UPDATE:  11:30 AM

The futures held the 1.618 line of 1167 until about 20 minutes ago, while SPX’s opening sliced through its 1.618 at 1177 like a hot knife through butter.  Now at 1164, is the rebound idea dead?

EUR and DX are both pushing the bounds of their respective wedges (and Gartley’s).  If stocks are to rebound, we need a reversal right here, right now.   There aren’t any good harmonic supports at these prices, but there are a fan line and trend line worth taking a look at.

Note the regression channel in the 2007-8 time frame.  It perfectly captures the highs and lows of that top.  I constructed some trend lines with the exact same slope and laid them over the 2011 top, connecting important highs and lows over the past year.   The slope is important, because it lends credence to the notion that these lines are legitimate, rather than the product of my bias.

The two lines have thus formed a channel, the centerline of which is drawn as the dashed line.  It’s worth noting that this centerline did a number on the Mar 16 decline, but was exceeded by the wild swings we saw in August and September.

Today’s plunge has paused right at the centerline, which might be significant.  It has also reached a fan line drawn off the Mar 09 lows through the Aug 9 low.  Either or both of these lines could act to arrest a further decline, but there’s no reason they have to.

In short, the case for a rebound is hanging by its fingernails.  If either of these lines fail, there’s not a lot of support until 1115 (horizontal), and then 1100 (fan line off the Oct 4 low and also the .886 Fib.)  Keep an eye also on the positive divergence on the 5, 15, 30 and 60 min charts.

ORIGINAL POST:  1:05 AM

Just completed a perfectly-formed bullish Crab pattern on the futures at the 1.618 extension of 1167.25.

Yesterday, SPX came within 4 points of completing its own Crab (1181 v 1177.)  So, it could be considered to have completed (96% of optimal AD.)

On the other hand, SPX closed at 1188 today.  If the current decline in the futures market (-13) were to hold overnight, that would result in a more precise Crab pattern completion in the 1177 area — a gap down that immediately reverses if the pattern were to play out.

If the SPX Bat pattern plays out, the most common potential targets (depending on which Point D is valid) are:

As mentioned yesterday, EUR/USD is very deep into a falling wedge and DX is very deep into a rising wedge.  AUD/USD is also very deep into a falling wedge.  Combined with the above patterns, conditions are ripe for a reversal of the past week’s weakness.

Does that mean the bear isn’t playing out yet?  Not at all.  In my opinion, there’s still at least a 50% chance that 1292 was the high and we’re on our way to huge losses.  However, the flip side of that 50/50 equation is the possibility that wave 2 isn’t quite done.

It’s days are numbered, though.  If it’s going to happen, it has to be pretty much immediately.  So, be careful.  Needless to say, a 100+ point rally between now and December 5 would trap an awful lot of bears.

Of course, if we get a garden variety .618 reversal up to 1239 or so, we’ll have a very nice spot at which to add to existing shorts.  Such a move, BTW, would tag a TL off the Oct 27 (1292) and Nov 8 (1277)  highs.

Looking at the big picture, there is a possible road map taking shape on the daily chart.

The only problem is that this Harmonic pattern is neither fish nor fowl.  It reverses at the .786, which would indicate a Butterfly pattern.  That would also imply a completion at the 1.272 at 1433 or the 1.618 at 1530.  I don’t consider either of those targets as even remotely possible at this juncture.

Bat patterns complete at the .886 Fibonacci, in this case 1324, which would also be in line with a trend line off the 1370 top through the Jul 7 high.  But, Bat pattern points B aren’t supposed to exceed .618 of the XA distance.  The .786 we see here should disqualify the pattern.

Another way of looking at it is the place Point X at the 1370 May 2 high, which results in a Point B at a little higher than the .618 Fib — making it a Gartley that completes at a .786 Fib — in this case 1307.

Of course, there needn’t be a harmonic pattern at play in order to identify a reversal target.  Wave 2’s often retrace to the .618, .786 or .886 Fib levels.  While the .618 ship has sailed, .786 and .886 in the 1307 – 1324 range are valid targets.

