If you’re a bear, the good news is that markets fell out of bed overnight — with the e-minis down 19 points as of a few minutes ago.  The EURUSD plunged from 1.3082 to 1.2916 in a matter of hours…

…and DX just peaked at 80.135.

The bad news (if you’re a bear) is that the damage was done overnight.  And, each is due for a reversal in the coming hour.

The EURUSD reached an important channel line of support — the red channel that has caught this particular falling knife many times since the July 1.2041 low.  While the pair might drift slightly lower, it is more likely to head higher throughout the day.

And, the dollar has completed a measured move higher, retracing 88.6% of its decline since the Oct 10 high of 80.295.  Look for a reversal here that will build a base for a eventual higher prices.

The good news for equity bears is we’re likely to hit the 1.272 Fib at 1415.06 (or, nearby .786 at 1413.24) on the opening, and maybe even complete the Bat Pattern at 1405 we’ve been talking about for the past week or so.

continued for members… (more…)

In my opinion, the next eleven sessions should shape up as a battle between the status quo and those who want a new direction.  The bull market, getting very long in the tooth, is overdue for a correction.  But, the administration, the Fed, and some on Wall Street need to keep it afloat for eleven more sessions — as a tumble in the weeks before an election wouldn’t be good for business.

The New Order thinks a tumble would be just fine.  It would expose the soft underbelly of the status quo’s approach and encourage the electorate to reconsider the current path.

Wall Street, which has benefited enormously from the Fed’s largesse, has reportedly thrown their support behind Romney.  Are they really ready to bite the hand that feeds them, or are the Romney donations simply a way of hedging the downside in case the current guys are thrown out?

In any case, I think the next two weeks will be largely range-bound — but, possibly very volatile — as the two forces duke it out for control.  The euro-zone obviously is working very hard to keep things together a little longer.  The following chart shows the negative overall trend (the big red channel) for the EURUSD, which should have seen the pair back to the channel bottom by now.

But, the jawboning and monetizing that boosted prices out of the falling yellow channel in January has kept the pair vacillating about the midline ever since.  I believe the pair will fall hard sometime in the next three weeks.  Whether it happens before or after November 6 is the only question.

Prices can remain in the red channel through then quite easily.  Even a loss of the red channel and support by the purple mid-line would be “positive enough.”

Likewise, the dollar is due for a breakout, but has been kept in check both by additional rounds of QE in order to prop up the current markets.  Whether it will break out before or after November 6 is the only question.

Stocks have reached important support from a channel perspective, so remain at risk for a significant break down if they don’t bounce very soon.

continued for members…

(more…)

SPX has fallen as far as it should if the bounce up to the .886 is going to happen.  I was stopped out at 1452.50 and will look to establish a long position at the .500 at 1448.25 or midline at 1446.30.  If it breaks those, there’s plenty more downside to come and I’ll play along on the short side.

continued for members… (more…)

Trend changes are always tough.  No matter your level of conviction, there’s always that “what if I’m missing something?” moment that makes time stand still.  You stare at the screen, watching the market unfold, and do your best to stifle the self-doubt — looking for any sign of encouragement or disparagement.

You draw a line in the sand and dare the market to step over.  When it does, you say a little prayer and then you celebrate.  You take your significant other out to dinner (they had to put up with you for the past 24 hours while you anguished over it — not pleasant, I assure you.)  You tip your waiter a little extra.  And, you slip the homeless guy on the corner a five-spot instead of a quarter (“there, but for the grace of God go I.”)

When the market doesn’t cooperate…well, I guess that’s what keeps cardiologists, psychologists and the good people at Oreo cookies in business.  You figure out what went wrong, enter it into your trading diary, and vow to avoid that particular mistake in the future.  The silver lining is that after making enough mistakes, you can get pretty good at this stuff.

The only real mistake is the one from which we learn nothing. – John Powell

* * * * * * * *

While I’m waiting to learn whether I’ll be dining out or munching Oreoes tonight, these are the charts I’m watching.  We came into the day short, so I’m encouraged by SPX’s daily RSI chart.  The latest channel looks bearish to me, though there’s an obvious test coming – regardless of whether we use the yellow or the white rising channel.

