It’s entirely likely the market will remain comatose for the next two days until the German constitutional court decision on the 12th and/or the FOMC announcements/press conference on the 13th.  IMHO, QE3 is very much baked into current prices; though, we should get at least a nice little pop if the central planners deliver as expected.

If not, expect a sizable sell-off unless Bernanke is able to let us down so easy as keep hopes very high (“we are postponing QE until October 12, at which point we will buy every POS bond in sight.”) It’s really that simple — which, of course, renders both fundamental and technical analysis meaningless in the short run and turns any long/short decisions made today into a veritable coin toss.

The German court situation is similar.  Draghi’s jawboning worked exceptionally well last week, producing a single-day 2.5 cent euro-bump versus the dollar that left it at least short-term overbought.  If, after adjusting their hats, the BVerfG reign (sic) on Draghi’s parade, look for the overbought euro to become oversold sehr schnell.

I have no special insight into either event.  Though, as I wrote last week, Dow Jones put out an interesting statistic last week regarding employment data: over the past 28 years, the August NFP stats have missed expectations 3/4 of the time.  For the past 10 years, the average adjustment after the fact is 62K.

Not that I think the Fed harbors any illusions about QE actually addressing the stifling unemployment in this country (yes, I’m cynical), but if they’re attempting to at least make it look good…this might play into their decision.  Their vastly greater concern is a stock market running on fumes and unbelievably leveraged banks whose solvency hinges on perpetuating the myth that their trillions in derivatives aren’t a bad hair day away from implosion [see: The Wipeout Ratio.]

Then, there’s the small matter of the election only eight weeks away from tomorrow.  The Republicans have stepped up Fed-centric rhetoric of late, practically guaranteeing an Eccles Building house cleaning if elected (though I suspect they’re only trying to lure some Paulies into the tent.)

At the end of the day, the Fed is at least as concerned with self-preservation as any other body politic.  After throwing “We the People”  under the bus for their friends on Wall Street, it’s hard to imagine them falling on their swords now for the sake of the economy (did I mention I’m a cynical bastard?)

As I perused the financial press over the weekend (anything to avoid doing my taxes), the euro zone’s financial melt-down dominated.  Criticism abounded, with a common theme being how much better America has handled the crisis.  While our friends across the Atlantic face many structural and governance challenges, the real difference between our fates has been the willingness of our politicians to spend $16 trillion more than they’ve taken in and our central bankers to stymie the natural market response — i.e., soaring interest rates.

Then, there’s the minor fact that the USD is still the world’s reserve currency.  As a wise friend of mine likes to say, until we go full barter and I start making your kids shoes in exchange for your extra chicken, it’ll remain so — even after we tumble over the fiscal cliff (we can’t really expect them to “fix” that in the months leading up to an election, can we?)

That’s where things get really interesting. The stock market’s ramp to new highs has taken our collective minds off the calamitous impact that a severe spending decrease and/or tax increase will have on our economy.  As our predicament comes home to roost, the (continuing) recession will finally be obvious to all.  Even if, by some miracle, Bernanke can muster enough spit and bailing wire to keep the markets from crashing, it’s not entirely up to him.

George Soros argued earlier today that Germany and the rest of the euro zone are heading for a Depression within the next six months.  Draghi and Merkel’s solid Eddie Murphy impression notwithstanding (Keep it together!  Keep it together!  Keep it together!), the weakened and over-leveraged US economy will no doubt follow suit.  Maybe the Fed will go down swinging, throwing good money after bad, and maybe not.  But, it will make a difference only in when and how — not whether — the markets will collapse.

In 1923, Dr. W. Frederick Gerhardt, head of Aeronautical Engineering at the University of Michigan reasoned that since wings provide lift, more wings would provide more lift.  He built a beautiful aircraft known as the Cycleplane that featured a total of seven wings.  It even flew a few times.

But it’s best known for the time it was being pushed along the ground and the entire contraption collapsed under its own weight.

As we’ve discussed many times in these pages over the past year, the solution for too much debt isn’t more debt.   There will be a point of recognition, sometime between now and December 31, when capital markets begin to reflect simple math.  The economic shock will be too great for even the Fed to mitigate.

When that happens, the rush to the exits will be swift and severe. But, until then, we’ll do our best to navigate the twists and turns — making the best of markets that are showing few signs of rational behavior.

