VIX coiling… forming a Bat in a Bat nearing the apex of a falling wedge and the intersection of two major trend lines.  Consider what happened the last time VIX formed a multi-year falling wedge like this — and they weren’t anywhere near as steep.

Financials will lead the way.  They got us into this mess, and they’ll get us right back…into a worse mess.   Unless S&P; comes out and upgrades half of the EZ, XLF is going down.  This is as bearish a setup as I can imagine, with XLF perched in an unbelievably precarious position.

It just completed a Gartley pattern and a rising wedge right at the upper bound of a broadening descending wedge — while also putting in Point C in either a Butterfly or Crab pattern.  Next stop is at least 10.05 — a 25% drop from current prices.

ORIGINAL POST:  12:00 PM

Equities still locked in a tug-o-war, so I’m focused on the EUR this morning  — it completed the latest Butterfly pattern we’ve been watching.   Charting with Harmonics and channels has been incredibly accurate for the past week.  Here’s the short term forecast I posted Monday.

 And, the actual results (I changed the forecast line to red for better visibility.)

So, let’s step back a bit and look at the bigger technical picture.  The following weekly chart shows the history of the Euro – USD relationship.   Euro coins and bills entered circulation in 2002, which just so happens to be a great fan line origination point.  It was trading at the time at around 83 cents.

Over the next six years, EURUSD soared to over 1.60, where it began a huge flag pattern that continues to this day.  Within the flag pattern, distinctive channels have developed.  The impulse moves down have largely been confined to the purple parallel lines, and the corrective moves up have followed the white, dashed lines.

Looking at the current channel down, we can see that it’s been frequently “interrupted” by diagonal corrective waves that follow the exact same slope as the much larger corrective channels.  I’ve called these “diagonals” for purposes of brevity.

It’s happening on a both a large scale and small.  Note that the thin, red diagonals are the same slope as the large, white dashed channels.  If you look closely, you can see what look like little continuation head and shoulder patterns playing out, with the diagonals acting as necklines.  They’ve taken on the appearance of stair steps ever since Oct 27.

Another notable feature of this market is the accuracy of harmonic patterns in predicting future price moves.  The yellow Crab pattern in the middle of the above chart is a great example.  Crabs look like a big “W” and follow a X-A-B-C-D pattern like most harmonics.  Once the X-A leg is established, we look for a reversal (retracement) to a Fibonacci level (indicated by the purple grid in the background.) Here’s a close up.

In this case, the reversal (Point B) came right around the .618 level, which left open the possibility that we’d eventually see either: (1) a Gartley that would extend to the .786 level; (2) a Bat that would extend to the .886 level; or (3) a Crab that typically extends to the 1.618 level.   In this case, that’s 1.2464 — a good 12.5% off the most recent (Oct 27) high.

When harmonic patterns reach their target, we look for a reversal.   Sometimes it’s small, sometimes massive.   In this case, we saw small reversals .01 – .02 back to a previous Fibonacci level (.618), followed by a continuation of the down trend.   Along the C-D leg, however, we’ve seen multiple harmonic patterns unfold, each adding another step to our staircase.

The latest to play out was a Crab or Butterfly that indicated a downside to the 1.618 extension at 1.2723.  We reached that and then some this morning, tagging 1.2696 and an important fan line in the process.

Although we’re still likely heading for the larger Crab target of 1.2464, we should expect a reversal back to a previous Fibonacci level or even back test the diagonal at this point.  A subsequent break of the diagonal — perhaps after forming a little H&S; pattern — should help us on our way to completing the larger pattern at 1.2464.

Note that at that point, we also tag a fan line from 2002.  Remember this chart from above:

Those dashed red lines from 2002 intersect with the lows of our flag pattern and influence what happens going forward.  In previous cases, they provided a bounce of a few cents.  When they were broken afterwards, EURUSD saw a particularly strong downdraft.

So, a bounce at 1.2464 makes perfect sense, as we’ll have completed the large Crab pattern and tagged one of these fan lines.    But, remember, we won’t complete the flag pattern until we reach somewhere around 1.135 — another 10.7% below current prices.  It could happen in a hurry when downgrades are announced for EZ sovereigns and/or the ECB.  

And, of course, there’s no guarantee that we’ll bounce at the bottom of the pattern.  In a vacuum, one would be tempted to see the past six years as the head in a giant H&S; pattern.  But, of course, we’re talking about the Euro in relation to the USD.  And, it’s simply a matter of time before investors notice the smoke coming from that tent as well.

Good luck to all.

UPDATE:  1:40 PM

I’ve been doing a lot of work with RSI lately — particularly with trend lines and, today, looking at harmonics.  I was somewhat surprised to see that relative strength moves in harmonic patterns just like underlying stocks.

The past three major turning points (P2, Minutes 2 and 4 of Minor 1) came as RSI completed a Fibonacci .886 retrace of the previous decline.  Now, as we’re trying to determine whether Minor 2 is over or in the process of ending, it’s very interesting that RSI is, again, approaching the .886 of its recent decline.

I know this chart is a little busy, so I’ve split it into two parts:  the first shows the time periods involved and the second expands the RSI study pane to better show the Fibonacci retracements. 

As of 1:55 PM, RSI stands at 61.5 versus the .886 target of 61.9.   It’s also hard to miss the fact that it’s closing in on the red dashed overhead trend line that’s marked the past five significant reversals.

After a 12-pt drop, SPX has recovered for a 5-pt gain.  But, we’ve clearly broken the channel that was guiding the upside since Dec 16.

With this last little spurt, SPX tagged again the major channel midline (yellow, dashed), completed a double top (triple if we count 1292) and completed a little Butterfly pattern that looks ready to reverse. 

In the meantime, EURUSD broke through the latest diagonal, completed its Butterfly to the 1.272 extension…so far.  As we’ve seen lately, these things can and do extend to the 1.618 which would be 1.2723.

XLF, which we’ve been watching for the past few days, touched it’s descending broadening wedge upper bound today, reaching 13.55 (versus our 13.65 Gartley target.)  That could be the end of the run, or we could get one last push up to 13.65 before the downturn.  Stay tuned.

