Yesterday’s close was ugly, exceeding the bottom of our SPX downside target range by 2.49 points.  It looked like a nice bounce at 1381 — the .786 of the 1576-666 crash from 2007-2009.  Then, perhaps aided by AAPL, the market faltered and closed at the low.

We’ve had a little follow through this morning, but so far prices have firmed above the 1370.58 May 2011 high — a level I have thought important to hold for the bullish case to remain (somewhat) intact.  And, remember, they need it to remain intact.

This market continues to push the boundaries, selling off nearly as far as it can without breaking the last of the plausible upside patterns — the rising white channel.

While we got in a tad early, we remain long from 1381 yesterday, and should see a nice rebound in the coming week if our analog continues to hold.  I’ll post some charts, along with key levels and indicators, below.

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Needless to say, yesterday’s decision to go short is working out pretty well.  While we missed the top by a couple of hours and nine points, we were well positioned for the 23-point plunge on the opening.

The analog we’re following continues to shine.  Having passed its first important test, another one lies just ahead.

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Finally, another important milestone has arrived.  My perspective has been that The Powers That Be would keep the crap game afloat long enough to maintain the status quo come election time.  And, from all accounts, that’s exactly the case.

While there is plenty to be worried about, you’d never know it from the way the markets have performed.  The S&P 500 has rallied 121% since March 2009 and sits only 50 points away from its recent high which, itself, was only 100 points from an all-time high.

All it took was $16 trillion of deficit spending, a few trillion in quantitative easing, some serious arm-twisting overseas, and a Plunge Protection Team that paid very careful attention to chart patterns.

Some economists (and central bankers) maintain that these steps were necessary in order to free the economy from the worst recession since the Great Depression.  I maintain they were taken primarily to keep global banks from failing.  Ending the Great Recession is the hoped-for side effect.

In my opinion, the books of the world’s largest banks are being cooked (with central bankers’ blessings) to such an extent as to make their balance sheets and income statements a farce.  They are being allowed to carry distressed and dead assets at book value, and to report their trillions in derivatives as a matched book without providing any details to investors.

Why do I harp about government, Fed and bank balance sheets?  Because, in the end, they must be dealt with.  The enormous sums are somewhat manageable with historically low interest rates, a co-dependent regulatory environment and a complicit mainstream media.

But, eventually, the scales will tip.  The truth will out.  Simple arithmetic will once again be accepted and the severity of our situation acknowledged.    It won’t matter who’s in the White House or who controls Congress, because the damage will have been done.

In fact, it’s been done already.  And, it continues to worsen.  The key to higher stock prices isn’t whether everything is getting better.  It’s not.  The key is how much longer TPTB can catapult the propaganda.

 

 

While I enjoy making money in the markets as much as anyone, I am saddened by the circumstances that make the analog we’re following [see: A New Old Analog] possible, if not inevitable.

MARKET UPDATE: 10:15 AM

Guided by the current analog, we went long at 1405 on the 25th, targeting 1428-1451 as the range for this move (reaching 1434.37). We also played the little H&S pattern last Friday for a quick 11 points and went to cash — where we remain.

As discussed yesterday, there are a number of chart patterns in play that offer guidance for the coming days and are consistent with our SPX forecast.

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NOTE TO MEMBERS:

It can be challenging to satisfy the desires of both long-term investors and short-term traders with respect to forecasts.  And, investors of all stripes have expressed an interest in being able to tell at a glance what the current forecast is.  So, I am trying out a new format for posting market expectations.

I will post major channels and harmonic patterns on the market pages (such as https://pebblewriter.com/markets/spx/ ) for those who want a quick snapshot of the longer-term picture.  It will also include brief commentary about major trends, general expectations and key price levels.

The daily posts will focus on shorter-term information generally geared to swing trading, economic commentary, market interactions, etc.  Any new ideas or forecasts such as our analog work will also be introduced here.