Stay tuned.

UPDATE:  12:00 PM

Taking a little short position here at 1435, with a trailing stop of 1435 if the break of the 60-min RSI TL plays out.  Probably won’t go anywhere, but you never know.  Maybe the Soros comments will rattle some folks.

Made an interesting discovery in EURUSD this morning.  The RSI level of 73.108 reached Friday is relatively rare.  It presaged several decent corrections over the years — the most recent being April 28 – May 3, 2011 when the market topped at 1370.

Eight out of the past 10 instances were followed by SPX drops of 50 points or more — typically within 2-3 weeks.

UPDATE:  3:20 PM

Adjusting my stop to 1434.

UPDATE:  3:55 PM

Taking profits on the bulk of my shorts at 1429.30; will leave a small flyer position in place.

 

UPDATE:  EOD

What a crazy day.  As I was writing about the inevitable demise of the economy as we know it, the market started slipping.  Pretty soon we had broken an important supportive TL on the 60-min RSI — usually a clear sign of at least a little slide in prices.

I paused my pontificating to put out a trade alert, and found out that apparently everyone at GoDaddy went out to lunch at the same time, leaving no one to pedal the generator that keeps millions of sites open.

No sooner had I sent an email version of the post and trade alert re my short at 1435, when I realized the email servers were down, too.  I switched to an old Gmail account and sent it out via email; hopefully, everyone got one.  I was a tad early, as it took a while for investors to believe that a dip was being allowed in the days leading up to Bernanke’s press conference (Thursday.)

Fortunately, there was plenty of remaining movement over the next hour or so and we were able to ring up another 6 points to the good.  Any other time, I’d stay full-on short into the close and overnight.  There is a strong case for continued weakness.  But, given the proximity of the German court decision re ESM and the FOMC meeting, I’m continuing to play it safe.  I kept a smallish position overnight, but took profits on the majority of my shorts.  Unless something changes, I’ll resume directional/swing trading again after Bernanke’s speech on the 13th.

Regarding the GoDaddy issue:  it continues to go down periodically.  As of a few minutes ago, the mail servers are down but the others are up.   There’s nothing I can do in the meantime other than send out email versions of each post and double-post everything to the old pebblewriter.blogspot.com address on Google’s Blogger until the dust settles.

BTW, as GoDaddy comes back to life, you will probably receive emails and/or texts advising you of “new” posts that were actually made months ago.  If you haven’t done so yet, register your email address in the window to the right and consider registering your cell phone for text advisories.

*  *  *  *  *  *  *  *

THE CONTEST

Just for grins, lets give away some memberships.  Since we’re likely to have some fireworks this week, I’m curious as to what folks are expecting.   From now through 6pm EDT on the 11th, submit your best guess as to the closing quote for the SPX on September 13th.  One entry only, please, and verified Disqus ID’s only.  Prizes are as follows:

• closest to the mark:  one year membership
• 2nd closest:         semi-annual membership
• 3rd closest:               quarterly membership

Post entries in the Disqus section of the THE CONTEST.  First come, first served.  Once a particular number is posted, no one else may chose it.  I’ll do my best to police these, but it’s up to you to do your homework first.  And, while you’re at it, impress us with the logic behind your reasoning.  I have some monthly membership awards to hand out for overwhelming brilliance, creativity or humor.

If you’re already a member, you may use your award to extend your current membership or give it away to your favorite charity or a close friend.  All winners are responsible for any taxes, etc. on their winnings, and entries are void where prohibited.

If Disqus eats your entry, use the “contact me” form in the menu above and I’ll post it for you as soon as I notice it.  Just to be on the safe side, you could also copy me at pebblescribe at gmail dot com.  Who knows when/if GoDaddy will get things going again?

Remember, post all entries in the Disqus section of THE CONTEST, not below.

Good luck to all.

 

 

 

 

 

ORIGINAL POST:  0930

The dollar and EURUSD have both reached short-term extremes and should bounce back strongly — if not today then very soon. Here’s the action as of the NFP print:

And, here’s DX’s action since then — falling out of the channel it’s been in since July 6. Does the dismal NFP report guarantee QE3?  The market is certainly acting like it.  Perhaps a case of buying the rumor, selling the news?