ORIGINAL POST:

Setting aside all the noise and confusion, the market still hasn’t managed to break 1288-1292 — the mark necessary to signal a move higher to 1307.  So, for now, we’re left with a 1292 Minor 2 top followed by a .886 minute [ii] retracement of a 130-pt minute [i] of Minor 3 down. 

If we break 1288-1292, then Minor 2 gets moved over to that new high, and we look for the beginning of Minute [i] of Minor 3 down.  Either way, the market is set to tumble significantly from either here or slightly higher than here.

UPDATE:  12:00 PM

Taking advantage of the lull in the market to clean up more of the channel lines.  I’m also charting the 1306.50 target via the rising channel (versus rising wedge) just in case we do break 1292.

Note, 1306.50 is the harmonics target.  There are actually four different trend line targets depending on whether you include the candle shadows on May 2 and/or July 7.

The market is almost even on the day, but looking at the past several days it appears to be tracing out a small Gartley pattern.  We’re searching for the Point C right now (which, conveniently for the bulls, will be slightly higher than 1275.46 in order to avoid one of those nasty 5 waves down.)

From there, the .786 beckons at 1263.59 — near the bottom of a broadening descending wedge.  A .618 retrace of AD would then be back to 1276.59 — roughly where we are now.  The RSI on the 15 and 60-min charts support this scenario, as does EURUSD.

The 60-min chart shows a Butterfly pattern in the works, with a reversal at the .786 Fibonacci.  An extension to the 1.272 would sink through the diagonal support to 1.2799 and set up a back test of the diagonal.

UPDATE:  10:15 AM

Update on yesterday’s XLF chart.  I think the broader market is going to have a tough time with the upside case unless financials can take part.  Looks like there will be great difficulty in exceeding 13.65.

The key to watch will be the gap close at 13.07 — off 2.96% from yesterday’s high.  A return to 13.65 from there would be +4.44%.  A downturn in fulfillment of the larger Butterfly pattern at 10.07 would be -23% from 13.07, -26% from 13.65.

All things being equal (are they ever?) my hunch is we’ll close the gap, then rally to around 13.65 before plunging to 10.

There’s a little Gartley in the works on the 15-min chart that would support this move.   Its .786 is, conveniently, 13.08 — a penny from the gap fill.

ORIGINAL POST:  9:10 AM

Even with yesterday’s price action (on below average volume), we’re in pretty much the same position as Friday.  We have reached some key harmonic targets, meaning a reversal could happen any time, now.  But, a logical alternate lingers just above at 1307.

As the chart shows, we reached the 1.618 extension of the small Butterfly (yellow) pattern yesterday at 1282.18.  A .618 reversal would indicate downside to 1261.50 — more than enough to close the 1268 gap from Dec 27.

The medium-sized pattern is a bit more problematic.  Its Point B slightly exceeded the .618, so technically it shouldn’t qualify as a Crab, yet it’s extended out to its 1.272 — which is neither fish nor fowl.   Crabs reverse at the 1.618, which is at 1306.50.  Remember 1307 is the alternate upside target we’ve kept an eye on since Oct 25.

Should we exceed 1292 (1288 according to more knowledgeable Ellioticians), 1307 becomes the primary target for completion of Minor 2 and resumption of the bear market.  There’s certainly ample bullish momentum, although the situations in Europe and Iran or any of the economic news expected out this week could change that in a hurry.

If we are able to reverse after closing the gap, we will likely continue higher in a rising channel that’s the equal of the falling channel that took us down to 1202.

But, note that the same price action still fits in a much more bearish rising wedge scenario too.  I’ve drawn it with a 1307 apex, but these things rarely go the distance (2/3 is common) and are subject to alteration along the way.

The currency picture continues to argue the bearish equity case.  EURUSD, despite its decent bounce yesterday, is following the exact same path we detailed last week and remains in the fast lane of a set of channels I drew months ago.  The channel and a fan line were tested but held.  If we break below the diagonal at 1.28-1.29, the next step should be down to 1.2464.

The dollar tested its rising channel, but so far has bounced back nicely.  It’s working on completing a Crab within a Crab that should see prices advance to 82.568 and then 83.872.

More shortly.

UPDATE:  3:45 PM

The financials have been a huge part of today’s rise.  But, a quick look at the daily XLF chart shows a bumpy road ahead.

Note the proximity of the upper trend line of the descending broadening wedge.  The last two times that TL have been tested, a severe sell-off ensued.  Note, also, the bearish Gartley pattern that’s formed since late October.  The .786 reversal is at 13.65 — a mere .18 above today’s high.

But, the most damning evidence of all is the RSI trend line.  XLF’s rallies have all come from a break of the downward sloping trend lines over the past two years.  Each of them eventually peters out when the RSI rises to the trend line from the Apr 2010 high (dashed, yellow.)  It’s obvious that the current rally has virtually no room to run.

In other words, this rally should be very short-lived.  I wouldn’t be surprised to see a shooting star candle on the day, followed by a test of the trend line connecting the recent lows.  If it’s broken, watch for XLF to trade sharply lower towards single digits.

UPDATE:   1:15 PM

This morning’s rise has convinced me to revisit the channel lines guiding this corrective Minor wave 2.  The chart below shows the original in red, along with the revised lines in yellow.  The dashed line is the channel midline — the point at which the SPX has currently come to rest.

I think these channel lines do a better job of capturing the highs and lows in Wave 2, even though they result in a midline overshoot in the first few days of December.   A good test for validity of channel lines is how well parallel lines worked in the past.  In short — very well.

Here’s a close-up of the new channel.  Note the 3-way intersection of the midline with both rising and falling background channels.  It won’t matter to Wave 2 anymore, but trend lines of the same slope will play a role in defining the Minor 3 bumps.

And, the longer term view of the revised corrective channels:

The fan lines from 2007 and 2009 (shown in log scale) do a very good job of depicting the two potential tops of Wave 2.  The red one indicates that a 1307-1330 top is a possibility, while the yellow one argues that the top is already in.  Some of you might remember the yellow line from previous posts, sometimes called the “fan line that just won’t quit.”

