The Night Before Christmas (Legal Style)

Whereas, on or about the night prior to Christmas, there did
occur at a certain improved piece of real property
(hereinafter “the House”) a general lack of stirring by all
creatures therein, including, but not limited to a mouse.

A variety of foot apparel, e.g., stockings, socks, etc., had
been affixed by and around the chimney in said House in the
hope and/or belief that St. Nick aka St. Nicholas aka Santa
Claus (hereinafter “Claus”) would arrive at sometime
thereafter.

The minor residents, i.e., the children, of the
aforementioned House were located in their individual beds
and were engaged in nocturnal hallucinations, i.e., dreams,
wherein visions of confectionery treats, including, but not
limited to, candies, nuts, and/or sugar plums, did dance,
cavort, and otherwise appear in said dreams.

Whereupon the party of the first part (sometimes hereinafter
referred to as “I”), being the joint-owner in fee simple of
the House with the parts of the second part (hereinafter
“Mamma”), and said Mamma had retired for a sustained period
of sleep. (At such time, the parties were clad in various
forms of headgear, e.g., kerchief and cap.)

Suddenly, and without prior notice or warning, there did
occur upon the unimproved real property adjacent and
appurtenant to said House, i.e., the lawn, a certain
disruption of unknown nature, cause, and/or circumstance.
The party of the first part did immediately rush to a window
in the House to investigate the cause of such disturbance.

At that time, the party of the first part did observe, with
some degree of wonder and/or disbelief, a miniature sleigh
(hereinafter “the Vehicle”) being pulled and/or drawn very
rapidly through the air by approximately eight (8) reindeer.
The driver of the Vehicle appeared to be, and in fact was,
the previously referenced Claus.

Said Claus was providing specific direction, instruction,
and guidance to the approximately eight (8) reindeer and
specifically identified the animal co-conspirators by name:
Dasher, Dancer, Prancer, Vixen, Comet, Cupid, Donner, and
Blitzen (hereinafter “the Deer”). (Upon information and
belief, it is further asserted that an additional
co-conspirator named “Rudolph” may have been involved.)

The party of the first part witnessed Claus, the Vehicle,
and the Deer intentionally and willfully trespass upon the
roofs of several residences located adjacent to and in the
vicinity of the House, and noted that the Vehicle was
heavily laden with packages, toys, and other items of
unknown origin or nature. Suddenly, without prior invitation
or permission, either express or implied, the Vehicle
arrived at the House, and Claus entered said House via the
chimney.

Said Claus was clad in a red fur suit, which was partially
covered with residue from the chimney, and he carried a
large sack containing a portion of the aforementioned
packages, toys, and other unknown items. He was smoking what
appeared to be tobacco in a small pipe in blatant violation
of local ordinances and health regulations.

Claus did not speak, but immediately began to fill the
stockings of the minor children, which hung adjacent to the
chimney, with toys and other small gifts. (Said items did
not, however, constitute “gifts” to said minor pursuant to
the applicable provisions of the U.S. Tax Code.)

Upon completion of such task, Claus touched the side of his
nose and flew, rose, and/or ascended up the chimney of the
House to the roof where the Vehicle and Deer waited and/or
served as “lookouts.” Claus immediately departed for an
unknown destination.

However, prior to the departure of the Vehicle, Deer, and
Claus from said House, the party of the first part did hear
Claus state and/or exclaim: “Merry Christmas to all and to
all a good night!” Or words to that effect.

DISCLAIMER: Please accept without obligation, express or implied, these best wishes for an environmentally safe, socially responsible, low stress, non addictive, and gender neutral celebration of the winter solstice holiday as practiced within the most enjoyable traditions of the religious persuasion of your choice (but with respect for the religious or secular persuasions and/or traditions of others, or for their choice not to practice religious or secular traditions at all) and further for a fiscally successful, personally fulfilling, and medically uncomplicated onset of the generally accepted calendar year (including, but not limited to, the Christian calendar, but not without due respect for the calendars of choice of other cultures). The preceding wishes are extended without regard to the race, creed, colour, age, physical ability, religious faith, choice of computer platform, or sexual preference of the wishee(s).

UPDATE:  3:40 PM EST

Looks like our 4th OPEX in a row closing around 1220.  Coincidence?  I think not.

UPDATE:  12:45 PM EST

In basketball, the expression would be “get that **** out of here.”   Investors just rejected the spike to 1230 in a big way, taking us back to flat on the day.

