SPX continues on the path we laid out for our new analog [see:  The Game is Afoot.]  We reached the lower end of our target range yesterday (Point A), breaking above the new channel mid-line.

We’re getting a back test of the broken channel mid-line here.   SPX remains within the proposed rising channel — for now.

We remain long since 1405 on Oct 25.  But, this is a good time to review the technical picture.  I’ve also adjusted the analog somewhat, including the targets for this particular leg.

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I love this old Sherlock Holmes expression (borrowed from Shakespeare’s Henry V.)  It perfectly captures the excitement of seeing a forecast begin to come together.  Although I’ll admit that, on the face of it, it makes just as much sense as “non-stop flights” and “your door is a jar.”

These are the early stages, of course, and things can come unhinged anywhere along the way.  Murphy is patiently awaiting his cue.

We are nearing the lower end of our target range as detailed yesterday [see: A New Old Analog.]  We should get a pause at the new channel mid-line around 1428, but we’re looking for higher than the .382 Fib.

I’m working today on cleaning up the analog charts posted over the past few days.  My trading platform (TOS) seems to be back to normal (haven’t had to reboot anything since starting around 5am — yay!)  So, look for a bunch of charts over the next couple of hours — including currencies and other major indices — that reflect the path I expect for the remainder of the year.

As I’ve posted before, analogs can be extraordinarily profitable when they come together.  But, they require a certain degree of faith (and a well-designed escape hatch for those that fail.)  From time to time, I make myself go back and re-read a post I truly hated writing: Lessons Learned.

In it, I detail the amount of money that second-guessing my own forecast cost me in the summer of 2011.  Don’t get me wrong; June-August was a very profitable period.  But, my returns would have been about twice what I experienced had I been able to ignore those nagging doubts.

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Our resolve was severely tested with two huge “pop and drops” in a row, but we were rewarded by reaching the upper end of our target range (SPX 1405.45) yesterday, closing our shorts from last week and opening a long position.

There is still downside exposure to about 1400 intra-day (the unfinished little Crab to 1401) and a .618 (of the 1354 – 1474 rise) at 1400.  But, the wave structure doesn’t look terribly complete.  So, use stops and trade safe.

For those not incorporating harmonics into their trading strategy, I can only imagine how utterly confusing this latest move was.  In fact, the entire past six weeks have been a market maker’s dream — constant whipsawing that would have been ridiculously difficult to anticipate based on earnings, economic data or Cramer’s ranting.

Seen through the prism of harmonics patterns, the reversal at 1474 was simply a Bat Pattern completion that paid off the 1576 – 666 drop from 2007 to 2009 [see: The World According to Ben].

And, every reversal since then has followed the rules of ordinary harmonic patterns — with occasional assists from chart patterns (mostly channels.)  The initial drop from 1474 to 1430 was a Bat Pattern retracement and channel line tag.  It set up a Bat Pattern (in purple) that signaled a reversal at 1469.50 (came at 1470.96) and established a declining channel (in white.)

The next move down was to the bottom of the new channel and a .618 retracement of the 1396-1474 rally.  It was followed by another Bat Pattern (in green) targeting a reversal at 1465.78 (came at 1464.02.)

The final move down was initially to the white channel bottom, but pushed through to complete a Bat Pattern .886 retracement of the 1396 to 1474 move, as well as a Crab Pattern (1.618 extension) of the 1430 to 1470 move.

By reaching 1405.45, it also solidified the upside case originally discussed back on the 17th [see: CIW Oct 17, 2012.]

If 1474 was a normal wave 3 or wave 5 high, we would typically be open to a corrective wave of greater than a .618 retracement.  Look what happens if we make it a .786 or .886 retracement.  Suddenly, the yellow 1.618 lines up very nicely with the other 1.618′s up there at 1515-1518.

In other words, a Crab Pattern with 1405 as its base instead of 1425 (the previous low) lines up with the 1515 Crab Pattern target established by the 1347 to 1074 drop from July to October 2011, and the 1518 Crab Pattern target set up by the 1422-1266 drop from April to June of this year.

