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

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

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

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

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

continued for members…The first is the .786 at 1660.86 where it overlaps the red .786 at 1660.05.  A reversal here would be a normal (nominal) retracement on the red grid after making a new high.

The next is the 1654.19 high from Jun 18.

UPDATE:  10:13 AM

Just tagged the .786 mentioned above.  The better target is 1655, but I’ll try playing a bounce with a small long position here at 1659.86 with very tight stops — as in 1659.  My core short remains in place.

A bounce up to 1666.96 would make sense, as would 1671 or even 1673.85.

The Philadelphia Fed Survey came out this morning.  9.3 is a big drop from last month’s 19.8.  But, as they put it, it was the third consecutive positive month.  Firms reporting increased activity beat out those reporting decreased activity 28% to 19%.  Demand fell 5 points to 5.3. Shipments fell 15 points to just below zero (first negative in 3 months.) And, employment dropped 4 points to 3.5, with firms reporting increased jobs beating out decreases by a small margin (19 to 16%.)

Is it negative enough to derail the taper talk?  Who knows.  But, it might sew some seeds of doubt…which is all the market needed to take a pause.

UPDATE:  11:38 AM

That’s good enough for me.  I’m closing my long position at 1667 and reverting to full short. Stops around 1668 ought to do.

That’s three little waves, which might be all we get.  If it doesn’t hold, then the white .618/red .886 combo at the intersection with the grey channel midline (1671-1672) would be my next best guess.

I’d likely not wait until 1668 to flip back to the long side.  Any move beyond 1667.05 would be cause enough.

UPDATE:  12:30 PM

Back to the long side here at 1667.07.  The best target looks like 1671.50ish, but it could go as high as the prior low of 1678.51 before getting out of hand.  I’d continue to recommend tight stops.

Looking at the 5-min RSI, we’ll probably get a pullback here to tag the white midline before we can look for any more upside.

Either of these guys would be a good fit.  I would imagine the purple will play out, as it would be the hardest to play: a drop to 1663 to flush out folks playing the bounce, then a pop in the final hour to tag 1671-1672 to flush out weak bears before a 15-17 point drop overnight to 1655.  Just thinking out loud…

UPDATE:  1:11 PM

Looks like it’s not going to hold.  Cutting my losses here at 1663 and reverting to full short.  It appears as if we might reach that first target today after all.

UPDATE:  2:16 PM

There are a couple of channel lines here that might try to interfere with our 1655 target — which is now 1653-1655 since the H&S completion came a little sooner than expected.

I suspect the solution will be a very quick tag and reversal…though SPX might decide that 1658.59 is close enough and leave it at that.

UPDATE:  3:20 PM

SPX is creeping closer to our target price range.  Remember we’re looking for a quick tag and quicker reversal to backtest something — probably the grey or red channel midlines at 1671ish, or even the neckline way up at 1684ish.

If it doesn’t shake out that way — if we go into the close without a bounce — that’s a lot trickier, particularly if we haven’t reached 1655.  The eminis equivalent target is 1650 — a good 10 points away.

I get nervous staying short overnight, but I hate to leave 16 points on the table (8 each way.)  Housing starts, building permits and Michigan sentiment all come out tomorrow morning.   Any of them can move the markets.

I suppose I’ll stay short overnight, and see what happens in the after hours — not recommended unless you can hedge.

GLTA.