In the last major update I posted on the dollar [see: Update – July 17, 2012], I argued that DX had pretty much run its course at 83.255 and would be heading down to tag the bottom of one of two channels it had been tracking: a steep purple channel at around 81 or the more mellow white channel somewhere around 79.30.

Five sessions later, DX reached 84.245 (a new 2+ year high at the rising wedge apex) and promptly plunged to our first target and paused.  Two long weeks later, it broke loose and dropped almost exactly to our second target — pushing slightly below our 79.30 target to 78.975 on Sep 14.

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Good morning.  SPX is getting support from the fan line from the early September lows (our yellow channel.)

I’m looking for a bounce to flesh out the channel — probably to 1464.50 or so.

UPDATE:  10:00 AM

We’re bumping up against a line in our big, red channel at 1463.1, so that could be the extent of this push.

I’m charting a new, broader channel in red.  It’s speculative at this point, but it corresponds with a 1.618 extension of yesterday’s high to its low.

The 15-min RSI has hit resistance, but SPX could eek out a couple points higher on negative divergence.

More in a few minutes, including an update on the longer-term picture and posts on RUT and CL.

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ORIGINAL POST:

Stocks continue to slip in a very controlled fashion, following our little channel religiously so far.  I remain short from 1474.

The EURUSD, which also completed a Bat (the larger red pattern) and two Crab Patterns last week, also continues to ease.

Some have asked about the dashed red channel line furthest to the right.  It has no particular significance other than it represents approximately the same width as previous such channels.  Because similar-looking channels vary in width, I always construct a new prospective channel that represents the average width of the past few whenever the current channel is broken.

Odds are that this one was drawn a little too narrow and we’re going to get a reversal here at the harmonic targets.  The alternative — that three harmonic patterns are busted and the channel width will dominate — is much less likely.

UPDATE:  10:50 AM

We didn’t get much of a retracement yesterday, so that’s still hanging out there.  The channel needs broadening, and it’s likely it’ll happen as a result of a bump up to establish a parallel channel line that includes the 1474 peak — as occurred on Aug 22, doubling that channel’s width.

Also, note the red RSI channel that corresponds with the mid-August corrective channel.  It features channel lines which are the same slope as the current one.  When it was broken to the downside, we saw a back test which didn’t quite complete, and a subsequent lower low.

When the RSI channel broke, SPX had already dropped from 1426 to 1419.  It fell as low as 1406 when the back test took it back to 1416.  The back test completed, SPX fell as low as 1398.

A similar expansion of the current channel could take prices up as high as 1462-1464.50.  It’s difficult to say with absolute precision as the channel slope is subject to change so early on.  But, 1462 marks the recently broken red channel line, so that would make for a normal back test.

If the back test completed there (without retaking the RSI channel) and the price channel continued similar to that in August, the drop would be to around 1444-1446, which is our Point B target around the red channel midline.

UPDATE:  11:45 AM

The back test reached 1461.47, but didn’t quite flesh out the channel there. It came back to tag the midline, and has potential to 1462.20-1462.90 around 12:00-12:15.  If the channel is still intact, the easy downside within the channel is 1453.74 by 12:45.

At that point, SPX reaches the white dashed fan line off the early September lows.  Expect the bulls to defend that line, as it could be construed as the lower bound of an insanely steep channel higher.

How steep?  It gains about 5 points per day, so the upper bound is already up to 1484.  I don’t anticipate this happening, but it’s good to know the potential if we should suddenly ramp higher and take out 1474.

We’ve made about 15 points since the peak.  A drop to 1454 in the next hour would bring that up to 20 points.  I’ll likely take some profits and/or play the bounce at that point — but, we’ll cross that bridge when we come to it.  Remember, this is OPEX week.  So, a fast and furious plunge is that much less likely.

You hate to leave money on the table if there’s more downside.  Many investors continue lowering stops; so, a significant bounce takes them out of their short position.  Others use channels — a break out signals time to switch sides.  I like both of those, as well as my trusty RSI channels and TLs.

You can also construct trades such that short term moves are captured by short term trades such as near-term options, and longer-term moves are tracked with less volatile instruments.

Any of these plans are fine — but the important thing is to have a plan and stick to it.  I think all professional traders would agree that most of their worst trades come on the heels of a decision to bend their own rules.

UPDATE:  2:25 PM

We’ve reached the bottom of the steepest channel up (note, I’ve changed the channel colors, as the previous colors were getting confusing.)

The market must either commit to the 5 point-per-session rate (the little yellow channel up), or settle into a more sustainable slope (the white channel up — about 2 1/2 pts/session.)  The yellow channel is nestled within the white channel which is nestled within the red channel (about 1.9 points/session.)

My take is that the yellow channel will break, and prices will test the white channel midline, followed by the red channel midline.  At current prices, we’ve only retraced about 23% of the 1396-1474 runup.

A red channel tag Wednesday or Thursday would make for a more respectable .382 retrace — roughly equal to a .618 retrace of the 1429 (Sep 10) to 1474 spike.

For now, the market seems content to stair-step lower, staying within the little white channel down.  With an upper bound at 1460 and lower bound at 1450, it serves as the simplest decision-making tool for setting stops and spotting trend changes.