Everyone loves analogs.  Sometimes they play out precisely with enormous profits as in July 2011 [see:  Why Analogs Work.]

While, sometimes they’re merely pretty close, providing accurate price targets even when the timing isn’t exactly right, like this one from April [see: Analog Details.]

Whether on a grand scale or not, analogs often predict price swings the rest of the investing world can’t see coming.  When we’re able to properly position ourselves in advance, we can profit handsomely — or at least increase our chances of avoiding disaster.

A few weeks ago, I observed that the three QE-infused equity rallies seemed to be somewhat proportional [see: The World According to Ben.]

It just so happens that 1566 is a stone’s throw away from 1553 — the Crab Pattern 1.618 extension of last year’s plunge from 1370 to 1074.  It also happens to be the apex of the rising wedge we broke in April.

• QE 1:  666 to 1228 = 562 points.
• QE 2:  1010 to 1422 = 412 points (412 = 73% of 562)
• QE 3:  73% of 412 points is 300 points.  1266 + 300 = 1566

A triple top has long been among my leading end-of-the-road scenarios for the 2009-2012 bull market (recall that Oct 2007 topped out at 1576 and March 2000 reached 1552.)  While the above calculations don’t — in and of themselves — make for a useful analog, they started me down the path to one that I think has a decent chance of playing out very soon.

continued for members…

Background

Although QE 1 officially began in Nov 2008, there was a point of recognition in Mar 2009 that some of the $1.75 trillion the Fed had pumped into the markets might find its way into equities.  SPX rebounded sharply from 666 to 1219 by Apr 2010, coming within 9 points of retracing a Fibonacci 61.8% of the crash from 1576 in October 2007.

Upon realizing that its QE feeding tube was being removed, SPX plunged to 1010.  It might easily have sold off more than 17%, but rumors began circulating about another round of easing.  They were all but confirmed during the Fed’s Jackson Hole meeting that August, and the market was off to the races again.

Interestingly, the gains to the next peak of 1370 in May 2011 were 61.8% of the previous 666-1219 move.  [This was also within 11 points of the Fibonacci 78.6% retracement of the 1576-666 plunge for a well-formed Gartley Pattern — kick-starting my fascination with harmonic patterns and giving birth to the original pebblewriter blog.]

Upon completing the Big Gartley, the market ran out of juice.  We all remember the ensuing 21.6% plunge (pebblewriter readers remember it quite fondly) to 1074 that came within 23 points of retracing .886 of the rise from 1010 for a nearly complete Bat Pattern.

Note that upon reaching 1344 in February 2011, SPX also completed a Crab Pattern at the 1.618 (shown in purple below.)  And, if we apply Fib time ratios to the move from Mar 2009 to the eventual high of May 2, 2011, we can see even more interesting coincidences.  Most important interim highs and lows occurred around key Fibonacci dates.

The Analog

When SPX rebounded from 1074 a year ago, it completed a perfectly-formed Butterfly Pattern at the 1.272, just as we had anticipated [see: All the Pretty Butterflies.]

The 11%, 155-point decline to the .707 established a base for the next leg up.  Note that we’re now very close to the .618 extension of the move from 1074-1421.  It sits at 1481.56, a mere 7 points from our recent high — a high that also completed a very significant 88.6% retracement of the all-time high of 1576 to the low of 666.

Note that this also occurred at the 1.618 time ratio of the 666-1370 bull market.  If we were to assume that the .618 of the latest Fib time ratio series should mark the low of this pattern as did last go ’round, the time ratio completes on October 27 — very much in keeping with my expectation that the market will rise into the election, then plunge.

There are more details that will have to wait until later today.  And, I’m working on fine tuning the next several weeks.  But, I believe the top is either already in, or is coming within the next three weeks at a price only slightly higher than current prices.

more later today…