At this rate, the next natural stopping point is the 79.90 level, which is both a 1.618 and a .786 target.  But, this feels very overextended to me already.

The daily RSI is already at its lowest value since May 2, 2011, when the SPX topped out at 1370.58.  There is a potential landing spot down at Point X, which probably correlates with the 79.90 level.

I expect SPX to top out somewhere between 1435 and 1445. Note the long term RSI TL just above current levels on the chart below.  I’ll play along on the upside, but am watching for the first signs of petering out.

UPDATE:  10:15

SPX is also very overextended, with the 60-min RSI nearing a critical overbought level.  Note the market’s reaction each time RSI tagged the highest TL (red, dashed.)

EURUSD’s daily RSI has tagged a TL coming off the highest point in the past 15 years — March 17, 2008.

If it is expanding to a new channel (red, dashed) to the right (chart below) it is obviously very overdue for a back test of the previous one.  Such a move would potentially take it to the 1.2933 level in mid-October — the .618 of the move down from 1.3485 in February.

UPDATE:  11:00 AM

Just saw an interesting blurb from Dow Jones.  Over the past 28 years, the August NFP stats have missed expectations 3/4 of the time.  For the past 10 years, the average adjustment after the fact is 62K.  I imagine the Fed is also aware of these statistics.

What would happen to this market if the Fed didn’t pull the QE3 trigger next week?  Or, how about a “Nein!” to ESM from the German Constitutional Court?  To my eyes, QE is very much baked into the dollar, the euro and the stock markets.

More in a few.

UPDATE:  12:00

A reminder, EURUSD is still back testing a 12 year old channel line.  It might get all the way there, and then again, it might not.  The diagonal purple trend line that cuts through the 1.272/.618 Fib lines dates back to the all-time low (.8227 in Oct 2000) for the pair.

Zooming in, we can see the recent channel action a little better.  If we measure the quick drops by adding the purple channels, we can see that this drop has already taken longer than the last two.

The pair went from its high to its low in only six months in 2008, bounced hard, and made another higher low five months after that.  Total time for the move:  11 months.  In 2009, it took only 7 months from the high to the low.  This time, we’re still working down from the high in May 2011 — 14 months so far.

Why?  The two previous drops benefited from a flight to safety (the dollar) that wasn’t hampered by $16 trillion in debt.  As bad as things are for the euro, the dollar is determined to give it a run for its money.  Whether we reach 1.10-1.12 or not will depend completely on the dollar’s ability to remain the cleanest shirt in the hamper/tallest jockey in the stable/most honest politician in the race.

More in a few.

UPDATE:  1:50 PM

I’m concerned that if/when this market cracks, it’ll go fast.  I’m setting stops at 1432 and will go short on any move lower.  My top scenario is a quick, but contained drop to 1425-1426, then a possible move higher into the German court decision on the 12th and FOMC on the 13th.

I’m not an EW fan per se, but I count an obvious five waves up from 1396 on the 4th.  I’m watching the channel setting on up on the 15-min RSI.  The asterisk marks a critical support point.

 

UPDATE:  3:15 PM

Apparently someone accidentally pulled the extension cord that powers the stock exchange; it’s been down for the past five hours and they just now noticed.  Just kidding, of course, but it sure feels that way.  Normally, this means big moves ahead, and I think this is no exception.

Here’s some charts I’ve been playing with.

VIX:

XLF:

McClellan Oscillator (NYSE) vs SPX:

 

UPDATE:  3:45 PM

Unbelievably orderly descent of the 15-min RSI on SPX.  Almost as though it was being orchestrated…

Prices, meanwhile, have made a perfect little pennant.  Ordinarily, these break upwards.

My inclination is to close out my long positions prior to the close.  Again, not thrilled with the idea of spending the weekend wondering whether someone is going to say the right thing or the wrong thing and send the market up/down 30 points on Monday’s open.

UPDATE:  3:57

Putting stop in here at 1437, will see if there’s a last minute spike.  Otherwise, selling on the close.

UPDATE:  3:00 PM

Back to cash for the weekend.  Done at 1437.80 for 5 pts and change on the day.

That was a heck of a lot of work for a whopping 3.24% the past four days.  SPX was up 2.2%. Definitely one of those weeks where the reward wasn’t quite worth the effort.  I’m pooped.

