UPDATE:  11:30 PM

What a difference the Oct 27 spike made…

Note how perfectly the yellow fan line off the Mar 09 bottom intersected with the fan line off the Oct 07 high — all at the apex of a big, fat rising wedge.

5 Year

3 Year

1 Year

Then October 27 came along, providing a slightly different trajectory for the rising wedge and, as a result, causing the fan line from 2007 to miss.  The new fan line from Mar 09 carries pushes the rising wedge apex up and out in time.  It’s made a difference of 35 points and two weeks.

UPDATE:  5:00 PM

Gold continuing to show weakness after breaking the RSI trend line.   The critical tests will be breaking out of the little purple channel and then taking out Fan Line 3.

If those should both occur, we could see a dramatic drop to complete the Crab pattern at the 1.618 extension of 1203.

UPDATE:  2:30 PM

Keeping a close eye on NDX, which should reverse course at 2571 – 2575, the confluence of three Butterfly patterns — one going back to 2007 and the others three and six months old.

The NDX’s rise is all AAPL today.  Like SPX, the leadership is becoming more narrow and volume smaller by the day.

The 2nd biggest component, MSFT (intra-day high = 30.8) faces a flaccid future.  It completed a big Bat (purple) at 30.53.  It’s also running into a Butterfly completion (yellow) at 31.54 and a second, small Butterfly completion (red) at 30.84. 

Two weeks ago, a Butterfly stopped INTC cold.  It’s currently clinging from a crumbling cliff, right at the 1.618 extension of 26.93.

Note that it was clobbered at the more common (for Butterflies) 1.272 extension at 25.27, only to recover and climb up to the 1.618.  Crabs sometimes go higher, reaching extensions of 2, 2.618, 3. 3.618, etc.  But, Butterflies are stuck with 1.272 and 1.618.  Bad news for INTC and NDX.

UPDATE:  1:00 PM

VIX, which has been carving out a massive falling wedge for months, showed signs of breaking out today.

 The rate of change just turned positive and is threatening to break another TL on the daily chart.

ORIGINAL POST:

A few of the go-go stocks are lending credence to the fact that this rally is simply overdone…

SBUX RW – out of room

CMG RW, Massive Divergence

Crab Complete

AAPL Crab going for 200?

GOOG Negative Divergence

WFM RW, Crab and Neg Divergence

Then, there’s COMP itself.

And, perhaps my favorite chart, the RUT.  It sports a touch of the fan line from Mar 09 (dashed), a completed Crab (yellow), a completed Bat (purple), a completed rising wedge (dashed lines) and a tag of the May 2 trend line — all on negative divergence and falling volume.

This is about as bearish as you can get and, as a broad based index, is much less susceptible to overly narrow advances and manipulation than SPX, COMP or DJIA.

More later.

UPDATE:  5:10 PM

NDX came within 3 points of one target and is dangerously close to the other.  Recall we have a very complete-looking rising wedge that might have a little upside left, depending on how it’s drawn (whether the Oct spikes are included or not.)  The intersecting harmonic patterns include:

• a Butterfly that began July 27 and is still under construction, reaching 2545.84 vs its 2548.2 1.272 extension target today (the red Fib scale)

• a 2nd Butterfly that began Oct 27 and offers a 1.618 extension at 2574.31(the purple scale)

If it’s the first pattern that plays out, it could happen any day.   The other is only 29 points away — one decent day of +1% or so — and is a cleaner fit for the rising wedge.   It’s also practically on top of 2571, the 1.272 extension of the October 07 (2239) to November 08 (1018) Butterfly.

AAPL is a big component of the NDX, of course, so we care how it’s doing in its patterns.  It exceeded its Crab pattern target by 11 points today, which is enough to stop out most stocks.  I don’t have any positions in Apple itself, but if I did I would tend to allow it slightly more wiggle room.

The USD changed direction as expected, right at the intersection of fan lines we discussed a few days back.  We’ll continue to watch closely, as an über-bullish resolution to the Euro situation could easily blow my forecast out of the water.

And, the flip side of the call, the EURUSD respecting the diagonal we’re watching…

ORIGINAL POST:  1:00 PM

Not much going on today.  All eyes on Greece, but no news of any substance other than…there’s no news.  The Guardian is running a dedicated page, updated by the minute, for those who want to be notified the very instant that nothing happens.

There’s been a bit of talk the past two days about an escrow account being set up to handle the upcoming Greek payment.  I just read a pretty good article here.

