UPDATE:  10:00 AM

The Dollar Index (DX) found support at the fan line we were watching.  There’s plenty of resistance up ahead, but the channel it’s in indicates a potential meteoric rise.  Note that this channel is at the exact same slope as every other from the past 4 years.

I expect a rise to the 87 area, sometime in the Dec 11 – Mar 12 time frame.  This part is tricky, as previous rises have channel surfed.  In the summer of 2008, DX accelerated when it shifted to a parallel channel to the left – not once, but twice.  Eventually, it returned to the original channel to complete the move. 

The Oct 09 – Jun 10 run did a bunny hop to the right, effectively slowing the pace of the rise.   The Oct 10 – Jan 11 rise fizzled after a respectable 10% run.  We’ll keep an eye on this one.

ORIGINAL POST:  2:05 AM

Updated chart on AUD/USD.  Start with a pretty cool 20-year trend line…

Toss in some neat fan lines, channel and some Fib retracements…

Makes a pretty compelling case for a reversal.

More later.

UPDATE 3:45 PM

More looks at the harmonic picture for SPX:

Note that we’re right at the .618 Fib from the big Gartley: 1228.  That also happens to be the 1.272 extension for the Butterfly pattern we’re within spitting distance of completing.  Coincidence?

For the Gartley, the target on the reversal is the .618 of the AD, which in this case is 935.  Now,  consider that 938 is our measured move target.  Hmmm…

UPDATE:  3:30 PM

And, the dollar chart to go with it.  I’m thinking the last leg up might be just [i] of 3, instead of 3 itself.

I can’t for the life of me figure out what’s keeping equities going.  All the signs are there for a huge plunge.  And, as extended as this thing has become, it should be dramatic.  And, it could happen any minute…or a week from Monday.

The timing is difficult, because the bull has overstayed its welcome.  I would expect a more rapid move back down, but I’ve thought that for days, now.  I’ll work on it more over the weekend.

UPDATE:  3:05 PM

Look what the great and powerful Oz has up his sleeve.  I haven’t seen very many charts this compelling lately.  Fan lines rule!

Note how decisively the fan and channel lines intersect at the key turning points.

I don’t think there’s much doubt we’re about to see a massive downturn any day now. 

UPDATE:  11:05 AM

ECRI’s numbers just out.  Weekly Leading Index annual growth rate very ugly at -9.6% — worst since Sep 2010.   ECRI has already called for a double dip recession that government intervention cannot prevent. The full report will be out shortly.

UPDATE:  10:45 AM

I’m also watching AAPL, which just completed a Bat pattern with its gap up and is working on one of several bearish candle patterns.  Check AAPL’s RSI, too.

ORIGINAL POST:

Look for this run up to crap out at the same fan line that stopped the Aug 31 and Sep 1 moves — currently around 1220.

The last time we had a pattern set up like this was Sep 16, 19 & 20th, when we formed a double top with the same huge negative divergence and same three candles.  If this gap craps, we could see a similar reversal to the 1.618 on the downside — in this case 984.

Spud put a question to me yesterday regarding the proper wave count.  There are so many different theories that have been proposed by people much more experienced than I —  It’s times like these that make me want to ignore EW all together!   Seriously, I’ve lost more money trading some expert’s count than any other single source of information (e.g. EWI’s silver forecast?)

Having said that, I think EW can be extremely helpful in raising questions about possible next moves, and is certainly helpful in trying to ascertain where in a larger pattern we might be.  It’s just that right here, right now, I can point to five competing counts — all perfectly logical — that could be right.  The only sure thing is that 80% of them are wrong!

So, I’ll throw my count into the ring:  an expanding ending diagonal.  It’s rare, but it seems to fit with what’s going on.   Guess we’ll find out soon.

Spent the entire day back testing Trend Line X (red, dashed.)  Should start back down now.

More later.

UPDATE:  4:30 PM

SPY provides an interesting peek at the big picture harmonic situation.  Note that the Gartley target is 93.87.

Take your pick of parallel channels.  None of them look particularly bullish.

I’ll update the “Path to 350” chart to reflect the obvious widening of the channels for this rally.  Hopefully will finish it by later tonight or tomorrow morning.

UPDATE:  3:00 PM

Backing out, trying to get a sense of the big picture…

Closing in…

And, the DX picture, on which everything seems to hinge at the moment…

The fan lines from the Apr 08 lows (the white lines) connect with each significant reversal as DX fell from its Mar 09 high at 90 to its November low at 74.  I draw them, then see if they ever come into play down the road.  Most of them do.