What’s more, my 13 year-old daughter leaves tomorrow for a week on the East Coast  — seeing historical sites from Boston to D.C. with her schoolmates.

I’ve been on the other side of the world from her many times, but this is the first time she’ll be the one far from home.  Not sure how I’ll handle it…but, she’ll be fine.  She makes friends everywhere she goes.

 

Hey, how about a contest around FOMC day just to liven things up?  How about a free 6 months membership for whoever gets closest to the close on the 13th?  I’ll put up a page this weekend with the details.

 

No, not in a “saves the world” sense.  But, he must have received my envelope full of liras because SPX is right on track to reach our target from the 4th [Counting Down, 3:30 update]. We’ll get into the specifics of his plan later, but first some charts.

We’ve reached 1417.59, the 1.272 of the two targets in the little Butterfly Pattern.  The 1.618 extension is still up ahead at 1423.31.

continued…

(more…)

His prepared remarks and Q&A may be seen here.

As of August 31, we’re up 54.64% since inception (March 22, a little over 5 months.)   A competing “buy and hold” portfolio would have earned about 1%.

• Inception to date:                  +54.64%
• S&P 500:                                +0.99%
• Differential:                            +53.65%

August was going so well until the 7th.  That marked the first of 20 sessions in a row that traded within 5 points of the fan line from the top in 2007.  Directional trading became very difficult, as every breakout or breakdown fizzled before it could get rolling  — a situation that will likely continue until the central banks’ intentions become clearer.

So, I’ve resorted to short-term trading — playing the daily swings (aka scalping) for a few points here and there and going to cash much more often.  Since Aug 21, results have been much more positive: we managed to salvage a 5.39% month versus 1.23% for the S&P 500.

The downside of such a strategy is that we might miss part of extended breakouts or breakdowns.  It’s also much more labor intensive — resulting in many more trades than normal (sometimes several in one day.)  I think it’s a risk worth taking — at least until after Sept 13th when the FOMC concludes its next meeting and QE questions are (hopefully!) answered.  Then, I plan to go back to directional trading before all my hair is as white as my knuckles.

Two months into Q3, we’re at 15.68% so far versus 3.19% for the S&P 500.  Q2 came in at 37.74% — which would have ranked us #1 among managers if we were an equity mutual fund or (according to these guys) a hedge fund.  Monthly results are as follows:

	pebblewriter	S&P 500
Mar (from 3/22)	.50	.37
Apr	9.35	0.0
May	14.59	(6.27)
Jun	14.52	3.72
Jul	10.29	1.23
Aug	5.39	1.96

as of August 31, 2012

More details and important disclosures here.

I’m not really a scalper.  Our swing/directional calls have been pretty successful and are a lot less stressful and time consuming.  But, we’ve had day after frustrating day of watching breakouts and breakdowns fizzle before they could even get started, leaving us with subpar performance for August (+5.4% versus our average of +12.2%.) 

Today marked the 21st day in a row where we traded within 5 points of the fan lines from 2007.  Complaining hasn’t seemed to help, so I decided to scalp this schizophrenic market and try to pick up a few points per day — at least until the Central Planning Sweepstakes winners are announced and things return to normal (hopefully by the 13th.)  

It’s good for an old dog like me to get the blood flowing by getting reacquainted with some old tricks.  But, buy and hold types might prefer to brush up on their golf game.  We’ve averaged 12 trades/month since the new site opened in March.  In the past two days alone we’ve traded 9 times.  Thankfully, it’s been volatile enough to pick up 2.3% in the process.

 

ORIGINAL POST:  9:30 AM

Emini’s are taking on a descending triangle look, and approaching the .618 time point where there should be either a breakout or breakdown.

It’s worth playing along on the downside at the opening to see if there’s another trip to the lower bound at 1395.  A stop at the upper bound (1406) should provide protection.  I’ll take a short position on SPX when it opens.

UPDATE:  9:50 AM

Strange opening, with SPX up while ES was down.  Opened a small short position at 1406, stops at 1408.50.  Lower bound on triangle for SPX is 1396ish.

If the 15-min RSI rebounds at a TL coming up, I’ll switch sides and play the upside.

UPDATE:  10:00 AM

Switching sides here at 1402, with very tight stop at 1401.

I still like the idea of a Butterfly Pattern getting going here.  I’ll post a chart in a moment.

