Market schedules for the Martin Luther King Jr. Holiday.

UPDATE:  5:40 PM

We clearly broke a trend line or two today.  I’ll write more this weekend, but while I’m thinking about it…  today’s retrace is not a big deal.  When the July decline got started, the first few days were quite modest.  No idea if it’s analogous or not, but consider the similarities between Jul 25 and today.

Of course, in July there weren’t as many people aware of what the next few days held in store.  And, the PPT was likely not as well prepared.  More later.

UPDATE:  3:20 PM

Fresh look at AUDUSD.  It completed a perfect little Butterfly pattern on the 15-min chart (below in purple).  Note the Point B at the .786 Fib which reverses twice out to a Point D at the 1.272.  We expect a reversal there — usually about .618 of the total pattern (distance of A-D), which is what we’re seeing now.

It’s clear, however, that a larger pattern is in play (seen in yellow.)  The move to the 1.272 extension constitutes a move to the .618 on this larger pattern.  And, a Point B at the .618 makes it either a Gartley, Bat or Crab — meaning it should reverse and return to somewhere between 1.0194 to 1.000.

There are also much bigger patterns to watch, such as the Butterfly that completes at .9014 (shown on the daily chart in red.)

UPDATE:  2:10 PM

Watching the VIX inverse H&S; play out.  The current pattern targets 24, and that starts the ball rolling on a larger pattern that targets 29.

UPDATE:  10:28

France downgraded, waiting for the official announcement.  Hasn’t been this much uncertainty in the air since (sarcasm alert) the LeBron James trade. 

And, while we’re waiting for the end of the world, here’s another one.  I believe that’s French Finance Minister Francois Baroin addressing the S&P; Credit Committee.

ORIGINAL POST:  9:35 AM

Following news of an imminent downgrade of EZ countries and abysmal JPM earnings, we’ve seen a moderate sell off so far.  Even an increase in consumer sentiment hasn’t been enough to stave off the long overdue correction.  This could be the real deal.

More later.

UPDATE:  10:20 PM

Just noticed that AUDUSD just broke its RSI trend line on the 60-min chart.  And, the daily chart shows quite well how the latest rise was most likely just a back test of the recently broken 200 SMA — indicated in red on the second chart below.

UPDATE:  8:40 PM

The AUDUSD has been a very reliable indicator of equity price direction.  Check out the long term chart, then how it matches up to SPX.

The fan line that cuts through Oct 4 makes for a nice neckline, no?  In my opinion, it’s got a day or two at most before its next tumble.  Friday the 13th anyone?

BTW, the very knowledgeable Mitchkeller over at the excellent YAEWAB has a great chart detailing the divergence.  In short, it’s extreme. 

UPDATE:  2:50 PM

Fine piece of writing from Charles Hugh Smith.

Read the rest at Of Two Minds.

UPDATE:  2:20 PM

Another day watching the paint dry on this market.  Although an interesting little tidbit concerning the VIX…  In addition to an apparent break out of the falling wedge (and back test), I see a very small inverse H&S; pattern developing on the hourly chart, indicating a nominal upside to 24 or so.  It’ll take a close at 22 to complete the pattern.

Of course, a close at 24 would portend a larger pattern to 28, which would lead to 40, etc. etc.  In Wall Street’s version of “If You Give a Mouse a Cookie,” there’s the very real possibility that this is only the first of the many more cracks in the dike to come.

We saw the same pattern get the July drop going.  Although, it took about three generations before it produced soaring VIX values.  Something to keep an eye on, especially if the back test holds.  There’s a similar back test occurring on SPX, although that particular rising wedge has expanded three separate times, tossing lower bound touches aside like used Kleenex. 

Perhaps, as we’re positioned a mere 12 points below our secondary 1307 target and nudging the psychologically important 1300 level,  we’ll see a decisive break one way or the other.

UPDATE:  10:20 AM

Yesterday, XLF tagged the .886 of an apparent Bat pattern and is now reversing.   Recall that its Point B slightly exceeded the .618 Fib that’s the limit for both Gartleys and Bats.   But, we had a trend line off the Feb highs that argued for a reversal at the .786 at 13.65.

