We’ll be watching to see what, if any, fallout there is from the Hilsenrath article on Friday after the close.

The eminis are looking weak this morning.  Recall that they reached the combination 1.618 and 2.24 extension Thursday, and are still down from that level.

Back test or breakout?  Until we actually see a thrust back into the white channel, I’m assuming back test followed by a decline.

We’ll go short on the opening, but be ready for a breakout if/when.

The dollar fell out of the steep, narrow channel – but has yet to react much as it exceeded the previous Apr 24 high.  Not much rationale from a harmonic standpoint to reverse after doing that.

It was the tag of that white channel midline that had me thinking Friday that we’d see a pullback when it reopened, but so far it’s not much of one.

The EURUSD is still showing weakness post the purple channel breakdown, but has still only retraced .618 of its rise from the Apr 4 bottom.

In the absence of a reversal — a distinct possibility given the latest falling wedge — we can expect at least .786 on the red grid (1.2850.)  But, that might be all the weakness we see if the rising white channel holds.

The USDJPY hit both our IH&S and Crab Pattern targets on Friday, but still not much of a reaction.

SPX has put together a really messy topping pattern these past several days since its Mar 9 high a few days prior to our target date of today.  And, it never quite tagged our targets of the yellow 1.618 at 1635.25 and the white 2.24 at 1637.15, let along the IH&S target of 1641.

It closed just below the .886 at 1633.65 on Friday, leading me to think there was a Crab Pattern extension in its future (a Bat Pattern would have required a Point B < .618.)  All we’d need is a reasonable Point C, which I think we just got courtesy of this morning’s little sell-off.

The opening price just fell, so I’m going to try a long position this morning and see if it can rally.  Going to take a stab here at 1630.

The key to the upside is breaking 1633.65 and then 1635.01.  Key support on the downside is 1626.74 and then 1623.09.

UPDATE:  1:55 PM

SPX broke the 1535.01 high, and then backed off some. An .886 retrace of the last leg up would be around 1627.80 — not a bad neighborhood for a stop as it intersects with the red .25 channel line in the next hour.

For reference purposes, the bottom of the red channel is currently about 1617, and it intersects there with the next lower purple channel line (the .75) in the next hour or so.

SPX reached the yellow 1.618, so the Crab Pattern can be considered complete.  Recall that 1635.25 has been on our radar screen since Apr 23 [see: CIW Apr 23] when it first appeared SPX might be setting up a Crab Pattern.

It was confirmed on May 3, when the 1597 high was topped.  The reasons for a downturn then are just as valid today.

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The market continues to melt up, enjoying the lack of any meaningful overhead resistance — for now.  As discussed yesterday, that should change around SPX 1635-1643.  Until then, at least, I remain long.

Meantime, the dollar continues to bounce around the channel lines, refusing to commit one way or the other.  We’ve been watching for any breakout that would signal an equity sell-off.

In the past, thrusts towards the channel midlines has been trouble for equities: the dips to 1042, 1173, 1074, 1266 and 1343.)

The recent completion of the purple Bat Pattern at the midline of the rising red channel also thrust past the white midline — but, produced only a 46-pt (3%) correction in SPX.

So, we’re left to wonder whether something bigger is coming: perhaps a run to the white .786 (85.47) to complete a big Gartley Pattern and tag the purple midline.

Note that the purple 1.272 is at about the same level, but there’s no argument for a Butterfly Pattern on the purple grid, only a Crab Pattern up at the 1.618 extension (also the white .886) around 87.

I’ll be watching to see whether or not the small rising purple channel holds.  If it does, the potential white harmonic pattern won’t play out and DX will remain above the .25 red channel line.  If not, there’s potential to the bottom of the red channel at 79.93.

The daily SPX RSI channels offer a bullish scenario if SPX can push through resistance at 1635-1641.

The past two days saw it break the TL connecting the last three spikes higher, and today’s value has topped the previous peak — so, a potential break in negative divergence.