Take a look at the RSI trend line I proposed several hours ago.  I thought it might be a back test of a broken TL, and that’s exactly what happened.  Even an alternate TL drawn without considering a back test has been broken, and from here the market is all but certain to drop.  The only thing holding it up at this point is the fan line off the 1158 lows.  If that breaks, 1200 will be get in a jiffy.

That was a 15-pt assault executed specifically to shake weak bears out of the market.  Puts were sold, shorts were covered, etc. — all so market makers wouldn’t have to take a bath on their underwater positions.   When people talk about market fundamentals and efficiencies, they’re ignoring these games that TPTB play every day.

Notice we back tested the former fan line a second time.  The same thing happened in the closing 90 minutes on the 17th.  We spiked 16 points to 1267, only to give back 36 points the following day as the market was establishing the channel in which we now find ourselves.

A fall back to the channel bottom from here would land us right at 1200.   The channel’s declining about 6 points per day, so Monday’s channel bottom would be a little lower, etc.  My top three candidates for the bottom, in order, are 1200 (.618 Fib, channel line, round number), 1181 (.786 Fib, channel line) and 1171 (.886 Fib, channel line.)

My top scenario is still a tag of 1200.  I anticipate RSI will break the alternate line when SPX breaks its fan line, then skirt along the top of the purple channel without reentering it. It’ll fall some, but not enough to reflect the 20-pt drop in SPX, setting up positive divergence for one last trip back up to a number just shy of the IH&S; completion (around 1255.)

UPDATE:  11:00 AM EST

Well, we’ve gone to 1230 — as noted below, the highest level we could go without breaking the back test and/or the channel.  While there’s plenty of downside pressure, the market seems content to sit here for now — typical of OPEX Friday.  It’s analogous to a race where the participants line up a few feet from the finish line and wait for the starter’s pistol. 

It gives us a little time to review the bigger patterns in the daily charts.

You can see our current little channel drawn with white, dashed lines.  These channel lines, BTW, are at the same slope of many others we’ve drawn over the months, so they’re probably fairly reliable — which means a break out of the channel in either direction will be significant.  It also means the next step up should halt at a parallel channel.

This is worth knowing, because if the fractal between Oct – Dec and Mar – July means anything, the next channel up could be the upper bound of the major channel that takes prices down a few hundred points starting next week.  [Of course, if the fractal (and the 2011 v 2007/8 analog) really hold, the start down began at 1292 — in a sense, the equivalent of May 2’s 1370.] 

Note the slope of the small white channel we’re in now is the same as that of July’s.  Note, also, the Fibonacci retracements in each time frame.  In July, the retracement was to the .618 level.  This time, we’ve reached the .500 level, and the .618 level is down below at 1200 (hence, the call for a dip to 1200 before the final push up.)

More later.

UPDATE:  9:50 AM EST

SPX gapped open to match the futures, but immediately started drifting lower.  For now, it just doesn’t have the juice to break out of its channel.  The RSI has broken out of its primary channel for the third time.

Notice the three little spikes that have corresponded with tests of the upper channel boundaries.  This latest one could be viewed as a back test of the RSI trend line off Wednesday morning’s lows.  It falls in a line with the two previous spikes, and has the effect of potentially setting up a positive divergence if the market will ever get on with the dip to 1200 I expect (post OPEX, it now appears.)

SPX itself is repeating the back test of the trend line before it, and could go as high as 1230ish in its attempt without breaking out of the primary channel.

More later.

ORIGINAL POST:   9:20 AM EST

The Gartley we saw complete on the e-minis yesterday has extended to a Bat pattern, meaning the overnight ramp job should reverse, still within the its channel.

The falling wedge has disappeared with yesterday’s and last nights sideways action, leaving an extension of the same channel that’s been guiding prices lower since Dec 5.  It clears the way for lower prices in the coming days.  Although, today is OPEX (options expiration) Friday, when anything can happen but typically nothing does.

Looking at the 60-min chart, it appears as though the RSI trend line has broken through its rising support.  So, the table is set for a decent drop.

I’ll post some SPX and currency charts shortly.

 **************

for Curiousmind….Poss fractal for DX? We’re off to a good start.  A similar move off the bottom would indicate a 2.618 extension up to 95.882.  The obvious divergence with the dip between Oct & Nov, vs 2008’s price going parabolic at that point.

UPDATE:  12:45 PM

I have to be out the rest of the day, but here’s what I see going on right now.  We’re still in backtest mode on just about everything.  SPX, in particular, is testing the fan line we talk about below.  If we drop below 1214, look for a downdraft to 1200 or lower.