It’s also worth noting that the original Gartley pattern, first introduced by H.M. Gartley’s Profits in the Stock Market (1935), made no reference to specific Fibonacci levels.  They’ve been added over the years by practitioners.  In the meantime, patterns that don’t quite fit the mold, but which are based on common Fibonacci levels, can and do play out all the time.  We’ll eventually find out what’s going on here, but for now we’ll just have to wait and wonder.

UPDATE:  3:50 PM

An updated look at the regression channel since the top…

Looks like the midline should provide a good turning point, although a similar spot in 2008 fell quickly to that declining market.  Re 2008, next Friday is 2011’s 150th trading day since the May top.  This proved to be the ultimate turning point in 2008.

Could we have a sharp rally in the next seven trading days?

ORIGINAL POST:

Market trying to make up its mind…

VIX channel evolving into a triangle.

SPX:  came within 4 of the 1177 Butterfly target, probably close enough to indicate the next move is up, but the near term is still a bit muddled.  I’m still mostly straddled here, with near-term bullish positions and longer-term bearish.  The RSI TL’s point to a breakout one way or the other before today’s close.

If the Butterfly does play out, the reversal at the 1.618 extension (1177) instead of the 1.272 means the .618 AD retracement target is 1138 instead of 1146 we talked about the other day.

The EUR falling wedge we were watching has the look of having broken out, but the move isn’t very convincing yet.  We got a backtest, but the initial subsequent rise hasn’t impressed me.

It would be too easy to slide the upper bound of the wedge up an smidge, and consider the whole thing to have not broken out at all — YET.  Either way you look at it, I see a wedge that’s due to break out.

Similarly, DX has established a nice rising wedge that reaches its apex on Friday, meaning it should break to the downside before then.

In sum, this feels like a consolidation, with bears trying to work up the courage for another push down — but just not able to shake the feeling that they’ll get trapped yet again.  And, bulls, wondering if Hopium might have finally exhausted itself in the avalanche of negative news.

But, we are clearly due for at least a decent rebound in the short run, possibly something more, before the next leg down.  And, for diehard bulls, there is still room for a larger C wave up before we consider wave 2 “done.”

UPDATE:  11:50 AM

Watching the falling wedge set up on EUR/USD:

The Butterfly I’ve been watching overshot the 1.272 extension, but the decline seems to be running out of steam.  We’ll see if the 1.618 extension at 1177 has any better luck.  That would also mark the 2.24 extension for the Crab pattern.

We’re also seeing divergence on the 5 and 15-min charts.  I took a stab at a few OTM calls for what could be a nice snap back.

ORIGINAL POST:  9:15 AM

If the cash market opens where the futures currently are, we’ll complete both the Butterfly and Crab patterns I pointed out last week.  If they play out, look for a strong rebound over the next several days.

To be clear, I would view such a move as leg C in a corrective 2nd wave, not the resumption of the bull market.  In fact, even though these patterns are clear and incontrovertible, there’s a pretty good chance that they produce a hiccup rather than a full-fledged reversal.

Any reversal should run its course within the next two weeks — most likely by December 2-5.

The Butterfly (in red) finishes at 1198.52 (the 1.272).  The smaller bullish Crab pattern (in purple) completes at its 1.618 at 1201.71.  

Potential Targets:

Butterfly:     .618 – 1246 
                   1.272 – 1298                 
                   1.618 – 1325

Crab:           .618 – 1242
                  1.272 – 1284
                  1.618 – 1307

UPDATE:  12:05 PM

The market seems to be in full OPEX mode, with every attempt at a breakout — up or down — quickly aborted.  At this moment, it’s pushing toward the downside, which is a good reason to revisit the harmonic picture.

A bullish Butterfly pattern (in red) that began Nov 1 finishes at 1198.52 (the 1.272).  While, a smaller bullish Crab pattern (in purple) that began Nov 9 finishes at its 1.618 at 1201.71. 

