Futures are pointing up, the US dollar’s vacillating, the USDJPY got the bounce — could be another positive Tuesday.  We’ll go long on the opening, with the yellow H&S neckline and red midline as our target.

UPDATE:  09:36 AM

Just reached the intersection and will go full short at 1645.55.  The .618 of the drop from 1661.91 is a little higher at 1646.94, so I might be a little early.

It all depends on whether the white or the red channel is in charge.  The top of the white channel is appealing at 1653.53 (the .786), so I’ll take any move through 1647 as a signal that it’s in play rather than the red midline.  And, though there’s room for interpretation, the rising purple channel midline appears to be closer to the .618 as well.

The falling white channel has the benefit of three tags on the upper bound and a lower bound that perfectly captures the 1.618 extension of the initial drop from 1674 to 1640 where it intersects with H&S target (1608) and the bottom of the large purple channel later today.

But, the red channel lines up well with some important reversals as well as the two bottoms made yesterday and back on May 23.   A reversal here at its midline would support its dominance.

Pulling back a bit, it’s obvious that either channel can get us to the bottom of the rising purple channel.  The question is when, and at what price.

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Friday’s close was uglier than we’ve seen in quite some time.  After completing several H&S Patterns, SPX should continue lower.  The question is whether or not it will first backtest any of the necklines — not necessary, but to be expected.  I’ll be looking for the right entry point.

SPX didn’t stop or bounce at any key Fib levels on its way south Friday.  It stopped going down simply because the market closed. So, any push lower will be cause to play the downside — regardless of the extent of the opening bounce.

Once SPX breaks lower, I’ll be looking for opportunities to play the inevitable bounces.  There will probably be several of them; so, swing traders and buy and hold types should stay focused on our ultimate downside target.

UPDATE:  9:40 AM

The index just moved into negative territory.  We’ll short here at 1631.60.  Charts in a moment, but the next potential Fib support is at 1626.54 – 1626.73.

UPDATE:  9:46 AM

Updated 60-min chart…showing the most likely operative falling channel in white.  This morning’s bounce on the opening backtested it, but it was less than convincing.  We’ll set stops at the midline (around 1633.50) just in case.

UPDATE:  9:54 AM

ISM survey and construction spending data is coming out at 10AM.  We’ll see if the market can push through the white midline on the news.  If so, the purple midline and yellow neckline are up around 1644-1645.

UPDATE:  10:02 AM

The data shows continued weakening, which should squelch the Fed tapering talk somewhat.

On the heels of the data, SPX just tagged our Fib target levels, so we’ll play the bounce here at 1627. Tight trailing stops starting at 1627.

Again, the key to sustaining any bounce will be a move back up through the white midline — now at 1633.  We’ll set our objective at 1644 — the purple channel (from 1343, Nov 2012) midline and the broken neckline of the largest H&S Pattern (in yellow.) It would also represent a 50% retracement of the move down from 1661.91 on May 30.

The ISM PMI Index came in at 49.0 versus expectations of 50.9 and last month’s 50.7.  The picture is fairly negative across the board, with employment clinging to a barely positive 50.1 reading.  In short, not the sort of report that would support the bullish economic forecasts being tossed about by the MSM lately — but, exactly the kind of report QE fans were hoping for.

UPDATE:  10:27 AM

The bounce reached as 1637.28 so far.  We just got a sharp downturn back to the white midline — likely just a backtest, a B wave in an A-B-C corrective wave to 1644ish.  But, any sustained push below 1633 and I’ll likely put a short position back on.

No sooner typed that than the index moved through the midline.  I’ll add an interim short position for a little deeper retracement to probably around 1628.07 – 1629.11 (.886 and .786 respectively.)  A move below 1626.89 and I’ll abandon the long position.

UPDATE:  10:36 AM

Just tagged the .786 at 1629.11, might still reach 1628.07.  I’ll set stops here on the short position just in case this is the full extent of the move.

UPDATE:  10:41 AM

Just took out the previous low, so full short at 1626.88.  We should get a bounce at the purple .25 at 1625, also the scene of the red 1.618 at 1626.54.  We came up just short of it earlier.

UPDATE:  10:47 AM

Taking another stab at a bounce here at 1626.   I’ll play the stops a little tighter this time.

Any move through 1625 is cause to resume full short, but I’ll likely pull the trigger a little quicker this time.  I’m disappointed to have missed the top with the last bounce — which didn’t even retrace .382 of the drop from 1661.91. This latest dip, which as mentioned actually tagged the red 1.618, also tagged the purple 1.272 and the purple .25 line.  So, if it can hold 1625, it could be a more substantial bounce.