In hindsight, the harmonics and chart patterns have done an outstanding job of showing us the way — even though there were times when the direction suggested made no sense at all.  If fact, I’m pretty sure that any bad trade I’ve made over the past six weeks was the result of “knowing better.”

The question now is whether reaching our 1405 target really suggests a move to 1500+, or is it merely setting the stage for a massive bull trap?

For help, I’m turning to an analog I think looks very promising.  We have done very well with these in the past [see: Why Analogs Work.]  The 2011 as 2007/8 analog knocked the cover off the ball last summer.  And, the latest took us from 1422 down to 1266 and back to 1474 in spectacular style — earning us 60%+ returns over those six months.

 

This new analog is important not just for its capacity to protect investors from losses, but its potential for nice gains for those who don’t mind speculating a bit.

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Here’s the chart I posted yesterday.  I’ll spend the next hour or so refining it and trying to better pinpoint some targets.

I call this a new old analog because it’s essentially a continuation of analog first posted on April 9th [see: New Analog I’m Watching.]   I noted the form of the latest move up from 1074 was essentially the same as that of the 2010-2011 bull market.

Here are the two charts, the first from last year…

…and the second from 2011-2012:

Looking back, two things really jump out.  First, the forecast for a high of 1472 and low of 1314 (later adjusted to 1292) was incredibly accurate considering it was made 5 months in advance of the pattern playing out.  Second, the forecast for the entire move to be completed by the middle of June was ridiculously inaccurate!

What I failed to consider at the time was the relative size of the two patterns.

UPDATE:  2:35 PM

Quick market note:

Looks like SPX is trying to break out.  As often happens, RSI is leading the way with a break out of the red channel via the 3rd white channel in a row to sport the exact same slope on the 60-min chart.

Ordinarily, we’d expect a back test of the red channel after a break out like this — so watch for that.  Once RSI is clear, however, it runs into the top of the purple channel rather quickly.  So, I expect this move up to complete rather quickly unless than channel can be broken.  My best guess at this point is 1435 on Monday or Tuesday.

1413.50 would be a very good number to break above… followed by the little channel SPX has bounced around in for the past couple of days — that shares a TL with the falling wedge (in yellow.)

UPDATE:  6:00 PM

Ran out of time to get the LT charts up before the close, but better not to rush them anyway.  Look for this post to be extended over the weekend.

Here’s how the 60-min chart ended the day.  Looks like a break out and back test to me — tentative target = 1430-1435.

To our friends on the East Coast, stay safe.  Better yet, come visit for a few days.  Huge bonus — zero political ads in California!

UPDATE:  WED OCT 31 / 11:35 AM

I appreciate everyone’s patience regarding these charts.  I’ve worked the past four days putting them together, and was going to post it last night.  But, a family emergency interfered.

Let’s start with the big picture. SPX is testing a trend line /channel mid-line that dates back to the 1937 top — the period, BTW, that I most closely associate with the current economy.

The past 20 years can be viewed as a series of parallel channels.   As we’ve discussed many times in the past, there are steeper channels within these channels, but eventually SPX falls back town to the lower bound, tests it, and breaks.

Another angle, including the corrective waves…

Which, like the channels up, can also be looked at as one big falling channel.  Time will tell whether or not we reached an important turning point in 2007.  But, if so, this big falling red channel takes on added significance.

For now, it’s enough to say that it’s a series of meaningful channels.  We’ll focus on the last two for purposes of the analog.

Here are the two periods we’ll concern ourselves with for the moment.  They take place within the upper half of the latest yellow channel.  If the analog continues to hold, the larger period highlighted on the right will perform as the one on the left.

A quick note: some prefer the term “fractal.”  They are, for all intents and purposes interchangeable, though fractal is somewhat more correct as it implies a change in scale — which is the case here.  I’ll stick with “analog” for now, just to avoid confusion with respect to previous posts.