EURUSD completed a bearish Bat pattern this morning, reversing right on the .886 Fib level.  Since then, it’s fallen back some but is still loitering around 1.300.  I look for it to fall off more as stocks decline.  Note that it reached its intraday low of 1.2957 around 4am, when the SPX futures were right at 1200.

A return to these levels during cash trading hours would satisfy the ideal fractal conditions perfectly.  It would also complete a falling wedge with positive divergence for SPX, and complete a bullish Bat or Crab pattern for EURUSD.  In other words, promising conditions for a return to SPX 1255 and EUR 1.32-1.33.

I’ll post more later after the close.

UPDATE:  11:30 AM

The market caught a bid, and flirted with a return to double-digit gains.  It’s more likely, though,  just backtesting the last fan line.  The decline over the past few days has been a textbook example of using fan lines in technical analysis.

Note how each trip to the channel bottom (white, dashed line) produces a new interim low.  If we draw a line between that new interim low and the most recent significant low — in this case, 1158.66 — we have a fan line.  We’ll mark the point of intersection “A” and the fan lines as the purple dashed lines.

After each new low, the market bounces (otherwise it wouldn’t be a low, but a one in a series of lower prices.)  When that bounce reaches the fan line from the previous Point A, it “tests” it.  These backtests are all marked with a Point B.

Sometimes the backtest reaches all the way to the previous fan line; sometimes it doesn’t.  But, wherever it runs out of steam, it’s now headed back toward the fan line it just created.  Occasionally it’ll bounce there; but, regardless, when it breaks through that fan line it can fall hard and fast.

I mention all this because this morning’s rally is clearly a backtest of the previous fan line.  For it to have any staying power, it must break through that fan line and reach higher highs.  Otherwise, it’s doomed to drop like a rock right through the fan line it just created.  That line runs through about 1212 right now, so watch that price level.

BTW, I’ve added a TL (solid powder blue) to the chart connecting today’s and Tuesday’s highs to create a falling wedge. If it holds, it has an apex of around 1181 tomorrow.   This is our secondary downside target, but falling wedges rarely fall all the way to their apex.  I’m still looking at 1200 as a more likely target.

More later.

UPDATE:  10:35 AM

The fizzle is on. We’ve given up most of this morning’s gains and are fast heading towards negative territory.   We reversed right at the .382 Fib (1225.6 v 1225.65 predicted) and closed yesterday’s gap in the process.

EUR’s bat pattern reversed as expected, with a nice bounce off the upper bound of the channel.  Ditto for the dollar.

Check out the RSI on the 30-min chart.

Each trip between the channel lows and highs suggests a trend line that connects the lowest values in the pattern.  As long as RSI remains above the trend line, everything’s good.  But, as RSI approaches the upper boundary of the channel, it has to “decide” between obeying the trend line or the channel.   The channel, being longer and stronger, has ruled so far.

We’re approaching the upper channel boundary again.  So, keep an eye out for a break in the trend line.  It’ll be a clear signal of further downside.  Conversely, a break out of the channel will be very bullish.

ORIGINAL POST:   9:30 AM

The market is going to open up this morning, but will it be enough to break the downtrend? 

We discussed the possibility of a falling wedge in EURUSD yesterday.  While EUR is up .5%, it’s possibly just expanding the wedge into a channel.  We’ll see whether it can break out of the solid yellow channel, and whether its RSI remains below the fall-back trend line.  On top of all that, the 60-min chart shows a completed Bat pattern, indicating a reversal at 1.3050.

The dollar, likewise, has had a nice move but hasn’t broken down yet — necessary for a significant stock rally.  Its RSI trend line is intact, and it appears to be backtesting the .500 Fib line.  We discussed yesterday the unlikely possibility that DX would zoom through this important Fib line in 24 hours, while the .382 line took weeks.

If this is a back test, and if EUR is still safely in its channel, look for this morning’s rally to fizzle.  In fact, the channels on SPX are still very much intact.

The SPX price channel is unbroken, even after a 13-pt gain — as is its RSI channel.  A breakout of either of these would mark a shift in momentum.   As currently drawn, the price channel could accommodate a rise to 1237 or so.  But, I don’t think we’ll reach it just yet.  We’re likely going to test the .382 Fib at 1225.65 and the 20-period SMA (1226) and back off from there.

This morning’s bump does a slight amount of damage to the fractal pattern.   If we are heading up, I’d rather it have happened following a lower low than yesterday’s 1209; but, it’s not necessary.  The 1200 figure is a Fibonacci ideal, meaning a 61.8% retracement of the recent rise just like we saw in July.  Yesterday we reached 55%.  It’s close enough, but would pencil out better at the higher Fib level.