But, it’s hard to justify from the standpoint of the falling white channel, which already backtested its midline.  So, either it won’t bounce much or the white channel is off a bit.  We’ll find out shortly.

UPDATE:  11:24 AM

Not much of a bounce at all.  Resuming full short here at 1625. Charts in a moment, including where I expect this downturn to finally reverse.

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The eminis completed a nice Head & Shoulders Pattern, but bounced off the neckline… right into a backtest of the broken purple channel midline.

The 60-min RSI chart shows the dilemma: support on the rising purple channel, resistance at the falling yellow midline.

I would normally give a 6-month channel midline the benefit of the doubt, but there have been many incursions over the past week.  And, the bulls know how important it is to hold the line on the H&S Pattern.

The US dollar isn’t a whole lot of help.  It found the support we anticipated at the .25 purple channel line, but hasn’t yet broken out of the falling white channel.

And, the EURUSD’s advance was turned back by the falling white channel as expected, but might have found support at a rising white channel line.

Today’s a big POMO day and the end of the month, so I suspect the bullish forces will be working overtime to keep the slide that the futures are indicating in check.

We’ll wait and see how the opening goes before giving up our long position.  Interim short only on the opening bell.  The SPX H&S hasn’t yet completed, and needs a close below 1643 — the line in the sand for this investor.

UPDATE:  9:35 AM

Got a bounce just slightly past the .236 on the purple grid, so I’ll take profits on the short position and revert to full long here at 1648.  Stops at 1648ish on the long position.

Remember, our long target from yesterday is 1666.69.

UPDATE:  10:05 AM

This morning’s stick save might seem somewhat arbitrary but, as is often the case, there’s a larger force at work behind the scenes.  And, I’m not just talking about the Fed.

It’s a channel, shown in red below, that picks up where the narrower red channel left off last week.  It fits with both the 1687.18 top (the .75 line) and the more recent 1674.21 top (the midline.)  And, now, its lower bound has caught a falling knife twice.

I suspect it will break down Monday.   But, for now, it gives SPX a shot at completing a Gartley Pattern up to our target at the purple .786 Fib line.  It’ll get another test shortly.

UPDATE:  12:20 PM

The red channel bottom survived its second test (a .886 pullback) and rallied to exactly the right place — the white .786 at 1658.78.

This sets up (but doesn’t guarantee!) a potential Butterfly Pattern.  Butterflies reverse at the .786 and extend to the 1.272 or 1.618.  In this case, the 1.272 is 1665.68 — only 1 point away from our 1666.69 target and the purple .786.

We should get a reversal here at 1650.97 (the white .236, to match this morning’s purple .236 reversal.)

UPDATE:  1:41 PM

Just a little warning, here.  SPX just completed a little H&S pattern on the 1-min chart that targets 1643.14.  Stops just below 1651 make sense here, though the .786 is at 1650.57.  So, maybe 1650 instead.

My likely reaction would be to go short for a trip to the neckline — which happens to currently be at 1643.50.

UPDATE:  1:56 PM

Finger on the trigger, watching to see if we get a breakdown through the .786 (1650.66 or 1650.06, take your pick.)  This is an obvious potential trap — the .786 Fib vs the H&S Pattern — so we’ll wait and see what happens…

UPDATE:  2:11 PM

Pulling the trigger.  Going full short here at 1650, targeting 1643 — but tight stops, in case all it’s doing is tagging the .886’s at 1648ish.  The move really wouldn’t confirm until a break of this morning’s low at 1647.62.

I show the larger H&S neckline at 1543.74, a little lower than my forecast would indicate the cross will occur.  In other words, this is probably either a deep retracement designed to stop out the bulls or an intra-day neckline tag designed to stop out the bulls.

UPDATE:  2:43 PM

Got the purple midline tag, but not quite the neckline yet.  Remember, it need not stop on a dime.  Some watching the neckline will expect it to keep going (it could!), and a little overshoot isn’t uncommon.

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The USDJPY pulled back from the brink, EURUSD is trying to make the best of the dollar’s momentary vulnerability, and stocks are wondering whether (if bad news is once again good) this morning’s data is “bad enough.”

We’re watching to see whether or not SPX’s drop at the end of yesterday’s session completes the wave higher.  A push back into the rising channel would be reason enough to play along on the upside.  The Inverted Head & Shoulders Pattern completes just above at 1654.54 and targets 1667.

I’d be more optimistic about that scenario if the EURUSD could break out of the falling white channel…

…or the USDJPY could climb back into the rising wedge.

UPDATE:  9:46 AM

SPX just poked up into the rising channel and appears likely to complete the IH&S targeting 1667.  Going long here at 1654.