If the analog holds, the current pattern will form a pattern something like this:

Here’s a closer look:

GLTA.

As we expected, yesterday’s pre-opening rally failed and new lows were reached by the end of the day — though we didn’t quite reach the upper end of our target range on SPX.   Here we are, 24 hours later, looking at pretty much the same set up.

The eminis are up 9 points, the dollar sold off nicely during the night, and the EURUSD is back below the support it tried to regain overnight.  Could this be a case of same tune/different day?

As we discussed yesterday, the dollar was due for a sell-off.  We got it — in fact nailing our proposed Point C (in yellow, below.)

The euro also complied, by putting in a wave C in its back test of the broken red channel.

SPX reached within a couple of points of the high end of our target range.  But, by my count it hasn’t completed the full extent of this sell-off.  Look for this rally to fail at around 1422.

The eminis, despite a great bounce off the .886 of the April – June correction, appears to have stalled at the bottom of the white channel.  And it did so without having reached its own harmonic target and without any positive divergence whatsoever.

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Very few of the rallies inspired by Draghi’s jawboning have lasted.  I suspect this will be no different — especially on a day when euro zone PMI hits a new low (since Sept 09) and US PMI, while marginallly higher, indicates falling new orders and higher prices.

The EURUSD has staged a nice rally off its overnight lows, but is just back-testing the broken red channel we discussed late yesterday.

I expect that the pop we get in equities on the opening will not last into the day.  SPX might reach yesterday’s target of 1421-1422.58 (around 10:15 EDT?), but then we should see more downside.

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If you’re a bear, the good news is that markets fell out of bed overnight — with the e-minis down 19 points as of a few minutes ago.  The EURUSD plunged from 1.3082 to 1.2916 in a matter of hours…

…and DX just peaked at 80.135.

The bad news (if you’re a bear) is that the damage was done overnight.  And, each is due for a reversal in the coming hour.

The EURUSD reached an important channel line of support — the red channel that has caught this particular falling knife many times since the July 1.2041 low.  While the pair might drift slightly lower, it is more likely to head higher throughout the day.

And, the dollar has completed a measured move higher, retracing 88.6% of its decline since the Oct 10 high of 80.295.  Look for a reversal here that will build a base for a eventual higher prices.

The good news for equity bears is we’re likely to hit the 1.272 Fib at 1415.06 (or, nearby .786 at 1413.24) on the opening, and maybe even complete the Bat Pattern at 1405 we’ve been talking about for the past week or so.

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In my opinion, the next eleven sessions should shape up as a battle between the status quo and those who want a new direction.  The bull market, getting very long in the tooth, is overdue for a correction.  But, the administration, the Fed, and some on Wall Street need to keep it afloat for eleven more sessions — as a tumble in the weeks before an election wouldn’t be good for business.

The New Order thinks a tumble would be just fine.  It would expose the soft underbelly of the status quo’s approach and encourage the electorate to reconsider the current path.

Wall Street, which has benefited enormously from the Fed’s largesse, has reportedly thrown their support behind Romney.  Are they really ready to bite the hand that feeds them, or are the Romney donations simply a way of hedging the downside in case the current guys are thrown out?

In any case, I think the next two weeks will be largely range-bound — but, possibly very volatile — as the two forces duke it out for control.  The euro-zone obviously is working very hard to keep things together a little longer.  The following chart shows the negative overall trend (the big red channel) for the EURUSD, which should have seen the pair back to the channel bottom by now.

But, the jawboning and monetizing that boosted prices out of the falling yellow channel in January has kept the pair vacillating about the midline ever since.  I believe the pair will fall hard sometime in the next three weeks.  Whether it happens before or after November 6 is the only question.

Prices can remain in the red channel through then quite easily.  Even a loss of the red channel and support by the purple mid-line would be “positive enough.”