If this morning’s rally does fizzle and we head back down, 1200 is well within the current channel’s boundaries today.  But, taking a full day to get there would put us slightly behind the fractal’s schedule.

Unlike the 2007/8 analog, this fractal isn’t running by the same clock.  About 2 days go by in the current pattern for every 3 in the Mar-July time period.  So, a comparison isn’t quite as precise.  I had expected the rise to start by options expiration Friday (tomorrow), salvaging market makers’ portfolios.  But, looking closely at the chart, I think the top of the coming rise should come around Wednesday of next week, give or take.  That leaves plenty of time for a 50-pt ramp job.

More later.

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.  As for the rise, OPEX Friday would be ideal, but anytime in the next few sessions would fit.

A 275 point plunge is nothing to sneeze at.  So, I’m posting this again in the hopes that having more eyeballs on it will help verify its veracity.   The above chart shows the comparable points.  The charts below provide a better idea of the scale of the moves.

If you just plain don’t believe in fractals/analogs, that’s okay.  But, before you blow it off, consider these posts I made in July after discovering the comparisons between the 2007 top and the 2011 top in late May.

       July 20:  http://pebblewriter.blogspot.com/2011/07/merry-christmas.html
       July 21:  http://pebblewriter.blogspot.com/2011/07/pulling-trigger.html
                      http://pebblewriter.blogspot.com/2011/07/so-far-so-far.html
       July 26:  http://pebblewriter.blogspot.com/2011/07/all-aboard.html
       July 26:  http://pebblewriter.blogspot.com/2011/07/happy-new-year.htm

I suppose you could say it worked out pretty well so far.

The one caveat:  this market hasn’t gone exactly as the last.   We had some pretty significant deviations around days 125 and 144.  We could have another deviation, too.  Although the odds are fading, there’s a slight chance we’ll reach up and tag 1307-1313 instead of 1255 before heading down in earnest.  If we surpass 1266, this entire forecast will likely need a major revision.

There’s also the possibility — given all the problems facing markets worldwide — that the whole thing takes a big, juicy dump right here, right now.  No black swans required.

Bottom line, keep your eyes peeled.  If this fractal holds much longer, there is significant risk ahead for anyone not paying attention — and potential rewards for those who are.

UPDATE:  6:00 PM

Fresh from the “How ‘Bout That?” department, Citi’s FX Technical Group is out with some analysis naming 985 as a potential target based on a comparison with 1978.  You can read the article here.

UPDATE:  1:20 PM

Update on EUR and DX.  Both are in a wedge, but with scant signs of divergence yet.  We could see a reversal any minute, but the key is whether there’s a break out — not just a move within the wedge.

My best guess is EURUSD is going to want to back test the psychologically important 1.30 level.  Note the solid red line now just below DX.  That’s the fan line we talked about last night (this morning!?!).  It runs from the April 08 lows through the Feb 14 and Oct 4 highs.  We should expect at least a little back test here.

UPDATE:  12:20 PM

DX appears to be backtesting the 1.618, otherwise still going strong.  Note the RSI seems to be testing its trendline.  The next move should be higher.

This correlates with the opposite move in EURUSD.

SPX trying to dig in, here.  It appears as though we broke the white channel and are backtesting it.  The RSI channel story indicates further downside.

But, I’m also keeping an eye on some potential resistance from a previously established channel.  It’s not a great channel, having been penetrated on both the upside and downside.  But, it might come into play here.  It’s shown below as the purple lines.

UPDATE:  11:25 AM

As we approach the .382 Fib of the 1074 — 1292 advance (1209.43) it’s probably a good time to review the harmonic picture for SPX.

I have two patterns shown on the chart above.  The purple pattern is a Gartley in the making.  Point B hit the .618 retracement exactly, and the .786 looms up ahead at 1121.

The red pattern is either a Bat or a Crab.  We don’t know yet, because with a Point B at .50 (its current position) it could be either.  A Bat would target the .886 at 1170 and a Crab the 1.618 at 1091.  I must admit, I favor the Crab pattern, because 1091 coincides with a huge H&S; completion target as well as one of our intermediate channels (the white dotted lines.)

If it reverses at its .618 (1200), it’s likely a Gartley with its own .786 target (1182.)  If it continues as far as the .786 at 1182, it’s a Butterfly with a target of the 1.272 extension at 1129.   One critical requirement of a Crab is that its Point B come in at less than a .618 retracement of the XA leg.  So, Gartley’s can and do extend to become Crabs — meaning, again, the 1.618 extension to 1091.