UPDATE:  9:55 AM

SPX just completed a little Gartley Pattern at 1659 with 5 identifiable waves higher.  I’ll try going short here and see if we can get something going on the downside.

I might be early — the IHS target is still 8 points away. And the gap SPX was trying to fill is technically still open up at 1659.76.  Our primary target yesterday was the .618 Fib at 1661.16 and the smaller scale (gray) .886 is at 1660.22.

I’ll use fairly loose stops — say 1662ish, as we also have a confluence of Fib levels at 1660-1661.

The larger traditional H&S Pattern we were following yesterday would have equal left and right shoulders at the purple channel .75 line — currently about 1662.  But, 1659 is close enough.  The neckline is back down at about 1642.

As we head back down, I’ll be watching for a bounce at the IH&S neckline at 1655 – also the midline of the revised rising white channel.

UPDATE:  11:00 AM

Got the bounce at the neckline/white channel midline as expected, flirting with higher.

The RSI picture suggests that a push to 1661 or 1667 is a good possibility, so I’ll probably take an interim long position with any strength through 1661.

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Lots of red out there this morning.  SPX just retraced .886 retrace of yesterday’s spike higher – a good place for a bounce.  We should get a bounce here, but keep an eye on the primary target: the purple channel midline, currently around 1642.19.

UPDATE:  10:00 AM

SPX just bounced up through the falling purple midline at 1650.  I’ll play the bounce here, with tight trailing stops.

This could be a bounce to further establish the falling red channel’s upper bound at 1658-1659, but you never know.  It could just as easily be a simple backtest of the falling purple channel midline — hence the tight stop.

There’s a tiny potential IH&S setting up that targets 1660 — the confluence of the .500/.382 retracements and a quick gap fill.  But, there’s also a small rising wedge here…

UPDATE:  10:23 AM

Stopped out on that little move, so back to full short.

Next stop should be the big purple channel midline.  It looks like 1641.85 on the 60-min chart, which is so close to the pink .886 at 1641.14 that I’ll use that as my target.

The big question, of course, is “then what?”  I did a lot of charting last night, and found some interesting patterns in the currencies [see: Update on USDJPY] that might shed some light.

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NYA recently reached an important turning point.  More than any other index, it suggests that a significant downturn has arrived.  The only hitch?  Its Harmonic Patterns have typically been overruled by SPX.

In April 2010, NYA was still 3.4% away from its 61.8% Fib level when SPX, 0.7% away from its 61.8% retracement, reversed sharply.  The Gartley Pattern that SPX missed by only 0.7% in May 2011?  NYA was still a good 3.7% away (though both completed a well-formed Crab Pattern set up by the 2010 drop.)

On May 22, NYA reached several important Harmonic Pattern targets, completing a Bat Pattern and three Crab Patterns.

• the .886 retracement of the 2007-2009 crash
• the 1.618 of the Jul – Oct 2011 correction
• the 2.618 of the Sep – Nov 2012 correction
• the 2.24 of the Apr – June 2012 correction

Recall that when SPX hit its .886 retracement of the 2007-09 crash last September, it dropped almost 9% from 1474 to 1343.  The next lower major Fib level had been the .786 at 1381.  What can we expect from NYA, especially when the investing world expects that the Bernanke put will prevent a correction of more than a few percent?

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If the 3-day weekend ramp job can hold, it’ll be 20 positive Tuesdays in a row.  But there’s a catch: ES just tagged the .618 Fib retrace at the top of what looks like a decent falling channel and a backtest of the rising purple channel’s .75 line.

A close up:

In short, holding these levels could be difficult.  I don’t think there’s any value in chasing this rally, and will look to short into it at the .618.

SPX will play catch up with the futures on the opening, perhaps up to its own .618 at 1667.45.  But, DX is showing strength and EURUSD is showing weakness.  This is likely a bounce on the way lower for equities.

UPDATE:  9:38 AM

That should about do it for SPX.  Shorting again at 1668, stops around 1670 — the bottom of the recently broken red channel.  The .786 is just above at 1676.13 if it should push higher.

It makes a difference which level SPX reaches on this initial push.  A rally to the .786 is much more likely to be the terminus of the corrective wave, while the .618 potentially sets up a move to 1681 to complete a Bat Pattern.

UPDATE:  9:46 AM

Looks like the .786 is in play.  I’ll continue to play along on the upside, with stops at 1667.  Since we got a bump last Thursday up to the .382, there’s the possibility SPX has the .886 in sight for a Bat Pattern.

Many of the recent tops have been followed by a .886 retracement.  But, it’s usually after a drop of more than 3%.