Likewise, the dollar is due for a breakout, but has been kept in check both by additional rounds of QE in order to prop up the current markets.  Whether it will break out before or after November 6 is the only question.

Stocks have reached important support from a channel perspective, so remain at risk for a significant break down if they don’t bounce very soon.

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SPX has fallen as far as it should if the bounce up to the .886 is going to happen.  I was stopped out at 1452.50 and will look to establish a long position at the .500 at 1448.25 or midline at 1446.30.  If it breaks those, there’s plenty more downside to come and I’ll play along on the short side.

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Trend changes are always tough.  No matter your level of conviction, there’s always that “what if I’m missing something?” moment that makes time stand still.  You stare at the screen, watching the market unfold, and do your best to stifle the self-doubt — looking for any sign of encouragement or disparagement.

You draw a line in the sand and dare the market to step over.  When it does, you say a little prayer and then you celebrate.  You take your significant other out to dinner (they had to put up with you for the past 24 hours while you anguished over it — not pleasant, I assure you.)  You tip your waiter a little extra.  And, you slip the homeless guy on the corner a five-spot instead of a quarter (“there, but for the grace of God go I.”)

When the market doesn’t cooperate…well, I guess that’s what keeps cardiologists, psychologists and the good people at Oreo cookies in business.  You figure out what went wrong, enter it into your trading diary, and vow to avoid that particular mistake in the future.  The silver lining is that after making enough mistakes, you can get pretty good at this stuff.

The only real mistake is the one from which we learn nothing. – John Powell

* * * * * * * *

While I’m waiting to learn whether I’ll be dining out or munching Oreoes tonight, these are the charts I’m watching.  We came into the day short, so I’m encouraged by SPX’s daily RSI chart.  The latest channel looks bearish to me, though there’s an obvious test coming – regardless of whether we use the yellow or the white rising channel.

The 60-min chart is also encouraging.  It’s broken the dashed yellow TL, but must push down through the purple one (from the Sep 14 high) in order to get the ball rolling on the downside. It’s already bounced off it once this morning.

Two weeks ago, the break of the initial yellow line was followed by a bounce off the purple line and a back test that added 30 points to SPX.  But, that occurred at the bottom of the white channel — not the top, where we are now.

While, the 15-min RSI looks like it’s back-testing a broken channel — helpful in confirming the broken rising wedge we’ve been watching.

I would be much more confident about equities taking a dump here if the dollar had reached its .886 off the last low of 78.96.  It would mean a tag of the (broken) falling wedge apex as seen below.  I thought it might happen after-hours last night.

The fact that it didn’t tells me there’s still a chance we’ll get one last push for equities, perhaps up to one of the .886’s we discussed yesterday: 1465.78 or 1468.93.

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Weird stuff in the currency markets this morning.  EURUSD busted its previous high, so out with the old and in with the new harmonic pattern.  In so doing, it reached a .886 of its now previous high, but after a .707 Point B — which doesn’t make for a solid Bat Pattern.

Furthermore, the smaller white pattern (the lower case letters) hint at a 1.618 extension rather than the existing 1.272 — though that would leave the larger pattern in no-man’s land shy of its 1.272 — with no .786 to support it.

As I often have to remind myself, there are forces at work in the universe other than harmonics.  Not every move has to fit a harmonic pattern.  There’s a perfectly good purple channel up here that, depending on where you draw it, could/should easily swat the EURUSD back down in a big way.

Bottom line, be aware that this pattern break could be positive for SPX — which reached an important bunch of Fib levels yesterday and was presumed to be selling off in search of a Point C down around 1444.

We had positive housing news that has the futures up a bit (+2 as of 9:25) going into the open.  So, keep your stops where you’re comfortable and we’ll try to sort this all out.

UPDATE:  9:45 AM

SPX just tagged the 1.618 (it was .26 short yesterday.)  But, it appears to be on course for the .786 at 1461.24.  Look for a turn there — also the scene of the expanded red channel top — or at the yellow .786 of 1464.03.