UPDATE:  9:35 AM

So, the 1.618 it is.  And, there’s the negative divergence on the 60-min chart, right on schedule.  And, the dollar is way oversold.  The big question is whether we’ll reverse at 1282.18 or push higher.

Any way you slice it, that makes for a pretty obvious 5 waves up from 1202.

UPDATE:  9:15 AM

We got slightly more of a move than I expected from the EURUSD, with a rise to the .886 (instead of the .786) and a perfect back test of the last fan line to have been broken.

Consequently, the eminis have reached the 1.618 extension rather than the 1.272 which is much more typical of Butterfly patterns.

A similar move in SPX after the open would result in 1282 (the 1.618 extension) rather than 1275 (the 1.272).  It would also almost certainly produce some striking negative divergence across the board.  Can we still gap and crap before 1292 is endangered?  ISM manufacturing data will be released at 10AM. 

ORIGINAL POST:  JAN 3, 2012 1:30 AM

[note:  this post was originally appended to the last Fractal Update post — which was getting a little unwieldy.  I’ve left it both places so as not to confuse folks even further.]

Looks like SPX left us with a Butterfly setup last Friday.  If it plays out, it would reverse around 1275.01 — which is dangerously close to a key Elliott Wave price level (we also have a well-established downward sloping channel line there.)

Note that the Nov 8 high was 1277.55.  Depending on how one counts the move off the 1292 top, 1275 is too close for comfort to that previous high.   It’s also just a few cents off the .886 retracement of the 1292 to 1158 move.

Here’s how the EW count appeared to me last week.  I wrote that we were about to commence Minuette (iii) of Minute [iii] of Minor 3 of Intermediate 1 of Primary 3. 

If we break 1277 (but not 1292) it means the move from 1292 to 1158 was Minute [i] of Minor 3 , with the three wave retracement to 1277+ being Minute [ii].  This actually makes more sense, as Minute [i] in Minor 1 was 112 points.  It’s likely that the same degree move in Minor 3 would be as large or larger.

If we exceed 1292, then we’re likely tracing out the final 5 waves of C of Minor 2 which, as readers will recall, takes prices up to the 1307-1320 area.  Whichever way it breaks, we’re either in Minor 3 (my top preference) or about to enter it.  It should be significantly uglier than Minor 1, which took the S&P; 500 down nearly 300 points (22%) in five months.  A 22% decline from Friday’s close would take SPX down to my short-term target of 983.

European stocks had a big up day, today, with the DAX up 3% and the CAC up 2%, both on light volume.  The DAX was boosted by a marginally better PMI reading which still indicates contraction rather than growth — particularly in the area of new orders.

The following are notes on the Euro from The Big Picture, posted earlier today:

    Last, just a quick observation on the Euro.  Note how the fast lane we talked about last week is marked by a series of decisive breaks of parallel trend lines.  A reminder, this channel is exactly the same slope as the past three two, so I’m inclined to give it the benefit of the doubt.

These are worth watching, as lately they are highly correlated with breaks in the US equity markets.  EURUSD seems to have established a new on on the 29th at 1.2857.  It has since rebounded somewhat, and could be tracing out a Gartley whose .786 Fib is at 1.3032 — right up against the channel boundary.

Whether it rebounds higher or not, a break of the dashed trend line is a great indicator of a bigger downdraft to come.  In the end, I expect EURUSD to fall faster than its sub-channel, crossing into the next one down at an accelerated rate as occurred in the last wave down in September.

The ideal spot would be tomorrow, Jan 3, as that’s the peak of channel as it intersects with the trend line just broken.  A full back test to the above-mentioned .786 Fib would be the perfect fit for a robust reversal.

I’m still expecting completion of the Crab pattern (in purple) at 1.2464 sometime around mid-January — a 3.5%+ move that would correlate with a 10%+ move in SPX.

A couple of interesting news/opinion blurbs in the past few hours:

The IMF, stating that the 50% haircut that was supposed to alleviate the Greek debt crisis is likely not sufficient.  This, combined with the Spain not-so-near miss of its economic target on Friday should give Europtimists pause.  According to Lagarde, the IMF will likely lower its global GDP outlook.  As the article points out:  “growth is a key factor in determining whether a country can escape from a heavy debt burden.”  Yes, and in an obvious corollary: “growth is practically impossible when a country is overburdened with debt.” 

More later.

I want to wish everyone a happy, prosperous and peaceful New Year.   The year ahead looks to be at least as “interesting” as 2011.   With the markets closed today, I thought I’d review a few of the patterns I’m watching.

First, an overview of the harmonic picture, starting with the biggest picture:

On the monthly chart, we just completed a potential right shoulder to a very large Head & Shoulder pattern that started with the 2000/1 top (the left shoulder).  Consider how the pattern aligns with the largest harmonic pattern (in purple, I’ll call it a Butterfly for now.)

The neckline, which tagged the .786 retrace in Mar 09 at 666, passes through the .886 at 565 in late 2016.  By drawing a parallel trend line across the shoulders, we can also construct a midline — currently around 1031.

I find this level interesting, because it’s reasonably close to the .500 Fibonacci level (1006) of the Butterfly pattern as well as the .500 Fib (1018) of a somewhat smaller Bat or Crab (in red) that began at the 666 level.  Also, note that reaching the 1006-1018 price level will complete a smaller H&S; pattern that features 1370 as the head and targets 773.  As we’ll see below, the smaller H&S; target is a stone’s throw from a Bat pattern target of 747.

The channel that’s formed by this H&S; pattern is aesthetically pleasing, but obviously portends a dismal economic picture  — a double-dip recession (for optimists) or potential depression.   Without getting into a protracted discourse on economics, this is consistent with my outlook on the economics picture.

Closer in, the picture is equally bearish.  Nestled within the large Bat or Crab pattern that’s been forming since 666 is a Crab pattern (in red) that began in August 2010.  It put in a Point B at the 1074 low in October, and would complete its 1.618 extension at 835 — just above the H&S; target of 773.