But, the daily chart can be deceiving on an intra-day basis. The current push above the yellow TL and red channel midline could be erased with a reversal later in the day.  If RSI is repelled at the red midline, the white midline or lower would be back in play.

Will SPX push through?

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Markets continue in a consolidation mode post breakout.  The EURUSD seems to have found its footing, with a couple of choices still possible for the operative channel and harmonic pattern in the near term.

The USD appears to have found support at the intersection of the rising white channel and the .382.  If it’s able to hold these levels, look for a return to test the yellow channel midline and the .618 at 82.577.

SPX just reached a small scale 1.618 at the midline of the small white channel.  We have been waiting for a backtest of the IH&S neckline (yellow, dashed) and/or broken TL’s that would confirm the operative rising channel.

This price level has potential. But, given the strength of many of the European markets, such a pullback might have to wait until SPX reaches our next target.

We’ll keep an eye on 1622, as a reversal through it would likely mean the back test is on.  I’d probably try an interim short there, with the most likely target being the intersection of the red channel midline and the IH&S neckline around 1614.09 around 12:15 ET.

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The dollar continues to hover around the midline of the falling white channel within the rising purple channel.

Closer up, we can see the short-run positive trend. But there are two harmonic interpretations that could play either way depending on how DX handles that midline.

The ES has tagged the top of the purple channel from Nov 2012 at a 1.272.  Should see a reaction, but not really due until the 1.618.

SPX closed right at the 1.272 on the small white grid on Friday.  Like ES, it’s not due a reversal as there was no .786 action to speak of.

We’ll go long on the opening (1614.40), but be ready for any move back through the Fib level and/or white channel (1613.75ish.)

A back test to the broken neckline (the purple oval), the broken purple channel midline or yellow trend line (yellow oval) is to be expected, but not absolutely necessary.   Rising channels have been showing extraordinary strength lately (e.g. the white channel within the red channel within the purple channel.)

Interesting that the DJIA is off this morning, while SPX continues to try and power ahead.  Seeing the same on the Nikkei, which by my reckoning is due for a stout sell-off to at least 12,678 or 12,360.

Note the yellow channel midline tag, the .618 and 1.618 tags. When that purple channel finally breaks, it should be substantial.

SPX’s white channel will eventually break down — perhaps for 15 points or more — but in the absence of a catalyst, it’s prudent to wait for the actual breakdown rather than anticipate it.  There’s blue sky all the way to the .75 purple channel line (1622ish) and nothing else waiting there except for the 1.618 extension of the action since Friday (1621.93.)

UPDATE:  10:50 AM

Getting the break down finally?  We’d need a break not only of the white channel, but the .75 line of the red channel (about 1615.20) to be on the safe side.

UPDATE:  10:55 AM

There it goes… taking a short position here at 1615.15, tight stops around 1616.

This is very likely a short-term play, not any kind of major move.  Such a move would require a decline through the red midline (currently 1608) and, then the purple midline (1606.)

If it pushes below 1612.85, look for strong support between 1606-1609.65.

UPDATE:  11:43 AM

Stopped out.  Back to full long.

This has the feel of a melt-up: no particular reason to tumble, and plenty of room to run.  I’m going to take advantage of the quiet session to do a little work on the medium-term forecast. For now, the near-term targets identified last week remain in place.

Back later.

UPDATE:  2:47 PM

SPX is back-testing the neckline for a little H&S pattern that targets 1623.80.  It’s pushed just below the white midilne, but the red .75 offers support around 1617.55.

UPDATE:  3:57 PM

Saw a push through the red channel line at 1617.55.  The immediate downside looks to be about 1616.50, with additional exposure down the the targets mentioned this morning.  This is likely a shakeout rather than a reason to panic.

I’ll continue working on the forecast this evening, and try to get it posted late tonight.

GLTA.

Reading the employment reports these days reminds me of the story told by William Goldman, celebrated screenwriter of such classics as Butch Cassidy and the Sundance Kid and All the President’s Men.  He was waiting for a producer to get off the phone when the man suddenly cupped his hand over the phone and shouted to his assistant: “Bill, Bill!  Which lie did I tell?”

