We have remained short since 1456 on Monday morning after going to cash over the weekend as a precaution.  Since then, the market has tested and broken through each of the channels we identified as offering potential support.

Moments ago, SPX tested the red channel mid-line at the same time it hit an .886 at 1435 of the most recent move up from 1430 to 1470.  We could get a bounce here that traders can capitalize on, while the potential for additional downside remains in place.

UPDATE:  12:25 PM

Our thesis has been that SPX rose at an accelerated rate, following progressively steeper channels on its way to 1474.  When it topped out, it then began a process of testing and breaking those channels.  The question is which channel will finally catch.

My favored target in this move remains the .618 retracement of the 1396-1474 move at 1426.34, though the white channel bottom might catch us just short of that around 1430.

SPX made a high of 1426.68 that started a little corrective wave on Sep 21, so that might help validate the .618 from a wave standpoint.

My only hesitation about covering our short there is the bigger picture, which argues for a tag of the .886 at the intersection of the bottom of the red channel and the largest white channel. It’s easier to see on a larger scale.

So, it boils down to whether the yellow or the white channel ends up holding (if either.)

It’s safe to say we should get a bounce at the .618, so the safe play is probably to take profits and play that bounce, going long with tight stops. While I believe we’ll get down to the .786 in time, the little white channel (as it’s currently drawn) doesn’t arrive there till about 1:30 tomorrow, so we might well back test something (the red channel mid-line?) before arriving.

That would be a 7 point bounce for traders — worthwhile enough.  While less active investors might prefer to set stops there around 1435.25 and let their shorts run.  Needless to say, breaking the yellow channel line would be a major event — so much so that we can expect bulls to put up a fight.

FYI, I show the smaller white channel bottom at 1430.17 (about equal to the Sep 26 low of 1430. 53 – another reason for a bounce) and the red mid-line at 1434.  For quite a while, I’ve thought that the nearly horizontal white channel could expand to incorporate the consolidation between Aug 6 – Sep 4.  It would make the white channel 85 points from 1474 to 1389 — a much more respectable reaction to a Bat Pattern completion after an 800-pt rally.

UPDATE:  1:25 PM

We bounced off the white channel line as expected (1430.64), rising very close to the red channel midline (1433.50.)  Now we get to find out whether the white channel should be expanded or not.  If you’re determined to ride a short position to the .618 at 1426.34, please use stops just in case the white channel is all the downside we get.

And, while I’m on the topic, we never really back-tested the broken pink channel line.  Our little white channel intersects there at around 1437 tomorrow morning.

I only see positive divergence on the 15-min and under time frame, so there’s no reason yet to expect anything bigger than that — other than the white channel bottom holding.

UPDATE:  1:45 PM

I’m going to go ahead and take profits on the short position here around 1431.50.  This is setting up as a decent bounce, and I’d like to participate.  If it turns into something more than a bounce at the yellow channel line, I’ll ride a long position for a while.  Please remember to use stops.

More in a moment…

UPDATE:  2:00 PM

Here’s what I saw that got me thinking… RUT is very deep into a falling wedge at the completion of a Butterfly (in purple) and a Crab (in red.)  While I think it also has further to go (probably 806-816 in the next week or so), it’s hard to imagine it not bumping higher from those three tells.

This is a smallish pattern, but it does argue for a decent bounce.

I have to sign off for the day — time to get on the road for the drive home.  My best guess is we’ll back-test the pink channel as high as 1437 very soon.  From there, the market has some decisions to make.

The 60-min RSI indicates further downside to the yellow channel bottom after a back test of the purple.  So, that would support the idea of a bounce to 1437 and retest of the bottom — maybe tagging 1426 in the morning intra-day, but that’s a bit speculative on my part.

Watch the dollar.  If it dips below 79.805, it has additional downside.  And, of course, if SPX breaks out of the little white channel, it has no doubt broken back above the pink channel and could easily rally another quick 10 points.

