A reminder: as discussed Friday, our focus on equity prices is now on the E-minis (ES.)  The overnight action is too important to leave out of the equation, and playing the cash markets only leaves anyone holding a position overnight susceptible to big moves without the ability to hedge or stop losses.

Although the E-mini can easily be margined, I don’t recommend it.  Our focus on finding and exploiting turning points in equity markets works well most of the time, but occasionally I miss a call.  In an unleveraged portfolio, this could mean a

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USDJPY has recouped some of its losses following the Bat Pattern completion Friday, but is still looking bearish.

DX is back to Friday’s low, but is holding so far at the large falling white channel midline, the red neckline and the rising white channel .236.

The E-minis are up 5 points this morning, but have yet to recover Friday’s losses.

I’ll go long on any sustained move through 1660, but otherwise remain short.  Any such move higher is likely to run out of steam at the .786 of 1661.43 or .886 at 1662.63 — though the white channel top is drawn through 1664-1665 and could attract an intra-day push while still holding.

A move through 1668, on the other hand, targets 1694 — the purple 1.618 — thanks to the substantial reversal (Point B) at the purple .886.

The key levels on SPX are the tagged .886 at 1664.72 from Friday, and the Aug 26 high of 1669.51 (the white .500.)

UPDATE:  7:00 AM

Going short here at ES 1665 and SPX 1666.  The falling white channel tops have been tagged, and ES just finally tagged the white .500 Fib.  Neither has exceeded the Aug 26 highs — meaning the purple Bat Pattern held.

SPX:

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The e-minis have reached the .886 retrace of the small drop from yesterday’s Gartley Pattern completion.  But, the pattern is more conducive to a Crab Pattern, which extends to the 1.618+ rather than a Bat Pattern due to the obvious Point B at the .707 (a Bat requires that it be <.618.)

An extension to the 1.618 would put the larger pattern in the running for a Bat Pattern at its .886 of 1662.63.

DX continues to show strength, having broken out of and now backtested the falling purple channel.

The USDJPY has fallen back inside the white channel. It has been backtesting the purple channel midline for several days and has failed, so far, to punch through the psychologically important 100 level.

Next move should be to backtest (at least) the red IH&S neckline at 98.53.

NFP coming up…

UPDATE:  8:33 AM

Crappy numbers: 169,000 vs 180,000 estimates.  However, the participation rate dropped to 68.3% — the lowest since 1978 — so, unemployment dropped from 7.4 to 7.3%.  This top line number should give the Fed additional cover to begin tapering this month if they so choose.

The e-minis took the opportunity to bag that .886/1662.63 Fib level, so the market should start backing off from here.

The dollar briefly sold off, only to get a strong bounce off the purple channel again — another back test.

The 10-yr, which reached our target range from several months ago yesterday, backed off slightly on the news.  It still has the potential to tag the .618/1.618 combo at 3.013-30.17, but for all intents and purposes, it should be close to an interim high here.

If the futures can hold their gains for another 30 minutes, look for SPX to pop to the grey 1.618 at 1662.44 or the purple .886 at 1664.72 on the opening.  It shouldn’t last, but I can’t discount the possibility that SPX will tag the top of the white channel (the .500 at 1668.42?) before turning south.

If so, it would set up the dip from 1669.51 as the head in a good-sized IH&S Pattern targeting the 1709 highs after a drop Monday to 1643 — the large purple channel bottom — to establish a right shoulder.

If so, that channel top tag could come late in the day.  I’d be long on the opening and ride the rally as far as it’ll go.

While I’m thinking about it… I’ve been battling the disadvantages of the S&P 500 index as a forecasting tool since I started the predecessor to this blog back on May 2, 2011.

It works fine during the trading day, but as any regular reader of this blog knows, too much happens overnight (ramp jobs) in the futures markets for SPX to work well 24/7. It’s the bane of every cash market investor who dares to hold a position overnight.

For that reason, I will be focusing more on the eminis going forward — both in trading and in forecasting.  They are quite liquid, do a better job of following the chart patterns and harmonic patterns that I use, and offer the ability to set stops overnight that actually mean anything.

They are a futures contract, to be sure.  And, investors can use them to greatly leverage an investment if they so choose.  But, as I’ve said many times on these pages, our strategy does not lend itself to using leverage.