Please note I’ve made no effort to put these targets in proper time perspective, but am just showing price targets for now.

Closing in a bit more, a couple of Gartley patterns are forming.  The larger purple pattern is the better formed of the two, as the yellow pattern Point C exceeded Point A by 2 points.  This is not technically permissible, though I chart it anyway because these patterns often defy the odds and work out.

I’ve also charted some Bat and Crab alternatives.  The key is Point B, which for a Bat must be less than a .618 retracement and for a Crab can be anywhere up to the .886 Fib level.  Note that the yellow Crab completion at 1091 also completes the H&S; pattern that targets 735, so this is a very significant target.  It also coincides with the larger (purple) pattern’s .886 Fib level at 1099. 

Put all these targets together, and you get a boatload of significant price targets:

By themselves, not a lot of help.  But, with these in hand, we can construct a model that attempts to align significant price levels with significant time levels by using channels and the analog I’ve been tracking since May and the fractal since November.  More later on that.

Last, just a quick observation on the Euro.  Note how the fast lane we talked about last week is marked by a series of decisive breaks of parallel trend lines.  A reminder, this channel is exactly the same slope as the past three two, so I’m inclined to give it the benefit of the doubt.

These are worth watching, as lately they are highly correlated with breaks in the US equity markets.  EURUSD seems to have established a new on on the 29th at 1.2857.  It has since rebounded somewhat, and could be tracing out a Gartley whose .786 Fib is at 1.3032 — right up against the channel boundary.

Whether it rebounds higher or not, a break of the dashed trend line is a great indicator of a bigger downdraft to come.  In the end, I expect EURUSD to fall faster than its sub-channel, crossing into the next one down at an accelerated rate as occurred in the last wave down in September.

The ideal spot would be tomorrow, Jan 3, as that’s the peak of channel as it intersects with the trend line just broken.  A full back test to the above-mentioned .786 Fib would be the perfect fit for a robust reversal.

I’m still expecting completion of the Crab pattern (in purple) at 1.2464 sometime around mid-January — a 3.5%+ move that would correlate with a 10%+ move in SPX.

UPDATE:  JAN 3, 2012

Looks like SPX left us with a Butterfly setup last Friday.  If it plays out, it would reverse around 1275.01 — which is dangerously close to a key Elliott Wave price level (we also have a well-established downward sloping channel line there.)

Note that the Nov 8 high was 1277.55.  Depending on how one counts the move off the 1292 top, 1275 is too close for comfort to that previous high.   It’s also just a few cents off the .886 retracement of the 1292 to 1158 move.

Here’s how the EW count appeared to me last week.  I wrote that we were about to commence Minuette (iii) of Minute [iii] of Minor 3 of Intermediate 1 of Primary 3.

If we break 1277 (but not 1292) it means the move from 1292 to 1158 was Minute [i] of Minor 3 , with the three wave retracement to 1277+ being Minute [ii].  This actually makes more sense, as Minute [i] in Minor 1 was 112 points.  It’s likely that the same degree move in Minor 3 would be as large or larger.

If we exceed 1292, then we’re likely tracing out the final 5 waves of C of Minor 2 which, as readers will recall, takes prices up to the 1307-1320 area.  Whichever way it breaks, we’re either in Minor 3 (my top preference) or about to enter it.  It should be significantly uglier than Minor 1, which took the S&P; 500 down nearly 300 points (22%) in five months.  A 22% decline from Friday’s close would take SPX down to my short-term target of 983.

European stocks had a big up day, today, with the DAX up 3% and the CAC up 2%, both on light volume.  The DAX was boosted by a marginally better PMI reading which still indicates contraction rather than growth — particularly in the area of new orders.

The following are notes on the Euro from The Big Picture, posted earlier today:

Last, just a quick observation on the Euro.  Note how the fast lane we talked about last week is marked by a series of decisive breaks of parallel trend lines.  A reminder, this channel is exactly the same slope as the past three two, so I’m inclined to give it the benefit of the doubt.

 

These are worth watching, as lately they are highly correlated with breaks in the US equity markets.  EURUSD seems to have established a new on on the 29th at 1.2857.  It has since rebounded somewhat, and could be tracing out a Gartley whose .786 Fib is at 1.3032 — right up against the channel boundary.

Whether it rebounds higher or not, a break of the dashed trend line is a great indicator of a bigger downdraft to come.  In the end, I expect EURUSD to fall faster than its sub-channel, crossing into the next one down at an accelerated rate as occurred in the last wave down in September.

The ideal spot would be tomorrow, Jan 3, as that’s the peak of channel as it intersects with the trend line just broken.  A full back test to the above-mentioned .786 Fib would be the perfect fit for a robust reversal.

I’m still expecting completion of the Crab pattern (in purple) at 1.2464 sometime around mid-January — a 3.5%+ move that would correlate with a 10%+ move in SPX.

 

**************************

UPDATE:  7:30 PM

The analog and the fractal…

 

 

UPDATE:  10:30 AM

Like this past July, I find myself watching the growing disconnect in the analog and fractal day counts.  In the 2007/8 v 2011 analog, the match was very solid going into day 31/32.   But, on Jun 22, TPTB decided to flex their egos and announced a release from the Strategic Petroleum Reserve [see: Not Terribly Slick. ]  It was a stupid political stunt that took CL — which had already dropped from 115 to 95 in the previous two months — down another $6 for an entire week.

But, it temporarily set stocks (and the analog) back.  So, the Day 42 peak didn’t arrive until Day 46; and, the Day 52 peak showed up fashionably late on Day 57.   It also occurred to me back then that — thanks to the blogging of yours truly and others — the analog was not as well-kept a secret as it might otherwise have been.  Even back then, readership had crept up past 1,000 hits daily.

Imagine you’re a Wall Street Master of the Universe and some flunky analyst mentions to you at the July 4th picnic that a blog she follows is forecasting a 20% drop in SPX over the next two weeks.  After firing her for being so gullible, you might assign a VP or two to investigate said blog.  When they report back, you might go beyond your typical market manipulation strategic realignment in order to protect your long positions (or, at least get the hell out before your clients realize the theater’s on fire.)