When we learn that the government is unable to keep track of the number of its own employees from month to month, how are we supposed to trust that any other number that purports to tell us how many folks are employed in offices, warehouses and saloons across the nation?

In the “bad news is good news” (more QE) and “good news is good news” world in which we’re living, this morning’s jobs report is — surprise! — good news.

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We’re still long from yesterday’s low, but coming up on important resistance.  This morning will be about figuring out when to sell.  I suspect 1615-1616 would be nice.

The dollar shot up on the news to an important channel line and the .618 retracement of its fall since Apr 24, but is dropping back.  How far it falls could be quite telling.

Stay tuned.

UPDATE:  9:42 AM

SPX just hit 1616.16. I’m shorting here, with stops at 1618.  Charts in a minute…

Note SPX just hit the top of the red channel within the broader purple channel, as well as the 1.272 Fib extension of the 1597-1536 drop from Apr 11-18.

There are still a number of higher potential targets:

• the top of the purple channel, currently around 1646
• the IH&S target of 1650 (now that SPX finally crossed the neckline)
• the white 1.618 extension at 1635.25

But, odds are they’ll have to wait for a back test of the lines of important resistance just broken.  It’s not that the 1.272 Fib line is that important.  There was no meaningful .786 reversal, so this harmonic pattern is much more likely to extend to the 1.618 at 1635.

This was our upside target if SPX was able to break through the resistance it just did.  And, we’re at an unusual point on the purple channel — the .625 line.  The .75 would be a much more common end point.

UPDATE:  10:29 AM

Looks like SPX is breaking out of the red channel, triggering our 1618 stop.  So we’ll switch back to the long side for a likely run up to 1624ish.  Stops at 1614ish.

The red channel is drawn with the best fit on the interior points on the 15-min chart.  But, by the time you examine a channel on longer time frames, all those precise reversals at the channel lines pretty much disappear.  In other words, there’s always wiggle room.

In fact, I’m going to switch back a short position here at 1618 just to protect against the possibility that wiggle room is at work here and the “break out” mentioned a moment ago is a false alarm.  If SPX pushes back up through the top of the red channel, I’d be content with an interim long position for a trip to 1624 rather than switching sides all together.

UPDATE: 10:55 AM

We’ve been talking about 1635 a lot lately.  There was Apr 29, when SPX came within one point of making a new high:

On the other hand, if it dips below 1592 in the morning, it has downside risk to the channel bottom at 1576 [it hit 1581] where it would likely catch a bid and start a run to 1635.

On Apr 25, when charting the IH&S (before it went circus freak on us) in Best Laid Plans:

That way, the Inverted H&S Pattern would feature a neckline that’s roughly the same as the purple channel .25 line, and would target the same price level as the 1.618 extension of the 1597-1536 slide: 1635.

But, my favorite reference was in July, 20 2011 in Ten Lousy Points, as we were about to nail the call-of-the-year thanks to our 2011 as 2007 analog:

There was a Santa after all!  The Dow soared 205 points, the S&P; 500 over 21.  The next two days tacked on 13 more points.  At that point, SPX was just 10 lousy points from completing an inverse head & shoulders pattern that might have sent it up 125 points to 1635.

We all know the rest of the story.  Suffice it to say there were a lot of hangovers those next few weeks that had nothing to do with New Year celebrations.  SPX dropped 120 points in 2 weeks, 230 points in 4 weeks and 750 points by the following Christmas.

There’s no real connection, of course.  After topping the 2000 high, SPX had just missed — by 30 points — completing an Inverted Head & Shoulders Pattern (in purple, below) that would have targeted around 1670.  Note that 1670 was also the 1.618 extension of the Crab Pattern that was in the works (also in purple.)

But, all was not lost.  After peaking at 1576, SPX went on to construct another IH&S that looked promising.  If it completed, it would have targeted 1635 — indicated by the dashed yellow horizontal line.