There is also horizontal support around 1200, not to mention obvious round number support.  While yesterday’s 1209 low might be close enough to consider these patterns completed, I would normally look for a more precise tag before playing the rebound.   Given that this is OPEX Friday, and MM’s are under water after yesterday’s plunge, I won’t be surprised if we see a ramp job kick in if we get any closer to 1200.

If they play out, initial (.618) targets for a rebound would be 1246 and 1242 respectively.  Common extension targets for the Butterfly would include the 1.272 at 1298 and the 1.618 at 1325.  Higher targets for the crab would include the 1.272 at 1284 and the 1.618 at 1307  — the same value as the 78.6 Fibonacci retracement of the 1370 to 1074 plunge.

Also note that current prices would make a very good Point B (about .382) for a much larger harmonic pattern with Point X at 1074 and A at 1292.  A leg up to 1242-1246 would make for a nice Point C.

ORIGINAL POST:  4:30 AM

Ages ago, on November 9, I expressed my frustration at being unable to more definitively discern the market’s next move.  From that post:

My favorite two scenarios are that: (1) wave 2 is over and we’re on our way down; or, (2) Tuesday’s high at 1278 (and a .786 Fib level off 1292) is a Point B that’s part of a larger Butterfly pattern.  The downturn I’m expecting Wednesday will lead to a higher low (Point C) between 1215-1238 that reverses for a final rise to 1307-1313 around December 5 (day 150 from the analog.)

I went on to cover my ass explain:

The key is where Point C lands.  It could go as low as A, but shouldn’t be any lower (with rare exception.)  In fact, 1215 is my defacto line in the sand to determine whether we have one last leg up or not.

There are all kinds of reasons this turd of a market should turn down right here, right now — without apologies, without looking back.  The arguments are clearly laid out in all the financial newspapers and websites.  Heck, you’ve been hearing them from me for months.

But, then there’s the fact that we couldn’t push convincingly through 1215 yesterday.  I know, we hit 1209 intraday, but we closed at 1216.  Coincidence?  Maybe, but it’s also possible that the triangle I’ve been harping about was one of the 46% that break downward, establishing a decent Point B in a larger A-B-C leg that’s heading for 1307-1313 on December 5.

For now, I’m going to consider that “line in the sand” as bothered, but not broken.  At the very least, we’re due for a bounce off of 1215.  Whether it’s an OPEX-infused backtest or a larger leg up is still up in the air, in my opinion.

We have positive divergence on the short-term charts; VIX is forming a falling wedge; and, surprisingly (not), a new rumor about some marvelous financial engineering that will save the Euro, once and for all (it won’t.)

And, finally, my gratuitous attempt to blind you with science…  The 2008 v 2011 analog I’ve been reporting on since last May says wave 2 isn’t over until day 150 — about 10 sessions from now.

All I’m saying, folks, is this is belt and suspender territory.  I’m short as can be, but I bought a nice little insurance policy yesterday that leaves me effectively straddling the market in the short run.  I may leave some profits on the table, but just in case Friday isn’t the big downdraft so many others are predicting, I’ll sleep better going into the weekend.

Good luck to all.

Finally, a nice crack in the market.  We’re currently testing the 1215 area I’ve referred to as the line in the sand.  A break here greatly helps the bearish case, but I’m remaining cautious until we move decisively through these levels. 

The chart below shows negative divergence on the 5-minute RSI.

Note also a potential Butterfly pattern that reverses just below 1200, and the .382 Fibonacci from the 1074 to 1292 move at 1209.43.

UPDATE:  1:15 PM

Here’s a little better view of the alternatives I see for the next move.  Note the triangle apex is about December 5, which matches the 2011/2008 analog precisely.

Note also that the past two OPEX closing prices have been roughly in a straight line with this month’s 1260.  Also, 1257.58 is the .618 Fibonacci retracement of drop from 1370 on May 2 to 1074 on Oct 4.  In other words, it’s quite likely we’ll close Friday within spitting distance of 1260.  After that, all bets are off.