I’m always looking for turning points.  When we’re right, life is good.  When we’re wrong, we might take a 1/2 or 1% hit before being stopped out and switching sides — no big deal.  But, for an options or leveraged futures trader, being wrong regarding a turning point can wipe out your portfolio.  Don’t do it.

I will use them on an unleveraged basis only in our new fund and in forecasting the markets in these pages, and would suggest the same to anyone who asks.  Beginning next week, look for daily charts and forecasts to focus more on ES.

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Sep 5 is another of those days we pegged a while back as potentially “big.”  You wouldn’t know it from the markets’ overnight action.

The USDJPY is still lurking at a key breakout or breakdown level.  Though it did finally tag the white .707 exactly — not to mention the purple .618 Fib and the rising purple channel’s midline.

The EURUSD is still settling back after falling below the rising light blue channel .236 line and the falling white channel’s .786 line.  Draghi isn’t doing much to help the QE bandwagon with his fiscally conservative comments this morning (no more money for Greece?  Really, Mario?)

And, the dollar continues to hold support after breaking out of the falling purple channel and above the red channel .146 line and white channel midline.

We took a core short position yesterday afternoon, thinking it might play out overnight.  It didn’t, so odds are SPX will go up and tag the .786 at 1660.51 to complete a Gartley Pattern this morning (or at least close the gap at 1656.02.)

I’ll play along on the long side from 1655, expecting to re-short at that point.

If it gathers steam, the pair of .382’s is at 1658-1659, the grey 1.618 is at 1662.44, and the purple .886 is at 1664.72 — which is also where I show the intersection of several channels.

UPDATE:  9:41 AM

SPX just closed the gap and tagged the purple .707 and the potential neckline (red, dashed.)  I’ll hazard a short position here at 1657 if it doesn’t punch through.

UPDATE:  9:47 AM

There’s the white .382 Fib.  I’ll try shorting here at 1659.

Now that SPX has pushed above the neckline of the potential IH&S Pattern, it needs to close above it in order for the pattern to be valid.

That equates to roughly 1660.51 — the .786 — at today’s close.  The pattern target would be 1681 — just above the white .618 of the grid whose .382 SPX just tagged.

It’s tough when SPX opens to know exactly which of multiple, tightly packed turning points it might select.  These are all close enough that, if I’m wrong, the damage will be minimal — even if we didn’t use stops (banish the thought!)

But, we can look to other issues for confirmation.  The e-mini, for instance, just tagged its .786 for a well-formed Gartley Pattern at the top of a small but decent-looking channel while also tagging the .786 of a larger falling channel.

Unlike SPX, it has definitely not completed an IH&S.  It could go on and complete the purple Bat Pattern up to 1662.63 and, thus, tag the top of the white channel before the next significant downturn.  But, that’s only 4 points away and could easily come after a test of the white midline down around 1640.

With beats on factory orders and ISM services this morning, and NFP coming out in the morning, I’d not want to be on the wrong side of the taper trade overnight for the sake of 4 points.

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DX has pulled back from the .500 retrace of the drop from 84.965 and a tag of the red channel .236 line and appears to have its sights set on a Bat Pattern — though it’s too early to say for sure.

The red channel — while not exactly a thing of beauty — has simply continued to chug along.  But, as an indicator of equity prices, DX has been a schizophrenic indicator at best.

The USDJPY, on the other hand, has journeyed as far as it can without breaking out or breaking down.  The red H&S Pattern in still in play, but so is a smaller IH&S Pattern.

It reached our target price zone a day early — representing a backtest of the broken purple midline, a completed Bat Pattern (small purple grid), and a tag of the tops of the short yellow and grey channels — not to mention the 3rd backtest of the white channel from Jul 2012.

At the very least, I would expect a pullback here — if only to the .618 at 98.35 to backtest the IH&S neckline.

To be clear, few of these H&S Patterns have produced significant payoffs.  But, the necklines have proven to be good indicators of turning points.

In contrast with DX, USDJPY has been a very good indicator of equity prices — as shown in the chart below.

So, when its chart indicates a critical possible turning point — as it does now — we should pay attention.  Note the pennant/triangle tag at the purple channel midline.