Above all, trade safe.  We’ve had a nice run in October — probably up 7% or so already.  These critical support levels mean higher risk.  Use stops!

I’ll post later tonight if it’s not too late.

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.

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I’m still traveling, so today’s post will be brief.   Yesterday’s short-term outlook is still intact.  We broke the pink channel line, which means our initial target of 1449-1452 is in play (the top of the red channel and the white channel midline.)  Look for a back test of the pink channel first.

I’d recommend lowering stops on our short position to around 1458 — depending on how closely you can watch it.  The more important issue is whether SPX can remain below the lower bound of the pink channel.

The dollar and the EURUSD are both testing very important levels, so downside risk is very high at the moment.  Equity bulls need the red channel top to hold.

Several of you have asked about the new analog.  Today is the day, even if I have to deliver it in installments.  There’s a good chance I can post it by 10:45 EDT; if not, it’ll be after the close.  I’ll put out an email when it’s live.

UPDATE:  10:30 AM

I know some of you are watching AAPL closely.  The 621-625 level is critical to AAPL.  It should provide a rebound.  But, if it fails, the next support is at 600 or 585 — at which point it would have lost a major channel.

If the channel holds, especially if AAPL closes above 618, then the Crab Pattern to the 1.618 at 719 is still very much on the table.

UPDATE:  EOD

SPX broke both the pink and purple channels today.  We’ll see if the yellow channel holds (currently around 1430 at #4.)  If so, the decline will also be limited to the red channel midline and SPX’s rally will still be intact.  If the yellow channel fails, look for a drop to the white channel bottom (#5) around 1413-1415.

AAPL respected the Fibonacci bounds we placed on it, reaching within 2 pts of the support we mentioned earlier this morning before reversing

I’m going short at the opening.  There are a number of channels offering support – notably down around 1450, but we’ll see how many will hold.  If SPX loses support at the pink channel (an echo of Sep 14 – Sep 25) around 1454, the top of the red channel is down around 1450.

Charts in a few…

UPDATE:  10:55 AM

So far, the channel line around 1454 is holding.   But, again, there are different ways to interpret this channel.  We won’t really know until we get a stop and can plot the lower bound a little better.  Watch your stops (1461?), but if the red channel breaks there’s additional downside to 1450 or 1447.

I’m traveling the next couple of days, so my posts will be a little spotty.  I finished the forecast I mentioned Friday, and almost got it posted this morning when the market opened.  I’ll post it after the close for members.

Next post in about an hour.

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ORIGINAL POST:

This morning’s election eve NFP ramp should reach our target #2 from last Friday at the .886 of 1469.50.  I would fade this rally if/when SPX reaches that level.  This has pop-and-drop written all over it.

If you’re stopped out on the opening, I would look to reshort at the .886.  As always, please use stops.

DX just bounced off the .618 of the 78.725 low.

UPDATE:  9:35 AM

That’s the tag of target #2 at the .886.  It could leak a little higher, but I’m re-shorting here at 1469 with stops at 1474.

In retrospect, I should have expected them to ramp this after-market due to the election season BLS report which comes out in the pre-market hours.  I thought we’d get a proper 3-wave correction before heading up to our target # 2, but neglected to consider the timing.

There’s some consolation in having nailed target #2 as well as we did target #1 yesterday.  But, I’m disappointed to have given back some of the profit we’d booked EOD yesterday.

UPDATE:  10:50 AM

The dollar pushed lower to a 1.272 extension, a little beyond the .618 of the rise since Sep 14.  This means DX is less likely to reverse at the .786 of 79.05 (other than a bounce) but could make its way down to the .886 of 78.899 by as early as Monday.

This implies that 1474 won’t stand as the high.  Sure, we should pull back from current prices.  The dollar is currently very oversold.  But, we have to remain open to the possibility of a double top or even slightly higher.