If enough Powers That Be got a whiff of the smoke that threatened to render them Powers That Were, that could account for a collective buying spree in an effort to keep the dream (aka Stock Options) alive.  Alas, as the unemployed analyst (now a social worker) will tell you, it delayed but didn’t derail the inevitable 20% crash.

Flash forward five months.  The MOTU have skillfully strategically realigned manipulated the markets to the exact same prices seen just before the July down draft.  So, thankfully, their bonuses are intact (give or take a few thousand layoffs.)   What do you suppose will be their reaction when, whilst bagging a baroness in St Barts or an elephant in Tanzania (photo safaris are for wimps),  another chart like this makes it past the junk mail filter?

UPDATE:  DEC 30 — 4:30 AM

I believe we have at most two more trading sessions before the bottom falls out of this market.   The fractal and the analog are muy preggo, and are simply awaiting the procession of Bentley’s to return from the North Shore.  Come Tuesday, the MD’s will take their respective tillers and run this leaky ship properly aground.

Some of the charts I’m watching…

 

 

 

Note that the NYA has better form than SPX for analog purposes.   When seen stacked with SPX, the pattern is nearly identical.  One key difference is the lack of an overshoot on the latest 2nd peak.  This is more in keeping with the July pattern, and makes for cleaner harmonic patterns, as well.

I don’t often look at long bonds, but the ten year tsy’s pretty interesting.  For those wondering if yields can go any lower, the bottom of the channel is down at 1.40% – a logical turning point.

 

UPDATE:  3:20 PM

Just tagged the 61.8% retrace and formed a little rising wedge on the day.   That could be it for wave 2, although 1264 (the .786) and 1267 (the .886) are still on the table.    A benefit the higher targets is that we’d complete a Gartley or Bat pattern — giving us more momentum going into the next down leg.

For those of you who follow VIX, it’s interesting to note that even after today’s retracement it’s locked in a nice little rising channel that should see it break out of the very large falling wedge (green, dashed) it’s been in since August — probably on Monday.  It completed a 5-wave advance yesterday at 23.56 — a 16% increase in 3 days.

This would be about 72% of the time from inception to apex, compared to 76% for the last falling wedge.

With volume being so incredibly low, it’s cheap and easy for market makers to run stocks up and trap a few more bulls.  It’ll be interesting to see the ISEE call/put numbers at the end of the day.

UPDATE:  DEC 29 — 10:20 AM

The bounce continues, with SPX up 7 to retrace almost 50% of yesterday’s losses.   I imagine we’ll go a bit beyond this and at least back test the SMA 200 at 1258.88 and the 20-period SMA on the 60-min chart at 1260.  The 61.8% Fib retracement is just above, at 1261.45.  But, be aware that many wave 2 retracements over the past several months have gone as high as the .786 and .886 levels.

This morning’s EURUSD rally appears to be running out of steam.  We completed a small, messy Butterfly pattern yesterday; it never quite reached the required .786 Point B, so is likely a Crab instead.  What we got, though, was a little breather at the 1.272 extension.

Looking at the 60-min chart, it’s obvious EUR is running into a buzz saw of overhead resistance and should soon resume its descent to 1.2464.

More later.

UPDATE:  6:00 PM

We closed at 1249.64, down 15.79 (1.25%) on the day.  It’s a pretty good start on what should be a very substantial decline.  We traced out a small counterwave from 1250-1254, but it’s not clear whether there’s more of a bounce in store.

More later.

UPDATE:  2:25 PM

Appears as though we completed the bounce.  Decline seems to have resumed as was indicated by RSI TLs (see 12:00 post below.)

UPDATE:  1:40 PM

Bounced at 1250 as expected.  Now, just tagged the RSI TL’s on 5, 15 and 60-min time frames at 1254.11, would be an ideal place for the decline to resume.

UPDATE:  DEC 28 — 12:00 PM

A nice kickoff for the decline we’re been waiting for…

We should expect to see a little bounce somewhere around 1250, as RSI bounces between a declining support TL (1) and an overhead TL of resistance (2) before resuming the downdraft to TL 3.

UPDATE:  4:15 PM EST

Signing out with an update of the fractal and analog charts.  I wish you all a great rest of the day.

While we’re looking a little hinky on the analog 2011 v 2008 comparison — with a day 165 that exceeds day 152 — I still have faith in its validity.

The most bearish trend line I can draw off the 1370 high is one that eliminates the shadow and cuts right through the July highs and connects with day 125’s high (July was an overshoot for analog purposes.)  That trend line was within 1/2 point of today’s high.  So, is it valid?

My preferred method for testing the validity of a trend line is to draw parallel lines (channels) and see if they also “work.”    I think they do — very well, in fact.

Another favorite method is to slap a regression channel on a chart and see how it compares.  The 1 standard deviation regression channel (beginning at the Feb 18 high) lines up almost perfectly with the trend line in question.  I fact, a few days passage of time will probably see them overlap perfectly.

The former channels and the regression channels all tie in nicely, by the way, with trend lines/ channels established in the 2007/8 top, so I’m inclined to give them the benefit of the doubt.

Today’s mostly overlooked news included the little tidbit that we’ll exceed our national debt ceiling Friday.  Perhaps some investors will revisit the uncomfortable fact that America’s debt problem is just as serious as most other countries — worse than many.  It’s fair to say that it represents a bigger challenge than does rising consumer confidence (without commensurate increases in income) an opportunity.  Should be an interesting week.

UPDATE 3:30 PM EST

Quick look at the EURUSD charts.  First, the big picture…

…and a close-up, showing the current channel segmented into three sub-channels.  Each represents a possible path within the same slope channel that’s contained all movement since July.  The current sub-channel is essentially the “slow lane”, dropping to the Crab target of 1.2464 (-4.6%) by Jan 13.

A quicker trip is entirely possible, but an arrival any later than mid-February would mean a break from the very well-established major channel.

And, last, the Butterfly and Bat patterns we’ve watching in VIX yielded a nice reversal today, with VIX up to 22.66 from its recent low (and harmonics target) of 20.33.