As to SPX, it has designs on completing a Bat up at 1664.72 or at least closing the gap at 1656.02, but has to do better than yesterday when the white channel .146 smacked it back down.

I’ll play along on the upside here, but will watch for signs of weakness.  As the daily RSI chart shows, SPX faces its own moment of truth.

UPDATE:  10:45 AM

SPX is approaching the .886 (1649.30) of yesterday’s drop from 1651 to 1633, at which point it will have also reached the purple channel top and the same falling white channel .886 that stopped yesterday’s rally.  I’ll try a short position with any weakness here.

I think 1649 is close enough.  Full short, with stops at 1651.36ish.

UPDATE:  11:13 AM

Got  very close to our stop, but seems to be backing off now — a pattern we saw with the Aug 30 lows.  Stay tuned.

UPDATE:  11:40 AM

Just stopped out on the short position, back to full long.  This price range is a little tricky, as the white midline still represents resistance, and the white .618 is just overhead at 1653.45.  Tight trailing stops make sense.  But, be aware that there may be some chop here.

If SPX can punch through, 1660-1664 could arrive later today.

UPDATE:  12:55 PM

It doesn’t make a lot of sense from a harmonic standpoint, but it occurs to me that we could get a meaningul reversal here at the red .500 at 1654.47.

Note how each of the previous declines going back to 11:15 ET on Aug 27 have come at key Fib levels on the red grid.  That particular one came at the .886.  The next came at the 1.000 (the smallest at 11 points), then at the .786, then the .618.

If the pattern holds, we’ll see another here at the .500.  I say it doesn’t make much harmonic sense only because this rise is way out of character for a typical for a C-D leg of a Crab Pattern.  It’s still in the vicinity of a .618 retrace, however, so I’ll try a short position on any weakness here.

If it doesn’t play out here, keep an eye on the red .382, which lines up with the white .382 at 1658.75 and the purple .786 at 1660.51.  I also show the neckline for the potential IH&S arriving any moment at the grey 1.272 at 1656.23.

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The futures again accomplished what the cash markets could not, ramping 15 points over the holiday weekend to present a mildly bullish view this morning.

As we discussed Friday, there is a battle brewing between the harmonic picture — which still suggests lower prices — and the purple channel bottom.  So far, the purple channel is holding its own.

But, this purple channel is subordinate to the white channel — which at present is being backtested.

I’ll play along on the opening, but will watch for any signs of weakness.

UPDATE:  9:33 AM

SPX is approaching the .618 (1653.45) of the last leg down from 1669.51.  This should be the first test of the market’s ability to break out of consolidation.  Breaking through 1646 was a good start.

UPDATE:  9:59 AM

We’re getting a pause here, resistance from the small rising purple channel midline.  Look for a backtest of the red midline at 1645-1646.

UPDATE:  10:20 AM

SPX has almost reached the red midline.  If this is only a B of C corrective wave, then we should see one last spurt higher to the .618 (1653.45) or possibly 1656.02 to close the gap from Aug 26.

UPDATE:  11:20 AM

Taking an interim short position here at the red midline at 1645.  The next support level is the .618 retracement of the latest wave up at 1636.96.  It also marks the bottom of the purple channel.

However, a retrace to the .786 at 1633.04 would set up a measured move to close the 1656.02 gap.

A reminder, the downside case presented last week is still very much on the table.  If 1627.47 should fail, we should see a quick decline to 1620.84 and, potentially 1577.

UPDATE:  1:08 PM

Going long here at 1635.  Tight stops, as this could be just a backtest of the purple channel bottom at 1637.   If so, the .786 at 1633.04 or the .886 at 1630.71 are up next.

UPDATE:  1:12 PM

I think I jumped the gun.  Short again at 1637 with stops around 1638.

UPDATE:  2:57 PM

Still inching down, very close to the .786 at 1633.41. The RSI charts suggest a little lower still.

UPDATE:  3:05 PM

Stopped out at 1638, back to the long side.  I suppose we’ll get the usual late-day bounce here, but don’t see the immediate upside other than a lackluster bounce off the purple channel bottom.