The dollar has held the large white channel midline thanks to renewed weakness in the yen and continuing weakness in the euro.  A push through the red channel midline should see the index up to the white .786 at 85.471 in the next few days.

The USDJPY recently completed a Crab Pattern to a 2.24 extension at the .75 line of the purple channel that’s guided the pair higher since last August.  It fell back to the 1.272 level, and is currently back-testing the channel midline.

Though the .618 at 105.57 is definitely on my radar, I believe it won’t happen until the pair first retreats to the bottom of the purple channel channel — probably around 99.30-99.50 early next week.  This suggests continuing weakness in equities before any new highs can be expected (look for an updated USDJPY forecast after the close today.)

The EURUSD is selling off nicely this morning, with our target of 1.28 – 1.2775 looking better by the hour.

If 1.2744 should fall, however, there is much lower potential.  I’ll post the pair’s updated forecast after the close today.

UPDATE:  10:45 AM

SPX is currently backtesting the bottom of the red channel (1670ish.)  The likely target is still the .786 at 1676.13.  I’ve redrawn the falling purple channel, which intersects with the .786 in the next couple of hours.

 continuing…

UPDATE:  11:35 AM

SPX pushed below the .618 Fib at 1667 and continues to leak a little lower — triggering our 1667 stop.  I’ll pick up an interim short position here, but this is likely a backtest of the yellow dashed TL from the 1994-2002 lows.  Keep an eye out for a reversal around 1665.  If it pushes through, the next lower support is around the broken purple .75 line around 1662.

Remember, not every retracement has to be to a Fibonacci level. This morning’s rally got to 1674.21, less than 2 points from the .786.  It’s a perfectly acceptable corrective wave 2 if, as I suspect, there is additional downside ahead.

The question came up the other day regarding the likelihood of Harmonic Patterns completing.  While certain patterns point to or suggest a subsequent move, they say nothing about the odds of reaching an ultimate goal — only the odds of a reversal upon reaching a goal.

We had a potential Point B at the .382 on May 23.  It opens up the possibility of a Bat Pattern at the .886 of 1681.29.  If I saw corroborating patterns such as a channel top or midline, another Harmonic Pattern, etc. I’d definitely give it extra consideration. It increases the odds, but never ever becomes a certainty.

At the end of the day, that’s the essence of my charting/investing technique: playing the odds, trying to find agreement among Harmonic Patterns, Chart Patterns and other technical analysis means to anticipate turning points — and being on the right side of the trade if/when they arrive.

UPDATE:  1:00 PM

The top of the falling purple channel, which is pure speculation on my part, intersects with the .786 in about 45 minutes.  It would make for a nice A-B-C corrective wave.  Right now, SPX is lurking around the yellow TL and the midline of a rising channel (white) I’ve drawn off the 1635 low.

UPDATE:  1:22 PM

SPX just broke down below the midlines/TL intersection.  I’ll likely close the long position and go short only with any push below the purple .75 line — currently around 1663.  I like the idea of a tag at the intersection of the rising white channel bottom and the .382 around 1655 in the next 45 minutes.

UPDATE:  1:29 PM

Full short here at 1663.  Watch for support around 1655.50.

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Staying short this morning. The short-term and longer-term pictures are turning more negative, and aside from bounces and/or Bernanke going on CNBC and yelling “psych!  It’s QE forever!” this slide could gain even more momentum today.

In looking at some of the bigger picture charts, the daily and weekly RSI picture is rather gloomy.  The weekly RSI has downside momentum and won’t find channel support for quite some time.

While the daily RSI has lost channel and TL support.

Even the 15-min RSI promises at least another leg down.

Note that SPX completed all the H&S Patterns we were watching yesterday, but which didn’t complete by the close — inserting just enough uncertainty into the equation to make me too nervous to stay short overnight.

Ordinary market?  Sure.  No problem.  A market where even a hint of amping up Fed action could turn things on a dime…not so excited about that.  Naturally, that’s what the market makers were after by propping things up in the last few minutes.  The latest pattern actually completed, but quickly got bounced back above the neckline.

All we need this morning is a push below 1635.53 to loosen things up a bit.

DX tested the large white channel midline again.  Remember it broke out on May 13, and has now back-tested it three times.  It’s also reached the bottom of the rising purple channel.

The large white channel is incredibly important, as it dates back to 2007-2008.  The peaks and valleys in the stock market are easily identifiable based on whether DX approached or exceeded its midline.  It’s in the lower right corner of the 20yr chart below:

UPDATE:  11:07 AM

SPX just nudged above the purple channel midline.  I’ll take a protective interim long position here at 1642, tight trailing stops.

