Reposted from last night:

Yesterday, I ran into a friend (and member here) who was trying to develop a strategy for the rest of the week; we got to talking about various approaches.

I know I wrote this numerous times last week, but it bears repeating: if you’re not a gambler, stay out of this market.  In the short-term, it’s just too dependent on what Bernanke says (or doesn’t) on Friday.

I blog every day about what I see and what I think.  As always, I have an opinion as to what will happen.   But, right now, my confidence in my opinion being right is a lot closer to 50% than the 70% I shoot for.  Why?

Most of what happens in the next couple of days will be driven by what Bernanke says on Friday.  And, while I have opinions, I have no special insight into what he’s going to do.  So, unless something really weird happens in the next two days, I will have at most a very modest bet in place when Bernanke starts talking.

Ever since 1426, trading SPX has been very high risk.  First, 1426 didn’t really match up with any patterns; 1422 or 1433, sure — but not 1426.  I saw a few Elliott Wave guys get it right, but that’s about it.  So, it wasn’t clear it was the top (still isn’t.)

Second, every one of the past 16 sessions has traded within 10 points of the fan line from 1576 in October 2007.   Thirteen have actually touched it, and 5 have straddled it.  Fan lines are extremely important, and the fact that the market can’t make up its mind is very telling.

Third, the cost of being wrong could be substantial.  I’m working on a forecast that covers a range of outcomes, but SPX could move +50 or -50 in a matter of a day or two — depending the what the news is and how well it’s delivered.

Looking back over the years, the worst trades I ever made came from being invested at a time when I wasn’t very sure about the direction, but had enough of a hunch to stay invested.  Sometimes these even work out, which is dangerous (it only encourages more hunch playing.)

I’ve learned the hard way that it’s perfectly all right to be on the sidelines.  Sometimes, it’s the only sensible approach.  Although illogical from a mathematical standpoint, in my  opinion losing actual money sucks more than does an opportunity loss.

So, unless there’s a great straddle (currently 5.10 ATM on SPY) or volatility trade that makes sense, this is one of those times.  I’m still long from 1409, with an objective of 1420-1422 and a stop at the fan line around 1405.  I’ll continue to take stabs at the intra-day stuff for those who like to day trade.  But, if nothing substantive happens in the next few days, I’ll be market neutral (and sleeping soundly) Thursday night.

I’ll post more after the open.

UPDATE:  9:50 AM

We’re getting that rebound we were expecting off the lower channel bound on the 30-min chart.  So far, the TL (red, dashed) from 1426 is holding, but I expect it to give way in the next hour or two.  If it does, potential targets are the .786 at 1420 and the .886 at 1422.  But, I wouldn’t be surprised if the channel midline (the yellow dashed line) keeps a lid on any break outs.

If the channel should break down for some reason, the immediate downside should be limited to the fan line down around 1405.  The channel bottom and the red TL intersect around 1410 at 1230 EDT, so look for a breakout or breakdown before then.

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I’ve been charting various indices all day — XLF in particular.  I’ll post those charts this afternoon.  In the meantime, SPX is trading in a little channel which hit the upper bound this morning at 1416 and has potential to about 1408-9 on the downside.

We’re still long from 1409 on Friday with a stop at 1407.  But, I think we’ll bounce around in this channel for the next several days.

The short-term harmonic picture shows a potential Gartley to 1420.55.

DX bounced back to the channel midline as we discussed last week, back testing an important channel line, too.

And, EURUSD back tested the lower bound of its channel, only to reverse off it and come to rest on a trend line of support.  The RSI did pretty much the same.  Charts coming in the next hour.

Update on the AUDUSD — also reaching an important level of support on daily RSI.

More later.

With all the whipsaw action these past two weeks, it might be helpful to review the big picture.  We’ll start with the chart pattern that’s easiest to see: a big rising wedge.

The wedge shows the potential for higher prices — a tag of the upper bound, for instance.  The apex is currently around 1472 in January of 2013 (but, wedges rarely play out all the way to the apex.)

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We got the reaction on the dollar and euro we discussed yesterday afternoon.  So far, it’s pointing to a continuing sell-off of equities.

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We’re all familiar “good news is good” and “bad news is good.”  Are you ready for “good news is bad?”  In a sign that things are becoming curiouser and curiouser, slightly better than expected employment numbers and flash PMI have sent the market down this morning.  Bullard, a non-voting Fe governor, made things worse by pronouncing QE3 iffy.

While the dip is slightly stronger than we expected, this is the back test of the neckline and .886 Fib (at 1404.64) we were expecting.

We’re flirting with breaking the wedge.  If this should happen, look for support at 1404.64.  If that level fails, then it’s likely down to the channel midline around 1390.

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ORIGINAL POST:  9:15 AM

The futures show how perfectly balanced things are at this level — with a step in either direction being very significant.

We tagged the IH&S target created back on June 19 yesterday, creating a double top after having broken the fan line off the Oct 2007 top.

We appear very likely to hit yesterday’s target of 1408 – 1410 on SPX after the open.  If it can hold those levels, we could see another leg up in the rising wedge.  If it breaks, look out below.

More in a few.

UPDATE:  9:35 AM

SPX had no trouble reaching our target range on the open.  Note that we have three chart features in play at the moment:  the rising wedge bound, a back test of the fan line (purple, dashed) and a little trend line drawn under the prices on the 60-min chart.

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In the wee hours of June 11, I pondered the possibility that the e-minis were forming an Inverse Head & Shoulder pattern [see:  Big Picture.]  I posted this chart, which showed that the target of such a pattern would be 76 points away from the presumed neckline — the exact same distance as the just completed orthodox H&S target from its neckline.

Of the road ahead, I wrote:

I’ve spent a lot of time lately agonizing over whether we’ll go back up and produce a new high.  The harmonic picture suggests we’ll put in a lower high — a point C which, less than A at 1419 (on ES, 1422 on SPX), would get the party started to the downside.

I can only imagine the amount of good money bears would throw away on puts and the like, trying to anticipate whether it was going to be a .618, .786 or .886 retracement.

Once we approached 1420, though, the momentum would shift to the bulls and an enormous amount would go into positioning for the upside.

What if it were simply a double-top?

Well, here we are.  The e-minis tagged 1420 about 45 minutes ago.

UPDATE:  10:00 AM

SPX completed its own “double top” just after the open.

This was as deep into the rising wedge we’ve been talking about as possible, and on the same day (but, not the same way) we speculated about last week [see: Moment of Truth.]

But, of course, it isn’t a double-top if prices keep rising.  Currently, the daily RSI shows no negative divergence whatsoever (although it’s present on every shorter time frame.)  If we blow through 1422, the upside targets are numerous.

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In a sign of just how over-extended this upside push has been, consider this rising wedge on the 60-min chart.  It’s not proof of an impending swoon, but put into context of our other charts, it sure has that feel.

As clean and simple as was the channel down from 1422 to 1266, the channel back up has been a mess.  I’ve redrawn it hundreds of times, as it continues to morph without rhyme or reason.   I sometimes peruse the Elliott Wave blogs out there, and I can see that many of them have also grown frustrated in trying to assign a legitimate wave count to this mess.

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