern completion at 1.3148 very deep into its rising wedge (also likely after hours.)

UPDATE:  9:35 AM

SPX just reached an .886 retracement of its rise from yesterday’s low, so we’ll cover our short and revert to full long here at 1625.  Stops at 1622.75.

UPDATE:  10:02 AM

Services PMI came in at the expected 53.5 versus last month’s 53.1.  Factory orders grew at 1.0% versus an expected 1.5% and last month’s dismal -4.9%.  The punch bowl just got topped up.  The game can go on — at least for now.

Note the all-important employment index — down to a barely positive 50.1, just like its manufacturing counterpart.

UPDATE:  10:15 AM

Just got stopped out at 1622.72, so back to the short side. Trailing stops.

There’s a Crab Pattern to be completed at 1608 — also the H&S target. But, there’s an argument for a leading diagonal/falling wedge that would indicate support at 1615-1617.  So, we’ll see.

Harmonics traders all just got stopped out when their potential Point C dropped below Point A — the last low at 1622.72.  But, wavers should be fine it this is wave B in a flat wave 4, which I understand is allowed to and frequently does dip below wave A.

Great way to shake out the bulls before a run to the upper bound of the wedge — if that’s what this is.  I’ll likely resume a long position on any strength back through 1622.72, but would much prefer a tag of 1616.24 first.

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