The bounce at the bottom of the red and white channels on the daily RSI confirms the purple channel bounce.  It even shows a little positive divergence.  But, there are longer term channels whose midlines — just above — should be even more influential.

It was this 15-min RSI chart that had me expecting a tag at 1633 or 1630.  Now that its daily candle has been magically transformed into a more bullish omen, the futures will probably gap down to tag one of those levels overnight.

In sum, I still see plenty of downside potential.  I’m just not willing to hold short overnight to capture it — not without a little more clarity.  There’s a good chance of rallying up to 1643-1645 for a Point C to establish a Butterfly Pattern that targets 1621.70 — in line with the red 1.618 at 1620.84.

I’ll likely go to cash at the close.

UPDATE:  3:47 PM

Closing out the long position and going to cash here at 1639.

Back in Carmel, where today’s high temperature should be a perfect 70 degrees (21 C.)  LA was great, but I had all the 105 degree days I need for a while.  Best wishes to Bella and Ed on their nuptials.  Thanks for including me!

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SPX reached our 1636.81 reversal target as expected yesterday afternoon.  The eminis are up 3 pts this morning on disappointing economic news (bad is still good), so shorting at 1644 and going long at 1636 appears to have been the right decision — for now.

As we discussed yesterday, a reversal at the red .786 might have been a set up for a bearish Crab Pattern down to 1620.84.   If so, prices should stay south of 1646.41.   We’ll watch to see how the market reacts to Chicago PMI at 9:45 and Michigan sentiment at 9:55 AM.

Stops at 1636 just in case, as a reversal at the .618 could also produce a Gartley at the .786 or Bat at the .886.

The dollar reached the purple channel’s upper bound as expected — also the midline of the falling white channel and the rising red channel .146 line.  Also note the completed IH&S Pattern.  To say this is a critical moment for DX is an understatement.

UPDATE:  10:02 AM

Stopped out on the long position, so I’m switching to short here at 1636.

As mentioned above, there’s a good chance of some serious whipsawing here.  Completion of a Gartley or Bat Pattern would mean another reversal at 1634.20 or 1632.65, which would establish nothing until we get a breakout or breakdown.

A drop below 1630.88 would help the 1620.84 scenario.  Note the grey 1.618 in the same vicinity (1621.28) as the red Point D.

Right now, SPX is sitting at the bottom of the purple channel.  So, the downside could pick up steam quickly if it’s breached.

A breakout above 1646 would be a great start for the upside, but the direction wouldn’t be all that clear until we top 1669.51.

The 60 min RSI isn’t all that helpful.  The red channel is bearish, while the purple is bullish.  Based on this chart, my preferred view is a strong intra-day dip to the purple channel bottom on positive price divergence, putting in a distinctive bottoming candle for the day at 1620.

But, it is the last trading day of the month.  Wall Street hates to close out a month on a negative note (bad for business.)

The daily RSI shows strong potential support at the bottom of the red channel that dates back to the 2011 lows.  No divergence there, as the tags have come at increasingly higher prices.  But, the low on Aug 27 followed another two quite closely — the first time that has happened in quite some time.

At the same time, RSI was tagging the bottom of the falling white channel, which shows nothing but divergence. The succession of lower lows in RSI accompanied much higher lows on SPX: from 1401 on Dec 28, 2012 to 1560 on Jun 24 and now 1645, 1639 and 1629 on Aug 19, 21 and 27.

Similarly, the three declining tags on the top of the white channel have accompanied higher highs on SPX: one each in the 1500s, 1600s and, a few weeks ago, the 1700s.

The top of the purple channel also shows plenty of divergence.  Since the Nov 2010 tag (SPX 1227) the RSI highs have continued to decline even as SPX itself has risen.

Divergence is a funny thing, though.  It can continue for a long, long time until rectified.  So, I don’t ascribe too much importance to the daily charts other than to note when RSI moves through a key channel line such as the drop through the yellow/purple midline this month — always a negative sign.

The fact that RSI went on to register two successively lower lows and hasn’t been able to break back above the midline is also negative.  The fact that it’s occurring in the context of higher rates, tapering, a looming deficit battle, etc certainly raises the stakes.

UPDATE:  11:15 AM

SPX just tagged the grey .886 and bounced.  Keep an eye on the falling white channel for signs of a break out.