The gold selloff that began Friday is continuing today.  There’s a test coming up at 1700, which besides being psychologically significant, represents a trend line off the August, September and November highs.  If gold bounces there, the latest decline from 1766 will look like a back test.

UPDATE:  3:30 PM

Consumer credit for December and Q4 was just released.   First, the manipulated adjusted numbers, the ones most financial journalists, the WSJ and CNBC will report:

Looks great, right?  Who wouldn’t get excited about a 9.3% increase in credit demand?  Think of all the iPad’s that’ll buy.  Here are the real numbers:

The nominal 4Q2011 v 4Q2010 increase was 0.1% for non-revolving credit and 5.5% for non-revolving credit.  Significantly less when you back out inflation.

The nominal quarterly growth rates (versus prior quarter) are as follows.

                                                  Revolving    Non-revolving

                Q4 2011                       4.3%              1.4%
                Q3 2011                     0.76%             2.24%
                Q2 2011                     1.00%              .88%
                Q1 2011                    -5.70%              .89%

In other words, it took a massive 4.3% increase in the 4th quarter of 2011 for revolving debt (credit cards) to get back to where it was in the 4th quarter of 2010.  This increase, BTW, occurred during a period of non-existent income growth.

In the 4th quarter,  credit card growth was 3X faster than non-revolving debt — that which typically accompanies larger ticket purchases that drive more sustainable growth in production.  Non-revolving debt growth slowed 37.5% from Q3 to Q4 — not the kind of stats recoveries are made from.

UPDATE:  1:45 PM

In light of Apple’s surge this morning, it’s no surprise that NDX is making a move.  However, it should be short-lived.  It has reached to within 37 points of its 1.272 on the big Butterfly pattern, 11 points on the smaller Butterfly and is very deep into a rising wedge with apex at these levels.

The NYSE Comp is closing in on completing a bearish Gartley pattern at the .786 Fib level of 8225.37 — just 1.8% above current prices.  I place much more credence in a broad index like this than the DJIA, which is struggling intraday to stay above its May 2011 high of 12876 — even as it completes a rising wedge and (as long as it stays below 12876) a double top.

UPDATE:  1:00 PM

The USD is poised to rebound strongly.  It has back tested an important fan line from June 2010 (bold dashed white) that marked the 10/4 and 11/25 highs, as well as another important line (bold dashed yellow) from July 2008 that has stopped several declines.

There is also ample support in the way of RSI trend lines on the daily chart…

…and a completed bullish Butterfly pattern on the 60-min chart.

UPDATE:  11:50 AM

AAPL just completed its Crab pattern at 465.87 and is due for a decline that, at an initial .618 of the XA distance, would take it to the lower bound of its rising wedge — around 404, for a 65-point swoon.  There should be substantial support there, as well as the SMA-200 at 380.

Like most of the rising wedges I’m watching, this one is long in the tooth and very far into the apex.  AAPL has actually exceeded its upper bound, is showing exceptional negative divergence, has tagged an RSI trend line going back to Apr 2010 — all of this on falling volume.

I love my Apple computers, but at these prices this market leader is looking downright buggy.  It should go without saying, but I’ll say it anyway: Apple has been a runaway freight train.  While these patterns indicate a significant downturn, this is one stock to be very cautious of when applying any bearish strategy.  Use stops.  Oh, and another thing… use stops.

The Euro, in the meantime, just touched an important Fib level on its corrective wave and tagged its daily RSI trend line.

While the Greece situation is anything but settled, this could mark an important turning point.  This last run up was so steep, it wouldn’t take much to upset this apple cart.

Note, also, that the diagonal (the dashed white lines) that marked the last step lower is now acting as resistance to the corrective wave up.  And, the RSI on the 4-hour chart is bearish in two different directions — as a top and a back test of the last month’s rise.

ORIGINAL POST:

It’s been a little too quiet the past few sessions.  Neither bulls nor bears have been able to mount a sustained push.  Everyone, it seems, is spellbound by the drama playing out in Greece and the veracity of last week’s employment numbers.

I tend to believe Greece will ultimately fall in line.  The establishment’s threats have fallen on deaf ears, so it’s time to pull out the bribes — or maybe just pull out the checkbook and kick this particular can down the δρόμος.  It will be distasteful but, with the amount of money at stake, TPTB understand well the relative bargain.