At some point in this decline, we’ll take a meaningful pause.  The dollar and euro need to consolidate, too.  DX spent three weeks consolidating around the .382 Fib level, and so far a mere 24 hours around the .500 level.

A logical spot would be a backtest (of everything) at around 1200.  I think it’s psychologically important to investors and, as mentioned above, it’s an important .618 Fib retracement of the powerful advance we saw between Nov 25 and Dec 5.

But, wherever we do reverse, it’ll be to set up a Point C in the smaller, red pattern and begin the more serious decline to Points D on both patterns.  One point to remember:  a rebound higher than 1266 means we’re likely going to put in one last high (1307-1313) before the next wave down.  I don’t expect it, but I feel obligated to keep mentioning it until it’s out of the picture.

There are two other dangers lurking out there for bears.  I still think there’s a good possibility that, on any meaningful rally, we’ll get close to completing an inverse head & shoulders pattern — just to shake out some bears and trap a lot of bulls.

I talked about this extensively last week; a bounce to 1255 or so would do it.  Note that 1255 would correspond with the TL (yellow, dashed) off the July highs.  I’ve drawn the IHS neckline as a solid yellow line.   See the Dec 9 post for charts of this and the several previous fake-outs.

If we were to reverse here at 1209, a .786 retrace would get us to 1255.  From 1200, a .786 retrace would reach 1252.

We’re also nearing the lower boundary of the channel that’s guided the upside since the 1074 lows (the broad, red channel.)  We could easily see a decent bounce here, as it also represents a major fan line.  Note how the three previous fan lines off 1074 (the yellow, dashed lines) provided a bounce before they were eventually broken.

UPDATE:  10:45 AM

SPX tagged our 1213.28 target (1213.21…close enough) and is lingering in the 1215 range.  It’s not oversold on any of my charts, but is pausing after completing the Crab pattern at the 1.618 extension, backtesting the yellow channel and tagging the white channel. 

I’m watching the 5-min and 15-min charts (note the RSI channel) for signs of a reversal, but the bears are still driving this bus — for now.

This is always the hardest part of investing, for me — letting profits run.  The temptation is to take profits in anticipation of a turn, but as we’ve learned so many times over the past few months, this market has been marked by excesses and throw overs.

Ron Walker has an interesting technique, where he watches moving averages on the 5-min and 15-min charts intra-day.  In an ideal falling market, the 10-period MA would be lower than than the 20 which would be lower than the 50 — the “moving average trio” he calls it.

It works pretty well, except when we get into periods of chop.  Then, one can look to the 15-min chart and observe the same MA’s.   When they get out of align (e.g. the 10 crosses above the 20) it’s a sign of a shift in momentum.  I like to also look at RSI trend lines and channels, as they tell a similar story in a different way.  Confirmation is always good.

ORIGINAL POST:

Between the horrid Italian auction (6.47% on 5 yrs), China hitting US car co’s with duties, etc… it’s possible that’s all the consolidation we’re going to see at all those 1.618 Fib extensions mentioned yesterday.   Crabs can and do continue out to larger extensions (2.0, 2.24, 2.618, 3.0, 3.618), it’s just that the 1.618 is the most common reversal.  Best to keep a close eye on things and see where the momentum takes us.

Next target on EUR/USD is completion of another larger Crab at 1.2464.   Although, we’ve backed away from the channel boundary, so there’s potentially more time for the pattern to complete.  I don’t think it will, but it could take as long as the end of January and still stay within the channel.

The dollar is also surging past its 1.618, with the next harmonics target the 1.618 of the larger Crab at 83.872 (the 3.00 ext of the smaller Crab.)

SPX is working on its own little Crab pattern that completes at 1213.28.

Here’s the medium term picture on SPX.  This morning’s decline clearly took us out of the channel (yellow, dashed) that’s guided the downside since Nov 30 and the upside since Oct 27 (the longer of the two yellow, dashed trend lines.)

Monday, I proposed a new, steeper channel (shown in white) to guide the downside.  Its slope is around 30 pts per week.  Now, we’re already bumping up against the lower boundary of that channel, too.  We also just hit the above-mentioned 1.618 target of 1213.21 – so things are moving fast.

More later.

UPDATE:  3:00 AM

Taking another look, I’m reiterating the post below.  DX completed a small Crab (purple) that’s been setting up since Nov 25 and should now reverse.   However, there’s a larger competing Crab pattern (in red) that started on Oct 4 and completes at the 1.618 at 83.872 — a 3.77% increase over current prices.

To further complicate matters, DX also reached the .50 Fib retracement of a larger Crab pattern (it began June 2010 at 88.905) as well as an important fan line.