The one that passed through the Nov 09 low, for instance, is right around 77.7 today — just a tad away from today’s low labelled as the end of wave 4.  Note it also provided guidance for the Jul 12 high – labelled as the end of wave 1 (it’s also Point B in our Crab pattern).

Likewise, the fan lines from the Mar 09 top (the red lines) connect with each significant reversal as DX climbed from 74 in November to almost 89 in June.   Again, most of them come into play.  The one that passed through May 7 2010 marked the recent Oct 6 high, labelled as the end of wave 3.

We saw a well-formed Bat pattern play out at very near the .886 Fib level at 80.635 — also at the intersection of two fan lines.  Now, we find ourselves at the .50 Fib level, wondering if the Bat might go on and extend to form a Crab pattern.

If so, DX should extend to the 1.618 Fib at 87.058 — also the location of an important fan line off the June 10 high.  It would also exactly match the .886 retrace off that June 10 high.  All this to say…I think DX has a big move ahead of it, from 77 to 87.  I’m working on the time frame, but I’m fairly confident it’ll be very soon.

More later.

UPDATE 12:10 PM

We appear to be leveling out around 1210.  The hourly RSI line — already at overbought levels — has been broken and appears to be backtesting.

ORIGINAL POST:

We’ve reached the .886 fib on the largest of the three potential Bat patterns we discussed yesterday.  It’s not a well-formed pattern, but the completion is at 1203.

An overshoot wouldn’t be surprising, given the strength of this rally.  Some call it a short squeeze, and I’d have to agree.  It’s happening on very low volume, so it hardly qualifies as a major turn.  I’d normally expect a quick backtest, but the slope of this advance means a backtest could extend beyond the apex of the rising wedge itself.  Wouldn’t be surprised to see it shoot beyond 1210 intra-day.

Recall that 1203 is also the level of the fan line connecting the 2007 highs to the Mar 16 low.  The next higher line in the sand is our old pal Trend Line X.  It stopped the Aug 31 and Sep 20 rallies.   It can be seen as the dashed yellow line at 1210 above.   The close for the day should be at 1207 to 1210 range or less, regardless of how high the intra-day rally takes us.

If I’m wrong, then the fail-safe level is the Sep 20 price of 1220.39.  Any higher close than that would probably invalidate my notion that we still have a lower low to put in.

As I mentioned yesterday, this rally feels a lot like those in July.  The start of the climb off the June lows had been delayed by the release from the Strategic Petroleum Reserves, and the act of catching-up led to so fast a rally that it overshot my goal by a good 25 points.

This advance feels extreme, especially coming on such low volume.  On the other hand, we’ve seen the rising wedge expand on us twice.  We’ve overshot my original 1182 target by over 20 points.  The momentum is clearly with the bulls.  It’s entirely possible that I’ve missed this call, and 1074 was the end of Minor 1.

Reaching 1040 by Oct 17 is looking increasingly difficult.  But, I’ve been in this position before — notably on Jun 26 [see: Cliff Diving] when I found myself very much alone, calling for a reversal to the upside.  Regardless of how it turns out, it’s never a good feeling.

UPDATE:  12:20 PM

Updated Bat pattern, assuming new Sep 20 entry point of 1220.  The .886 is at 1203.79 — just above our fan line (see below) shown here as the highlighted yellow dashed line.

Big Picture

Medium CU

Close Up

And, a quick look at the tech picture…

1 Year

Close Up

A wedge that looks like it wants to break, negative divergence out the wazoo and an RSI TL that refuses to yield.  Shouldn’t be long…  (pun intended.)

MICROSOFT READY TO POP?

Just noticed an interesting chart: a rising wedge along with a completed Gartley.  If that old college chum in Redmond or your hair stylist hasn’t sold her MSFT yet, might be a good time to give her a call and suggest she sell it and put the proceeds into TZA.  As in right now.

ORIGINAL POST:  10:20 AM

I’m looking at channels, trend lines and fan lines, trying to make better sense of yesterday’s rise.  I remembered that I was ahead of the crowd in calling the break of the trend line from the Mar 09 lows — only to discover that some others used arithmetic rather than logarithmic scales in their charting. In that instance, it was only after we broke the arithmetic scale TL that others saw what I had been seeing.

I prefer log because it’s the method that takes into account the obvious compounding of advances and declines.   The effect can be significant over a longer period of time.  It also might be the cause for my frequently being a tad early.  That might be what’s happening here.