There has been so much written about the employment numbers, it’s been hard to nail down the truth.   Many have accused the BLS of manipulating the numbers.  I think that goes without question.  Just look at the past year.  In almost every case, the revisions of previously released numbers have been less rosy — sometimes much less so.  The misses are anything but random.  On the other hand, the market seems content to accept the “good news” on face value, and sometimes there’s no convincing folks who are enjoying a lovely cruise that a life jacket should be kept close by.

I put much more faith in technical analysis than fundamental, but it’s interesting to note that only 59% of the 184 S&P; 500 companies who’ve reported Q4 2011 earnings have beat expectations — a three year low.

Here’s the big picture in SPX just prior to the opening bell.  Note there are two possible fan lines from the Mar 09 bottom — one including the October 27 spike and the other which doesn’t. 

 

The harmonic picture is a bit muddled, since we’ve exceeded both the .886 retrace of the 1370-1074 plunge (1336.86) and 1.272 Butterfly target at 1329.11.  My gut is that last week’s spike was a throwover, but we won’t know until it’s over.

The rising wedge has filled out to nearly its most robust potential — taking into account Oct 27.  It’s very, very mature and clearly nudging its apex.  Keep an eye on the lower bound, as a break of this trend line will likely result in a decent decline.

The key level in a decline is 1292.  A breech will damage the most positive wave count.

VIX continues its melt down, touching the lower bounds of its falling wedge within a falling wedge and remaining below a .886 retracement (18.11) of its run from 14 to 48.

Stay tuned.

I recently finished The Great Depression, A Diary, by Benjamin Roth — an Ohio lawyer who chronicled his daily observations of the economy and politics from 1931 – 1941.  It’s riveting reading, as the events Roth describes are eerily similar to those of today — a real estate bubble and crash complete with banksters (amongst whom the politically connected are saved by taxpayers), communities falling apart, growing international tension, massive government intervention, the discovery of the printing press, etc.

Roth, an intelligent man and excellent writer, tries desperately to understand the causes for the upheaval and speculates as to the best remedies.  To read his entries is to have a front row seat in the theater of investor emotions.  He despairs as things get progressively worse, and rejoices when the economy seems to be turning the corner — only to despair again through the endless false starts.

Investors in 2012 are no less confused.  Though a third of American homeowners are underwater, a parade of industry and government mouthpieces declare the real estate crash over.  Our national debt grows by a trillion dollars annually, but our bonds command historically low yields.  And, despite labor force participation rates at 30-year lows, we get huge stock market rallies on “game changing” employment improvement.

One constant, then and now, is the willingness of our elected leaders to say and do whatever it takes to safeguard the power of the real owners of this country.  The military-financial complex that owns America will continue in power as long as citizens don’t realize just how tilted are the tables, how rigged the game.  When truth accidentally slips out, Congress always investigates.  Underlings sometimes even go to jail.  But, does the system ever change?

Consider this passage Roth wrote about two of the 4,000 bank failures in 1933:

“In Cleveland the collapse of the Guardian and Union Trust Banks is under investigation and criminal action will probably follow.  The investigation shows that the banks were run for the benefit of officers and directors: juggling of figures in financial reports; no examination by State banking board for 8 years; immense loans to officers and directors for speculative purposes without collateral; speculation by the bank in common stocks through subsidiaries formed for the business; hiding of losses on bad loans by methods of accounting.”

Change the names and the dates and the stories are essentially the same as today’s.  If anything, Roth’s description of Depression-era banksters’ underhanded dealings seems quaint by today’s standards — where banksters bribe politicians in broad daylight and politicians return the favors by the hundreds of billions.

Just this past weekend, the NY Times broke one story about a man who blew the whistle on the mortgage industry’s foreclosure improprieties in 2003 — years before “robo-signing” had been coined, and another story on a $25 billion settlement between mortgage companies and state attorney’s general to compensate those who lost their homes due to those improprieties.  Yes, nine years after being caught screwing people out of their homes, banksters are buying their way out of jail by offering the foreclosed a whopping $2,000 each. 

When FDR took office in 1932 he laid blame at the feet of the Depression’s banksters.

“…the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men….  By failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.”

But, FDR bailed out his share of banks (often chosen by political connectedness) and later opposed creation of the FDIC — one of  he recognized the importance of reform, establishing the SEC and the FDIC.

UPDATE:  12:30 PM

Okay, lots going on.  This will be a long post, but I’ll save as I go.

First, I immediately looked at the DX after the employment figures came out.  The dollar quickly dropped to an important fan line at 78.815, then reacted very strongly, shooting up to 79.485 before settling back down to the current 79.245. 