The rise of the past two days tagged the .886 of 13.89, slightly shifting the TL off the top to exclude the July 7 high.  It’s not quite as good a fit as the other, but it’s still legitimate.

Trend lines don’t have to include every relevant point.  Occasionally, whether through excessive exuberance or good old market maker manipulation, the boundary gets pushed.  It’s a way of clearing out shorts and puts, who set stops at price levels representing important resistance.

A hallmark of this market over the past year has been the ramping up of prices in the futures markets overnight.  For relatively little cost, market makers can create a gap up at the opening of the cash market that, more often than not, carries through into the day.

It’s a manipulation, of course, that always works — until it doesn’t.  When a market is stretched beyond what the underlying fundamentals and economic backdrop support, it has the tendency to snap back violently.  All it typically takes is a catalyst:  downgrade,  default,  ugly employment or earnings report, war, oil shock, etc.

The job of Wave 2’s is to stretch that rubber band as far as possible, shaking out as many bears as possible. As Daneric so eloquently put it in his post last night:

Wave 2’s do not want to be wave 2’s,  no matter what the size. Part of wave 2’s personality is that they wish to be true bull waves.  And true bull waves do not retrace partially – they make multi-year market highs.

This one has been very strong.  It’s made believers of many former bears — witness the record low bearish sentiment among small investors.  But, it will fail — and soon.  And, yes, financials — which are largely responsible for the excesses that led to the financial crisis in the first place — will lead the way.

ORIGINAL POST:

COMP has completed a Bat pattern that hints at a possible extension to a Butterfly at 2838. 

The first pattern, a Gartley, completed at the .786 (on the purple grid) on Oct 27 at 2753.  Since then, however, another pattern (in yellow) has emerged — with a Point B at the .786 and currently approaching the .886 at 2718.  At that level, it lines up nicely with a trend line off the July highs and signals an impending reversal.

The only issue that gives me pause is the RSI, which indicates slight positive divergence and has broken through the TL that ran through the Oct high.  If we give it the benefit of the doubt, it’s not hard to imagine the current pattern extending out to form a Butterfly at 2838 — the 1.272 Fib.

We should get a reversal here at the .886 regardless.  The key will be whether we continue down — by breaking through the TL off the Oct 4 bottom (and the RSI TL) or whether we bounce off the RSI TL to make one last high at 2838.

BTW, 2838 lines up very well with a trend line off the May 2 top and the July highs — the equivalent of the situation in SPX with 1307.  I’d be inclined to go with this as my primary forecast — except for the fact that we have a large rising wedge and striking negative divergence on the 60 min chart.

In short, the situation is very analogous to SPX.  Either the market turns very soon and pays off some of these negative short and medium-term signals, or we could get a last little bump up to the TL off the May 2 highs.  So, if we break through 2718 and the previous high (2753), look for a run up to 2812 (the .886 on the combined patterns) or 2838.

A different picture presents on the Russell 2000 (RUT).  Recall that the COMP is market cap weighted, with the top 5 stocks (AAPL, MSFT, ORCL, GOOG and INTC) representing 25% of the total; the RUT’s biggest stock is only .32% of the index.

This is what the broad small cap market looks like — absent the juicing going on in the ever narrower “leadership” segment.  The daily chart shows very strong negative divergence and a clear touch on the “third rail” which is also the neckline for the H&S; pattern.  In fact, Minor 2 looks like nothing more than a back test of that neckline and — except for the Oct spike — has traced out a very convincing rising wedge.  All in all, it’s a very bearish chart.

More later.

UPDATE:  2:20 PM

ORIGINAL POST:

We have a nearly completed Bat pattern on the Dow.   Counting from the May 2 high, the .886 is at 12,594.

But, the same pattern drawn from the July 7 high is complete.  We reached the .886 of 12,486 yesterday.

Either looks complete from the standpoint of the channel lines and the trend line running through the topping pattern — the intra-pattern third rail.

We also have a clear touch of the RSI trend line from Feb 2011, the start of the topping pattern.  The segment from the October highs represents obvious negative divergence.

Unlike the S&P; 500, the trend line connecting the May 2 high with the July highs leads us to right here, right now.   On the Dow, Minor 2 looks very, very done.