The past five years, charted in the logarithmic scale that I normally use.

Here’s the same period, logged in arithmetic scale.

See the difference?  Here’s a close up, w/ log:

And, without:

In the log scale chart, there’s not really an appropriate fan line through yesterday’s top.  In arithmetic scale, it’s clear as day.

Also, note the 30-point difference in the target of the bottom-most fan line — the one I have been using to triangulate our 1040 target.  It passes through the very significant 4/26/10 high.  In arithmetic scale, the same fan line indicates a 1010 target.

The intersections with the 2010 horizontal trend lines take an interesting turn, too.  The log chart:

And, arithmetic:

There are clearly implications for the speed and distance of our next move down.

In the meantime, we’re left to ponder yesterday’s huge move up on pathetic volume.  On the arithmetic chart, the fan line from 2007 through the Mar 16 low provided yesterday’s high and might well cap any further advance.

On the log chart, that fan line is several points higher, say 1201 — which is very close to today’s intra-day high.  I can see it putting the kabosh on any further upside, too.  Both cases are good for the bears, and both provide cover for yesterday’s higher than expected run-up. 

So… to log or not to log?  Which is correct?  I’ll revisit this question after the next move is resolved. In the meantime, there’s a rising wedge with negative divergence with my name on it.

More later.

UPDATE:  EOD

Hate to be posting this so late in the day, but I’m traveling on business and am just getting back to my room.

Today certainly put my bearish conviction to the test.  I haven’t felt so steamrolled since July 1st.  Under the 2011 = 2007 analog, that’s the day the market was supposed to run smack dab into the trend line from the May 2 top and, failing that, the .886 Fib on the Bat pattern that had set up since Jun 1.

After having been so accurate in calling a rapid rise to 1320-1330 from the 1258 lows (remember the choruses of “flash crash!”) I watched in horror as the market surged past my target.  It finally (mercifully) came to rest at 1356 — exceeding the TL and the .886. 

Of course, a couple of weeks later, my ego and my portolio were salvaged as the market finally topped (at a fan line) and dropped a bunch of points.  But, there were some lesssons there which, had I learned them, might have saved me some serious stress today.

First, consider all the possible entry points on harmonic patterns.  Had I chosen the May 2 high of 1370 for my Point X, I would have accurately chosen 1357.75 as my Bat Pattern .886 instead of 1327.

Second, I would have been less wedded to the TL off the May 2 high.  I was so positive we’d have an exact repeat of 2007 that I assumed the TL off the May 2 high had to be repeated.  If I had been more open-minded re the Harmonics pattern…

The lessons here?  I’m going to let the channel line float, telling me where it needs to be drawn instead of me telling it.  Second, I’m taking another look at the entry point.  If, instead of the Sep 27 1195 high, we’d used Sep 20’s 1220 as Point X, then our reversal would come in around 1203.  The Aug 31 high of 1230 would have indicated 1212.

I’m going to take a fresh look in the morning.  In the meantime, though, I’m looking closely at July 1 as a worthwhile guidepost to the next few days.

UPDATE:  3:20 PM

VIX looking like it’s ready to pop.

UPDATE:  1:05 PM

Just saw a chart of the EMA 50 that caught my eye.

Also, note that the internal trend line I mentioned this morning seems to be holding pretty well.  It’s a fan line from the 2007 top that connects with the Aug 15 & 16, Sep 7, 8 and 27th highs.  It’s marked in bold yellow in the above chart.

In terms of timing on the downside….  My original forecast from 2 weeks ago identified 1040 17th or so.   That would be roughly 150 points in 5 trading days from right here.  Normally, that would be a tall order.  In this market — very doable.  The trick will be getting things going on the downside.

Obviously, we’re at a critical juncture.  Any time a market seems poised to break out from a long established pattern — in this case, the channel it’s been in since July — one of two things will happen.  If it fails, like it did on Sep 16, we get things like 150-point declines.  If it does break out,  which I’m certainly not ruling out, the momentum could be substantial.

For me to believe that’s happening, I’d want to see a close above the channel at the very least.

UPDATE:  10:50 AM

Just completed a nice looking back test of the rising wedge.  The advance seems to have stalled out, with volume dying off and breadth easing.

While it could have a little more juice in it, this advance seems to be sputtering.  The inverse H&S; pattern would be very lopsided, with a tiny shoulder on the right side.  Stranger things have happened, but I wouldn’t put much stock in it without a more symmetrical shape.