As to the alternatives, here’s how I see them stacking up.

The Butterfly pattern that’s been forming could complete at 1313.67 (the 1.272), although they occasionally extend to the 1.618, which would be 1340.  I consider 1340 unlikely, as it would involve the market breaking through a very important trend line coming off the May 2 highs (the dashed, purple line.)

Also important is 1307, which marks the .786 Fibonacci retracement of the above-mentioned move.  Since 1307 and 1313 are so close to one another, I would consider that range a reasonable target for the upside, if it occurs.

Another pattern supporting the upside scenario is a channel that’s formed off the October bottom.  The midline points to the 1307-1313 range sometime around December 7-13.

The big question remains whether a higher high is in the cards or not.  After doing a lot more research, I am only slightly less confident than the 50/50 I’ve been over the past week or two.

Take a look at the RSI’s major trend lines, seen as a triangle on the daily chart below.  The TL’s (solid purple) converge on around December 5.   A major increase in stock prices would probably entail a break above the upper trend line — something that’s been very difficult to accomplish going back as far as January 2011.

Each previous occurrence of converging trend lines on the RSI daily chart set up a significant downturn.  The downturns, which occurred when the lower RSI trend line was broken, are marked with a yellow asterisk.  Follow the yellow vertical time lines upward to see the associated SPX price action.

As mentioned above, the most recent lower trend line (purple, since Aug 9) is converging with the upper TL around December 5.   The market must break, one way or the other, out of the converging lines.  These similar past patterns suggest that move will be down, as do the ones from 2007-2008:

 

BTW, it’s interesting that the last TL break on the right occurred on May 2, two weeks before the actual high of May 19.  Look closely and you’ll see that, on May 19, RSI was backtesting its trend line.  While the market moved 18 points higher, the RSI came in lower — in a classic example of negative divergence.  I won’t be surprised if the same happens in this market.

UPDATE:  12:15 PM

One of the my favorite of TOS’s limited charting capabilities is the regression channel.  You get to pick two points — the start and the finish — and it does all the rest for you.  It’s not only easy, it’s pretty bias-proof.  Other than gaming the start and finish lines, there’s no way to impose my directional bias on the results.

Here’s what I’m studying this morning:

In my opinion, we have at most three weeks during which to match up to 2008’s moves.  I’ve selected December 5 as the most likely day the bear market resumes — although it could happen anytime between now and then.   The only question, in my mind, is whether we turn down from these levels or whether we go back up and tag a slightly higher high — say, 1307-1313.

Once we do turn down, it will be a much more powerful decline than we saw in August.  In fact, it should be at least as powerful as the decline we saw in the latter half of 2008.  Those with large equities portfolios should consult with their advisor asap about hedging them, or at least placing stops.

ORIGINAL POST:  2:15 AM

Whether you call it a flat or a triangle, the market is looking very much like a coiled snake.  The line we’re oscillating around is 1258, the neckline of the large H&S; that broke to the downside on August 1.

More later.

UPDATE:  10:00 AM

And, this concludes the regime-change rally.  Did you catch UniCredit’s $10 billion quarterly loss?  The big Italian bank will shake up its investment banking and trading operations…presumably to avoid any future trading losses and investment impairments like it just suffered.  It will also go to the capital markets to meet its Basel III capital requirements, said raise to total…$10 billion.  It’s being billed as a strengthening maneuver, but given that it matches the recent quarterly loss, it looks more like plugging a recently discovered hole in the dike.

Much, much more negative news and commentary regarding the Euro this weekend — commentary we’ve been writing in these pages for months.  Even the MSM is getting into the game, which means the downside could accelerate.  But, it also elevates the risk of being oversold from time to time, as spec money piles on top of longer term positions.

SPX is down 10, but is looking choppy.  Friday’s Butterfly could pay off as low as 1242, but I’m still keeping an eye on the larger Bat that completes at 1284 (.886) or extends to a Butterfly at 1314 (1.272).