UPDATE:  10:10 AM

If/as we approach the upper bound, we’ll have to be wary of a reversal that could start a Gartley in the other direction.  The BC leg was roughly .618 of the AB leg.

So far, we’ve retraced .786 of the BC leg.  The upper bound is roughly at 1408.50 — which also happens to be the upper Fan Line from 2007.

More in a few.

UPDATE:  10:20 AM

The 5-min RSI has provided a nice road map this morning.  Just broke out of its little corrective channel — but that rising purple line is one of our major channel lines.  Make or break time for this little rally.

If we hit the upper bound, I’ll likely take profits and wait for a breakout to get back in.  Otherwise, cash sounds fine.

UPDATE:  10:30 AM

Taking profits here at 1408.55, will stay in cash unless break 1409.55 or little channel up breaks down.

UPDATE:  10:45 AM

Channel broke down, but RSI picture isn’t so clear.  Will stay in cash for now.

More in a few.

UPDATE:  10:50 AM

5 min RSI broke back through support.  Will we get a tag on the lower RSI channel line again?  It’s the same line for the 15 min, too.  The lower Fan Line is just below at 1404.80.

If that doesn’t hold, there’s also a TL at 1403 (white) that might correlate with the RSI channel lower bound.  If that doesn’t hold, there’s always a yellow channel line at 1399 and the descending triangle lower bound at 1396.50.

It just now occurs to me that the frequency with which SPX traverses between the upper and lower fan lines (currently at 1408.42 and 1404.80) has provided some tasty trade opportunities.  In the past 20 days, it’s ventured into the gap 30 times, 22 of which traveled to the other side and 8 of which failed.

Given the 4 point gap and using reasonable stops, that would have translated into a nice little trading system:  22 x 4 = 88, 8 x -2 = -16, net = 72 pts. Probably not useful going forward, as we should break out of this tight range once the Central Bank Sweepstakes winners are announced.  But, for now, the an lines are definitely exerting a lot of influence.

UPDATE:  11:15 AM

Speak of the devil.  Just had a little reversal at the lower fan line.  I’ll play the odds and go long if we break above 1404.80 — stop at 1402.80.

UPDATE:  11:20

Changed my mind — don’t like the RSI pattern.  Will wait for a better setup.  Looks like more downside to me.

More in a few.

UPDATE:  11:40 AM

So much for ignoring the trend!  RSI broke up through its FL and SPX appears headed for the 1408.40 side of the gap (also the triangle upper bound.)  As before, if it breaks convincingly through 1409.55, I’ll consider it a breakout of the triangle and tag along on the upside.  If not, happy here in cash after making lunch money for the day — or might take another run at a reversal.

UPDATE:  1:30 PM

SPX approaching that white TL (1405-ish) again.  If it breaks through, should be a good short.   Chart in a minute.

UPDATE:  1:55 PM

Yikes!  That was a break through.  If 1401.25 broken, immediate target is 1400.  I’ve added some channels (yellow, dashed) that seem to be working pretty well in the short run.  We just bounced off 1401.38, will likely back test the presumed channel line in red — also a yellow channel line.  This is really bouncing around, I’ll set a loose stop at 1405 — as we might go back and back test the broken TL (white.)

 

UPDATE:  2:35 PM

I’ll give it another point or so to see if it’s stopped by the TL back test.

UPDATE:  3:44 PM

Going ahead and closing out the short here at 1403 for a whopping 2 point gain.  We’ll probably get a bounce off the RSI TL, and I like the idea of being in cash again overnight.

ORIGINAL POST:  9:45 AM

There are three crucial dates coming up that will determine much of the market’s direction in the coming months — culminating with the FOMC press conference on the 13th.  I expect we’ll continue to bounce around in the general vicinity of current prices for the next 9 days.

If the current downward sloping channel (in red) is to hold, we’re heading down this morning — probably to the same neckline established Friday.  It looks to be around 1399.40.  I’ll play along on the short side and look for a reversal there.

UPDATE 10:25 AM

Having reached 1399, I’ll stay short and see if the sloppy H&S pattern might play out, putting in a stop around 1402.50.  This makes two right shoulders, BTW, the same as occurred in the last larger pattern from Apr 23 – May 4.

Why the change of heart?  We could be working on a Crab pattern with Friday’s low as our Point B.  It would target the 1.618 at 1387 — also a channel line objective (purple.)