ORIGINAL POST:  10:00 AM

We’ve reached last week’s .886 target of 1182.06, the logical place to reverse and complete wave 5 down of Minor 1 if this is, indeed, a Bat pattern playing out.

The alternative, of course, is that we’ve already started into Minor 2 and that this pattern will extend, closing beyond the channel.   Many EW experts, including some very good ones, are operating under this theory — having called 1074 the Minor 1 bottom.

But, my money is on this being an intraday push — like many we’ve seen before.  I’m going out on a limb and will start loading shorts.  My respect for the alternative viewpoint means I’ll keep a close rein on things — tight stops, etc.

There is an internal trend line that runs through about 1192.  If we overshoot on the Bat, it should provide a good line in the sand.

PATH TO 350: Day 8

Almost done with this counter-move.  My forecast is <1040 by October 17, so we'd better do a hard bounce off the channel line and get started on wave 5 sehr schnell.

Note that today our shadow hit the channel line, but we closed well within the channel itself.  A move to 1182 would leave a shadow above the channel line, but should close below it.

Postings will be spotty next week.  I’m traveling on business, and… I did promise myself I’d cut back on the old pebblewriter treadmill.   Haven’t done very well in keeping that promise yet…

BTW, daily page views have nearly doubled these past couple of days.  Anyone know why? 
 

UPDATE:  4:10 PM

Looks like we’re working on completing the 2d wave of the final five to 1182.  Whatever the wave count, we’ve completed four legs of a possible Crab Pattern that began at this morning’s 1171 high.

Crabs’ Point B is at the .886 of the XA leg.  As the chart shows, we came within 47 cents of that level before the last minute dip to the close (aka Point C.)

Crabs complete at the 1.618 XA extension.  In this case, that works out to 1184.87, just 2.81 away from our .886 fib target.  The move up to 1182-1184 should come quickly next week, followed by an even swifter reversal.

UPDATE:  3:00 PM

DX looking ripe.

UPDATE:  1:30 PM

I expect it’ll look something like this.

Here’s the corresponding dollar chart, also showing a corrective wave within the counter-trend decline.  Near-term correction should continue to the .886 at 78.131, followed by a resumption of the climb to at least 80.635.   Note, that’s the .886 Fib of DX’s Bat pattern.  If we blow through (accompanying a more serious market crash) then the upside is to the 1.618 at 87.058.

ORIGINAL POST:  12:20 PM

Should catch at 1155 and reverse to 1180 if this is a Bat playing out.  If it evolves into a Butterfly, it might extend to the 1.272 at 1148.

1148, BTW, is close to the .618 (1149.60) of the larger Bat pattern we’re following — the one that indicated 1182 as our upside.  So, I’m inclined to believe this morning’s decline is a Butterfly.  The only difference, of course, is we should expect a stronger snap-back.

Also, note that at 1148, this corrective wave 4 is equal to wave 2 from Oct 4.

updated chart 1:07 pm

We’ve completed another H&S; pattern on the 5-minute charts, that could push us further down.  But, the last one didn’t play out, and we do have good horizontal support as well as the .886 here.  If the Bat morphs into a Butterfly, the downside is 1148 – only 3 pts away from the H&S; target of 1145.

UPDATE:  3:00 AM

THE PATH TO 350:  Day 7
 

The strong counter-trend rally is developing a rising wedge with an apex of around 1180.   This coincides well with the Bat pattern .886 (mentioned below) of 1182.

SPX has held pretty religiously to the B-6/B-7 channel thus far, the only excursions being intra-day shadows.  So, it’s likely we’ll tag the 1182 level and retreat to the .786 at 1170, back within the channel line.

If we push decisively through 1195, I’m prepared to reevaluate. 

Employment numbers are due out at 8:30.  It’ll be interesting to see if September’s numbers are revised to below the 0% increase that was reported.  Moody’s just downgraded a boatload of British and Portuguese banks.  So far, the futures haven’t noticed. 

ORIGINAL POST:  1:50 AM

I mentioned yesterday that I wasn’t thrilled with the presumed Bat pattern because the entry point looked wonky.  Ideally, Point X should be at a clear and distinctive reversal.

I was operating on what I thought was a pretty good EW count.  It has since been proven at least suspect, and probably wrong by today’s rise above 1140.  So, I’m going to keep my nose out of the EW tent and refocus instead on the harmonic picture.