UPDATE:  3:05 PM

The market has given back all this morning’s gains and is clinging to support.  1459 is an important level for it to hold, or there’s potentially much more downside — perhaps the .618 at 1457 or even the white channel midline at 1450.

If we get a bounce here, I’d consider taking profits at 1461.  I can see a broken rising wedge and broken channel lines, but others show support at this level.  I’ve spent the past several hours trying to get a handle on things and am, frankly, a little baffled.

I believe when things are unclear, it’s usually best to step aside and let them sort themselves out.  So, I’ll let the market tell me which way it wants to go.

UPDATE:  3:50 PM

I’ll likely take profits going into the close.  I still see a mixed next few days, and it seems silly to hold shorts into the weekend.  So far, we retraced .886 of the drop from 1474, reacted down to the .618 from that, and should be up on Monday.  But, I have no conviction.  So, to cash I go.

Just looking for a little more action into the close.

UPDATE:  4:00

Gone to cash at 1460.  Post mortem probably Saturday afternoon.

ORIGINAL POST: 9:15 AM

We began yesterday’s post with a chart of competing patterns in EURUSD.

Many currency traders disregard H&S patterns in currencies, but I believe they play out more often than not.  Mario Draghi’s comments this morning gave EURUSD the boost it needed to reach the neckline and clear the way for further upside.

The RSI shows a probable back test of the neckline, but appears to support our forecast of a bounce to 1.30 or 1.31.  This is consistent with my expectation that the smaller dollar channel would break down, which indeed it has.

This should give SPX the boost it needs to clear its red channel on the opening bell.

UPDATE:  9:40 AM

SPX gapped open, and will likely back-test the red channel it broke up through. As I posted  yesterday, we can expect at least a pause at the last interim high of 1457 and the .886 Fib at 1459.51.

Also at the 1457 level — a line on the largest purple channel that’s guided us up from the June lows.  It’s stopped the market’s advance each of the past two days.

We remain long from 1441 with an initial target of 1461.  There, we run into the white channel top as posted in the last update to yesterday’s post.

UPDATE:  10:12 AM

We just tagged our target from this morning.  I expect a pull back here, so good time for traders to take profits, or at least enter stops.  I’m taking some profits at 1463 and will likely play the retreat on the first sign of weakness.

Note that the dollar just tagged a channel line of support on the downside and should rebound here at 79.54.  It has more potential downside, but I believe it will need to gather some strength for a push lower.

More in a few…

UPDATE:  11:00 AM

I’m playing the short side for a bit, with an objective of 1452.52-1455 around 11:50 this morning.  But, beware of support at the 1457.71 (.618) and 1456.63 (a channel midline.)  Best to use trailing stops on this move.

Although there’s an argument for no higher prices period, SPX could definitely go higher than this morning’s 1463.14.  I just don’t know if it can manage it today.

Charts in a few…

UPDATE:  11:20 AM

A trend line on the 5-min RSI clearly shows the sell signal.. As often happens, it came a good 10 minutes prior to the broken trend line on SPX itself.

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ORIGINAL POST:  9:20 AM

Competing patterns in the EURUSD…

And, DX taking another crack at breaking out of the channel…

Nothing much is likely to happen until the ISM services numbers come out at 10.

UPDATE:  10:40 AM

Nothing too exciting here.  Slight increase in several measures, even as employment and order backlogs contract.  Between the dollar’s strength and global slowdown, exports are also contracting.

UPDATE:  11:10 AM

A reminder, we’re still long from 1441 yesterday.  We’re approaching a critical level — the top of the falling red channel we’ve been in since Sep 14 at 1474 — currently at 1454ish.  We’ve bounced back off it several times.

Yesterday’s downturn was another bounce off the channel midline.  We retraced a little over 50% of the decline since Monday, so are potentially forming a Bat Pattern at the .886 of 1455.07.  A reversal there would mean yet another rejection off the channel top.