I’ve also been exploring various ways of passing along information on when I make a trade.  Note that my personal trading style is fairly active.  I don’t usually day trade.  But, if I see an opportunity to capture 10-15 points when a harmonic pattern completes, I will usually do so.

My approach is simple: if I can make 1%+ per week on average, I’ll have a decent year.  As of mid-October, we’re averaging closer to 3% per week.  Sometimes trades take several days to work out, and sometimes several minutes.

This past Friday was a great example. We reached the middle of our target range indicated by the analog we’re following.  I thought there was a possibility we’d move even higher into the range, but saw a bearish H&S pattern completing.  I posted:

The little H&S played out, so we could see a sell-off down to around 1412 or so.  I’m closing my long position at 1423.50 and playing along on the downside, with the expectation of going long again either later today or tomorrow…There’s a high potential for being whipsawed here.  Longer-term investors might want to hang in there.

Less than two hours later, we had reached our target:

We just reached 1412.91 — close enough to my 1412 target.  Divergence is mixed, with positive on 5, negative on 30, even on 60, 4-hr and daily.  My gut feeling is we’ll rebound here, but I have nothing to hang my hat on other than a couple of hazy RSI channel lines and a cynical attitude regarding TPTB.  I’m closing out my shorts here and will stay in cash over the weekend.

Between the run-up we enjoyed from 1405 to 1423 and the move back down, we made a little over 2% — a nice trade for an unleveraged account with no exposure to specific names in less than a week.  But, it could just as easily have taken several weeks.

Bottom line — it’s up to all members to decide whether to play along or not.  Just know that if you do, there is always the possibility that my position may not be held for very long. Long-term buy-and-hold investors might wish to focus on the forecasts and big-picture harmonics.

Short-term traders, on the other hand, might want to keep an eye out for the blue boxes in the daily posts highlighting my position changes during the day.  I’m also exploring sending out Twitter messages to highlight trades.  It’s simple, fast and cheap for both of us.  And, you can set Twitter to text you or email you messages.  Please let me know your thoughts.

And, please let me know your thoughts on the format below.  Again, this is the overview from the page:  https://pebblewriter.com/markets/spx/   I’ll continue with the daily post shortly.

Thanks.

 

ORIGINAL POST:  9:25 AM

major channels:

major harmonic patterns:

3-year

1-year

close-up

 

forecast:

We’re currently following an analog that has been very accurate since March 2012.  SPX reached our target range of 1428-1451 on Friday, then dropped out of a rising channel.

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SPX continues on the path we laid out for our new analog [see:  The Game is Afoot.]  We reached the lower end of our target range yesterday (Point A), breaking above the new channel mid-line.

We’re getting a back test of the broken channel mid-line here.   SPX remains within the proposed rising channel — for now.

We remain long since 1405 on Oct 25.  But, this is a good time to review the technical picture.  I’ve also adjusted the analog somewhat, including the targets for this particular leg.

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I love this old Sherlock Holmes expression (borrowed from Shakespeare’s Henry V.)  It perfectly captures the excitement of seeing a forecast begin to come together.  Although I’ll admit that, on the face of it, it makes just as much sense as “non-stop flights” and “your door is a jar.”

These are the early stages, of course, and things can come unhinged anywhere along the way.  Murphy is patiently awaiting his cue.

We are nearing the lower end of our target range as detailed yesterday [see: A New Old Analog.]  We should get a pause at the new channel mid-line around 1428, but we’re looking for higher than the .382 Fib.

I’m working today on cleaning up the analog charts posted over the past few days.  My trading platform (TOS) seems to be back to normal (haven’t had to reboot anything since starting around 5am — yay!)  So, look for a bunch of charts over the next couple of hours — including currencies and other major indices — that reflect the path I expect for the remainder of the year.

As I’ve posted before, analogs can be extraordinarily profitable when they come together.  But, they require a certain degree of faith (and a well-designed escape hatch for those that fail.)  From time to time, I make myself go back and re-read a post I truly hated writing: Lessons Learned.