It came within 10 points on Dec 26, but couldn’t quite close the deal.  As I wrote in July 2011, the rest was history.  That 1635 IH&S target would have to wait…until now.

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BTW, I’ve extended and expanded the current membership offer through the end of the weekend.  Charter Annual memberships at $1,200 fix your subscription price for the life of the site.   Annual memberships are slated to increase to $1,800 when this deal is done and $2,500 when the upcoming fund is launched.   Click HERE to sign up.

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UPDATE:  2:40 PM

So far, 1618.46 has held as the daily high.  We’re seeing a little more movement, back down to the 1.272 Fib and below that gray channel line.  We’ll take a look at near-term and ultimate targets in a moment.

First, a quick look around at other indices which, for the most part, are flashing at least “interim highs” indicators.

COMP nailed the middle most 1.618 of the three nestled close together between 3343 and 3435.  This is the extension of the drop from 3134 to 2726 in Mar – June 2012 — the equivalent of the 1422 – 1266 drop in SPX (which exceeded its 1.618 way back at 1553.)

RUT hit an important trend line dating back to August 2008, but appears to have potential to 969 and then 988 — call it 1000 — based on Harmonic charts.

The DJIA has reached one 2.24 extension (13,338 – 12, 035 from Apr-Jun 2012) but has stopped just short of the more recent one created by the Sep-Nov 2012 downturn at 15,137.

As for SPX itself, it’s a little early to speculate.  The 1.272 at 1614 could provide a floor.  But, I suspect the immediate risk is to 1609 or 1603 by the end of today’s session.

We’ll discuss the most likely scenarios below.

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We open this morning with the RUT, which appears for all the world in freefall.

Note that this plunge, if it continues, will complete a rather nasty H&S Pattern around 900 that targets 840.

Which would put it in the neighborhood of the bottom of a rising wedge and the .618 of its leg up from 765.

Initial claims were off 18,000 rather than up slightly.  And, the ECB, as expected, lowered interest rates by .25% — which will goose the markets a bit.

Will it be a lasting pop, or pop and drop?  We’re not really supposed to care.  Let’s hold our noses and jump in.

Taking a spin around the currencies…  DX has had an interesting reaction to something supposedly so bullish…

And, the EURUSD isn’t exactly signalling a rally:

The AUDUSD, which we haven’t looked at lately, is on the edge of a cliff.  Recall that it completed its yellow Crab Pattern a long time ago.  It’s now pondering the white Crab Pattern to the 1.618.

But, it’s formed a triangle (yellow, dotted) that dates back to 2010…

That really looks like it should break to the downside — almost certainly breaking 1.00.

And, our old friend the USDJPY… looks like the bounce may be fizzling — if not downright reversing.

In short, the rest of the world continues to signal a downdraft in stocks.  But, SPX is soaring.

We closed the short position that we adopted on the opening yesterday at the close for a small profit — even though it didn’t quite reach our 1580 target.  I was worried that the ECB rate cut and predictable initial claims report would do…well, exactly what they have done.

We can assume that SPX intends to tag 1600 in the mix of everything.   Could it happen?  Sure, if certain things fall into place.  Maybe even a little bit higher…

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Playing the downside this morning, as the dollar has reached an important Fib target.

But, watch for SPX to rebound at the bottom of its rising wedge — around 1590.72, which is also the .618 of the latest wave up.

For those playing the bounce in gold, DX bottoming here means GC has probably topped out.  I’d switch back to short with relatively tight stops, targeting the previous lows and ultimately 1155.

UPDATE:  9:40 AM

Just hit 1591.48 – not quite the .618 but a direct hit on the bottom of the wedge.  Switching back to the long side with stops at 1590ish.

But wait, you say, what about the dollar’s rebound?  Glad you asked.  It was a tag on the 1.272, and since we saw a reversal a little higher at the .786 it’s a legit Butterfly Pattern.