I went to the DX because I’d been studying a very bullish fan line pattern on it last night.  Here’s the updated longer-term picture.  I’ll show it in phases, so you can get my drift.  First, fan lines from the 2008 lows.  As you can see, there’s good strong support at current levels.

Next, we add in fan lines from the 2009 top.  Note, we now have two fan lines of support at the current prices.

 

Clearly there is resistance above from the lines running through the highs in January — probably around 81.70.  But, the trend is still up — with both higher highs and higher lows.

And, the harmonic picture is positive, with the larger Bat pattern (in red) pointing to the .886 at 87.076 and the smaller Crab pattern (in purple) pointing to the 1.618 at 83.872.  Interestingly, the 87 level intersects with the fan line running through both the Mar 09 and Jun 10 highs (solid yellow line.)

Unless we’re going to have a stock rally that also sends the dollar up, something’s gotta give.  I think the currency markets know it.  Gold traders seem to know it, too.  The back test we’ve been watching has completed and prices are currently down 16.

Okay, so what about stocks?  First, here’s one chart that should really matter.

Here’s the same chart in logarithmic scale.  Both exclude shadows and tails.

If we fiddle with the critical line (through current prices) a little, it ranges from 1345 to 1380, as follows:

• arithmetic, no shadows:  1345
• arithmetic, w/ shadows:  1354
• log, no shadows:  1369
• log, w/ shadows:  1380

These values are of today; obviously they increase with each passing day.  That’s a pretty wide range, of course, with pretty important implications — since 1370 has been presumed to be the P2 top.  Let’s look for some guidance from harmonic patterns.

The price action since Oct 07 makes for a near perfect Gartley pattern.  Point B was a 60.8% retracement of the 1576 to 666 drop (61.8% is ideal.)   And, 1370 came in at 77.4% — just 11 points shy of the ideal 78.6%.   Now, at 1344, only 37 points from 1381, is it possible we’ll make it back there for a precise completion?

The affirmative case is sound.  As mentioned just above, the fan line from Mar 09 hits 1380 in a log chart, utilizing shadows on the Oct 27 high.  And, we’ve surpassed the fan line from the Oct 07 high, so it no longer provides upside resistance.  So, 1381 is a distinct possibility.

Of course, it’d wreak havoc with the Elliott Wave counts most folks have been using.  The drop to 1074 a few months ago obviously overlaps with the Apr 10 high, and they tend to frown on Wave 1 and Wave 4 overlaps.   We’ll set EW stuff aside for another post.

There’s an equally good case to be made for the other levels.  As the chart above shows, the arithmetic fan line comes in at 1345 w/o shadows on the Oct 27 high (add those in, and we’re looking at 1354.)   The current level also makes plenty of sense if you toss the Oct 27 spike and take out the other shadows (more on Oct 27 this weekend.)

That way, today’s rise is just a blow off top that pierced the Oct 07 fan line and we’re still reasonably close to a proper turn on the Butterfly pattern (the smaller letters) and we can head back down Monday after the Greece deal blows up.  Otherwise, there’s not much to put a cap on the rise until 1367.

Remember, the same chart in log scale without shadows gets us to 1369 — right below the previous high.  Obviously 1370 would provide tremendous horizontal resistance.  And the inverse head & shoulder pattern target of 1367 is right there.  It’s also pretty close to the the 1375 target of the Butterfly pattern (smaller letters) if it should play out at the 1.618 instead of 1.272 extension (as they sometimes do.)

Some other patterns I’m watching:  AAPL has reached the channel boundary, but still hasn’t completed the Crab pattern at 465.87.  In fact, its failure to participate in the rallies of the past few days has to be a bearish indication.

NDX has broken through the fan line and trend line that aligned the previous three tops with Oct 2007 high.  Looking back over the past 5 years, it’s likely heading for the 1.272 Fib level at 2571 (although Point B is sorta in no-man’s land, halfway between the .786 and .886.)

The 2571 price level roughly coincides with the currently Crab/Butterfly (purple) we’ve been tracking and lends credence to the previous pattern (red) being a larger Butterfly itself.  The 1.618 extension of the purple pattern is at 2574 and the red 1.272 is at 2548.

On a broader index, the NYSE Composite clearly points to a rise to the 8225 level — a 2.2% increase over current prices.  It’s the intersection of the .786 of a very clear Gartley pattern and fan lines from the 2007 high and the 2009 low.

The RUT looks even more out of gas.  The fan lines off the highs and the lows intersect right at 831 — where we are now.  There’s a perfectly formed Bat pattern with an .886 at 838.15 and a perfectly formed Butterfly with a 1.618 at 835.74.  Getting much beyond 838 will be very difficult.

