All eyes on the Fed this week, of course.  The usual course is a triangle, narrowing as we approach the moment of truth.

Note the overnight stick save on ES, back above the neckline and channel mid-line.

And, the bump at the bottom of the red channel for USDJPY — after the new high last week.

Happy Friday the 13th everyone.  Yesterday we looked at an interesting bullish path that, given the price action overnight, is in serious danger of fizzling.  This morning, we’ll turn to the bearish case that represents the more obvious scenario to play out.

Setting aside everything else, the two H&S Patterns we’ve been watching have confirmed, and still point to SPX 1755-1760.  Even what’s left of the overnight rally won’t get prices back above the neckline.

As we discussed yesterday, this is the obvious case.  Yet, I can’t tell you how many times over the past 8 months the obvious bearish case failed to play out.  Normally reliable patterns have been beaten silly by overnight ramp jobs, etc.

In fact, if the market holds these levels, there’s still a legitimate path to our Butterfly Pattern targets. And, did anyone happen to notice the USDJPY made a new high yesterday?

The key for equities is SPX 1780 — the neckline.  If it acts as a lid on this little rally, watch out for 1755.  If the market pushes through and negates the pattern, then all is well in the Fed’s Fun House.

Stay tuned.

As discussed very early this morning, the H&S Patterns on SPX and ES have completed.  The downside course is clear. The neckline is the same slope as all the other juicy H&S Patterns of the past few years (really!) and it bears a strong resemblence to the H&S Pattern of

SPX came within 10 points of its Fibonacci target — same as occurred in April 2010 and May 2011 before those big downturns.

SPX already broke the Dec 4 and Nov 20 lows, so the bullish harmonic scenarios are rather limited.  ES, on the other hand, stubbornly refused to play ball — staying north of 1774.50 until just a moment ago.

It finally cut loose, only to stop way down at…wait, 1771.75?  That’s not even 3 points.  It isn’t even a Fib level, for crying out loud!  Or, is it?

Turns out 1771.75 is one of those magic numbers that the bulls are hoping can turn the tide.  It’s also one of those moves that MM’s live for, that are so meticulously well-planned that they separate all but the most paranoid traders from their hard-earned money.

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ES reached our interim goal of 1799.50 overnight.  Is there more to come?  The currencies are mixed.

The EURUSD, a completed Bat Pattern at a long-term channel midline…

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Nice little sell-off on ES, reaching potential support at the channel midline near 1800.  This will delay the march to 1823, as the red channel obviously is  now obviously kaput.

Like the USDJPY, this is a small scale double-top after a rather anemic reaction at the .786 and .886.

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While much of my trading is driven by swings lasting only days or hours, occasionally we arrive at one of those critical junctions that’s been years in the making.  For the S&P 500, 1823 is one of those levels.

This is the culmination of a huge Butterfly Pattern, the 1.272 extension of the drop from 1576 in Oct 2007 to 666 in March 2009.  I’ve been watching it for months, as has anyone who takes Harmonics seriously.

The previous significant reversals on the harmonic scale charted above ranged from mild to severe.  And, note that 2 of the 3 came up 10-11 points shy of their projected turning point.

• 17% drop from the .618 Fib level in April 2010
• 22% drop from the .786 Fib level in May 2011
• 9% drop from the .886 Fib level in September 2012

Butterfly Patterns require a significant reversal at the .786 Fib level, and the 22% drop from May – Oct 2011 certainly qualifies.  However, they can extend to either the 1.272 or the 1.618 Fib level.  In other words, the real damage might await us at SPX 2138.

In a heavily manipulated market such as we now have, this turn of events would surprise no one.  Take a nominal breakthrough in the budget deal, pour a little more QE on it, sprinkle in an overnight ramp job or two and we could slice right through 1823 as we did 1576 (the potential double-top.)

If the market does react, however, the implications range from minor (off 5-6% to 1700 or so) to huge.  How huge?

Many investors have seen the comparisons between the current market and 1929.  But, the last major sell-off after completing a Butterfly Pattern was in 1973.  The S&P 500 dropped 48% between January 1973 and October 1974.

While we wait for 1823 to show its colors, I’ll look more closely at the strengths and weakness of this potential analog (see more on analogs and their effectiveness HERE.)

Stay tuned.

ES and SPX are completing a Bat Pattern this morning.  Look for a reaction at SPX 1809.62 — the red .886 Fib level.  Charts in a few…

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Today should be all about establishing a Point B for the final Butterfly Pattern.  The magic number?  SPX 1806.16 (1805.50 on ES.)

How else to explain the market’s euphoria over a taper-quickening jobs report?  This morning’s made to order market “response” sent ES scampering up to nail Wednesday’s target.  And, it’s hanging in there — at least until the pop and drop.

UPDATE:  9:50 AM

We’re seeing a Gartley unfold first, which will lead us to the .786 later in the day.  Look for the IH&S we’ve been expecting to set up after the pullback from 1801.58.

UPDATE:  11:15 AM

Making a slight adjustment to the IHS.  The pullback shouldn’t be all that great, as we’ll probably reach SPX 1806 at the close, leaving latecomer bulls who hold long over the weekend with a disappointing opening on Monday — one last shake down before the climax next week — probably Wednesday.

The eminis are a little trickier.  If they’re to reach their 1.272 at 1837.26, it’ll have to happen overnight or over a weekend.  With an extra 15 minutes at their disposal, they could easily tack on an extra few points to reach the white .886 at 1808.53 today — even if SPX only reaches the .786 at 1806.  If not, Sunday would do nicely.

SPX could also push past to its own .886 at 1809.61, which would be a great head fake as it would signal the 1.618 extension at 1834.  Bottom line, be careful.  If you intend to hold long over the weekend, keep in mind that this whole move is an precision exercise in manipulation.  It has been very carefully crafted to separate you from your money.

UPDATE:  1:50 PM

SPX just reached the .786.  Well…almost reached it.  By coming up just a few pips short (1806.4 versus 1806.16) they can justify a last-minute rally to close at a high point.

UPDATE: 4:25 PM

The day’s high for SPX: 1806.04 versus our 1806.16 target.  For the e-minis: 1806 versus our target of 1805.05.  Close enough for government work.

I have some very interesting charts to post regarding the implications of completing the big Butterfly Pattern.   As mentioned before, there are two versions: mildly upsetting, and leaping- from-windows ugly.   I’ll try to get them posted later this afternoon.

The market’s hanging in there, finding support at the purple midline and a red channel line  after retracing completing a bullish Bat Pattern yesterday. The bulls need ES 1786/SPX 1785 to hold.

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INITIAL POST:  9:20 AM

Between bank downgrades, the ADP report and a raft of bearish analogs floating around out there, it’s a tough day to buy the dip.  But, that’s exactly what the charts, particularly a rather bullish analog, are telling us to do.

Look for the eminis to potentially tag the white .786 at 1782.63 and for SPX to bottom out at current levels (1785.91.)

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