In it, I detail the amount of money that second-guessing my own forecast cost me in the summer of 2011.  Don’t get me wrong; June-August was a very profitable period.  But, my returns would have been about twice what I experienced had I been able to ignore those nagging doubts.

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Our resolve was severely tested with two huge “pop and drops” in a row, but we were rewarded by reaching the upper end of our target range (SPX 1405.45) yesterday, closing our shorts from last week and opening a long position.

There is still downside exposure to about 1400 intra-day (the unfinished little Crab to 1401) and a .618 (of the 1354 – 1474 rise) at 1400.  But, the wave structure doesn’t look terribly complete.  So, use stops and trade safe.

For those not incorporating harmonics into their trading strategy, I can only imagine how utterly confusing this latest move was.  In fact, the entire past six weeks have been a market maker’s dream — constant whipsawing that would have been ridiculously difficult to anticipate based on earnings, economic data or Cramer’s ranting.

Seen through the prism of harmonics patterns, the reversal at 1474 was simply a Bat Pattern completion that paid off the 1576 – 666 drop from 2007 to 2009 [see: The World According to Ben].

And, every reversal since then has followed the rules of ordinary harmonic patterns — with occasional assists from chart patterns (mostly channels.)  The initial drop from 1474 to 1430 was a Bat Pattern retracement and channel line tag.  It set up a Bat Pattern (in purple) that signaled a reversal at 1469.50 (came at 1470.96) and established a declining channel (in white.)

The next move down was to the bottom of the new channel and a .618 retracement of the 1396-1474 rally.  It was followed by another Bat Pattern (in green) targeting a reversal at 1465.78 (came at 1464.02.)

The final move down was initially to the white channel bottom, but pushed through to complete a Bat Pattern .886 retracement of the 1396 to 1474 move, as well as a Crab Pattern (1.618 extension) of the 1430 to 1470 move.

By reaching 1405.45, it also solidified the upside case originally discussed back on the 17th [see: CIW Oct 17, 2012.]

If 1474 was a normal wave 3 or wave 5 high, we would typically be open to a corrective wave of greater than a .618 retracement.  Look what happens if we make it a .786 or .886 retracement.  Suddenly, the yellow 1.618 lines up very nicely with the other 1.618′s up there at 1515-1518.

In other words, a Crab Pattern with 1405 as its base instead of 1425 (the previous low) lines up with the 1515 Crab Pattern target established by the 1347 to 1074 drop from July to October 2011, and the 1518 Crab Pattern target set up by the 1422-1266 drop from April to June of this year.

In hindsight, the harmonics and chart patterns have done an outstanding job of showing us the way — even though there were times when the direction suggested made no sense at all.  If fact, I’m pretty sure that any bad trade I’ve made over the past six weeks was the result of “knowing better.”

The question now is whether reaching our 1405 target really suggests a move to 1500+, or is it merely setting the stage for a massive bull trap?

For help, I’m turning to an analog I think looks very promising.  We have done very well with these in the past [see: Why Analogs Work.]  The 2011 as 2007/8 analog knocked the cover off the ball last summer.  And, the latest took us from 1422 down to 1266 and back to 1474 in spectacular style — earning us 60%+ returns over those six months.

 

This new analog is important not just for its capacity to protect investors from losses, but its potential for nice gains for those who don’t mind speculating a bit.

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Here’s the chart I posted yesterday.  I’ll spend the next hour or so refining it and trying to better pinpoint some targets.

I call this a new old analog because it’s essentially a continuation of analog first posted on April 9th [see: New Analog I’m Watching.]   I noted the form of the latest move up from 1074 was essentially the same as that of the 2010-2011 bull market.

Here are the two charts, the first from last year…

…and the second from 2011-2012:

Looking back, two things really jump out.  First, the forecast for a high of 1472 and low of 1314 (later adjusted to 1292) was incredibly accurate considering it was made 5 months in advance of the pattern playing out.  Second, the forecast for the entire move to be completed by the middle of June was ridiculously inaccurate!