Friday is OPEX, so look for strong resistance to any major moves until Monday.

ORIGINAL POST:  12:15 AM

Thanks to the regime change in Italy, the EURUSD has shot up a whopping .11%.  In other words, there is a well-deserved skepticism as to whether having a new driver at the wheel will make any difference to the Euro’s trajectory as it sails off the cliff (hint: it won’t.)

The bump does, however, complete a bearish Bat pattern on EUR/USD.

The next few weeks will be critical to the Euro, as it will either verify the steep, downward sloping channel I’ve drawn for EUR/USD or not.

If this channel (which is the exact same slope as the two previous channels) holds, we’ll see the Euro drop to 1.16  or lower by March at the latest.

The other impact of the bump in the Euro is the corresponding 6-8 pt bump in the eminis.   If this level holds into the cash market, it could complete the small Bat pattern we’ve been watching at its .886. at 1271.

A reversal here wouldn’t necessarily mean a huge downdraft.  It would be perfectly in keeping with a triangle wave B that leaves open the possibility of a C wave to 1307-1313 over the next several weeks.  I still see a 50% chance of reaching those levels by December 5 and then reversing hard.

UPDATE:  4:20 PM

Today’s action fulfilled the small Butterfly pattern’s target, reaching 1266.98 versus our target of 1267.38.  This was also the .786 from the recent 1277 high, so we are probably safe in calling this latest move complete.

Still, there is at least a 50/50 shot at a higher high over the next two weeks.  It would most likely come around the 1307-1313 level as a result of one of this jumble of harmonics patterns playing out.

Harmonics with Upside

Close-up of Patterns Above

The downside case is a little less complicated.  First, the big picture:

More in a few minutes…

And, in the interest of staying humble…

Here’s my forecast (the purple line) from early July, complete with my view of the proper channel lines (thin red lines) way back then.  I’ve taken the liberty of adding another channel line to connect the July highs with the recent peaks that I originally thought would maybe reach 1258 in September — going on to reach 1040 by November.  Oh, well.  Guess it could still happen…

Note the 87-day cycle lines.  These date back to May, when I first noticed a weird regularity to the market’s plunges [see: Sure It Works in Practice].  I’ve since refined the cycle, which in 2011 got stretched and compressed just as it did in 2007/8.  Since one of these original dates just occurred, it’s probably time to revisit the pattern.  I’ll try to post more over the weekend. 

ORIGINAL POST:

The Butterfly we discussed yesterday has played out perfectly at the 1.272 at 1258…so far.   We also discussed it going on to fulfill the 1.618 at 1268 which, after the Michigan sentiment numbers, looks like a distinct possibility.  Also, 1271 marks the .886 retrace of the recent drop from 1277.55.  It could work as a Bat pattern Point D.

Personally, I’m starting to lighten up on longs and raising cash a bit more than normal (usually, if I have lunch money, I’m under-invested.)  I’ll probably add to existing longer-term shorts around 1268, depending on which way the wind’s blowing.  Though I’m convinced the market will be much, much lower in the next 30 days, I’m not yet convinced that we won’t see one last run at 1307-1313 before turning back down.  Hence the somewhat straddled position, with longer-term shorts and near-term longs on which I’m lightening up.

But, remember, I’m almost always early.  So, this course no doubt will leave some upside profits on the table and get me into shorts at too high a price.  I can live with that.  And, in this market, I’d much rather be early than late.  Everyone has to trade at their own comfort level.  Not everyone is going to be comfortable buying puts on a day when SPX is up 26.

Here’s the chart I put up yesterday, showing the competing harmonic patterns:

The larger (dashed, yellow) Butterfly could go on to tag 1313.  Or, we could turn down immediately after completing the small Butterfly (solid yellow, on right) at 1268, and head down to 1199-1215 which, readers will recall, is our line in the sand — regardless of whether we head higher in the interim.