The 60-min chart is also encouraging.  It’s broken the dashed yellow TL, but must push down through the purple one (from the Sep 14 high) in order to get the ball rolling on the downside. It’s already bounced off it once this morning.

Two weeks ago, the break of the initial yellow line was followed by a bounce off the purple line and a back test that added 30 points to SPX.  But, that occurred at the bottom of the white channel — not the top, where we are now.

While, the 15-min RSI looks like it’s back-testing a broken channel — helpful in confirming the broken rising wedge we’ve been watching.

I would be much more confident about equities taking a dump here if the dollar had reached its .886 off the last low of 78.96.  It would mean a tag of the (broken) falling wedge apex as seen below.  I thought it might happen after-hours last night.

The fact that it didn’t tells me there’s still a chance we’ll get one last push for equities, perhaps up to one of the .886’s we discussed yesterday: 1465.78 or 1468.93.

continued for members… (more…)

Weird stuff in the currency markets this morning.  EURUSD busted its previous high, so out with the old and in with the new harmonic pattern.  In so doing, it reached a .886 of its now previous high, but after a .707 Point B — which doesn’t make for a solid Bat Pattern.

Furthermore, the smaller white pattern (the lower case letters) hint at a 1.618 extension rather than the existing 1.272 — though that would leave the larger pattern in no-man’s land shy of its 1.272 — with no .786 to support it.

As I often have to remind myself, there are forces at work in the universe other than harmonics.  Not every move has to fit a harmonic pattern.  There’s a perfectly good purple channel up here that, depending on where you draw it, could/should easily swat the EURUSD back down in a big way.

Bottom line, be aware that this pattern break could be positive for SPX — which reached an important bunch of Fib levels yesterday and was presumed to be selling off in search of a Point C down around 1444.

We had positive housing news that has the futures up a bit (+2 as of 9:25) going into the open.  So, keep your stops where you’re comfortable and we’ll try to sort this all out.

UPDATE:  9:45 AM

SPX just tagged the 1.618 (it was .26 short yesterday.)  But, it appears to be on course for the .786 at 1461.24.  Look for a turn there — also the scene of the expanded red channel top — or at the yellow .786 of 1464.03.

It would help the downturn case immensely if DX could complete a proper Bat Pattern down to the 78.906 level.   We’ll look at the implications of all this in a few minutes.

UPDATE:  10:25 AM

So, a .786 Point B is different from a .618 in the land of harmonics.  If prices are to move higher, it portends a Butterfly Pattern that can extend to the 1.272 (1483) or 1.618 (1499.)

I say “if” because quite often the .786 is the end of a counter or corrective wave in the midst of a primary move in the other direction.  But, such instances typically (not always) show more signs of a big reversal — such as a more pronounced Point B at the .618 on the way up to the .786 (indicating a completing Gartley Pattern) and/or corroborating charts among other indices and currencies.  As discussed above, we don’t have those here.

In the absence of other evidence, the only way you know for sure whether a .786 (or any other Fib level) marks the end of a counterwave (and resumption of the primary) or is merely a pause before prices head higher is whether the market reacts in a meaningful way or not.

That’s why a lot of harmonic investors are scalpers — placing a bet shortly before reaching potentially important Fib levels and blowing out the position quickly if they don’t get the reaction they were expecting.

Getting back to the above chart… Note that the Point B at the white .786 is at 1461.24, while the yellow .786 is up at 1464.03.  Remember, the Point A down at 1425.53 serves both patterns.  The only difference is where they started (Point X.)  Because the white pattern is contained within the yellow pattern, the yellow pattern should trump in cases where they conflict.

Yesterday, it didn’t much matter — as they were within a couple points of one another and there were several other Fib levels close by.  But, the implications become bigger as the pattern extends.  The yellow 1.272 and 1.618, thus, are at 1488 and 1505.

Anyway…we have the EURUSD at a .886 retracement of its former high (Sep 17 – 1.3171) but a dollar that hasn’t quite reach its (78.906 would be a .886 retrace of its Sep 14 78.725 low.)

The euro threatens to break out of a channel that dates back to November 2010.  If it doesn’t reverse very quickly, the next stop is 2% higher at 1.34 (the 1.618 of the 1.3171 to 1.2802 drop and the .618 of the 1.4246 to 1.2041 drop.)  Note: there is significant negative divergence in every time frame from 15-min up to daily, so a big reversal here should be no surprise to anyone.