I’ll write more over the weekend, but that’s the technical picture right now.  There’s ample justification for a little more upside on SPX — perhaps 1367-1370.  Though, I suspect financial and geo-political events over the weekend will have a lot to do with how far this goes.  Looking at the pathetic volume, I’d say this is a last gasp, one way or the other.  SPX is clearly not being emulated by broader indices, which tells me it’s not going to last.

NYA is just about there — maybe another 2-3% — and RUT should be pretty much done.  The dollar looks to rise strongly, but will run into some resistance around 81.6.   The Euro put in a spinning top today, which perfectly reflects the binary nature of it’s future.  A quick .05 move either way is almost certain.  And, check out gold, which closed nearly $40 off its highs.

Last, let me address the question of bias.  There are many technical analysts who blithely and consistently offer both bullish and bearish alternatives.  While some of these guys offer good alternative viewpoints, I’ve always found it frustrating to read between the lines and discern their real opinion.   There are others who throw out forecasts without providing any rationale so that we may judge for ourselves whether or not they’re sound.  These are even less useful.

I find it most useful to have an opinion and trade accordingly, using stops in case my opinion turns out to be wrong.  I’ve been stopped out of bearish positions four times since SPX 1202.  But, each position was the result of forecasts driven by sound technical analysis techniques that, while not always perfect, have a better than 50-50 track record.

I trade aggressively for my own account, using options more often than equities or funds.  In July – August, using these very same techniques, I was up 28X.  So, I’m very comfortable taking a 1-3% hit here and there.  Many of you trade stocks or mutual funds, and so these numbers aren’t going to be comparable.  But, if you use stops (which you must, especially in this market) your returns should still be in the 20% + range since I started this blog on May 2, 2011.

If you go out and buy puts or calls every time I say we’re going up or down and let the position ride without stops or adjustments, it will be very difficult to make money.  This, in my opinion, would be speculating and not investing or even sound trading.

I am still bearish because the economic indicators and my technical analysis tells me the next major move will be down.  But, I fully recognize the possibility that the enormous amount of QE (by whatever name) will drive prices higher.  It happened during the Great Depression, in the midst of arguably much worse economic conditions.  But, I don’t think it’s sustainable — given the enormous debt we have and the persistent budget deficits that will continue to make it worse.

If something happens to change my point of view, rest assured I will let you know.  In the meantime, I will continue to do my best to have an opinion that makes for successful trading.    Have a good weekend.

ORIGINAL POST:

Well, obviously 1333 was not the Wave 2 top.  On the other hand, this is just as obviously 5 waves up.

That .886 retrace at 1336.86 that we just exceeded is an 88.6% Fib retracement of the whole shooting match — the 1370 to 1074 Wave 1 decline.

BTW, the ISM Services report can be read here.  It’s not as amazing as one would think.

UPDATE:  1:00 PM

Unless/until 1333 is taken out, we’re calling that the Wave 2 top.  The wave action since then has been garbled, meaning it could be interpreted in a number of ways.  We’ll know soon enough, though, whether the 88.6% retracement of 1333 – 1300 was a corrective wave (if 1333 was the top) or another impulse wave — in which case it’ll exceed 1333.

The run from 1300 to 1329 looks like a corrective A-B-C wave to me, but a move back above 1333 will prove that wrong.  On the other hand, a move below 1321.41 will pretty much kill the idea of a nice neat 5 wave impulse. 

Notice the RSI trend lines on the 5 min chart offer two options.  RSI can continue to bounce along on the underbelly of TL A, going higher and potentially testing 1333.  Or, it has the perfect opportunity to follow TL B down, testing 1321.41.  It’s not an ironclad test, but it’s a pretty good indication. 

ITM, gold has backed off its earlier highs.

ORIGINAL POST:

Gold has pushed about as far as it can go without breaking through what I believe is a back test of the last fan line.   It’s also stalled at the .382 Fib line of the Crab pattern and is showing strong negative divergence on the 60-min chart.

More later.

Fan lines often signal important turning points, and are thus an important aspect of technical analysis. 

UPDATE:  12:30PM

We’ve popped up above the 1326.41 Gartley target, only to stop right at the 1.272 target (1329.11) of the much larger Butterfly.  It’s also a stone’s throw from the .886 (1329.71) of what I presumed was a Gartley pattern.  Remember, Gartley’s Point B is at the .618 Fib level — which was 1320.87.