If 1397 holds, however, it leaves open the possibility that we’re working higher (the red pattern) and just established a Point C.  Given the implications, I’m 50:50 as to whether TPTB will allow lower prices to set in just now.

My gut is that a nice meaningful drop would give better cover for whatever central banking goodies they have in store, while higher prices would make things more politically difficult.  We’ll find out shortly.  Watch your stops.

If we successfully back test 1400 and 1397 falls, we could get a nice big downdraft.  Targets include the H&S target of 1370.  But, that’s unlikely to happen very quickly.  We have the above-mentioned purple channel line as well as one of our yellow channel lines of support at 1389 — just above the 1.618 at 1387.07.

A reminder, this kind of day trading is decidedly not what pebblewriter.com is all about.  But, as long as market is bouncing around — being held hostage to the three events depicted on the above chart — we might as well try to pick up a few points here and there.  Twenty points per week on the SPX would equate to 5% per month — a very respectable outcome.

More shortly.

UPDATE:  1:30 PM

The 15-min chart is showing a possible turning point — end of the back test or break out?

The markets have settled down a bit, giving me a chance to update some other charts.  The dollar is again testing the midline of its little contra-wave channel.

As we discussed Friday, its RSI has completed the back test of a falling wedge that indicates higher prices (thus, probably lower equity prices.)  An important fan line (7-11) drawn from the recent RSI high has been broken, although a lesser one (7-12) is immediately ahead of us.  Breaking this line will likely correlate with breaking through the center line of the price channel — ushering in a test of the channel high or at least a back test of a key Fib price level.

This is normally a pretty reliable indicator.  As can be seen from the last system of fan lines, each broken fan line led to a nice bump in DX.  But, back tests can be substantial.  When the first fan line was broken at Point 1, the RSI back tested that line all the way to Point 2.  In so doing, however, it established the larger channel (in white).

Another fan line break at 3 led to a nice bounce; and, the next back test (at 4) put in a higher low which led to a substantial rally.   Note that Point 7 represented negative divergence.  DX reached a higher high (84.245 v 83.67) but RSI didn’t.  Point 7 also represented a tag of the upper channel bound.

It might have signaled an upward breakout, but for that negative divergence.  All things being equal, this is a bearish indicator.  And, in fact, it was accurate.  DX’s RSI began a trip to the other side of the channel, completing it at 10 on a back test of the Point 9 fan line break.  Since then, we’ve been consistently breaking up through and successfully back testing those fan lines.

Again, if we can break the fan line running from 7 to 12/13, the dollar should rally nicely.  But, check out the white channel in the context of the bigger picture and you can see the fly in the ointment.  Yep, that’s negative divergence between Point A and Point B versus DX’s price increase during the same period.

It goes to show how confused the signals are at the moment — and why a sizable drop in the dollar (probable rise in the euro and stocks) is still very much on the table.  If it plays out that way, look for DX to test the red channel line again — currently around 80.75 — or even the next lower red channel line below 80.

We have two days until the ECB announces its monetary policy decisions (7:45 EDT on the 6th, with the press conference following at 8:30.)  If the past is any guide, we can expect a pop in the euro around the announcement.

I wouldn’t be surprised to see this rally in DX continue till the RSI channel midline, probably around 81.46-81.64 on DX, at which point an ECB announcement sends it back down to test the lows — resulting in a tag of the 1.272 and/or .5000 at 80.83-80.88.   Any immediate disappointment out of Frankfurt would, of course, clear the way for a trip to the RSI channel upper bound — probably at DX 81.86.

Many ECB announcements have provided very short-term pops in the euro.  So, I would hesitate to jump on the band wagon as long as the German Constitutional Court decision on ESM is still hanging out there (expected Sep 12.)  And, with so many divergent voices arguing for different outcomes, don’t be surprised to see some very negative comments regarding accommodation in the interim.

More later.

UPDATE:  2:10 PM

Channels and a RW for EURUSD.

Note the break and back test of the RSI channel (in white.)

UPDATE:  2:15 PM

SPX RSI broke up and out of the little 15-min channel we discussed at 1:30.  It should go up and test my stop at the 1402.50 pivot point — with a max upside (if it remains in the red channel) at 1405.  I’ll play along with some longs here at 1400, with stops at 1400.