An equivalent move lower in the dollar would mean 77.209 — a .618 retracement of the entire 72.86 to 84.245 move from May 2011 to July 2012.  This would fit pretty well with our  DX forecast from October 3.  But, again, there is significant positive divergence across the board in the dollar.

Needless to say, such a 2% move in both could easily produce a 2% move higher on SPX.  Figure 30+ points — which would be in the vicinity of the 1.618 extensions mentioned above (1499-1504.)  The 1.1% decline in DX from Sep 28 to Oct 5 accompanied a 2.4% ramp in SPX.

For the sake of argument, suppose a 1% DX move produced a 2% SPX move.  Then, a DX decline to that .618 at 77.209 would align with a 67-point SPX move to 1527 — just beyond the 1.618 extension (at 1518) of the SPX plunge from 1422 to 1266 over the summer.

SO….

In my opinion, the EURUSD freight train has to turn, and turn quickly, if 1474 is going to hold.  I’m going to take a few minutes to examine this more closely.  I’ll be back asap.

In the meantime, those of us who were stopped out this morning might want to re-short either here or the somewhat more likely reversal of 1464.03.  If you’re holding short, be prepared for the possibility of 1469 (the yellow .886.)

More shortly…

UPDATE:  12:55 PM

My apologies for the delay.  Sometimes, as I’m working out a forecast, a harmonic pattern pops up and insists on being considered.  Here’s what I’m noticing…

It’s really puzzled me that the harmonic patterns, which have dove-tailed so beautifully for the past three years, would suddenly not. Specifically, the extensions of the yellow pattern (from 1474 on Sep 14 to 1425 on Oct 12) don’t line up with any of the previous patterns’ Fib lines.

The 1.272 is up at 1487 and the 1.618 is at 1505.  About the only thing giving them any scent of legitimacy is the relative closeness to 1500 — a nifty top from a history book perspective.

Consider the red Butterfly pattern by comparison, which made a nice turn at the 2007-2009’s .618 at 1228, put in a Point B at the .786 (thus signalling a Butterfly) and then produced a great reversal within inches of the 1.272.

It’s 1.618 is up at 1515 — only 3 points  from the 1.618 of the purple Crab Pattern from 1422 to 1266.  The purple pattern’s 1.272 was only 9 points away from the 2007-2009’s Bat Completion at 1472.

That’s how harmonics normally work.  Things align, with the completion of one pattern setting up or fulfilling the next.  So, again, what’s with the yellow pattern?

Regular readers know that I was surprised at the market’s relatively tame reaction upon reaching the .886 retracement of the 1576 to 666 crash.  Suppose there’s more downside to come?  And, suppose it comes before the move up past 1500 discussed above — or even negates a move higher?

I’m going out on a limb here, but I found that by moving Point A of the yellow pattern lower we can get it to line up quite nicely.  Spooky nicely.

Below you will find a close-up of the above chart.  Note the yellow grid in question — which, ideally, should provide guidance regarding the next leg up.

I’ve added another grid (in red): a measure of the move between 1396.56 and 1474.51.  This illustrates the degree of any retracement from the 1474 high.  SPX slightly exceeded the .618 of 1426.39 back on Oct 12 — which flustered some Elliott Wave folks by overlapping the Aug 21 high by 1.15.  Without digressing into a EW discussion, let’s just all agree that it complicated things (at least).

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.

If we force a .886 retracement, it lines up even better — landing right in the middle of the others.

Of course, a dip to 1405 flies in the face of my expectation that TPTB would engineer a feel-good rally into the election.  A 3.8% correction now, with only three weeks to spare, certainly wouldn’t help preserve the status quo.  But, as we’ve seen in the news this past week, maybe Wall Street is ready for a change.  What an interesting battle that would be:  Bernanke versus Dimon, Blankfein, et al.

If we reverse hard at these levels (1462-1466), I’ll consider the above scenario very much on the table.  There are enough bearish warning signs to support it: the 60-min and daily RSI channels…

DX is close enough to a significant reversal point, very deep into a falling wedge with RSI breaking out from a long down-turn — much like at the October 5 SPX high of 1470.  It’ll probably tag the .886 at 78.906 after-hours.