We hit 1321.41, which is generally close enough to work.  Gartley’s are also expected to reverse at their .786 Fib level, which was the 1326.41 level I posted this morning.  Prices dawdled at that level for three hours before popping up as high as 1329.1 a few minutes ago. 

The number we care most about, of course, is 1333.47.  It should present tough horizontal resistance, along with the Butterfly target (1329.11) and the Fan Line from 2007 which we just hit.  Here’s the updated big picture of our fan lines, trend lines, channels and harmonics.

And, a close up…

Recapping:  current prices are right at the fan line from 2007 and are at the completion of the bearish Butterfly pattern (1.272 of 1292 – 1158) and the .886 of both the 1370-1074 drop and the last significant move (1333 – 1300), not to mention back testing the rising wedge that recently broke.

There’s also pretty decent negative divergence across the board.

All in all,  an excellent case for 1333 as the top.  Does this guarantee it won’t go higher?  Absolutely not.  Experienced traders know that $&#@ happens.  That’s why they use stops — as I always, always recommend.  Even when I’m positive about a call, I still use stops.

If you don’t, you will lose money to the x-factor stuff that always crops up when you least expect it.  If the past few months has taught us anything, it’s how precarious the markets are — whether you’re a bull, a bear or neutral.

UPDATE:  10:10 AM

The ISM Chicago’s PMI numbers aren’t bad — from 53.1 in Dec to 54.1 in Jan.  Only fly in the ointment is that production and employment show declines, and inventories show a slower rate of growth.  These are the indices you want to see accelerating if a recovery is really in the works.

The inventory number is odd, because it shows a higher index but contracting direction and slowing rate of change.  This is especially troubling for the economy, since the lion’s share of GDP growth last quarter was in inventories.  I believe the real growth ex-inventories was only 0.8%.

UPDATE:  9:35 AM

This morning’s pop should not hold, as it is completing a bearish Gartley at 1326.41 that also back tests (for the third time) a fan line (dashed, purple.)  In my experience, rallies based on perennially inaccurate ADP numbers almost always fail.

ORIGINAL POST:  1:20 AM

Apple’s high yesterday was only 7.63 from completing a bearish Crab pattern at 465.87 — a price that would also exceed the channel that’s guided AAPL’s upside for many moons.  Check out the negative divergence on the hourly and daily charts.

This makes eleventy-some-odd Crab patterns I’m following in different stocks, indices and currencies, but that’s another story.  Can the market (especially post AMZN earnings) keep it together long enough for the Facebook IPO to officially mark the top?

Wait, you say, NDX is bulletproof!  It just made a new 12-year high!  Yes, but it also made its fourth touch on a trend line (also a fan line from Oct 07), the previous three touches of which resulted in 8.9%, 9.8% and 16.6% plunges (7.1%, 8.2% and 18.2% on SPX) respectively.

NDX is also 2.22 away from completing a Butterfly pattern that calls for a sharp reversal.  The Bat completion on Oct 27 produced a 10.8% decline, and Butterflies usually reverse farther and faster.   And, lastly, Wave C up from Nov 08 has equaled Wave A in price and is barely over a Fibonacci .618 in time.

It occurs to me we’ve had this kind of setup before.  On September 16, I noticed AAPL was completing a Crab pattern whilst SPX was completing a Bat pattern and NDX a Gartley.  All three were screaming REVERSAL at the top of their lungs, so I wrote about it [see: Bats and Crabapples.] 

I didn’t know it at the time, but it was the day before Wave 5 really got going.  Apple tacked on 11 more points the next day… then collapsed 16%.  SPX plummeted 12% and NDX plunged 12.6% collapse.

Technical analysts live for forecasts like that.  September was a very, very good month for my trading account — second only to July/August.  This interminable Wave 2 has been difficult, what with several false alarms.  Even with stops, it’s taken a toll both financially and emotionally.   I’m heartened to see we’re back in a position to reap some nice profits over the next few days.

As always, good luck and keep the faith.

UPDATE:  7:50 PM
Charles Hugh Smith’s Of Two Minds blog is a delight.  Recently, I linked to his brilliant Dear USA: Your Account is Overdrawn.  Today, he tops himself by providing a sound argument for the incarceration of the most prolific counterfeiter in the world: the Federal Reserve.  Read more at: Counterfeit Money, Counterfeit Policy.