Also, remember that 1620 itself isn’t the most likely target if SPX does take a dive.  The purple .618 is just below there at 1617.27, and — being on a larger scale — makes a much more appealing target.

And, if such a dip didn’t recover intra-day, our A:B = C:D scenario starts to make a log to sense.  An exact replay would put SPX at 1582 on Wed Sep 4 (the yellow D.)  It’s a 3% move (each way), so I’d really like to see it play out.

In fact, short of a break out today, I’ll probably go into the weekend short in order to be positioned properly (not recommended for nervous types, hedging recommended.)

UPDATE:  1:15 PM

Backtesting the purple channel bottom?

UPDATE:  3:55 PM

I’m tempted to hold short over the weekend.   The near-term looks quite negative from my standpoint — with those 1617 or 1577 targets looking particularly tasty.  But, I’ll cover my shorts here at 1631 and go to cash over the long holiday weekend just to be on the safe side.

I’ll write more later.  Have a great weekend everyone!

SPX finished the day very close to our initial target for the corrective wave, the bottom of the red channel and the .500 Fib at 1634.28.  Importantly, it closed within the large purple channel.

I’ll look for an opportunity to go long this morning, probably at 1628-1632.

The futures are off slightly, so there’s a very good chance SPX will complete the little Bat Pattern it has started to the .886 at 1628.96.

The eminis are back within their purple channel as well, and could be done with the correction after tagging the .786 at 1627 or .886 at 1626.   However, I can’t rule out a small Crab Pattern intra-day to intersect with the purple .618 at 1611.37.

The dollar broke out of its channel, completing its IH&S and running up to tag its .618.  It just backtested its neckline.

If the fear trade and/or the emerging market debacle continue, it should be making a major reversal here at the bottom of the red channel.  But, there’s clearly resistance to be overcome.

UPDATE:  9:33 AM

Going long here at 1632, stops at 1627ish.

UPDATE:  11:22 AM

Potential resistance here at 1646, the red .786 and top of a possible new rising channel.    Note there’s a gap to fill at 1656.  The .707 at 1657.19 looks like a good short-term target.

UPDATE:  12:33 PM

Getting some weakness off that resistance.  I’ll play the downside for possibly 1636 or more.  Stops at 1647.

UPDATE:  2:29 PM

The market has seemingly nodded off… I have to duck into a meeting for the next 1-2 hours, but here’s my expectation:

SPX continues to follow the tiny white channel to the .500 or (more likely) .618 at 1636.81, at which point it should reverse and move higher.  I would take profits there and switch long, but with stops at 1635 in case it goes on to tag the .886 or (more likely) the .786.

If it reverses by 1630 or breaks out of the white channel, I’d be long — looking for 1638+. Any dip below 1627 is likely headed for 1621.

GLTA.

ES lost all its overnight gains and is trending lower.  Note the reversal off the falling yellow channel midline.  Will the PPT come to equities’ rescue?

It appears likely to reach the combination small Crab Pattern completion at the 1.618 and larger purple .618 at 1611 — perhaps even on an intra-day basis — if it can’t hold current prices.

Though, as I showed last night, the eminis are currently sitting at the bottom of the purple channel.  So, any venture lower stands a decent chance of reversing.

I’m staying short on the opening, but watch out for the possibility of the channels to trump the harmonic influence.

UPDATE:  9:39 AM

We’re either bouncing or backtesting. I’m going long here at 1630 (ES 1628) with stops at 1627.46.

The dollar has probably bottomed and is well on its way to completing a IH&S we charted last week.  Before, it was moving in tandem with equities.  Now, it will be the beneficiary of rising fear and uncertainty.

The USDJPY reversed its foray back into the falling white channel and is heading higher — perhaps an IH&S in its future as well?

For its part, SPX is clinging to the equivalent channel lines.  A failure to hold the purple line could easily mean a tag of the red 1.618 or purple .618 at 1620 or 1617 respectively.  A failure to hold there could mean the AB=CD pattern we discussed a couple of weeks ago to the purple .886 at 1577.

