pebblewriter

Category: Charts I’m Watching

  • The Bulls Fight Back

    The market is parading around in yesterday’s Apple earnings report like a glamor queen in a mink stole.  An economy that can pump out eleventy zillion iPhones is very pretty, indeed.  Then, along comes the stink of a very disappointing durable goods report.  And, that mink stole is suddenly, jarringly out of place in this economic favela.

    It was a nice overnight ramp.  It’s taken us past the channel line we identified as key for the bears in yesterday’s analog update.   But, is this the hard bounce at the neckline we’ve been discussing?  Is our alternative playing out (the purple, dashed line) or is this yet another in an endless series of head fakes?

    Looking at the daily RSI, we’re back testing a trend line (yellow, dashed) going all the way back to last August’s lows.  We broke it on the 9th — remember that 16-pt tumble out of the rising wedge?  I’m going to watch that TL like a hawk, as I believe it holds the key to which way this latest confusion resolves.

    Bottom line, you can’t break down from an eight-month, 400-point rising wedge and not expect the bulls to put up a little fight.  That’s what back tests are all about.  It’s a case of the bulls not being ready to give up, and the bears not having enough conviction.

    Just like confirmation of a H&S pattern has its levels of certainty, so does the bust of a H&S pattern.  One key indicator to watch is whether we exceed the previous shoulder — 1392.76 on the 17th.  So far we haven’t, reaching only 1390.81 this morning.

    Another is whether this ramp causes the overall pattern to start looking malformed.  In this case, the left shoulder was very lumpy and drawn out to begin with — a complex H&S left shoulder with two touches of the neckline.  So, a complex right shoulder with two touches would actually be in keeping with the existing pattern.

    Remember, we had originally been looking for 1400 in order for the right shoulder to be proportional to the left.   We never did reach the parallel shoulder line, and so an A-B-C move to 1400-1408 would leave the pattern looking slightly better.

    The only issue with that scerario, though, is that the analog doesn’t fit as well if the right shoulder extends more than a few additional sessions.  In 2011, the H&S pattern took 41 sessions, with the left shoulder lasting 13 sessions (32%), the head lasting 18 (44%) and the right shoulder lasting 10 (24%).  Thus far, this pattern has taken 57 sessions, with the left shoulder lasting 22 (38%), the head lasting 24 (44%) and the right shoulder (so far) at 11 (19%).

    While no particular proportionality is required of H&S patterns, it is for analogs.  I’d be a little leery of the analog playing out if the right shoulder lasts too much longer.  By Tuesday of next week, the right shoulder — and the entire H&S pattern — will be roughly proportional to the 2011’s.  That means whatever bump this pattern has in store should run its course pretty quickly if the analog is going to hold.

    Bernanke speaks at 2:15 EST.  I suspect most of the fireworks is done till at least then.

    Stay tuned.

  • Analog Update: April 24, 2012

    The analog we’ve been watching since April 9 is playing out nicely so far.  We got the original bounce at 1357 as forecast, followed by a rise to the middle of our 1380-1400 target range.  The H&S pattern we expected did, in fact, set up and complete yesterday.

    Now, we’re back testing the little channel (solid yellow) formed by the right shoulder.  It was broken during yesterday’s plunge.

    As we discussed yesterday, if the wheels fall off the analog, it’s going to happen here — at the H&S neckline.  A hard bounce would likely send SPX up to tag the initial rising wedge apex at 1462-1472 (the purple dashed line.)  It can be viewed as a Crab pattern with the 1.618 at 1462 (in purple, points not marked.)

    But, I think we’re more likely to see the analog continue to work.  The key will be a failure of this morning’s rally/back test and a close below 1363.  Note that we’ve also established a channel to the downside (red, dashed) that coincides nicely with the harmonic picture.

    The pale blue Bat/Crab indicates a potential to 1335-1340, which would be a nice spot for a back test of the H&S pattern itself.  From there, the larger red Butterfly pattern takes over, with potential to 1317 (the 1.272) or 1289 (the 1.618.)  Though, a drop below last October’s 1292 would be a challenge.

    The key levels I’m monitoring today are 1378 — at which point the back test starts to intrude into the previous channel, and 1382 — at which point the larger red, dashed channel is jeopardized.

    Good luck to all.

  • Update on EURUSD: April 24, 2012

    April 24, 2012

    From both a fundamental and technical standpoint, the long-term, medium-term and short-term pictures are all negative on the EURUSD.  Yet, it keeps hanging in there, the beneficiary of a great deal of ECB and, yes, Fed intervention.