UPDATE:  2:50 PM

Crickets.  So, let’s take a quick look at gold, which has exceeded the level the channel indicated.   Is the harmonic picture indicating more downside in danger?  Recall that we’re tracing out a Crab pattern marked below in purple. 

B1 was a .886 retrace of XA, qualifying it as a potential Crab (although it would be a Butterfly if we throw out the extremely long tail.)  As a Crab, it should put in a Point C somewhere below Point A and then extend to the 1.618 level (or greater) at 1203.

I would be perfectly at ease with that forecast — but for the recent strength that saw it break out of the channel.  Most forecasters I read are calling for continued strength, and there’s certainly some logic to that view.  On the other hand, we can view Point X as the vertex of recent fan lines that argue for further downside.

Note how the break of Fan Line 1 led to a sharp drop, establishing B1 as the 2nd point for Fan Line 2.  A back test ensued, eventually setting up a H&S; pattern (FL 2 as neckline) that saw another drop to B2.  B2 became the 2nd point for Fan Line 3.  The back test of FL 2 is underway, and in fact has gone as far as it can without breaking through to the upside.

The Crab pattern is perfectly fine as is as long as prices stay below C1.  If they should exceed it, but stay below A, the pattern is still intact — but with B2 (slightly lower than B1) and C2 as the turning points.  Note that B2 is also at the .886 retrace of XA, and thus points to a D at the same level of 1203.  This scenario is shown below.

The red, dashed line is a TL that goes back to 2008, so it’s significant that it was recently broken (B2).  A drop back down to test FL 3 would obviously also break the long-term TL.

Importantly, we’re currently sitting at a .786 retracement of the C1 to B2 drop and .886 of the decline from the latest high (1767 on Dec 2) to B2.  Although neither of these moves is in and of itself a harmonic pattern, these are significant Fib levels and, along with the fan line back test, are a good argument for a reversal.

Bottom line, gold, just like equities, is pushing the limits of the patterns that normally guide price movements.  It’s overbought for sure, but I’ve learned the hard way that gold can go on being overbought for a long time after it should reverse.  I believe the short term bearish case is still intact, but have to temper that view due to the channel break.

If prices should break the fan line in a significant way, I’ll be inclined to step out of the way and wait to see if prices reverse before Point A at 1924.  We should know in the day day or two.

UPDATE:  10:20 AM

VIX is rebounding strongly, about to test the falling wedge at 20.2 or so.  It’s in the early stages of forming a Bat or Crab, which would imply targets of at least 22.68.  It will also complete a little IHS at 20.4 with a target of 23.8.

 

UPDATE:  9:50 AM

Chicago PMI down from 62.2 to 60.2, the second decline in a row and greater than the drop expected to 61.5.  The improving economy story is getting a little harder to swallow.  Consumer confidence is up next.  UPDATE:  Consumer Confidence down from 64.8 to 61.1.  This should complete this morning’s bullish burp.  Case-Shiller came in at -1.3 for November, -3.7% for the year-on-year.  Total drop since 2006 is -32.9.  Wonder if that might shake Consumer Confidence just a tad.

UPDATE:  9:40 AM

In addition to the Crab pattern that completes at 1289, we’ve now formed most of a Gartley that points to the same level — shown below in purple.  Keep in mind that, because it’s just shy of the .618 reversal for Point B, it could also qualify as a Bat or a Crab — which would take it to the .886 (at 1283) or the 1.618 (at 1242) respectively.

If the new H&S; pattern completes, it currently points to 1265ish.

ORIGINAL POST

The futures are flashing a 6-pt gain on “renewed optimism over the Greece situation.”   Gotta admit — it’s hard to even type those words given the number of times (all of them, so far) that the optimism has been just plain wrong. 

This morning, we’ll see the Case Shiller 20 City Index, which should be negative, and consumer confidence (10am), which might continue to surprise to the upside.  Fellow Americans seem not to realize how deep is the puddle of stinky goop in which the country has stepped.  Chicago PMI is due out at 9:45am.

We’ve filled all the gaps up to the upside, but there are plenty down below.  We closed yesterday below the SMA 10 for the first time in what feels like ages, saw the stochastic and MACD turn over, formed a bearish hanging man candle, and saw the EMA 3 and SMA 10 cross negative.  The put-call ratio remains overly bullish and the McClellan Oscillator is preparing to flash a sell signal.  In other words, most of the negative momentum indicators I watch are now negative.