But, there are several patterns that hint at more upside — IF we’re able to break out of the channel (don’t expect it to be easy.)  The yellow pattern suggests at least a Gartley completion at the .786 of 1465.10.  A Bat would target the .886 of 1469.50

The red pattern completed a Gartley Monday at 1456, but could also be a Bat based on the .618 reversal on the 27th.  If so, the .886 is up at 1459.51.  A Butterfly would be at the 1.272 at 1472.14 or the 1.618 at 1483.45.

And, the purple pattern — which is still trying to complete a Bat at 1455, could be working on a Crab at the1.618 of 1468.

All of these require a clean break through the red channel.  I wouldn’t blame anyone for taking profits if/when we reach it a fourth time.  That would be a nice 13-14 point gain since yesterday — another 1% in the bag in the first few days of the new quarter.

I can’t say for sure what to expect.  But, I see no negative divergence on SPX on any time frame — while there’s plenty to be found in the dollar — on nearly every time frame.  SPX is trying to break out of a 2-week channel, while DX is trying to quit both a 10 week channel and a 2-week channel.  My gut says stay with SPX at this point.

We’re in the top quarter of the channel now, so a rejection off the very top should be limited to the channel line we just broke up through (1446ish) if SPX is to break out and go higher.  A break down through 1446, on the other hand, would mean we’re less likely to come back for a 6th try.

UPDATE:  11:40 AM

The dollar is looking very weak here, forming a lazy triangle/RW on negative divergence.  This will break down if SPX is to break out of its channel.

Remember, when SPX breaks out, it’ll likely back test the red channel — maybe from 1457.14 — the last high.  If a legitimatel break out, the channel top should hold.

UPDATE:  11:50 AM

Just reached the channel top, pausing for dramatic effect…  Might pull back here a bit, maybe 1450-1451.  Note the RSI still looking positive, with the purple channel midline and the white TL just above.

Let’s talk about the objective for a moment.  Remember, we completed a big Bat Pattern objective on the 14th — the .886 of the 1576-666 decline from 2007-2009.  We’ve retraced only 44 points since reaching that milestone.

It may have seemed like a lot, but in the scheme of things, it wasn’t.  Therefore, my expectations of this breakout are modest.  I’ll be open to the alternative, but the yellow .786 at 1465.10 or .886 at 1469.50 would be a normal retracement if this is merely a corrective wave 2 on the way to a 100-pt reaction that would be typical of completing that large a Bat Pattern.

As I wrote when I called this latest top on the 14th [see: The World According to Ben], the last Bat Pattern this large to complete was in March 2007.  SPX retraced a relatively minor 98 points before continuing on to make a double top at 1576.

A 98-pt drop here would mean 1376, not the mere speed bump of 1430.  The daily RSI has been a very good indicator for us of medium-longer term trends.  It’s hard to trade intra-day, because the value that gets printed is the end-of-day value.  But, it’s great at pointing out upcoming support and resistance.

Bottom line, there’s plenty of it just above.

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ORIGINAL POST:  9:25 AM

We remain long from yesterday at 1442, and appear likely to hit the lower end of our initial target of 1452-1456 around the opening bell.  We are entering dangerous territory at 1450, and tight stops are a great idea.  This could easily be a pop and drop, so I’ll use tight following stops on the way up.

Here’s the potential problem.  The dollar is presenting two legitimate channels.  If the purple one holds, SPX’s spurt this morning will not last.  If we’re working on reaching the red lower bound, then DX should fall to 79.598 or even 79.515 and all is well in short-land.

I’ll start with a stop of 1450 and work from there.

 

UPDATE:  9:40 AM

Got stopped out within a minute of posting that.  Gone to cash for the moment.

Here’s the other thing I saw that concerned me.  Right after the opening, RSI was pushing that solid white trend line visible here on the 15-min chart.

And, here on the 60-min chart…

Meanwhile, EURUSD is bumping up against resistance on its 60-min chart.