Notice the white trend line coming in from the left and connecting today’s high with the Oct 4 high.  This is actually a fan line off the Apr 22, 2008 low of 71.05, further underscoring the possibility of a reversal here.

The question is “how big?”  In the two previous “big channels”, the .50 Fib touch was followed by a reversal to the .382.  In this case, that would be a 2.3% decline to 78.989.  There are only about a day or two left during which DX could fall to 78.989 without pushing the boundaries of its current channel. 

So, summing it all up, there’s a pretty good likelihood of a drop in the dollar to as low as 78.79–79.238 over the next day or two, followed by an increase to the 1.618 at 83.872 for a nice bullish weekly candle (although there’s no requirement for a big pause or reversal. ) The finished product would look something like this:

Remember, our objective in the dollar is at least 87.076 — the .886 retracement of the June 2010 to the May 2011 drop.  So, whether tomorrow’s pullback is 0.5% or 2.3% is only relevant for short-term traders.  Longer term, the trend is up — way up.

Thanks to Bettlejuice for correctly pointing out the inverse H&S; pattern on DX.  We recently completed the neckline, and the objective target is around 87-88 — the same as the presumed Bat pattern mentioned above.

More later.

UPDATE:  7:15 PM

Still traveling, but just a couple of quick observations.

Watching an alternative, steeper channel (in white) than the already steep yellow one that’s been guiding prices lower.  This one could get us to 1200 by tomorrow, but I’m leery of an unbridled downside with OPEX right around the corner.

We’re getting pretty close to the 1.618 extension on the downside, so we might be due for a day or two of consolidation before the downdraft resumes.

Speaking of downdrafts, EURUSD did exactly what we expected today — tagging its 1.618 extension of the Crab that’s been setting up since Nov 25.  Again, a little consolidation is to be expected, unless things come completely unraveled.

And, DX hit the 1.618 in its Crab pattern.

I’ll try to post more later tonight after returning home.

UPDATE:  2:15 PM

Possible crab setting up on DX at the 1.618 extension. 

On the other hand…

SPX hit its .618 intra-day, with a possible .786 ahead to complete a Gartley at 1247.  Seems like the Fed is content with current rates — possible disappointment over no accommodation?  Should bring downside pressure.

UPDATE:  9:00 AM

Off to Venture Summit Silicon Valley, so won’t be able to post later today.  As discussed earlier, it appears the upward momentum at the tail end of yesterday still has some juice left — based largely on less suckish sentiment data out of Germany.  Retail sales came in ugly.  Soon, there will be no place for the sad truth of this ongoing recession to hide.

Futures are indicating an increase of 8 pts or so.  That would put SPX at 1245ish on the opening, with the .618 retrace up ahead at 1246 and a (purple) channel line of resistance at 1248.  The channel (yellow, dashed) that’s so far contained this drop maxes out at 1254, so that should be our max upside unless there’s a break out.

My gut is that this channel will break down today.  I believe we’ll gap up, then crap somewhere in the 1247 -1254 range and make a bee line to 1200 or lower.   GLTA.

ORIGINAL POST:  1:10 AM

Channel (yellow, dashed) holding nicely, as is the descending broadening wedge.  We ended the day on an up note, with the momentum favoring a return to at least the channel midline.

But, take a look at the fan lines from the 1158 lows (purple, dashed.)  Each, when broken, has been back tested in a meaningful way.  A tight backtest of the fan line broken yesterday would reach only 1250 or so — somewhat short of the top of the channel/wedge.

Besides backtesting the fan line, we’d also be  backtesting the channel we traced out on the way up.

On the other hand….. Like the previous moves, we could get all the way back to a .886 Fib retracement without breaking free on the upside.

EURUSD behaved as expected today, falling strongly within the channel.   The next move should be a continuation to the 1.618 Fib extension at 1.2464.  But, it’s entirely possible we’ll rebound to the .886 at 1.3270 first.  We hit a previous low, making a double bottom of sorts, and the market might take a day or two to digest.

Lots being written about the lack of confirmation from VIX yesterday.  It was down .71 on a day when the SPX was off 18.72.  Very strange.

However, we saw this in July — a lack of confirmation of the actual risk the market was facing.  It’s clearly in a falling wedge, so the next move should be up (although it could drop a little more first thing in the morning, first.)  It just remains to be seen what the time frame is, and whether we’ll have one last little spurt up to 1307-1313 first.

A reminder, OPEX is coming up Friday.

UPDATE:  2:00 PM

We’re at a critical level in the short run.