It would help the downturn case immensely if DX could complete a proper Bat Pattern down to the 78.906 level.   We’ll look at the implications of all this in a few minutes.

UPDATE:  10:25 AM

So, a .786 Point B is different from a .618 in the land of harmonics.  If prices are to move higher, it portends a Butterfly Pattern that can extend to the 1.272 (1483) or 1.618 (1499.)

I say “if” because quite often the .786 is the end of a counter or corrective wave in the midst of a primary move in the other direction.  But, such instances typically (not always) show more signs of a big reversal — such as a more pronounced Point B at the .618 on the way up to the .786 (indicating a completing Gartley Pattern) and/or corroborating charts among other indices and currencies.  As discussed above, we don’t have those here.

In the absence of other evidence, the only way you know for sure whether a .786 (or any other Fib level) marks the end of a counterwave (and resumption of the primary) or is merely a pause before prices head higher is whether the market reacts in a meaningful way or not.

That’s why a lot of harmonic investors are scalpers — placing a bet shortly before reaching potentially important Fib levels and blowing out the position quickly if they don’t get the reaction they were expecting.

Getting back to the above chart… Note that the Point B at the white .786 is at 1461.24, while the yellow .786 is up at 1464.03.  Remember, the Point A down at 1425.53 serves both patterns.  The only difference is where they started (Point X.)  Because the white pattern is contained within the yellow pattern, the yellow pattern should trump in cases where they conflict.

Yesterday, it didn’t much matter — as they were within a couple points of one another and there were several other Fib levels close by.  But, the implications become bigger as the pattern extends.  The yellow 1.272 and 1.618, thus, are at 1488 and 1505.

Anyway…we have the EURUSD at a .886 retracement of its former high (Sep 17 – 1.3171) but a dollar that hasn’t quite reach its (78.906 would be a .886 retrace of its Sep 14 78.725 low.)

The euro threatens to break out of a channel that dates back to November 2010.  If it doesn’t reverse very quickly, the next stop is 2% higher at 1.34 (the 1.618 of the 1.3171 to 1.2802 drop and the .618 of the 1.4246 to 1.2041 drop.)  Note: there is significant negative divergence in every time frame from 15-min up to daily, so a big reversal here should be no surprise to anyone.

An equivalent move lower in the dollar would mean 77.209 — a .618 retracement of the entire 72.86 to 84.245 move from May 2011 to July 2012.  This would fit pretty well with our  DX forecast from October 3.  But, again, there is significant positive divergence across the board in the dollar.

Needless to say, such a 2% move in both could easily produce a 2% move higher on SPX.  Figure 30+ points — which would be in the vicinity of the 1.618 extensions mentioned above (1499-1504.)  The 1.1% decline in DX from Sep 28 to Oct 5 accompanied a 2.4% ramp in SPX.

For the sake of argument, suppose a 1% DX move produced a 2% SPX move.  Then, a DX decline to that .618 at 77.209 would align with a 67-point SPX move to 1527 — just beyond the 1.618 extension (at 1518) of the SPX plunge from 1422 to 1266 over the summer.

SO….

In my opinion, the EURUSD freight train has to turn, and turn quickly, if 1474 is going to hold.  I’m going to take a few minutes to examine this more closely.  I’ll be back asap.

In the meantime, those of us who were stopped out this morning might want to re-short either here or the somewhat more likely reversal of 1464.03.  If you’re holding short, be prepared for the possibility of 1469 (the yellow .886.)

More shortly…

UPDATE:  12:55 PM

My apologies for the delay.  Sometimes, as I’m working out a forecast, a harmonic pattern pops up and insists on being considered.  Here’s what I’m noticing…

It’s really puzzled me that the harmonic patterns, which have dove-tailed so beautifully for the past three years, would suddenly not. Specifically, the extensions of the yellow pattern (from 1474 on Sep 14 to 1425 on Oct 12) don’t line up with any of the previous patterns’ Fib lines.

