ORIGINAL POST:

We just tagged the two harmonic targets discussed yesterday: the 1.618 of the smaller, red pattern (from 1334 to 1266) and the .707 of the larger, purple pattern (1422 to 1266.)  In so doing, we’ve gone about as far as we can within the (red) rising wedge here at 1377.

The wedge must either break out or break down.  They usually break down; but, either way, it should be enough of a move to flesh out the small (purple) channel some.

The trend remains up, but I will look for any weakness to scalp a few points on the downside, with an objective of 1367 and stops at 1380.  Absent any weakness, I’ll hold long.  Prices often move sideways just prior to options expiration day.

If prices break out from the rising wedge, the immediate upside within the channel is up to the mid 1380s.

When we race through an important trend/fan line such as we did with TL 1 yesterday (see chart below), we often see a back test.  In this case, the back test looks to be about 1367 – hence my downside target.

The Philadelphia Fed reported generally weak survey results across the region this morning.  I won’t regurgitate the whole July report here, but suffice it to say the current conditions index remains in negative territory — meaning respondents are seeing continuing contraction. The key tables are presented below, but the (fairly unvarnished) report is worth a skim.

UPDATE:  11:15 AM

I’ve redrawn the channel to what I think is a better fit.  It leaves the upside open, but no big gap opportunities — just the slope of the upper bound itself.  It could eek out another few points before running out of room — maybe 1384 or so.

There’s always a little wiggle room with wedges, as the choice of time frame shows.  The chart above uses the 30-min time frame and allows for candle tails to dip down below the wedge’s upper bound.

Use of a shorter time frame such as 10 minutes means there’s more to a candle’s real body and less relegated to the tail.  It can sometimes lead to different conclusions, such as the chart below.  I could make a case that the wedge has already broken down and is back-testing the lower bound.

Then there’s the danger present in every wedge — a widening of the wedge itself.  I’ve drawn the chart above to tag the interim lows along the way.  But, it’s not unusual for wedges to widen to the point where those tags are no longer even used, as follows:

In this case, it makes a difference of about 3 1/2 points.  But, in larger wedges, the difference can be significant.  Bottom line, it comes down to judgement.  I try to never make a forecast — long or short term — based on a single indicator.  The best ones are a mosaic of half a dozen indicators across multiple indices or instruments that all point in a unified direction.

And, if I’m ever unsure, I pull money off the table rather than bet a lot playing a hunch.  Better to wait and see if a new high or new low is made and a trend established.  And, use those stops!

A good example is NFLX.  The stock rose from 2.40 to over 300 from 2002 to 2011.  Then is fell spectacularly to 60 inside of 10 months.  How do you forecast something like that? As it turns out, NFLX has done a very good job of obeying its long-term channel lines.

When it fell out of the current line, there was usually another TL exerting influence, such as the parallel lines and the big descending triangle.  But, not every move was well-signaled.

It’s easier now, looking back at the major channels, but in the early days of the top and decline, these channels were in their infancy and not very discernible.

Presently, NFLX is at the intersection of three different channels.  It’s meeting resistance from both the red and purple declining channels that are several years old, while moving upwards through a small bullish channel (also in red.)

In general, I favor older, bigger channels over smaller ones.  In a battle of wills, take the brute.  And, there’s obviously some consolidation going on right here at the .500 Fib level — not normally a trend stopper.

If I had to guess, I’d say NFLX is going to obey the large red channel and pull back here.  There’s plenty of room to the downside that would require no special magic whatsoever.  It could even stay in the little red channel (keeping the upside alive) and fall as far as 76.

It would make a great place from which to start a fresh drive upwards and potentially out of the bigger channels — perhaps driving toward a Bat pattern completion at the .886 Fib level of 104.  But, if the market falls apart, it would simply continue on down with just about every other stock.

So, if I were inclined to play NFLX (which I’m not), I’d be thinking about a little downside bet here, but would definitely put in a stop just above the previous high of 86.65.  I’d probably take some profits at the bottom of the little channel and let the rest ride — especially if the overall market is melting down by then — utilizing trailing stops all along the way.

UPDATE:  12:30 PM

Zooming in on the rising wedge, I think the apex is probably closer to 1383 than 1384 — though RW’s rarely go all the way to their apex.  And, again, a widening of the wedge makes for a higher apex — so watch the trend.  Volume is very light, so please exercise caution.  Keep those stops where you’re comfortable.

If we slap a little harmonic grid on the intra-day pattern, as Dillsz comments below, we see a 1.618 Fib line at 1382.58.   It’s not something to bet the farm on, but it reinforces the notion of 1383 as an interim ceiling.  The channel bottom crosses about 1360 by the end of the day, but big dips in the midst of a melt-up the day before OPEX are rare.

I stress interim, because the daily chart clearly shows a wide open path to our 1389-1404 target area.  In fact, 1389 is already within range of our existing rising wedge (in white.)

How we get there from here is anyone’s guess.  But, I mostly expect one last retrenchment before the final push to TL 2.  A logical place would be TL 1, but the 161.8 would also do since we’ve already exceeded it by a few points — especially if we tag 1383 later today.

Because the slope of the RW’s upper bound is pretty steep, each passing day supplies us with more upside potential.  Today, the bound is around 1390.3.  Tomorrow, it’s about 1393.5.  It reaches 1404 around Jul 31.  While SPX has been pretty faithful zig-zagging back and forth between its upper and lower bounds, that could change in a heartbeat.

I have to run out for an appointment — probably until about 2:15 PM.  Will catch up with you then.  GLTA.

UPDATE:  4.00 PM

Nothing much to report.  Looks like we’re caught in the OPEX tractor beam, closing in on 1375-1380.   Though, the US dollar, VIX, RUT, VIX and XLF all point to a sideways to slightly down market over the next day or two.

Look for updates to RUT and EURUSD later tonight.