The SPX, on the other hand, touched its .786 Fibonacci retracement — for the second time — yesterday.  That’s from the July 7 high, BTW.  The .786 off the May 2 1370 high is 1307.

Neither really works as a completed Harmonic pattern.  Like the DJIA, Point C is lower than Point A — in this case, much lower.  Not good form.

And, the only pattern that completes at a .786 is a Gartley, which requires a Point B at the .618 (the Aug 31 high of 1230 came within 18 points.)   So, again, not really well formed.

All that being said, should we care?  A .786 retracement is one of the most common corrective wave targets.  The trend line connecting the Feb and July tops is pretty well in place (though not quite a perfect fit).  The trend line (the third rail) running through the pattern has clearly been connected.  And, the RSI trend line just got tagged — with negative divergence since late Oct.

Taken separately, they’re a bunch of interesting little indicators that catch your eye.  Together, they form a beautifully laid out mosaic of a Minor 2 top.

The steps on which EURUSD pauses before each push down are getting shorter and shorter.  Two steps ago, we didn’t even get a right shoulder to the H&S; pattern.  This last step hasn’t even bothered with a head — just a left shoulder and done.

One way of looking at it is that we’re getting that much closer to the floor dropping out from underneath, a rifle shot to the next lower channel as happened in each of the previous two major channels. 

Another interpretation is that we’re tracing out a falling wedge — which necessarily gets narrower as we approach the apex. 

The two options lead to quite different outcomes for the Euro and the equity markets.  We are approaching the end of the Crab pattern I’ve been watching for the past two months.  Its 1.618 extension is just below at 1.2464.  The problem for EUR bears is that 1.2464 also marks the crossing of an important fan line, highlighted in the chart below as the yellow dashed line rising from 2002.

This will be the first test of this particular line, but in tests of previous fan lines we saw bounces ranging from barely noticeable to .08.  The fact that this one coincides with a Crab completion makes me think it could be significant.

Also, there are several other harmonic patterns to consider.  The one starting in June 2010, featuring May 2011 as the Point A, has a .786 Fib level just up ahead at 1.2531.   The Point B didn’t quite reach the .618, so there’s a very good chance it’ll register as a Crab (with a .9983 target!) instead of Gartley, but the .786 should be good for a bounce all the same.

And, last time I checked, there were a slew of short spec positions on the EURUSD; so, a hard bounce could have some legs as short covering commences.  It probably couldn’t break out of the major channel (purple, solid).  But, it might try for 1.30 in a backtest of a channel line (yellow, dashed) and a fan line down from the Jul 08 highs.

But, currency traders are very savvy at harmonics, so most of these targets are well-known; the surprise element might well be muted.  And, I’m not sure how much of an impact a bounce will have on equities.  I realize that sounds a little heretical, but hear me out.

The last major move up by EURUSD was from 1.1876 to 1.4939 over the time span of Jun 7, 2010 to May 4, 2011 — a stunning 25.8% rise.  During that same time, SPX rose from 1050 to 1347, a similarly spectacular 28.3% increase.  We were thus conditioned to see them as moving in lock step.

Since May 4, however, EURUSD has fallen from 1.4939 to 1.2685 — a 15.1% slump.  It represents a 73.6% retracement of the previous rise.  SPX, on the other hand, has fallen a mere 58 points from 1347 to 1289.  That’s only a 4.3% drop for a 19.5% retrace.  Clearly, the step ain’t so locked anymore.

Those who, like me, are of a bearish persuasion, will see this as a negative divergence that will soon be rectified when SPX catches up on the downside.  A 15.3% drop from 1347 would be 1143.   A 73.6% retrace would target 1128.   We could see DX at 82 if the 10-year auction comes in around 1.90%.

Last, remember we’re talking about the Euro’s health vis-a-vis the USD.  If you subscribe to the “least dirty shirt” theory, you’ll see the dollar’s relative strength as a temporary flight to quality that benefits from a lack of good alternatives.   Clearly, the USD has its own issues.  One of these days, the ravenous wolves will notice the other fatted currency barely outrunning its weaker sibling.  

More later.