UPDATE:  2:30 PM

Watching all the Green Mountain Coffee news reminds me of a post I made in August…

Worth keeping an eye on these things, folks.

UPDATE:  1:00 PM

Dill just correctly pointed out a potential bullish Butterfly that began with Point X at 1215 the other day.   If the bearish Butterfly we’re working on right now plays out, taking us to a Point C at 1258 or 1267 as mentioned in the 11:30 update, then look for the reversal to 1199 or so.  It would be the Point D of the new Butterfly, as well as the 50 SMA and the 1.272 target of Tuesday’s Butterfly.

Is that confusing enough?  I’ll draw a chart, but you won’t like it.  For harmonics traders, this is what I would call a target-rich environment.  Too many targets, in fact.

The Butterfly we’re watching play out right now is the small yellow one to the right.  It targets 1258 or 1267.  From there, some reversal targets include the 1.272 at 1218 or the 1.618 at 1206.  I mostly favor 1218 because, being right next to 1215, it would maximize confusion and ambiguity, a hallmark of this market.

These targets, BTW, line up nicely with those of the Butterfly we completed Tuesday, namely 1212 and 1208 (the other yellow pattern, to the left.)

The Butterfly Dill mentions (shown in white) puts in a Point C at 1258 or 1267 and heads for a Point D of 1199 or 1177.  Naturally, if we pass though 1215, this will be much more likely and clearly violates my line in the sand.

Then, there’s the original larger Butterfly pattern I mentioned a couple of days ago when we completed the Gartley.  That pattern, as you’ll recall, would take us to 1313.  It’s shown above as the green dashed line.

So, there you have it.  Lots of choices. FWIW,  my gut is that we’ll reverse at 1258, head down to 1210-1215, then either  collapse or take one last shot at 1313. 

UPDATE:  11:30  AM

The .786 at 1228 has, as we expected earlier, continued to be tested this morning.   In fact, the testing has taken on the form of yet another Butterfly pattern (bright yellow Fib’s).  If it plays out, it could take us back to 1258 or 1267 (the 1.272 or 1.618 fib levels) before reversing. 

ORIGINAL POST:  10:00 AM

The Gartley and Butterfly patterns we were watching played out perfectly.  The question now is how large the move down will be.  Typical targets revolve around a retracement or extension of the DA leg, ranging from .618 to 2.618.

Here are the patterns themselves.  The purple Gartley pattern and the yellow Butterfly pattern completed within 2 points of one another at 1276 and 1278. 

The initial target of a Gartley is .618 of the DA leg, which would be 1238.61.  SPX’s initial plunge in roughly the first hour of trading was 1239.58 — 1 pt from our target.  Not too shabby.

Now, take a look at the purple Fibonacci markers to the right of the chart.  These mark all the retracements and extensions of the Gartley DA leg.  The 1.618 extension is generally considered a pretty robust move; it stands at 1177.90.  Although any fib level before that can and likely will provide a bounce or even a reversal.  Note the close yesterday right at the .786 level.

The Butterfly pattern DA leg Fib levels are indicated in red.  A Butterfly pattern typically pays off more than a Gartley, so a 1.618 extension is fairly routine.  That would take us down to 1215 or so.

As I wrote yesterday, 1215 is pretty much a line in the sand for me.  A fall below that level makes one last leg up look much less likely, while a hard bounce at 1215 or above leads me to believe we’ll tag 1307 or 1313 by December 5 before the face ripping commences.

But, keep an eye on these fib levels.  We’re heading up, but I think it’s nothing more than a bounce at this point.  Look for the market to at least retest the .786 fib (1.272 for the Butterfly) at 1228, and quite likely head down to 1215.  Whether we go lower from there….we’ll just have to wait and see.

There’s plenty of reason for us to continue down, but look for TPTB to pull a miracle stick save which, like all the others, is simply a baseless rumor.  While all the attention has been on Greece and Italy lately, we have a rather momentous date with our own fiscal destiny with the supercommittee’s report due on November 23. 

More later.