That 11.5% gain will pale in comparison to the move to 30+ in the next few weeks — easily obtainable as a target of one of the harmonic patterns and/or the latest falling wedge (dashed, red lines.)

UPDATE:  2:25 PM EST

Holding steady below this morning’s high of 1269.37.  On the currency front, the dollar appears to have completed its test of the major channel, and should start up any time now.  It bounced off a rising fan line (from Apr ’08) at Point A, then a falling fan line (from Mar ’09) at Point B.

The RSI channels offer a good indication of what to expect.  At Point 1, RSI bottomed – confirming the falling channel since July 12.  The parallel channel line, once drawn, gave us both an upside target (Point 2) and a means by which to determine if/when a breakout occurred.

In back testing the upper channel line from Point 2 to Point 3, RSI established a new rising channel, the upper bound of which is a continuation of a former trend line.  Now, at the lower bound of that new channel, RSI has run out of room on the downside and should rebound higher to test the upper end of the channel — as indicated with the yellow arrow.

The slope of the forecasted RSI move indicates a move to the upper bound in the next few days — which would correlate with DX returning to the channel midline in the same time frame.  I’m looking for the next move to (at least) 83.872 to complete the crab pattern at the 1.618 extension, although if the downward move in the markets unfolds as I expect, look for it to move much further.

With DX’s daily RSI at only 56.4, there’s plenty of room to run on the upside.  As the longer-term chart illustrates, RSI topped 82 in May ’10 and 92 in Oct ’08.  If the current channel holds, DX could reach the Bat pattern (and, a Crab) target of 87 (an 8.7% move) as early as next week and as late as mid-March.

At that point, it also reaches the upper end of the channel it’s been in since 2008.  I’ll update the EUR shortly.

UPDATE:  10:30 AM EST

Although we’ve pushed a few points higher on the opening, we’re still within a rising wedge with apparent divergence on multiple time scales.   Further, we have resistance up ahead with both the downward and upward sloping channels (intersecting at 1276) that have guided much of the past year.  Volume continues to be “holiday light.”

We’ve exceeded  Dec 7’s 1267.06, meaning we’re most likely in a more complex minuette (ii) of minute [ii] that should peter out before reaching Nov 8’s high of 1277.55.   It would look something like this:

In Elliott Wave terms,  it would mean we’re about to commence minuette (iii) of minute [iii] of Minor 3 of Intermediate 1 of Primary 3.  A third of a third of a third is a big deal, even if it is in Intermediate 1.  We can expect the downdraft to be ugly.

The alternative is well known and, from what I can tell, the more prevalent view:  that we’re still tracing out an extended Minor 2 that could take us as high as 1307-1320.   It’s definitely a possibility,  although the analog and fractal argue otherwise.  But, that’s what stops are for — right?

UPDATE:  DEC 27 — 2:00 AM EST

Merry Christmas, all.  I hope everyone had a blessed holiday, surrounded by friends and family.  As for my family, we had a frenzied trip to LA followed by several much more relaxing days up the coast.  I don’t mind at all that we’ve a short week ahead of us.

Friday was a surprise to me — not that the market rose, but that it rose above 1261 to complete an Inverse H&S; pattern.  The big question now, of course — what does it mean?  Are we automatically going up 134 points?  In short, no.

First, this pattern doesn’t constitute a bottom.  In fact, it comes at a point when we’re already up 185 points from the 1074 bottom.  That makes it a continuation pattern, which just doesn’t count as much.  On his Busted H&S; Bottom page, Bulkowski states that IHS bottom patterns fail 8% of the time in bull markets.  This is not a bull market, so the failure rate should be much higher.

We saw a number of failed continuation H&S; tops in August and September.  There’s no reason we couldn’t be seeing a failed continuation bottom here.  The last such large IHS pattern peaked (the head) on March 16.  In the next four days, we only saw 29 points out of the 82-point objective increase potential.

The other issue that troubles me is that we broke an important trend line connecting July 7 and Oct 27 highs.  That TL ran through 1262 Friday, but we closed at 1265.33.  The volume was extremely light, which diminishes the validity of the move.  But, the move might be enough to embolden the bulls.  There are multiple higher trend lines of resistance ranging from 1306 – 1328.

So, which way Tuesday?  For a hint, I’m watching currencies.  Thing have been quiet on the EUR front for several days; but, there are still downgrades out there in the near future.  A very small increase could be immediately ahead, but the next big move will be down as we run smack dab into the channel boundary.

The dollar is similarly poised for a sizable move, pinballing off fan lines on its way to 83.872.

I think it’s likely we’re seeing a very deep wave 2 retrace and the next step is down.  While .618, .786 and .886 Fib retracements are the most common retracements, there have been a few wave two’s in the past year that retraced virtually the entire previous first wave.  1.000 is a Fib number, too.  And, to do so on a low volume “vacation” day seems especially right.

Still, I think it’s still prudent to employ stops to protect against any further upside surprise.   More later.

UPDATE:  DEC 23 — 3:00 PM EST

Sorry for the delay in updating.  I’m sitting in a Los Angeles Starbucks with the world’s slowest internet connection — 150 kbps.  Playing havoc with TOS desktop.

Bottom line, we reached 1263.69, which technically completes the Inverse H&S; pattern.  We’re also within spitting distance of a double top, which is a four-of-a-kind to the Bat pattern’s full house.    On the other hand, we’re still well within a (slightly adjusted) rising wedge and all the other bear signals.  So, as the market loves to do, we’re going into a 4-day weekend with the maximum ambiguity possible.

We’ve got some real negative divergence going, and RSI has broken three successive fan lines on the 15-min, a big one on the 60-min chart.  Looking very precarious for the market…but there’s still that IHS to consider.  I think this is a bull trap, so I’m going into the weekend very short with some reasonable stops — just in case.

I’ll be out of pocket for the rest of the day, so this will be my last post today.  But, I’ll post either later tonight or tomorrow and we’ll see what the rest of the day brings.

Good luck to all.