And, the dollar RSI had tagged important support at two lower channel lines.

UPDATE:  10:10 AM

SPX gave up all its gains and is essentially flat on the day. I remain in cash, waiting for a clearer sign.  Here’s an update on that 60-min RSI chart.

We broke the initial (purple) TL, and found support at the yellow.  We then had a back test of the purple, followed by a drop back to yellow — which as of a few minutes ago, was also in danger of being broken.  A break could signal a return to the 1430s.

UPDATE:  11:30 AM

I’m taking advantage of the lull to finish that channel study I started yesterday.  I’ll post it as soon as possible, as I believe it provides some great info on the direction over the next several weeks.

UPDATE:  11:45 AM

Just got a crack in the pink channel bottom, and a break of all the RSI TL’s discussed above.  Look for a bounce/back test off the purple channel bottom around 1439.50.  I’ll look to play the back test for a potential short.

DX just tagged the bottom of the red channel, and immediately bounced back to where it was.  Here’s the 5-min chart, showing very good support off that channel line.

And, the RSI close-up.

UPDATE:  12:12 PM

Scratching my head here…  the SPX 15-min RSI shows equally strong potential in both directions.  I’m going to try a small long here at 1441 with tight stops, say 1439.80ish, in the belief that the purple channel will hold.  It it breaks, I’m short.  Be aware that this might be nothing more than a back-test of the broken pink channel.

If it’s only a back-test, it should run out of steam shy of 1445.

UPDATE:  12:45 PM

The DX RSI is back to testing a channel midline (purple, dashed), but in the midst of a falling wedge that matches that of the price index.  The red channel correlates with the price channel we’ve been following since the 14th, and shows the rising trend.

The small purple channel shows what might happen if DX runs into a brick wall at that yellow mid-line.

Recall that the dollar completed a Bat Pattern on the 14th at the bottom of a long, well-developed channel.  It has since retraced only a little past the .707.  If the red channel since the 14th is the first wave up after that Bat Pattern completion, we should get a corrective wave.

If so, we might get one more push higher within the latest move down — just to scare equity longs, and then the channel will break down — with a DX push to at least 79.515 and potentially lower.

Let’s back out and review the big picture.  The dollar is caught between two competing huge, long-term channels. The purple is falling; the red is rising.  In 2008, DX got very close to its 1.272 at 68.947.  It might still be trying to get there, in which case the purple pattern should dominate.

I tend to think the downside is done, and we’re working higher – in which case the red pattern should dominate. There was a time when the euro was viewed as the dollar killer.  I own a couple of books advising folks to sell all their dollar assets and put them in euros.

More in a few…

UPDATE:  1:45 PM

DX just tagged the upper bound of a potential falling channel (purple) that could take it down below the red channel if my above theory were to play out.  If the channel is close to correct, this rise should peter out at the red channel line just above around 79.78.

If this should happen, look for a nice rebound for stocks, perhaps as high as the red channel top at 1454ish.

The other obvious possibility is that this morning’s plunge — which has Point B written all over it — could help set up a Butterfly lower.

If so, there’s a good possibility (but, not necessary) that DX would move higher in search of a Point C first.  The red channel midline — where it intersects with the larger falling red channel — is an area that intrigues me.  It would occur around 3am EDT right at 80.

If you’re long, let me remind you to use stops.  This is a very dicey situation.

Another RW on DX?

UPDATE:  2:30 PM

SPX just spiked lower, tagging the red channel mid-line and rebounding. I’m inclined to give it some leeway here, and will hold on to my longs just a little longer, maybe down to 1438 or so.  The midline will be my guide.

Potential falling wedge on the 15-min chart to match the rising wedge on DX?

If it plays out, that should be about it for the downside.  DX at 79.825 and SPX at 1439.01.

 

UPDATE:  3:30 PM

Barring any further drama, let’s get back to the long-term DX charts.

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