• MCO moves from a fairly low point (-300) to a fairly high point (225+)
• The backtest is to a fairly high point, say 100 or more
• The pattern develops slowly, over months instead of days
• There’s a converence of patterns in different time frames

In addition, the RSI on the daily chart reached the 61.9 level intraday.  Recall that we were watching for a .886 retracement to complete a Bat pattern as has occurred on each of the previous three big pullbacks.  I’ll be watching to see if it closes at 61.9 or better.

Last, negative divergence — which is almost always present when we get a blow-off top like this — is present in the 60-min time frame, and everything shorter than that, too.

It’s entirely possible we’ll head up to 1307, but even at 1295, we’ve hit all the targets necessary for the alternative Wave 2 formation to be considered complete. 

More later.

ORIGINAL POST:

After several days of virtually no movement, looks like we might finally get a resolution to the pattern.  Recall that since before we labelled the Oct 27 1292 high as the Wave 2 high, we’ve had an alternative high of up to 1307-1313 based on an important trend line that connects May 2 with the July highs.  It’s shown as the red dotted line in the chart below.

It sits at the top of a rising wedge that also happens to coincide with the termination of a bearish Bat pattern playing out on the e-minis.  In the futures, the 1.618 Fib is right at 1307.

We can hit or even slightly exceed 1292 and still see the previously identified harmonic patterns play out.  But, the important issue here is the almost certain reversal with the Crab, the rising wedge, horizontal resistance and the channel midline (red, dashed) all conspiring to put a stop to any further rises.

More later.

We’re bombarded with the gold bugs’ warnings.  If you don’t convert every last cent into the shiny stuff right now, you’ll be ruined.  But, before you run your wheelbarrow of worthless greenbacks down to the local PM dealer, let’s consider the technical picture. 

Many of you have been asking for an update and I haven’t posted about it for a while, so I’m happy to oblige.  Here’s where we left off on September 25:

First, check out the harmonic picture on the daily chart.  GC completed a crab pattern (purple, since 8/25) at the 1.618 extension of the XA leg.  The target was 1570.20, and we just overshot that by 12.

However, there’s a larger Bat pattern (in yellow) at work that started way back on July 1 at 1478.30.  It should extend to at least the .886 Fib level at 1528.40, although it could turn out to also be a crab with a 1.618 extension.  Either is possible with a .50 AB retrace (of the XA leg.)

If I’m crazy enough to try and catch this falling knife (which I’m not) I can look at the RSI for confirmation.  Check the red trend line on the daily chart, just up ahead of the falling RSI.  It would certainly argue for a turn in the very near future.

Since that post, gold did in fact reverse at the .886 reaching 1535 (versus our 1538 target) to complete a Bat pattern (shown in red).  It then completed another Bat pattern (in purple) that is probably going to morph into a Crab.  Here’s the chart:

The point at which one pattern stops and the next begins is actually a Point B in a much larger Crab pattern (in yellow), although it could qualify as a Butterfly if we ignore the dramatic push down on Sep 26.

A Butterfly would extend to the 1.272 or 1.618, at 1358 or 1206 respectively.  A Crab would typically complete at the 1.618 at 1206.  Either would fit with the still-forming Bat pattern (purple) that should complete at the 1.618 at 1368.

There are a couple of other important chart patterns worth noting.  First, GC has been supported by a long-term rising trend line that provided the most recent bounce at year end.

Also,  the July 1 low has acted as the origination point for several fan lines that have heavily influenced GC.  These can be seen as the pink dashed lines below.  Each time one of them was broken, GC fell pretty dramatically.

The back test of this latest break overshot the fan line by a little, tagging the 200 SMA just beyond.  It also nudged the RSI up to a point where it’s hitting serious overhead resistance.

If we bounce off the 200 SMA and RSI trend line and break the long-term price trend line at around 1550 shown on the weekly chart above, we’ll likely complete the Crab pattern — meaning a rapid descent of $250 or even $420/ounce.

 Is the Fed ruining the dollar?  Yes.  Will running the printing presses day and night eventually ratchet up inflation?  Yes.  Will gold be a great way to hedge?  Quite possibly.   But, in the meantime, gold’s not the safe haven you’re looking for.

Good luck to all.

VIX coiling… forming a Bat in a Bat nearing the apex of a falling wedge and the intersection of two major trend lines.  Consider what happened the last time VIX formed a multi-year falling wedge like this — and they weren’t anywhere near as steep.