The case is growing for 1333 having been the Wave 2 top, but the door won’t be closed until we see a significant downturn that destroys the upside case — probably somewhere around 1270.  The SMA 50 has moved above the SMA 200 by 71 cents.  Watch VIX this morning.  It’s done a very good job of indicating major turns, and it’s currently positioned very near the apex of a huge falling wedge, having recently closed below its Bollinger Band.

Now that we’re working on a new H&S; pattern, the key will be whether we can close below the new neckline.  It’s the downward sloping dashed yellow line below.

more later.

UPDATE:  1:55 PM

We just hit 1311.71 on what looks like an A-B-C corrective wave, very close to the 1312 back test target discussed at 9:40 below (which, upon closer inspection, should top out around 1313.8)   We’ve also tagged the 15-min RSI TL, meaning we should turn back soon if this bounce is going to be limited to a back test.

We’re sitting at the 10-period MA on the 60-min chart, and the 50-period MA on the 15-min chart — both of which should help contain any further upside.  The 10 day SMA on the daily chart is just above at 1313.37.

UPDATE:  12:00 PM

The market bounced at 1300, one of the three levels we were watching, and is currently back testing the neckline of the little H&S; pattern that started everything (see first post below.)  The RSI TL is also being backtested, and should provide a clue as to when the back test will fizzle.

If the neckline holds, the next H&S; pattern to play out should be tilted the other way — that is, the right shoulder will be lower than the left.  Interestingly, the neckline of this pattern would complete right around the TL discussed in my last update.

The ability of the market to push through this TL would manifest in a strong decline.  In fact, the target of the new H&S; pattern is currently around 1264 — the .786 Fib level of the 1158 to 1333 move and the level of horizontal resistance from Dec 7 and Dec 27.

UPDATE:  9:40 AM

Nice clean break of the 60-min RSI TL.

For this decline to really take off, we’ll want to see a break of the TL on the daily RSI.   Note the proximity of the 50 and 200 SMAs.  The only thing that could keep the 50 from peeking (and peaking) above the 200 would be a very sharp correction.

If this decline sticks, it’ll be the first time we’ve closed below the SMA 10 since December 19.  The SMA 20 waits for us at 1297.30, very close to the 1.272 extension at 1298.60 — two of the three primary reasons I’ve drawn in a bounce at 1298.  

The third is that 1300 should produce a “round number” bounce and, depending on the timing of the decline, might intersect with resistance from a couple of TL’s on the price chart.  We discussed this last week… it would be quite normal to see a pause at the yellow dashed TL that has investors scratching their heads, wondering whether this is a significant downturn or simply the fleshing out of a channel.

The bounce, wherever it comes, will likely take the form of a back test of the H&S; neckline (red, dashed) — which means it could go as high as 1312 or so.  It would give bears another opportunity to add some shorts for the next leg down.  Place stops accordingly.

Financials face a similar test.  XLF, which has spent nearly two weeks above its SMA 200, broke its 60-min RSI TL and the price channel it’s been in.  The real test will be to break back beneath the 200 and to break the daily RSI TL.

ORIGINAL POST:  2:45 AM

This is a continuation of several posts last week in which I suggest 1333 was the Wave 2 completion.  Taking into account negative divergence on most time frames, excessive bullishness, poor breadth, etc., I believe 1333 was at least at an important turning point.   Almost every indicator I watch is calling for a significant downturn just ahead.  A quick glance at the past few days confirms there’s a clear path lower.

Recall that we just completed a Butterfly pattern (and Bat) that call for a sharp decline.  As we discussed over the weekend, the pattern targets 1010 or 1050.  The question arises as to how we get there.

 

We need one slightly lower price move in order to complete the H&S; pattern we’re tracing out.  And, the fact that Friday’s low came at .786 of the 1306 – 1333 move tells me we might be working on a Butterfly pattern.  These typically complete at the 1.272 or 1.618 extension (1298 and 1289, respectively) — which is pretty cool as the H&S; pattern completes at 1288.

As mentioned earlier, we have a decent shot at some cascading H&S; patterns playing out on the downside.  It wouldn’t take much to build some momentum.

BTW, I don’t have a lot of pet peeves, but it kills me (not literally) to see how often the word “literally” is grossly misused.   We’ve all heard someone say “his eyes literally popped out of his head” or “her butt is literally as big as a house.”

Thankfully, the speaker usually means the word “figuratively” or “practically.”  Here’s a promo that popped up on the newswires this morning.  I’ll leave it to my astute readers to decide whether or not the Renaissance Orlando Resort just announced a Valentine’s weekend special for cannibals.

Meanwhile, the Euro-mess continues to display strains between the haves and the have nots.