UPDATE:  DEC 23 — 10:10 AM EST

I’m continuing on this thread to make it easier to follow the fractal story.  From a bear’s perspective, we’re dangerously close to the inverse H&S; pattern completion at around 1261-2.  From a bull’s perspective, we’re dangerously close to the .886 Fib level at 1259.69.

At the .886, we’ve officially completed a bearish Bat pattern — which is the full house to the .786 Fib level’s two pair.  Does it make me nervous to be flirting with the IHS?  Like the woman says, “you betcha.”   Although nothing is certain, the RSI trends, the rising wedge (right at the apex) and the completed Butterfly within a completed Bat pattern provide reassurance.  Some charts:

Remember the VIX charts from this past Tuesday?  It looked like we were completing a Butterfly pattern (purple) within a large Bat pattern (yellow.)  They completed at 20.88 and 20.66 respectively.  Yesterday, we reached both targets — along with the intersection of two important channel lines.

Two other tidbits…  Isn’t it downright poetic that the final leg down starts at 1258ish?  As we’ve discussed many times, this has been a pivotal level going back to the last top.

 

I also find it mathematically satisfying that the next leg down starts on December 27 — though it would be December if Monday weren’t a holiday.  As astute readers will remember, December 26, 2007 was the lip of a 230-pt crevasse.

More later.

UPDATE:  12:15 PM EST

Good time to update the fractal chart…  As Reason #9’s go, it’s a doozy.

The Dec=July fractal is complete.  We could start down any time, though I imagine the ugliness will probably wait until Tuesday (it is Christmas, after all.)  If the Crab that concluded in July were to repeat to the same extent and at the same speed, we’d be looking at 983 by Jan 10.   That’s a 21% drop in 3 weeks time.

And, finally, Reason #10:  the 2011 v 2008 analog.

There are two key differences: (1) the spikes around days 125 and 144; and, (2) the harmonic patterns.  In 2008, the market produced a Point B at the .382 Fib level in May, establishing a Crab pattern that paid off nicely with pushes to the 1.272, 1.618, etc. all the way down past the 3.618 extension at 666.

On Nov 25, 2011, we established a Point B right at the .618 Fib level, meaning this is at least a Gartley pattern targeting 1121.  From there, we’ll see.  But, there are other patterns such as the fractal shown above that argue for an extension to at least a Crab’s 1.618 at 940.

Whichever way this works out, it’s been an adventure.   I take no joy in being bearish, because if this forecast works out it means many more months — maybe years — of continuing recession or even depression.   I haven’t talked much about the economy lately, as I’ve tired of pointing out the obvious.

But, IMO, we’re hanging by our fingertips.  It would be quite the Christmas miracle if we somehow resolved our financial challenges and pulled ourselves up without a great deal of real pain.  I pray we can; but, unfortunately, I don’t think we will.

Many refuse to see it coming — wishful thinking, I guess.  Or, it just hasn’t affected them yet.  My Christmas wish is that friends/followers will at least take proper precautions — lightening up on equities, buying protective puts, etc.

If I’m wrong about the past 6 months research, I think the worst that happens is a little lost profits.  A stop at 1265-1270 should take care of the upside risk.  But, if I’m right, the trip down to the 700’s will decimate many more portfolios than the last go-round.  And, given the more precarious economic situation we’re in this time, the feedback effect on the global economy will be devastating.

I’ll watch these patterns over the next several days and let you know what I see.  In the meantime, good luck to all.

–PW

UPDATE:  10:05 AM EST

And, that’s within a point of my 1253 target — close enough.  I’m going to assume this is THE TOP until the market proves me wrong.  I may be early (usually am) but I think it’s time.

For anyone counting, it completes or establishes:

(1) a small crab that started Tuesday
(2) the .786 Fib retracement of the decline since 1267
(3) the apex of a rising wedge from the 14th
(4) a parallel channel line equidistant from the last
(5) an 88.6 Fib retracement of 1267 – 1158
(6) the 5th back test of a fan line off 1158
(7) negative divergence on the 5-60 min charts
(8) the 60-min RSI channel touch I mentioned below

Not saying it couldn‘t go up any more, it wouldn’t be unusual for SPX to dance around these levels — give or take a few points — for the rest of the day.  But, those eight arguments are pretty convincing in my book.

UPDATE:  9:35 AM EST

So far, so good.  1253 looks safe as the turning point.

We’re looking at a back test as well as a channel touch for the 60-min RSI.

And, there’s negative divergence on all charts through the 30-min.  Shouldn’t be long.

UPDATE:  9:15 AM EST

With a little bump this morning, we should be able to complete a small Crab pattern up to 1251, shown here on the 15 and 60-min charts.

It also completes a rising wedge and, most importantly, approximates the .786 Fib level (1253) of the previous decline.  This has been my favorite price target for the fractal.  This should be the last hurrah.

ORIGINAL POST:   2:45 AM  EST

Yesterday’s intraday recovery probably portends a positive open in the morning, but there’s plenty of economic news coming out (initial claims, GDP, etc.) that could easily influence direction and distance.

Our channel (white, dashed) was officially broken Tuesday.  Between it and the fan lines from the Nov 25 1158 bottom, it’s been pretty easy to anticipate this past week’s moves.  However, the push we saw Tuesday and Wednesday saw the last fan line broken to the upside and the previous fan line tested again.

In a vacuum, this is a pretty bullish sign.  But, look at the rising wedge that’s being developed (with the red dashed line added).  There’s also an increasing amount of negative divergence that spells trouble for the bulls.  Any pop in the morning is likely to be limited to 1251 (1259 at the most) and short-lived.

More later.

I’ll be traveling the rest of the week, so posts will be spotty.  Here’s a quick overview of the patterns I’m closely watching.  First, the Dec = July fractal we’ve been watching since Dec 7, seen stacked as well as combined on one chart.

At 1242, we achieved a respectable .618 retrace of the recent decline — which could be all we get.   But,  in July the retrace was 84%; and we could get as high as 1260 without completing the inverse head & shoulder pattern.  The .786 retrace would be 1253 and the .886 would be 1259.