However, note that in reaching the 1.272, DX broke down from the purple channel that’s guided it higher since January.  As such, the 1.272 is unlikely to stop the decline.  Look to the 1.618 at 80.825 — also the scene of the red .618, white .500 and purple .382 — which would make it an equally legit Crab Pattern.

That additional drop should be enough to help equities make the next push higher we discussed late yesterday.

UPDATE: 10:15 AM

Just got stopped out of the long position so switching to short for the .886 at 1587.76.  Stops at 1590ish again.  Charts in a few.

UPDATE:  10:20 PM

Close enough.  Back to the long side here, with stops around the 1587 channel line.

UPDATE:  10:45 AM

Decent rebound so far.  Should be out of the woods, but keep those stops where you’re comfortable.  A break below 1587 would likely mean a downdraft to 1580 or lower.  I’ll set stops there.

Next resistance on the upside, the TL from the 2000 & 2007 tops – the dashed red line at about 1593.40.

BTW, we’re conditioned to think that a push lower such as we had this morning is bearish — a reminder of the risk in holding stocks.  But, from a technical standpoint, that’s often not the case.

Note that the little rising wedge we were watching this morning (yellow, dotted) featured an apex around 1604 on Friday.  In essence, it limits the upside and the time in which to reach it.

If the 1587.86 low SPX just made holds, the new rising wedge apex is much further out in the future — and, at higher prices.

RSI also gets reset with a move lower like this, clearing the way for more upside — if it’s in the cards.

Even a move down to 1580 leaves a nice channel to the upside in place.  Just means it would take a little longer to get there.

UPDATE:  1:00 PM

A break through 1587 and we’re short again…

UPDATE:  1:11 PM

Somehow, in this “random walk” down Wall Street, the marvelously efficient and unfettered SPX managed to stop one nickel above yesterday’s low of 1586.50.  Since that was a 55%ish retracement of the 1577 – 1597 rise, a Bat Pattern is a good possibility.

If so, the .886 is down at 1579.84.  Note that this is also roughly the level of the 1.618 extension of the 1586 – 1597 rise — hence my earlier note that a drop through 1586 would likely result in 1580 or lower.

If, by some miracle, 1586.50 holds, then this is a very deep retracement of the last move up.  But, that’s looking less likely by the minute…

The FOMC announcement is coming up at 2PM ET.  The market’s acting like it knows something bad is coming…

Remember, 1586.50 is the key level.  First support after that is the .618 of the 1577-1597 rally at 1585.20. So, use stops judiciously.

UPDATE:  1:40 PM

Just broke through 1586.50 and then some.  The .618 coming up…

After that, the .786 at 1581.84 and the .886 at 1579.84.  The .886 is the one that lines up with the most significant support: the .25 line of the purple channel from 1343.

UPDATE:  1:52 PM

Have to try a long position here at 1585 – the .618 — just in case.  Stops at 1584.50.  The FOMC coming up in just a few minutes…

I can’t imagine the Fed tightening in any way today. So, I continue to see this as a corrective wave in an overall move higher. But, we’ll always play along on the short side as long as they want to play that game…

UPDATE:  2:00 PM

No change.  Downside?  Just kidding.

Hmm… fiscal policy constraining growth.  Continues to see downside risk.  Could increase or reduce QE.  One dissenting vote… Esther.

UPDATE:  2:20 PM

SPX broke out of the little falling channel and is back-testing the broken yellow TL.  As before, a push through the last low (1584.70) opens up 1580.  Trailing stops are a great idea.

I’ll post an update asap, but have to grab a conf call first.

UPDATE:  3:15 PM

SPX just pushed below 1584.70.  Back to the short side targeting 1580, with stops at 1586ish.

UPDATE:  3:45 PM

Just tagged the .786.  It should head lower to our 1580 target, but I’ll take an interim long position for the bounce, stops at the 1582 entry.  Core short still in place.  Charts in a few…

UPDATE: 3:55 PM

Going to cash at the close.  I suspect we’ll drop to 1579ish either in the closing minutes or in the morning, but either way it’s not worth the risk of the overnight position.

Charts in a few…