What I failed to consider at the time was the relative size of the two patterns.

UPDATE:  2:35 PM

Quick market note:

Looks like SPX is trying to break out.  As often happens, RSI is leading the way with a break out of the red channel via the 3rd white channel in a row to sport the exact same slope on the 60-min chart.

Ordinarily, we’d expect a back test of the red channel after a break out like this — so watch for that.  Once RSI is clear, however, it runs into the top of the purple channel rather quickly.  So, I expect this move up to complete rather quickly unless than channel can be broken.  My best guess at this point is 1435 on Monday or Tuesday.

1413.50 would be a very good number to break above… followed by the little channel SPX has bounced around in for the past couple of days — that shares a TL with the falling wedge (in yellow.)

UPDATE:  6:00 PM

Ran out of time to get the LT charts up before the close, but better not to rush them anyway.  Look for this post to be extended over the weekend.

Here’s how the 60-min chart ended the day.  Looks like a break out and back test to me — tentative target = 1430-1435.

To our friends on the East Coast, stay safe.  Better yet, come visit for a few days.  Huge bonus — zero political ads in California!

UPDATE:  WED OCT 31 / 11:35 AM

I appreciate everyone’s patience regarding these charts.  I’ve worked the past four days putting them together, and was going to post it last night.  But, a family emergency interfered.

Let’s start with the big picture. SPX is testing a trend line /channel mid-line that dates back to the 1937 top — the period, BTW, that I most closely associate with the current economy.

The past 20 years can be viewed as a series of parallel channels.   As we’ve discussed many times in the past, there are steeper channels within these channels, but eventually SPX falls back town to the lower bound, tests it, and breaks.

Another angle, including the corrective waves…

Which, like the channels up, can also be looked at as one big falling channel.  Time will tell whether or not we reached an important turning point in 2007.  But, if so, this big falling red channel takes on added significance.

For now, it’s enough to say that it’s a series of meaningful channels.  We’ll focus on the last two for purposes of the analog.

Here are the two periods we’ll concern ourselves with for the moment.  They take place within the upper half of the latest yellow channel.  If the analog continues to hold, the larger period highlighted on the right will perform as the one on the left.

A quick note: some prefer the term “fractal.”  They are, for all intents and purposes interchangeable, though fractal is somewhat more correct as it implies a change in scale — which is the case here.  I’ll stick with “analog” for now, just to avoid confusion with respect to previous posts.

If the analog holds, the current pattern will form a pattern something like this:

Here’s a closer look:

GLTA.

As we expected, yesterday’s pre-opening rally failed and new lows were reached by the end of the day — though we didn’t quite reach the upper end of our target range on SPX.   Here we are, 24 hours later, looking at pretty much the same set up.

The eminis are up 9 points, the dollar sold off nicely during the night, and the EURUSD is back below the support it tried to regain overnight.  Could this be a case of same tune/different day?

As we discussed yesterday, the dollar was due for a sell-off.  We got it — in fact nailing our proposed Point C (in yellow, below.)

The euro also complied, by putting in a wave C in its back test of the broken red channel.

SPX reached within a couple of points of the high end of our target range.  But, by my count it hasn’t completed the full extent of this sell-off.  Look for this rally to fail at around 1422.

The eminis, despite a great bounce off the .886 of the April – June correction, appears to have stalled at the bottom of the white channel.  And it did so without having reached its own harmonic target and without any positive divergence whatsoever.

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Very few of the rallies inspired by Draghi’s jawboning have lasted.  I suspect this will be no different — especially on a day when euro zone PMI hits a new low (since Sept 09) and US PMI, while marginallly higher, indicates falling new orders and higher prices.

The EURUSD has staged a nice rally off its overnight lows, but is just back-testing the broken red channel we discussed late yesterday.

I expect that the pop we get in equities on the opening will not last into the day.  SPX might reach yesterday’s target of 1421-1422.58 (around 10:15 EDT?), but then we should see more downside.

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