And, here’s the analog that started it all — 2011=2007/8.  This one first came to my attention in May, although it was early June before I started charting it.  There have been some divergences, for sure, but the similarities are spooky.

The info is the same on each chart — just different ways of displaying it.  Although I was most interested in the day 150 equivalent, there’s a striking similarity between day 162 in 2008 and 160 here in 2011.

If the analog holds, we’d be looking at a 200 point SPX decline (1041) between now and the end of January.  The fractal leads to the same conclusion, with a forecast Crab pattern completion at 983. 

If all this interests you, go back and read the several “Another Fractal” posts since December 7.  Good luck to all.

UPDATE:  10:45 AM

The channel lines are shaping today’s action perfectly.  The question is whether we’ll add a few points and fill out the white, dashed channel above at 1251-1255.  VIX and DX could both use a little more downside to properly set up their rise, so I’m betting the market rallies just a tad more before the plunge.   But, be careful, we’ve technically met the requirements (with the .618 touch) for the downside to have started already.

More after the close.

The fractal we’ve been watching the last couple of weeks  Another Fractal: December 7] and [Another Fractal: Update Dec 14] is playing out very accurately.

As I noted in last week’s update:

Remember the fractal I posted last week?  It’s, um…, still here.   If it were to hold perfectly, it would do a .618 Fibonacci retracement of the 109-point Nov 25 – Dec 7 rise, landing at 1200 — then rise to as high as 1255 before a violent plunge to 980. 

From Dec 7 Post

From Dec 14 Post

We got the 61.8% Fibonacci retracement yesterday — touching 1202.37 in the afternoon meltdown.  This morning, we’re continuing to follow the pattern, thus far scoring a 27-pt gain to 1233.  Here’s what the fractal looks like today.

Now, as the rest of the investing world is forgetting about the troubles of the past few weeks, they’re starting to focus on the Inverse Head & Shoulders pattern up ahead.   As we talked about two weeks ago:

I think this would get a lot of people excited, just like similar moves did back in July and previously in December 2007.  Each of those IHS patterns trapped a lot of bulls when they came up 10 points shy of completion. [see: Ten Lousy Points.]

 So, where do I think this rise will land us?  The IHS pattern would complete today around 1261 or so.  Subtracting “ten lousy points” yields 1251 (1261 – 10 = 1251.)  But, that’s oversimplifying it, right?

In July, SPX retraced 84.35% of the previous dip in the corresponding period.  That points toward 1257 (64.69 * .8435.)

Then, there’s the Fibonacci methodology.  The relevant figures are:

Any way you slice it, the turn should come somewhere around 1251 – 1257  (1258 is a key number over the past year.)  And, it should happen quickly — by tomorrow or Thursday.  After that, watch out below.

There is corroborating evidence in the VIX daily chart.  Over the past five years, VIX has traced out very clearly defined channels.

Looking a little closer, it’s apparent that VIX has not only reached the lower bounds of three intersecting channels, but is nearing the completion of a bullish Butterfly pattern (in red) within the last leg of a large Bat pattern (in purple) at 20.88 and 20.66 respectively.

A frantic push to 1251-1257 on SPX could easily knock VIX down to 20.66-20.88,  finishing off both patterns and setting the stage for a strong rise in VIX to go with the stock sell-off.

I know what you’re thinking…. we can’t have a panic sell-off without a huge dollar rally.  What’s happening with the dollar?  Here’s our well-worn daily chart, showing all the major channels and fan lines over the years.

The close-up of the current channel shows the recently completed crab pattern and subsequent (today’s) reversal.  I’m expecting a drop back to the fan line we just cracked.   It might correspond with a touch on the channel wall, but more importantly, it’ll drop below the psychologically important 80 price level (which was tested today.)

It’ll appear to be a game changer, but it’s a dollar bear/stock bull trap.  As the harmonics show, this downturn in the dollar is simply the payoff from a little Crab pattern (purple).  The bigger prize is the larger Crab pattern (in red) that completes at a minimum of 83.872.

I say “a minimum” because the similar move in 2008 blew out to a 300% extension vs the garden variety 161.8% that qualifies as a Crab.  I don’t know how high this thing can go, but I do know it won’t start with an “8.”

It’ll correspond with a huge sell-off in equities that initially sends SPX to 1181, and thereafter to 983 (if the fractal plays out exactly as July.)

I’m out the rest of the day.  Good luck to all.

UPDATE:  2:15 AM

The low for the day was 1202.37, just a smidge above the 1200 target.  Volume was on the light side, but this is the week before Christmas.   As mentioned earlier, we have positive divergence all over the place.  So, 1200 still fits as an interim bottom — although the lower target of 1190 (the .786) is still a legitimate alternative.

The channel we’ve been following this past week runs into a much larger upward sloping channel tomorrow or Wednesday.  I expect a bounce either here or 1190, and then a more dramatic downdraft to follow.  Stay tuned.

UPDATE:  3:40 PM

Within 3 pts of our 1200 target and the .618 Fib level.  As expected, there’s positive divergence on every chart between 5 and 60 minutes.

UPDATE:  2:00 PM

We dropped through the fan line and are in the process of back testing it.  The channel ranges from 1220 down to 1190 today, so lots of possibilities.  1200 is the .618 Fib of the 1158 to 1267 rise, so it remains our most likely short-range target.

Too early to say, but it appears as though we’re setting up for some positive divergence, meaning SPX will register a lower low while the RSI doesn’t dip to the same extent.   The outcome would likely be a rebound in SPX to match the RSI numbers.

And, an updated peek at our Dec=July fractal…

The daily chart shows the approach to the .618 Fib and the large up and down channels.  Just eyeballing it here, it looks like a completion of the inverse H&S; pattern would have to happen by Wednesday in order for it to remain inside the downward-sloping (white, dashed) channel.

That fits my timeline just fine.

ORIGINAL POST:  9:45 AM

So far, a replay of the past several days.   Positive action in the futures overnight, gap up, gradual sell-off.  Either the channel or the back test of the last fan line runs out of time today.

More later.