Financials will lead the way.  They got us into this mess, and they’ll get us right back…into a worse mess.   Unless S&P; comes out and upgrades half of the EZ, XLF is going down.  This is as bearish a setup as I can imagine, with XLF perched in an unbelievably precarious position.

It just completed a Gartley pattern and a rising wedge right at the upper bound of a broadening descending wedge — while also putting in Point C in either a Butterfly or Crab pattern.  Next stop is at least 10.05 — a 25% drop from current prices.

ORIGINAL POST:  12:00 PM

Equities still locked in a tug-o-war, so I’m focused on the EUR this morning  — it completed the latest Butterfly pattern we’ve been watching.   Charting with Harmonics and channels has been incredibly accurate for the past week.  Here’s the short term forecast I posted Monday.

 And, the actual results (I changed the forecast line to red for better visibility.)

So, let’s step back a bit and look at the bigger technical picture.  The following weekly chart shows the history of the Euro – USD relationship.   Euro coins and bills entered circulation in 2002, which just so happens to be a great fan line origination point.  It was trading at the time at around 83 cents.

Over the next six years, EURUSD soared to over 1.60, where it began a huge flag pattern that continues to this day.  Within the flag pattern, distinctive channels have developed.  The impulse moves down have largely been confined to the purple parallel lines, and the corrective moves up have followed the white, dashed lines.

Looking at the current channel down, we can see that it’s been frequently “interrupted” by diagonal corrective waves that follow the exact same slope as the much larger corrective channels.  I’ve called these “diagonals” for purposes of brevity.

It’s happening on a both a large scale and small.  Note that the thin, red diagonals are the same slope as the large, white dashed channels.  If you look closely, you can see what look like little continuation head and shoulder patterns playing out, with the diagonals acting as necklines.  They’ve taken on the appearance of stair steps ever since Oct 27.

Another notable feature of this market is the accuracy of harmonic patterns in predicting future price moves.  The yellow Crab pattern in the middle of the above chart is a great example.  Crabs look like a big “W” and follow a X-A-B-C-D pattern like most harmonics.  Once the X-A leg is established, we look for a reversal (retracement) to a Fibonacci level (indicated by the purple grid in the background.) Here’s a close up.

In this case, the reversal (Point B) came right around the .618 level, which left open the possibility that we’d eventually see either: (1) a Gartley that would extend to the .786 level; (2) a Bat that would extend to the .886 level; or (3) a Crab that typically extends to the 1.618 level.   In this case, that’s 1.2464 — a good 12.5% off the most recent (Oct 27) high.

When harmonic patterns reach their target, we look for a reversal.   Sometimes it’s small, sometimes massive.   In this case, we saw small reversals .01 – .02 back to a previous Fibonacci level (.618), followed by a continuation of the down trend.   Along the C-D leg, however, we’ve seen multiple harmonic patterns unfold, each adding another step to our staircase.

The latest to play out was a Crab or Butterfly that indicated a downside to the 1.618 extension at 1.2723.  We reached that and then some this morning, tagging 1.2696 and an important fan line in the process.

Although we’re still likely heading for the larger Crab target of 1.2464, we should expect a reversal back to a previous Fibonacci level or even back test the diagonal at this point.  A subsequent break of the diagonal — perhaps after forming a little H&S; pattern — should help us on our way to completing the larger pattern at 1.2464.

Note that at that point, we also tag a fan line from 2002.  Remember this chart from above:

Those dashed red lines from 2002 intersect with the lows of our flag pattern and influence what happens going forward.  In previous cases, they provided a bounce of a few cents.  When they were broken afterwards, EURUSD saw a particularly strong downdraft.

So, a bounce at 1.2464 makes perfect sense, as we’ll have completed the large Crab pattern and tagged one of these fan lines.    But, remember, we won’t complete the flag pattern until we reach somewhere around 1.135 — another 10.7% below current prices.  It could happen in a hurry when downgrades are announced for EZ sovereigns and/or the ECB.  