 

UPDATE:  2:30 PM

Raising stops to 1404.6.  SPX has broken through our presumed red channel and appears heading for the .786 at 1406.59 or the .886 at 1407.87.  Will keep stops close behind.

UPDATE;  2:40 PM

That’s good enough as far as I’m concerned.  Closing out the long position with a tag of the upper Fan Line from 2007 at 1408.50 and .786 of 1413-1396 Fib.  Getting short again here, with stops at 1410.

 

 

UPDATE:  2:55 PM

When we first discussed the red downward sloping red channel, I noted how narrow it was — and how it was likely to expand, much like the channel down from April to June did (it features the exact same slope.)

Sure enough, today’s action presents some alternative channels that, while not negating the original red one, provide some guidance as to the interim moves that might serve to widen it.  In addition to the red channel (CH1), we have a white one (CH2) and a dashed yellow one (CH3).  The latter are less steeply sloped, and thus give SPX room to expand the red channel if that’s in the cards.

If SPX reverses before the close, it’ll likely be back to the Fib 1404.62/lower fan line.  At that point, it could leave a big spinning top for the day — the perfect way to show the market’s indecision.

UPDATE:  3:30 PM

It’s worth noting that SPX has retraced a Fib .786 of the decline from 1413 since Friday.  Any time I see a stop at the .786, I’m thinking Butterfly Pattern. While the 1.272 extension of this pattern (in purple) would land at 1417.59, the 1.628 extension would take SPX to 1423.31 — right next to the .886 of the next larger pattern at 1423.25 (seen in red.)

While that could easily mark the end of things, leaving 1426.68 as the high, another possibility is 1423 (on ECB announcement day?) would mark a Point B in a larger Crab Pattern — the 1.618 extension of which is 1445.

We’d end up with a scenario something like this:

This is pure conjecture, of course, but it sort of fits with my notion of how the Central Bank sweepstakes might run — a modest ramp into Thursday’s ECB announcement, followed by realization that: (a) “it’s” a stupid idea that will never work; or, (b)  “it” won’t work without a favorable German court ruling.

If we get a favorable ruling, it would be bullish going into the FOMC press conference.  If not, markets soften (but not too much, as the Fed will surely save the day.)

I still believe the Fed would like to not have to bring QE just yet, if they can avoid it.  It doesn’t matter so much who injects liquidity into the markets, as long as someone does.  Benny and the Jets would surely prefer it be the Europeans.

UPDATE:  3:45 PM

It’s been a good day playing the swings, so I’ll go to cash at the close — setting a stop here at 1405.  We tagged the lower fan line as discussed in the 2:55 post above.

UPDATE:  3:55 PM

Covered at 1405.  Cash for the night.

ORIGINAL POST:  10:15 AM

Got stopped out on the opening this morning (1408.90) and immediately shorted. How low can we go?  I see support at 1398-1399, and will consider covering or setting stops there.

Depending on your point of view, Lockhart was testing the market’s reaction/letting us down easy/managing our expectations.  And, the market reacted predictably.

According to Lockhart — the economy has been growing at 2% (versus hoping for 2 1/2%)  which is very modest growth, won’t bring great progress in bringing down unemployment.  While inflation remains subdued at a little over 2%.  He said it was a close call in terms of warranting further easing.

It would be an easier decision if we were to see persistence of less than 100k monthly employment growth or signals of deflation.  But, the question remains as to shorter and longer term costs.

Forecasting low rates into 2014 has kept rates low, could take rates even lower.  Lower mortgage rates would help qualify more real estate buyers.  But, lower rates isn’t really the issue — even though they would have some positive effect

Re Draghi no-showing at JH — a signal that all hands are on deck in Europe, paying attention to their issues, which have contributed to the uncertainty that we’re dealing with.  The fact that they’d stay home in august is a good thing.

Re the costs and benefits of additional QE:  costs are speculative, don’t really know what costs are over longer term.  We could see some benefit, but limited benefit for limited risk and I think manageable costs over the longer term.  Not overly concerned with costs of more action, but see limited benefits, too.

I continue to believe the Fed really doesn’t want to implement more QE unless they have no other choice. I believe this morning’s announcement was, as George Carlin would call it, a test fart.  How crazy would the markets go if we don’t announce it now.  What if we don’t announce on Sept 13?  What if we never announce it again?