    Here’s the long term picture as of this morning.  EURUSD has been stuck in that purple channel for years, and isn’t likely to break out anytime soon.  Note the fan line off 2000-2002 coming into play again soon.

    From a harmonic standpoint, the purple pattern calls for a trip to the .886 at .9115, but not anytime soon.  The red pattern has more immediate import.  There are plenty of candidates for a Point B — near the .382, the .618 and the .786.  While it’s possible we’ve completed a Gartley, it normally requires a bit more precision than this, so I’m assuming that was a near miss.

    There’s a good chance we’ll target at least a Bat pattern with completion at the .886 of 1.2226 — spitting distance from the larger (purple) pattern’s .500.  But, to get there, we’ll have to continue following the red dashed channel and not be waylaid by the fan line.

    The channel is fairly strong — in place for over a year.  And, there’s a fan line just above current prices for reassurance purposes.  The close up picture below gives us an idea what to expect in the near term.

    This potential Bat pattern calls for a move lower, to at least the .886 level at 1.2721 — which, coincidentally, is right at that fan line.  We can also see that the last fan line off the presumed Point X leaves a rather narrow margin of safety for the next move down.  A break of 1.3110 would start the ball rolling.

    The H&S pattern we’ve been watching for what feels like forever has resisted playing out, though the channel will force its hand soon enough.  It’s mirrored by an RSI trend line which is there for the breaking after another crash into the upper TL.

    Investors who play the EURUSD would be wise to use stops.  The ongoing problems in Greece, Italy, Portugal, Ireland, etc. have been exacerbated by election angst in France and the failure of the Netherlands government.  But, the ECB has learned much from the Fed about propping up markets.

    While their efforts don’t promise of a return to prosperity anytime soon, they’ve grown very fond of the stick save press release.   They’ll be using it a lot in the coming weeks.

  • A Recommendation

    Regular readers know how fixated I am on the ballooning national debt.  In my opinion, it represents the single biggest threat to our future.  So, I get pretty excited when I come across an important step in the right direction.

    Some friends of mine have put together a coalition that urges our leaders to end their partisan bickering and get on with the job of putting this country back on course to financial solvency.

    I’ll post more later, but as you head into the weekend, please click on the link below and check out this incredibly important message.  If it resonates (you’re in the wrong place if it doesn’t!) please pass it along.

  • OPEX Games: April 20, 2012

    SPX reversed right on schedule at 1370.  While my comment about the little channel intersecting with 1400 today was delivered somewhat in jest, the analog — which called the recent bottom at 1357, top at 1392 (middle of our 1380-1400 range) and now yesterday’s 1370 stick save — has been remarkably accurate so far.

    Our original chart from July 11th [see: Analog Charted] is looking rather prescient.

    July 11 Analog Forecast
    Actual

    Yet, as we discussed last week, the key will be a break of the neckline [see:  Analog Details].  A failure to do so in the next few trading sessions means we’re going up to tag the apex sehr schnell.

  • City of Dreams

    I’ve been harping on the incredible threat represented by the $250 trillion in almost entirely off-the-books, unregulated derivatives market — 95% of which is should be but isn’t on the books of the top five US banks [see: The Wipeout Ratio.]

    It’s an astonishing 550 times the tier 1 capital on the books of these same banks — all of which are considered too big to fail.  Looking at it another way, a two-tenths of 1% decline in the value of those derivatives could completely wipe out all tier 1 capital altogether.  If that weren’t bad enough, it’s dwarfed by the global derivatives market of $707 trillion.

    It’s hard to appreciate just how much money we’re talking about.  But, demonocracy.com does an outstanding job of putting it into perspective, focusing on the 9 largest banks’ $228.72 trillion in exposure.

    Take the time to read this, and please pass it along. Click anywhere on the nice pretty picture below.

  • Going, Going…

    I’d be impressed if the bears were able to deck OPEX — the perennial champ — and let the H&S pattern play out just yet.  But, here we are, at the bottom of the nice little channel that’s guided the upside since 1357 on April 10.  I suspect the sell-off will be limited to 61.8% of the rise, or 1370.

    The nice thing about the .618 is that it leaves open the possibilities of a Gartley, with a reversal at the .786 at 1365, or extension to a Crab’s 1.618 at 1335 — which would be a nice level at which to start a back test of the neckline.

