ORIGINAL POST:  9:55 AM

The night watchman at the plunge protection team was obviously dozing last night when futures traders snuck in and engineered the dip we discussed yesterday:

The trend remains up, but I will look for any weakness to scalp a few points on the downside, with an objective of 1367 and stops at 1380… How we get there from here is anyone’s guess.  But, I mostly expect one last retrenchment before the final push to TL 2.  A logical place would be TL 1…

If you didn’t get short ahead of time, the likely downside of this push is the small channel bound at around 1364.  I don’t think it would be worth jumping in at this point.  Of course, if we break 1360, it’s a different story.

The channel bottom isn’t absolute, as there are a few different legitimate choices depending on whether one includes tails or not.

The picture is a little clearer on the daily chart.

If I’m not mistaken, that’s a very nice tag of TL 1 at  our objective of 1367 (well, 1366.64)  and probably marks the low for the day…less a few more easily rattled options buyers whom the market makers wanted to shake free of their winning positions.  Gotta love OPEX.

Now, onto the big questions:  Where do we go from here?  What happened to our price targets?  And, what happens after we get there?

continued…

A bullish interpretation of the channel looks something like this:

While the less bullish outlook offers a downside to as low as 1362.

We could also drag along TL 1 for the next several sessions before running into the bigger rising wedge we’ve been in since 1266.

Almost forgot, right?  This channel isn’t happening in a vacuum.  It’s part of a much bigger rising wedge whose lower bound is way down at 1350.   As such, it’s relatively unimportant and can be broken without the overall trend being damaged.

The upside picture is a little clearer after this little bump in the road.  While many bull runs have been stopped by a 1.618 harmonic target (a Crab) being reached, it’s relatively rare to call it quits at a .707.

The game is on as soon as RSI signals it’s ready to rise again.  Note that we back tested the former channel line as expected, and are in the process of heading for the next lower TL — right about where the “4” is on the chart below.

It would coincide with the intersection between TL 1 and the rising wedge (white) lower bound on the price chart and make an excellent launching point for the next leg up.  The most logical way to reach it is through chop — muddling sideways for the next few sessions as discussed above.

The last time we tagged this line was a tiny back test on July 16.  SPX hit a low of 1345 the next day, and began its last leg up to yesterday’s 1380 — a 35 point rise.  So, a similar move (drawn in bold yellow below) back up to the red RSI TL (added) might also be expected to throw 35 points our way.

Adding 35 points to today’s low would yield 1392 — right in the middle of our target price area.  The timing is a little harder to pin down, but if the RSI moves continue as they have, it will likely be around July 31 or Aug 1.

Remember, the daily RSI chart doesn’t indicate the range of values — just the closing value.  So, a top higher than 1392 — say 1404 — might be reached intra-day and the daily RSI could still close inside the red TL.  Just a thought.

I think it’s safe to say that if RSI doesn’t do the little about face there at TL #4, there’s not a lot of support down below until it reaches TL #5 — which probably correlates to the purple channel line for SPX.

THE UPSIDE

So much for the immediate upside.  What happens after that?

Roughly parallel to the (white) rising wedge’s upper bound is the big purple channel which originated at 1074 last October and includes the June 4 1266 low.  It’s the dominant chart pattern of the past year and currently resides around 1315.

Astute readers might recognize the big purple channel’s upper bound as the upper bound of the big yellow rising wedge I focused on earlier this year.   Here’s a chart that includes both that wedge and the current rising wedge we’re in.  Notice anything interesting?

They both have an apex around 1462 — which to me is a very interesting number.  First, it’s the target I put on SPX back in April.  Remember the analog that guided us down to sub-1300 and wondered aloud whether we might be developing an RSI channel?  Do a search on “1462” on this blog and you’ll see it referenced eleventy-zillion times.

Second, 1462 is the Fib 2.24 of the May-October pattern, not to mention a stone’s throw away from the .886 of the 1576-666 decline (1472, the red pattern), the 1.272 of the 1370-1074 decline (1451, purple) and the the 1.272 of the 1422-1266 decline (1464, white).

When harmonic patterns line up and share important targets, I pay attention.  I also pay attention to charts like this, where one wedge’s apex becomes another rally’s high.  I don’t know if the current wedge will expand like the 2011 one did, but I can’t help wondering if the last apex (1462) might become our new high.

Put it all together, and toss in a logical trend line across the past two tops, and you get something like this.  It’s enough to make you think about going long.

Good luck to all.

 

UPDATE:  12:38 PM

The market’s leaking a few points lower, just tagged 1362.77 — very close to the “less bullish outlook” of 1362 we discussed above.  We also tagged the .618 Fib line on the larger purple pattern — should offer good support.

We can linger in this area and the rising wedge bound will come to us through the passage of time.  For those playing the upside, this will likely be a good place to jump in if you’re not already long.  As mentioned above please use appropriate stops.  This is a lot of activity for OPEX Friday, and that added volatility means greater risk.

If we break decisively through 1360, the next hurdle to the downside the lower channel bound at 1350 today, or 1353 on Monday.