Note there have been many midline incursions, so this could be just another one.  Tight stops are very important on this position — with the key being not a price, but the midline itself.

The purple channel is young, so there’s a possibility it’s not the operative channel at all.  I speculated yesterday that the corrective move might backtest the red channel up at the point marked “C?”  But, that point is no longer achievable within the falling purple channel.

So, either the purple channel is wrong, or the rally is headed towards the purple .75 line (where it intersects with our falling purple channel) at 1660, or the rally is over and just doesn’t know it yet.

This morning’s low pushed below the big purple channel’s midline momentarily, and has since bounced 6-7 points.  So, we can’t ignore the possibility that it will respect that support going forward.

There are two basic possibilities for the corrective wave: (a) it ended at the purple C yesterday afternoon and this morning’s low was wave 1 of the next impulse down (which would be a 3rd wave); or, (b) we’ve only completed waves A and B, with C still to come — probably up at 1660, the intersection of the top of the falling purple channel and the rising purple .75 line (the white A-B-C.)

If the falling channel is right, the white C has only till about 12:15 ET to play out.  After that, the top of the falling channel starts forcing the upside lower.  There’s a fan line that comes from the 1687 top (dashed pink, below) that, if broken, could open up that 1660 level in a hurry.)

UPDATE:  1:05 PM

Still walking it up… 1648.39 looks good for a short-term target (the next 10 minutes or so.) It could also be the full extent of this corrective wave, so I’ll likely revert to full short there.

UPDATE:  1:38 PM

That’s close enough.  Full short here, stops around 1649ish.

Just went back and studied the previous purple channel midline tags in the previous corrections over the past six months.

In Dec 2012, note it was 2 bounces, followed by a .618 retrace of the second, then the drop through the midline in the 11th hour.  The total 4.4% correction went from the top of the purple channel to the very bottom — and, in fact, established the bottom going forward.

The smaller 3.1% correction in Feb 2013 went from the .75 line to the .25 line of the purple channel.  It got a big .786 bounce at the channel midline, then fell straight through to the .25 line.  It then retraced that entire move, dropped back .618 to establish a right shoulder, then polished off an inverted H&S pattern that kicked off the next leg of the rally.

The last correction, at 3.9%, took SPX from the .75 channel line to the bottom in 6 sessions.  Its passage through the midline was quick and painless, though it took several tries and an overnight ramp job to break back above it on May 3.

Of these three corrections, the closest in form and size to SPX’s current travails was the one in December: two bounces, 11 hours over 3 sessions, a .382 retrace of the initial drop to the midline from near the top of the channel.  It occurred over Christmas week, with Christmas day right in the middle, and the other shoe dropping on the 26th.

UPDATE: 2:20 PM

SPX just moved up through the .618 Fib and our 1649 stop level.  It might be a little overshoot designed to trigger stops, or it could be going to the .786 at 1651.52.

The purple TL from 1994/2002 is also right there.  Adding a long for the extra 2 points seems kinda silly.  I’ll just sit tight with the short.

UPDATE:  2:28 PM

Looks like the .618 is backtesting, so I’ll try another interim long at 1648.43 and see if it can get up to 1655 by the close.  Stops at 1648.30.

UPDATE:  2:34 PM

SPX just ticked down below the stop, but the better place would the bottom of the little red channel.  Will hold the interim long until that’s broken.

UPDATE:  2:46 PM

That was a smart move, as the bottom of the red channel held without any trouble. I’ve added an alternative channel higher, shown below in white.  Its top and the red midline intersect at the .886 at 1653.38 on Tuesday morning, so I’m going to go with that scenario for now.

It also provides a place for SPX to go if it pushes through the red channel bottom.  If it occurs around 3:05-3:10, it would make for a nice backtest of the falling purple channel .75 line around 1645, stopping out a few longs before the last push higher.

UPDATE:  3:18 PM

Dropping through the red channel bottom.  Selling the long position here at 1648.60, full short again.  But, watch for the white channel bottom at 1645.50 or 1646.19.

The 60-min RSI shows an inflection point here — the .25 of the white channel and the midline of the yellow.

Unfortunately, it doesn’t tell us whether those channel lines will hold.

UPDATE:  3:48 PM

Going into the final 15 minutes, and SPX just bounced back from beyond the bottom of the white channel.  Fakeout or are they going to close it positive on the day?

I’ll go back to where we started today’s discussion: the dollar.  The white channel midline is still standing.  The USDJPY is also looking positive, and the EURUSD is looking weak.

We might get a little spurt up to 1651 by the close, but I think we have at least 50 points of downside from here.  I’ll hold short over the weekend.