One middle-of-the-road scenario (acceptable to PPT) would be a quick drop to 1617-1620 and recovery to the purple channel line by the end of the day so as not to disturb the daily chart — which isn’t nearly as scary as the short-term charts would indicate.

The new, slightly less ambitious purple channel:

As I mentioned last night, I’ll be in and out today.  Should be back in about 2 hours.

UPDATE:  12:50 PM

Back online…  SPX has backtested the 1.000 of the potential Crab Pattern.  If it can stay above 1640, it should set its sights on the red midline or even top. Crabs often rebound from the 1.272 up to the .886 or .786 (1642 or 1645) before continuing down to the 1.618.

But, given the bounce on the new purple channel bottom, it’s quite possible the downside will be limited to this morning’s lows.  For that scenario to play out, there should be no more missteps.

The nature of this Crab makes playing it very difficult.  If the market’s to recover, we should expect a small corrective wave 2 somewhere along the way — after a 14 pt reversal would be logical.  But, it wouldn’t be clear whether a 7-10 pt reversal right now is corrective or heading down to the 1.618.

UPDATE:  1:18 PM

I’ll play the short side here on any push through the 1.000, but it might be only a short-term trade.  Even a garden variety .618 retrace would mean a drop to 1632 — 14-16 points round trip.

UPDATE:  2:30 PM

I have to duck out for the rest of the session.  I expect the little decline we’re getting now (thank you, Mr Market) to bottom out around 3-3:30 at the .500 at 1634 or .618 at 1632, then go on to new highs on the day — possible as high as 1650 at the red midline.

To be sure, the 1.618 is still very much on the table.   It just seems as though the urgency is out of the decline.  A reversal, or the calm before the storm?  I don’t know.  But, I like the looks of the daily RSI chart:

GLTA.

I ended yesterday’s post without the usual admonishment to not hold overnight unless you are capable of hedging and effecting stops overnight.  Last night’s futures action is ample proof of why.

War jitters have sent the futures tumbling overnight — but right to the .886 retrace of the latest move up.

I’m assuming that SPX will do the same when it opens, dropping 15 points to the red .886 at 1642.91 and testing the bottom of the purple channel again.  I’d close any longs asap and play the downside to as low as 1640ish, and look for a bounce there.

The dollar is taking it all in stride…

And, the USDJPY is near support at intersecting channels as well as its own .886.

UPDATE: 9:34 AM

SPX just dipped below 1641 and should get a bounce within the next point or so.  I’ll switch to a long position here with stops at 1638.

We’re well into the red channel again, so this should resolve one of two ways: a reversal by the end of the day that climbs back out, or a tag of a prominent red channel feature such as the midline at 1635 or bottom at 1620.94 (also the red 1.618 extension.)

I’ll hold long unless prices push below last Wednesday’s low, in which case I’d go along with the fear trade.

UPDATE:  9:45 AM

So far, so good.  But, keep an eye on the 1639.49 low.  A dip below probably means a trip to that 1620 mark on accelerating volume (so far anemic.)

I have to run out for several hours (in LA today) but will post later in the day.

UPDATE:  EOD

SPX held the 1638 stop/support for several hours, but in the end couldn’t recover.  The Syria rumors are coming fast and furious, and it’s certainly beginning to look like a shooting war.

As mentioned above, a plunge through our 1638 was cause to go short with an initial objective of 1635 (didn’t hold) or 1620.94 — where the 1.618 and .618 reside.

The next support isn’t until our original target from our downside scenario of a few weeks ago — 1577, though the .786 isn’t a bad fit depending on the timing.

The eminis present a different view, however.  A stop right here solidifies the lower bound of the rising purple bound (it’s broken on SPX.)

I’ll be in and out of appointments tomorrow but should have the opportunity to post before the market opens and periodically throughout the day.

Not that long ago, AUDUSD served as a great indicator for US equities.  It still is at times, but the slide since April has been pretty steady.  The charts I posted last Jan 11 haven’t needed much updating:

At the time, a Bat Pattern had completed at the top of a corrective channel (in white, above) after the breakdown of a rising wedge.  It looked fairly bleak for the pair.

And, in fact, the Sep 2012 high of 1.0623 never was broken.  Seven months later, AUDUSD has reached the bottom of that white channel.  Seems like a good time to revisit the charts.

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