The EURUSD is quite deep into a rising wedge at the intersection of two harmonic resistance levels on negative divergence and with and RSI channel pointing down.

I don’t know if there’s anything to it yet, but the Financial Times reported today a key aspect of the Save the Euro Zone campaign may be in danger.  Zero Hedge’s take can be found here for those who don’t subscribe to FT (but, it’s free, so why not?):

A plan to create a single eurozone banking supervisor is illegal, according to a secret legal opinion for EU finance ministers that deals a further blow to a reform deemed vital to solving the bloc’s debt crisis.

For those who have been waiting patiently (and the rest of you) for a short, sweet buy/sell signal with limits and stops, I hate to disappoint you.  We’ve been right on the money for over a month, now — with great returns to show for it.

I normally suss these things out sometime between putting the girls to bed and nodding off at my desk around 2am.  But, this seems important enough to devote market time to it.  This outcome, if it plays out, represents a big shift in my thinking.  And, I don’t take such things lightly.

I’m very comfortable going into the close short, with the understanding that we could still run up and tag 1464 or even 1466 before reversing.  We’re up enough this month already that I’d allow loose stops.  The behavior of the currencies after-hours will tell us a lot.

More after the close.

 

 

 

ORIGINAL POST:  7:45 AM

I’ll likely fade this rally.  The prospect of a breakout is there, but there’s just as great a chance that it falls back.  Best to follow with tight stops and see where it takes us.

EURUSD has reached our targets (C? and d? below) two days ahead of schedule, but has also reached serious resistance just beyond the .886 of the decline since the 5th and is bumping up against the long-term channel.

The dollar has also reached a potential turning point, the .786 of the rise since the 5th for a potential Gartley — though the potential exists for a Bat completion down at 79.309.UPDATE:  9:50 AM

We’ve reached the top of the former red channel and the white channel midline.  If we break through here, look for at least a back test of either/both.

The currencies are standing back and watching, meaning this rally is nearing a pause at least, and likely needs to gather more strength before advancing any further.  I’m guessing this is about it for now, and am raising stops to 1449.

UPDATE:  10:05 AM

Just topped 1450 and the .500 Fib of the 1474 to 1425 drop.  This would be a likely spot for the market to turn.   If it pushes any further, the .618 is just ahead at 1453.61.  Raising stops to 1450.

EURUSD just tagged the original apex of the rising wedge from last week — still hasn’t broken through the last high and is beginning to look quite extended.

DX hasn’t quite reached its .886/1.618 channel back-test at 79.309.  However, it did also reach its apex from last week.  It’s not only not moving inversely to equities at the moment, it’s actually strengthening.

When SPX turns, don’t be surprised if we get a back-test all the way to 1443-1445.

UPDATE:  11:05 AM

This is likely the final thrust.  Two .618’s just ahead:  the .618 of 1470-1425 drop @ 1453.61 and the .618 of the 1474 to 1425 drop is 1455.80.  The .382 of the 1430-1470 is right in there, too, at 1455.46.   The higher target level of 1455ish is therefore the more likely.

continued for members… (more…)

Judging from the currencies, I think we could see a bit of a sell-off this morning, down to either 1426 or 1413.  I’ll take a small short position on the opening and monitor it closely for a reversal.

The dollar has pretty nearly completed a back-test of its recently broken channel that dates back to July.  In the process, it’s constructing a pretty well-formed falling wedge at the .618 retracement of its climb from 79.18 last week.

The EURUSD, in the meantime, has pushed up further into its back test of its channel at just beyond its own .618.  It has formed a rising wedge that suggests a pullback here.

UPDATE:  10:05 AM

That should do it for the upside.  Just tagged the channel line.  RSI failing to show further upside potential.   Will add to shorts here at 1438.  Stops just beyond the channel line (currently 1439ish) just in case.

Should have waited for that channel tag before going short.  But, the currencies got me excited and I pulled the trigger before double-checking the channel.  Darned emotions will get you every time.

If I’m right (now) about shorting, RSI’s little push above the red channel below will reverse and head south any minute.

UPDATE:  11:00 AM

DX is very close to breaking out.  I find that most wedges break out at a significant Fib ratio of both time and price from inception to the apex.   Time is usually at 61.8 of the way from inception to the apex, with the .786 and .886 as the next most common marks.