    If there’s one thing you can count on these days, it’s the market’s insistence on maintaining maximum ambiguity for as long as possible.

    More later.

  • Who We Rooting For, Again?

    It’s a sputtering economy in one corner, OPEX in the other.  But, wait, that’s no ordinary boxing ring; it’s a house of mirrors and Ben Bernanke is the referee.

    If bad news is bad, this is bad.  Unemployment claims are up.  Housing sales are down.  Philly Fed survey numbers are down.

    Then again, maybe bad news is good.  The slumping economy has the QE crowd salivating again (you’d think they’d run out of spit sooner or later.)

    Even if we could forget the economy, QE and the 5/6ths completed H&S pattern, tomorrow is OPEX.  And, as we all know, that means the fight is rigged — at least until Monday.

  • VIX at a Crossroads: April 18, 2012

    Where there was once a falling wedge, there is now a channel.  The April 10 breakout that looked so promising completed a Bat pattern and promptly reversed nearly 61.8% of the move from the 13.66 bottom.  Is this the end of the ride, or are there bigger and better things in store for VIX?

    I have tentatively added another channel to the RSI to accommodate the latest spike.  It would likely guide the next leg down, if indeed that’s forthcoming — which I mostly doubt.

    Of course, every time we complete a Bat pattern with a Point D at the .886, we’re also establishing a potential Point B in a larger Crab pattern.  In this case, that would result in a completion Point D at the 1.618, which is 27.12.

    That’s an interesting price, because it equates with the 2.618 of the small Butterfly pattern potentially setting up on the hourly chart.

    Things get real interesting when you back out and look for competing or complimentary patterns.  On the 60-min chart, we can see that the move off the bottom conforms to a upward-sloping channel (in white) so far.  This channel will intersect with the downward sloping main channel (yellow) on Friday — which, of course, is OPEX.

    It’s only fitting that the point at which VIX must commit to one channel or the other arrives on OPEX.  The situation reflects the alternatives we’ve been discussing for SPX.  The analog we’ve been watching indicates a short-term top is at hand, and we should see a brief but scary sell-off in the next few days.  This would correlate with sideways action in VIX, followed by a breakout of the yellow channel to follow the white one — probably topping out at the 27.13 level at the bottom of SPX’s decline to around 1305-1317.

    The alternate SPX view is that we go on up and tag the rising wedge’s apex without the sell-off first.  There’s certainly enough important news in the pipeline over the next few days to bring either course to fruition.  Such a movement in stocks would mean the white channel breaks down and the yellow one holds — knocking VIX back to the 14.5 — 15.8 range.

    Of course, such a move would complete most of an inverse H&S pattern (in yellow) and set up the next upside break out.  Technically, we have enough of a right shoulder as it is, but a drop to around 16 would be ideal.

    In summary, my leading assumption is sideways until OPEX, then a breakout up to the 23-24 range to complete the IH&S that correlates with the SPX’s H&S move down.  We should then see a back test of the yellow neckline and subsequent push to the 27-30ish range to correlate with SPX’s move to 1307-1317.

    It would be a break of the yellow channel (which has a grand total of two anchor points on its upper bound) that would be similar to the Mar 16, 2011 breakout to 31.28 (see below.) But, such a move would bring it back the midline of the long-term channel that’s been such a magnet for breakouts over the past few years.

    That midline, by the way, is in the same neighborhood as the Inverse Head & Shoulders target of 28.20, which would be very doable if SPX were to plunge 70-80 points over the next week.

    But, keep the alternatives in mind.  The market is exceedingly hinky lately; and, as much as I like the analog, it’s certainly not guaranteed to play out.  As always, please use stops.

    Good luck to all.

  • Channel Surfing: April 17, 2012

    The analog I first posted about on the 9th [see: Analog Details] has performed well this past week.  Given the overnight action in the futures, it’s about to get a boost in the right direction.

    A perfectly formed H&S pattern would mean a right shoulder in the 1400 range.  Though, as we pointed out yesterday, we already have enough of a right shoulder to matter.

    For anyone interested, I posted Part 2 of Why Do Analogs Work? yesterday.  It details the 2011 as 2007/8 analog, and delves into the numerous chart patterns, fan lines, regression channels and harmonic patterns that took us from May to July of last year.

    It’s a decent guide to how these various patterns interacted and combined to generate a top, and subsequent fall — helpful hints for times like these.

    Stay tuned.