Given where we closed today, I’d say there’s a great chance we’re working on completing a Bat pattern with the Sep 27 1195.86 as an entry, or Point X.  The Point B retrace was .236, a perfect fibonacci retrace for Bats.  The target is the .886 at 1182.06.

Another possibility arises, though, based on the fact that we came very close to the .618 at 1149.60 today.  1149 could be a Point B, with a reversal to Point C before climbing again.

If we get any kind of reversal tomorrow, look for a rebound to the .786 at 1170 instead of the .886.  This would be a Gartley instead of a Bat, and it would fit just fine with the channel line (B-7 in red) that’s bounded the decline since July.

In any case, we should top out Thursday or Friday and begin a sharp 130+ point decline that wraps up in a week or so.

Keep an eye on the channel line.  While we could easily exceed it intraday, we shouldn’t close above it (about 1173 Thursday, 1169 Friday.) Any such close would be a sign that a lower low is probably not in the cards.

Also keep an eye on the SMA 50.  Currently at 1183, it should help keep a lid on any upside.

Back in July, I blogged about the 2011 v 2007 pattern being off by a few days.  It struck me then that as the 2011 market approached the edge of the cliff, it slowed relative to 2008.

Perhaps some of the forces propping up the market were aware of the analog and threw more ammunition into preventing a repeat [see: Happy New Year and All Aboard.]  They only delayed the inevitable, as the market fell 57 days after the top versus 2007’s 52 days.

Interestingly, the market caught up to where it “should have been.”  The 2007/8 market bottomed 70 trading days after its 10/11/07 top.  After its plunge, this market found a new bottom at 69 trading days after its May 2 top.

The chart below details day-by-day comparisons between the two markets.

updated to EOD

Yesterday’s low of 1074 could be interpreted as the equivalent of 3/17/08.  It is the 108th day since the top and 23rd since the 8/31/1 midpoint; that would correlate nicely with the counts of 107/22 for 3/17/08.

But, I think it’s more likely that we’re simply seeing the same pre-plunge analog fart that we saw back in July, and before that in June.  If so, we’re at the equivalent of 3/12/08 and Minor 1 isn’t quite over.

I’m looking for a decline to 1040 sometime around next Friday, which is at the confluence of a number of harmonic patterns, head & shoulder patterns, trend lines and fan lines [see: The Path to 350.]

Also, a word to the wise: I’m usually early, and I often underestimate the degree of the declines I forecast.

I had a wonderful lunch with some very close friends the other day.  They’re both off-the-charts smart.  He’s a CFA, former actuary, institutional asset management whiz.  She’s an artist turned entrepreneur turned asset management whiz.

Yet, their jaws dropped when I ran my forecast of the S&P; 500 dropping to 350 past them.  When I mentioned that 350 would be the first wave down of five in P[3], I caught them checking their watches, LOL.  I know it sounds preposterous.  Such a decline no doubt means a Depression.

When I first started talking about another Depression many months ago, most people thought I was ready for an I-love-myself jacket.  Now, I’m hearing it talked about daily in the mainstream press (another reason we’re going to bounce up very soon.)

As my friend reminded me, many US stocks derive plenty of earnings from overseas, and are well-positioned to take advantage of still-strong BRIC economies.  That’s the key question, isn’t it?  It’s pretty clear the US consumer isn’t going to buy as many Cokes and iPhones as in the past.  But, maybe the Chinese and Brazilians will.

Will that be enough to prop up multinational earnings?  And, what about interest rates?   Can we count on 0% bills and 2% notes, or will we see higher interest rates competing for equity investment dollars?  What would that do for PE ratios?  And, what would it do for global liquidity and wealth?

Lots to think about.

More later.

THE PATH TO 350:  Day 6

Charts updated for end of day prices.  So far, so good.

Going to have to think about the EW count a little more, but I take great comfort in the fact that the midline of the channel effectively capped today’s rally.

And, an updated chart on the 2011 v 2008 analog…

For an important discussion about the comparison, see Tell Tale Fart. 

EUR/USD should get one more push down to 1.31 if only the Bat plays out — 1.16 if it’s the crab instead.

Take a look at Apple, which just broke through a rising wedge 5 years in the making.  It could and probably will backtest for a while.  But, this is market leadership showing its hand in a very negative fashion.

It’s developing a bullish Crab pattern that indicates a potential reversal, but not until we get to 340.

That’s a big drop from 422 on Sep 20, when we noted the very bearish, completed Crab and Butterfly patterns.

More later.