Price can be any of these, but I look for a Fib ratio within the wedge that matches up with other significant levels.  In this case, the .786 is very close to the .618 retracement of the recent 79.18 to 80.29 run that broke out of the channel and set up this back-test.

It’s also close to the .500 retracement of the dollar run-up from 74.86 to 84.245 between Oct 27, 2011 and July 24, 2012.

The trick in these exercises is getting the apex just right, as everything else is drawn around it.  Wedges can and do expand, and they fail a certain percentage of the time.  So, I rarely act on one without first finding corroborating evidence.

If/when the logjam breaks, look for a breakout to around 80 for starters — whatever lines up with 1426.34 on SPX.

UPDATE:  11:35 AM

The dollar and euro just broke through their wedges, and SPX broke down below the previous low to tag the 1.272 at 1427.04.  We should get at least a bounce here, as there was a reversal at the .786 up at 1433.51.  And, this is where it gets tricky.

My money is on a tag of at least the .618 at 1426.34.  If SPX falls any further, the 1.618 of this little pattern is right at 1422.43 — a fraction above the April highs.  I imagine the bulls will defend this level.

So, I’ll cover my shorts and go long here at 1426, with a stop at 1422 just in case.  I’m probably early, meaning I’m leaving money on the table.  If we break 1422.38, there could be considerably more downside — easily to the .786 @ 1413.

More in a few.

UPDATE:  12:40 PM

The market is in a quandary.  There’s unfinished business with several of the harmonic patterns and the big, white channel, but completing them means slicing off a good bit of the bullish case for folks who care about waves and such.

SPX would love dearly to go down and tag the big, white channel — simultaneously tagging the bottom of the small red channel, the mid-line of the gray channel, and the bottom of the expanded small white channel.

A rebound there (our target #5, around 1413-1415) would establish a new leg up on rather firm footings.  But, it would overlap the April 2 high of 1422.38 — confounding the EW bulls.

Then there’s the bane of everyone who charts the market:  shadows and the dilemma of log versus arithmetic scale.  Depending on how one draws the big white channel, SPX is either tagging important support or has broken it — at least intra-day.

But, I don’t think the Fed has pumped eleventy bazillion dollars into the markets… just to watch it evaporate three weeks before an election where their very jobs (nay, legacies!) are at stake.

Rest assured, the Plunge Protection Team is on Tactical Alert.  Snipers are positioned, and little red dots suddenly appear on the chest of anyone caught glancing at a sell button.

If you’re not sure, just look at AAPL.  Remember back on the 9th when it was down 13 points intra-day, 82 points since its 705 high?  I posted that 621-625 was critical support that should provide a rebound.  It wasn’t a lucky guess.

It was the bottom of one channel that’s guided the stock since 522 in May, another channel dating back to June 2011, the completion of a Crab Pattern, and the .618 of the 570-705 ramp from July – September.  The low for the day was 623.55, a level still not broached.

But, don’t be fooled.  Surviving this little scare does not mean everything’s fine.  Far from it.   If AAPL rebounds over the next few days — which it will — it has to climb past 705 just to negate a bearish prognosis (Point C must remain lower than Point A.)  Reversing at the .618 established a Point B for either a Gartley, Bat or Crab pattern that could take it back down (after the election) to 597, 583 or 487 respectively (the red patterns below.)

The worst joke of all would be on those who jump in with both feet at the new high of 706, only to run head on into a completing Crab Pattern at the 1.618 of 719.30 (the purple pattern above.)

UPDATE:  2:50 PM

Rebound has started in earnest, with SPX coming up on 1430.  The first big test is up ahead at the 60-min RSI channel line.  This is the channel we examined in the 10:05 post that signaled a reversal in the early morning ramp.

SPX should take it this time.  The price channel is currently at about 1433.

BTW, note that this morning’s 1425.53 low is the first in the past week exhibiting positive divergence — that is, a new price low was made in conjunction with a higher RSI low.

 

 

 

 

 

 

 

ORIGINAL POST:

I’m keeping trailing stops fairly tight on this ramp after going long at 1431.50 yesterday for a bounce.  There’s a good chance it won’t last.  More after the open.

UPDATE:  9:40 AM

New channel for the leg down?