SPX is paused here at the .382 Fib retracement of the rise we’ve seen over the last two weeks.  It also marks one of our key channel lines (dashed, white.)  A breakdown through the bottom of these support levels would also mark a failure of the wedge to hold.

One helpful guide is the 5-min RSI.  Here’s it’s forming a little symmetrical triangle.  I’m looking for a breakout one way or the other as an indication of next steps.

There’s a slight positive divergence going on with the short-term charts, but not enough to be overly concerned.

UPDATE:  11:20 AM

A quick review of the channels we’re watching.  As we discussed last week, the descending broadening wedge continues to play out, with another touch of the bottom wedge line threatening to wipe out Friday’s gains.

Note, the bottom wedge line is also a trend line off the 1292 highs.

UPDATE:  10.00 AM

ORIGINAL POST:

EUR/USD continues to respect the channel line we drew months ago, even completing a nice little head and shoulders pattern on the 60-min chart.

Why do I have so much confidence in this channel?  It’s at exactly the same slope as the three previous declines.  In other words, this isn’t my bias talking.  Just a three-peat of an established pattern.

If we continue down the same path, notice that there are some pretty violent crashes in the two previous channels, with .05 – .08 weekly moves after a period of consolidation at the channel boundaries.

EOD:

Charts to chew on…

UPDATE:  2:55 PM

Here’s an updated chart with the Fib’s clearly marked.  This could count as a sloppy Gartley (which reverses at the .786) or a Bat (reverses at the .886).  Either way, we stay within the wedge.

UPDATE:  1:10 PM

We’re stalling at 1253 as I expected — 13 points short of completing an IHS.  We could go up to the .786 at 1259 or the .886 at 1263 and still be safely within the wedge.  It would also allow for more negative divergence to set up, typically an effective bearish indicator.

Here’s a good view of the July and current setups, along with the 2007 version.  Both the previous fakeouts trapped a lot of bulls, salivating over a potential 100+ point rally.

Thinking like a market maker…can you imagine a better setup to rake in boatloads of money from hopeful bulls?   What’s really changed in Europe that would indicate they’re finally getting their act together?  Another summit, another promise to take things more seriously.  Big whoop.

And, with all the attention there, what about our own fiscal predicament?  It’s not as though we have a clue (or the political will) to address our very deep-seated problems.  Washington is no doubt thrilled to have the attention focused elsewhere for a change.  But, do you think S&P; has forgotten?

Here’s the post from July:  [Ten Lousy Points].

And, a quick peek at a rising wedge setting up within the descending broadening wedge. 

Just a reminder, if we break out to the upside — which according to Bulkowski happens 55% of the time with descending broadening wedges — I see the limit as 1307-1313.  So, to me, the question isn’t whether but when we head south.

UPDATE:  11:15 AM

Here’s the Inverse H&S; pattern the bulls are counting on.  It would complete at 1266, but as we’ve discussed the past several days, I think SPX will come up short — trapping many bulls in the next phase of the decline.

Potential Fib stopping points off the recent 1267 high are 1253.46 (.618), 1259.44 (.786) and 1263 (.886) — all shy of the 1266 that would complete a potential IHS.

Looking at the RSI trend line on the 30-min chart, I think 1253.46 is the most likely area for a top.

If we redraw the channels with that as the daily top, it’s a better fit all around.  Consider what’s going on with the 60-min chart’s RSI.

It’s a broadening descending wedge — cousin to the broadening ascending wedge the SPX just broke down from.  RSI is bumping up against the top trend line, meaning it has to break through on the upside or a crash down to the much lower bottom TL is just around the corner.  I’m expecting the latter to commence momentarily.

Just a reminder as to where we are on the daily RSI:

ORIGINAL POST: 

Look for this little rally to stall at the upper end of the channel we established after breaking down from the megaphone pattern.  The channel can be drawn two ways, depending on whether we include the shadow from yesterday morning.

The main takeaway is that we’re making lower highs and lower lows.   Until that changes, the trend remains down.

More later.

UPDATE:  EOD

The fractal we discussed yesterday played out perfectly today (the equivalent of July 8-11, 2:3 time ratio.)  Look for more downside (targets discussed earlier today) before a rebound next week.   The cynic in me expects the July 22 rebound high to line up with OPEX Friday, but we’ll see as we move along.

Clearly someone trading in SPY had the same idea about an IH&S; pattern, and ran up the equivalent of 27 SPX points in the minutes after the cash market closed.   It came right back down, of course.