The 1.272 is up at 1487 and the 1.618 is at 1505.  About the only thing giving them any scent of legitimacy is the relative closeness to 1500 — a nifty top from a history book perspective.

Consider the red Butterfly pattern by comparison, which made a nice turn at the 2007-2009’s .618 at 1228, put in a Point B at the .786 (thus signalling a Butterfly) and then produced a great reversal within inches of the 1.272.

It’s 1.618 is up at 1515 — only 3 points  from the 1.618 of the purple Crab Pattern from 1422 to 1266.  The purple pattern’s 1.272 was only 9 points away from the 2007-2009’s Bat Completion at 1472.

That’s how harmonics normally work.  Things align, with the completion of one pattern setting up or fulfilling the next.  So, again, what’s with the yellow pattern?

Regular readers know that I was surprised at the market’s relatively tame reaction upon reaching the .886 retracement of the 1576 to 666 crash.  Suppose there’s more downside to come?  And, suppose it comes before the move up past 1500 discussed above — or even negates a move higher?

I’m going out on a limb here, but I found that by moving Point A of the yellow pattern lower we can get it to line up quite nicely.  Spooky nicely.

Below you will find a close-up of the above chart.  Note the yellow grid in question — which, ideally, should provide guidance regarding the next leg up.

I’ve added another grid (in red): a measure of the move between 1396.56 and 1474.51.  This illustrates the degree of any retracement from the 1474 high.  SPX slightly exceeded the .618 of 1426.39 back on Oct 12 — which flustered some Elliott Wave folks by overlapping the Aug 21 high by 1.15.  Without digressing into a EW discussion, let’s just all agree that it complicated things (at least).

If 1474 was a normal wave 3 or wave 5 high, we would typically be open to a corrective wave of greater than a .618 retracement.  Look what happens if we make it a .786 or .886 retracement.  Suddenly, the yellow 1.618 lines up very nicely with the other 1.618’s up there at 1515-1518.

If we force a .886 retracement, it lines up even better — landing right in the middle of the others.

Of course, a dip to 1405 flies in the face of my expectation that TPTB would engineer a feel-good rally into the election.  A 3.8% correction now, with only three weeks to spare, certainly wouldn’t help preserve the status quo.  But, as we’ve seen in the news this past week, maybe Wall Street is ready for a change.  What an interesting battle that would be:  Bernanke versus Dimon, Blankfein, et al.

If we reverse hard at these levels (1462-1466), I’ll consider the above scenario very much on the table.  There are enough bearish warning signs to support it: the 60-min and daily RSI channels…

DX is close enough to a significant reversal point, very deep into a falling wedge with RSI breaking out from a long down-turn — much like at the October 5 SPX high of 1470.  It’ll probably tag the .886 at 78.906 after-hours.

The EURUSD is quite deep into a rising wedge at the intersection of two harmonic resistance levels on negative divergence and with and RSI channel pointing down.

I don’t know if there’s anything to it yet, but the Financial Times reported today a key aspect of the Save the Euro Zone campaign may be in danger.  Zero Hedge’s take can be found here for those who don’t subscribe to FT (but, it’s free, so why not?):

A plan to create a single eurozone banking supervisor is illegal, according to a secret legal opinion for EU finance ministers that deals a further blow to a reform deemed vital to solving the bloc’s debt crisis.

For those who have been waiting patiently (and the rest of you) for a short, sweet buy/sell signal with limits and stops, I hate to disappoint you.  We’ve been right on the money for over a month, now — with great returns to show for it.

I normally suss these things out sometime between putting the girls to bed and nodding off at my desk around 2am.  But, this seems important enough to devote market time to it.  This outcome, if it plays out, represents a big shift in my thinking.  And, I don’t take such things lightly.

I’m very comfortable going into the close short, with the understanding that we could still run up and tag 1464 or even 1466 before reversing.  We’re up enough this month already that I’d allow loose stops.  The behavior of the currencies after-hours will tell us a lot.

More after the close.