I’m taking profits on my long position here at 1441 and will sit on the sidelines until this sorts itself out.

More in a few…

UPDATE:  9:55 AM

Here’s one problem.   The EURUSD, after completing a Crab Pattern at the purple channel line as we anticipated, reversed and broke the channel it’s been in since late July 24 (in red.)  It’s back-testing the red channel now, and is unlikely to retake it.

This doesn’t mean it can’t move higher — on the underside of the channel.  I wrote about this a few days ago, noting that the channel would run out of room prior to the election, but TPTB would likely seek to keep it afloat until after Nov 6.

These back tests sometimes go on for quite some time, so I don’t see a clear signal from the EURUSD just yet — other than the possibility that this morning’s rally is done (hence closing the long position.)

The dollar, meanwhile, broke out of the channel it’s been over the same period.  It hasn’t completed a back-test to the same extent as the EURUSD — but there’s a good possibility it will, ramping equities a little higher in the process.  So, why not just stay long?

Since it exceeded the previous high of 80.25 yesterday, the downside case presented by the purple grid is damaged somewhat.  Doesn’t mean it can’t go down, but there’s no harmonic case to support it at present.

Here’s the scenario I have been expecting for the past several weeks…

continued for members…

(more…)

The Bat Pattern that completed on Sep 14 [see: The World According to Ben] has played out nicely so far.   Remember, Bat Patterns provide early warning of a reversal at a Fibonacci 88.6% of a previous significant move.  In this case, it was 88.6% of the 2007 — 2009 crash from 1576 to 666.

Note:  In reality, the pattern paid off twice.  Since SPX reversed at the 61.8% Fib in 2010, it first signaled a Gartley Pattern.  These complete at the 78.6% Fib — 1381.50 in this case.  SPX came within 11 points of this target in May 2011, providing an excellent opportunity for making money on the ensuing downturn.

Since reversing at 1474, SPX shed 44 points to 1430, then retraced 88.6% of that decline to complete a much smaller Bat Pattern at 1470 on October 5 (charted below in purple.)  Although 44 points is nothing to sneeze at, it doesn’t measure up to the 98 points lost the last time a Bat Pattern of this magnitude completed in Feb 2007.

Harmonic patterns frequently nest inside and morph into one another.  An astute trader can either profit from the turns or, at the very least, protect a buy-and-hold portfolio from otherwise unforeseeable market plunges.

There are many ways to utilize Harmonic patterns.  I use them in combination with other chart patterns and technical analysis to enhance the accuracy of forecasts.  A stripped-down version of my current short-term chart shows the role that harmonics, channels and a large rising wedge have played over the past month or so.

The descending red channel did a fabulous job of guiding the downside from Sep 14 to Oct 3.  When it was broken on the 4th, a new channel was established (in white.)  This nearly horizontal channel proved its worth earlier today, signaling us to take profits on a short position established a few days ago at 1455.

All of this action has taken place within the confines of a large rising channel (in yellow above) that’s guided prices since the 1266 low on June 4. This yellow channel, in turn, is contained in a larger white channel.  Together, they’re playing out a familiar refrain.

As the market rises, it usually accelerates in a series of channels featuring continually steepening slopes (there are several others in addition to the white and yellow.) When the market tops out, it decelerates, breaking these channels one at a time until ready to begin the process anew.

Declines are typically contained in similarly-sloped falling channels — seen above in red.  The falling red channel in the short-term chart above is barely visible in the upper, right corner of this chart — providing context for the Bat Pattern reversal from 1474 thus far.

What does it all mean for the future?  The major indicators discussed above (harmonics, chart patterns, etc.) all point to the same conclusion — a market running out of steam.  In fact, it appears to be in for a nasty downturn in the not too distant future.

Analogs, sometimes called fractals, are simply repeats of past price movements.  The 2011-as-2007 analog provided an opportunity to short the July 2011 crash in advance, accurately predicting the very day the downturn would begin [see: Why Analogs Work.]  Another analog posted this past March [see: Analog Details]  accurately predicted the downturn from 1422 and subsequent return to 1474.

Yesterday, I posted a new and promising analog [see: Analog Alert] that shows the top is either already in or will be soon — perhaps just after the election.  Check back in the next few days for additional details.