ORIGINAL POST:

We’re seeing the (initial) payoff of all the harmonic patterns we’ve been watching.   SPX is currently off 22 from yesterday’s forecast/actual 1261 close — a little over a 25% retracement of the last rise.  First, the daily picture:

The reversal at the triple top of 1266 goes a long ways toward validating the primary channel lines (yellow, dashed) I’ve been assuming are correct.  The contra-channel lines (red, upward-sloping) should provide some guidance on the way down from here.

We know they’re important because lines of the same slope have played such an important role in the past.  Consider the past three years:

As always, the primary channels become contra after a change in direction, and vice versa.  Naturally, they aren’t the only channel lines that matter — far from it.  But, they’re the ones that have most of the action since the March 09 lows.

There are many possibilities for how this plays out.  For one thing, this move down says nothing about whether there’s another leg up past 1292 or not.  Some Elliott Wavers are adamant that this is the B wave down in the C wave up of a larger A-B-C move from 1074 to 1307 or so — a corrective wave 2.  Looking at the charts, there is a very good case to be made for 1307-1313.   It’s my top alternate.

It’s also just as likely that this is the first wave down of an impulsive wave 3 down.  If so, things will get real interesting real fast.  Since we won’t know till we know, let’s look at some near-term possibilities.

Remember, we’re working on a large Gartley pattern (in purple, below.)  Our Point D target is 1121.  With that in mind, it makes sense to see how we might get there.

As can be seen above, 1121 is very close to the 1.272 extension of the 1158 to 1266 rise (1129 is the actual 1.272 fib).  This would suggest a Butterfly pattern, which requires a .786 Point B — which would be 1181.  [There’s no reason these patterns must be in sync, but I like to look for such intersections as they often portend a more likely outcome.]

The other reason I like this Butterfly pattern — and I’m speculating here –is that it would entail a Point C up around 1256-1258 (the white circle), which would mean we come within 10 points [see: Ten Lousy Points]  of completing a rather large Inverse Head & Shoulders pattern.  [see: Big Pictures]

We discussed this possibility over the past few days.  It’s an analog to both the July 2011 and the December 2007 markets and would trap an enormous number of bulls.  It would also crush the many bears who would go max short for the move down, only to see a rebound right around OPEX next Friday.

The same IHS fakeout possibility exists with other right shoulders, BTW, including any of the fib levels between 1181 and 1225.  The key ingredient is a bounce back to just short of 1266.

If our December as July fractal holds, the move back to C at 1256 would correlate to July 21, meaning the next leg down could be massive.  After July 21, the Gartley I had predicted sailed beyond the .786 Fib retracement level to the 2.618 extension (eventually to the 3.000 at 1074.)

Reaching even the 1.618 extension on the current Gartley would take us to the 3.00 on the Butterfly, both at 940ish.  Of course, a move below 1085 or so completes a massive H&S; pattern that would target 785 on the downside.  Remember what I said above about things getting interesting?

With all that out of my system, please understand this is a like a high stakes game of “If You Give a Mouse a Cookie.”  Something benign leads to something else ominous that leads to other stuff that’s just plain ugly.  But, there is absolutely no requirement that we dip all the way to 1182.

There are plenty of channel, fib and fan lines that could arrest us in the very near future.  The most obvious coming up are 1225-1230 (channel and .382 fib) and 1209-1212 (.382 and .500 fib’s.)

As I speculated yesterday, we have established a downward-sloping channel (dashed, yellow) that would take us to any of the afore-mentioned targets.  If, however, we place another trend line (purple, dashed) in just the right place, today’s move down looks a lot like a falling wedge.

A breakout here could go back up and test the upper limits of the channel, or further — finishing off a proper A-B-C corrective wave 2 and thrilling the EW crowd.  As before, the key is 1292 (and, now, 1266.)

On the downside, the key is 1200.  It’s not only the .618 of the proposed Butterfly, but also marks a critical contra-channel line that, if broken, would likely result in a massive sell-off. (It’s held twice before — 1074 and 1158 — but its days are numbered.)

Good luck to all.

…to the list of countries not coming to the financial world’s rescue.    Fascinating article on a subject we haven’t talked about in a month or two — China’s 64 million empty spec apartments.

Read the rest of the article, complete with satellite photos  here.

And, just to balance things out, an excellent commentary on the game afoot in euro land.  Is there any chance that Friday’s summit will produce real results?  Steen Jakobsen, chief economist at Saxo bank, details his doubts quite nicely.

Read the rest of the article here.

And, last, thanks to Mish for a totally unrelated chart that perfectly sums up the recovery we’ve enjoyed since this recession officially ended in June 2009…

Source: http://globaleconomicanalysis.blogspot.com/