 

UPDATE:  10:30 AM

I’m covering here at 1399, but will stay on the sidelines for the moment.  If we break 1398.04, I’ll go short again with an objective of 1386-1389, trailing stops starting at 1398.

 

Note that 1398 is not only the previous low, it’s the level of one of our channel lines (parallel to the former neckline.)  Breaking it would make an upside harmonic pattern that much less likely.

more in a few…

UPDATE:  11:00 AM

We’re catching a bid here at 1398, with the hourly RSI showing positive divergence on an oversold condition.  I think the market might bounce back to 1402 or slightly higher, and will try a small long position here — strictly a day trade — with stops at 1398.

If we break lower again, I’ll go back to the short position with 1386-1389 objective and trailing stops starting at 1398.

 

UPDATE:  11:30 AM

The 5 minute RSI broke through double resistance.  I’ll stay long and raise my stop to 1399.

UPDATE:  1:15 PM

Still sitting with a small long position.  SPX tested our white channel line again and it held.  Our upside probably isn’t terribly great right now.  Resistance is overhead at the purple channel (1402) and the intersection of the white channel with the lower of the two fan lines from 2007 — right at the Fib .886 of 1404.64.

If we can get to and somehow break through that level (somewhat unlikely) the upside would appear to be capped at the intersection of the top white channel line (the previous neckline) and the larger downward sloping channel right at 1409.

The larger trend does appear to be down — probably a Crab pattern with a target on the 1.618 at 1386.84 — also the white channel bottom and a purple channel line.  The key will be the white channel line currently providing support.

UPDATE:  2:45 PM

The dollar has broken up through the channel midline and is currently testing the recently broken purple channel line.

The purple channel line is a major feature on the long-term chart.  DX broke down through it about a week ago, but it’s done this in the past and managed to bounce back in short order.

If it can retake this line, the larger upward trend can resume.  The chart below shows how influential these channels have been in the past.

But, there are other speed bumps to deal with.  The dollar is at a critical intersection of these purple channels with the white channels and the big yellow channel shown below.   The big yellow channel (used to be purple) has been in charge for almost 14 years.

And, of course, this intersection is occurring in the vicinity of an election that has major implications for the economy, Fed composition (and thus policy) and our relationship with the rest of the world.

I wouldn’t be surprised to see DX stay relatively close to this nexus for the next 10 weeks — until we get past the election.  Breaking out of this tangle of intersecting channels would signal an economic sea change — one that’s decidedly not beneficial to equities.

The wild card remains the euro.  It’s such a major component of the dollar’s value that a failure of the EZ to produce a fix the market can believe in will boost the dollar — regardless of what Bernanke announces tomorrow or on Sept 13.

The red channel I show extending to the right up above is the likely path forward.  Reaching the upper bound is the next major move, but there’s a lot of ground to cover first.

Our medium-term objective for DX remains 87.  It’s the Fib .886 retracement of move down from June 2010 to May 2011 (purple pattern) and the 1.618 extension of the Jan to May 2011 decline (yellow pattern.)  The intersection of a Bat and a Crab pattern is almost always significant, so we should expect a serious reaction at 87.  The charts say it’ll happen at about the same time as the election.

This timing intrigues me. What would it mean?  Would the administration and the Fed allow the dollar to rise (and equities to fall) as we approach the election?  I think it more likely they’d pull the trigger on QE enough in advance of November 6 to make a difference.

More in a few…

UPDATE:  3:20 PM

Just hit 1402, so I’m raising my stop to 1400.50.  I still plan on being largely in cash by the end of the day (though I’ll probably put on a small, highly leveraged short just for fun.)

UPDATE:  3:40 PM

Almost to 1404, and just tagged purple channel line.  Raising stop to 1403.30.

UPDATE:  3:50

Finally stopped out there at the channel line.  Could be a few bucks left, but that’s okay.  I’m buying a few O.O.M. puts with a downside target of 1386 tomorrow (if there are any QE bulls who haven’t already pulled the plug???) but am otherwise in cash.

Thanks to OnTheFly, who correctly pointed out the H&S pattern that began on Aug 6 and completed today (dashed yellow neckline.)  It’s very lopsided, but if it plays out it indicates a downside of 1370.