And, of course, there’s no guarantee that we’ll bounce at the bottom of the pattern.  In a vacuum, one would be tempted to see the past six years as the head in a giant H&S; pattern.  But, of course, we’re talking about the Euro in relation to the USD.  And, it’s simply a matter of time before investors notice the smoke coming from that tent as well.

Good luck to all.

UPDATE:  1:40 PM

I’ve been doing a lot of work with RSI lately — particularly with trend lines and, today, looking at harmonics.  I was somewhat surprised to see that relative strength moves in harmonic patterns just like underlying stocks.

The past three major turning points (P2, Minutes 2 and 4 of Minor 1) came as RSI completed a Fibonacci .886 retrace of the previous decline.  Now, as we’re trying to determine whether Minor 2 is over or in the process of ending, it’s very interesting that RSI is, again, approaching the .886 of its recent decline.

I know this chart is a little busy, so I’ve split it into two parts:  the first shows the time periods involved and the second expands the RSI study pane to better show the Fibonacci retracements. 

As of 1:55 PM, RSI stands at 61.5 versus the .886 target of 61.9.   It’s also hard to miss the fact that it’s closing in on the red dashed overhead trend line that’s marked the past five significant reversals.

After a 12-pt drop, SPX has recovered for a 5-pt gain.  But, we’ve clearly broken the channel that was guiding the upside since Dec 16.

With this last little spurt, SPX tagged again the major channel midline (yellow, dashed), completed a double top (triple if we count 1292) and completed a little Butterfly pattern that looks ready to reverse. 

In the meantime, EURUSD broke through the latest diagonal, completed its Butterfly to the 1.272 extension…so far.  As we’ve seen lately, these things can and do extend to the 1.618 which would be 1.2723.

XLF, which we’ve been watching for the past few days, touched it’s descending broadening wedge upper bound today, reaching 13.55 (versus our 13.65 Gartley target.)  That could be the end of the run, or we could get one last push up to 13.65 before the downturn.  Stay tuned.

ORIGINAL POST:

Setting aside all the noise and confusion, the market still hasn’t managed to break 1288-1292 — the mark necessary to signal a move higher to 1307.  So, for now, we’re left with a 1292 Minor 2 top followed by a .886 minute [ii] retracement of a 130-pt minute [i] of Minor 3 down. 

If we break 1288-1292, then Minor 2 gets moved over to that new high, and we look for the beginning of Minute [i] of Minor 3 down.  Either way, the market is set to tumble significantly from either here or slightly higher than here.

UPDATE:  12:00 PM

Taking advantage of the lull in the market to clean up more of the channel lines.  I’m also charting the 1306.50 target via the rising channel (versus rising wedge) just in case we do break 1292.

Note, 1306.50 is the harmonics target.  There are actually four different trend line targets depending on whether you include the candle shadows on May 2 and/or July 7.

The market is almost even on the day, but looking at the past several days it appears to be tracing out a small Gartley pattern.  We’re searching for the Point C right now (which, conveniently for the bulls, will be slightly higher than 1275.46 in order to avoid one of those nasty 5 waves down.)

From there, the .786 beckons at 1263.59 — near the bottom of a broadening descending wedge.  A .618 retrace of AD would then be back to 1276.59 — roughly where we are now.  The RSI on the 15 and 60-min charts support this scenario, as does EURUSD.

The 60-min chart shows a Butterfly pattern in the works, with a reversal at the .786 Fibonacci.  An extension to the 1.272 would sink through the diagonal support to 1.2799 and set up a back test of the diagonal.

UPDATE:  10:15 AM

Update on yesterday’s XLF chart.  I think the broader market is going to have a tough time with the upside case unless financials can take part.  Looks like there will be great difficulty in exceeding 13.65.

The key to watch will be the gap close at 13.07 — off 2.96% from yesterday’s high.  A return to 13.65 from there would be +4.44%.  A downturn in fulfillment of the larger Butterfly pattern at 10.07 would be -23% from 13.07, -26% from 13.65.

All things being equal (are they ever?) my hunch is we’ll close the gap, then rally to around 13.65 before plunging to 10.

There’s a little Gartley in the works on the 15-min chart that would support this move.   Its .786 is, conveniently, 13.08 — a penny from the gap fill.

ORIGINAL POST:  9:10 AM

Even with yesterday’s price action (on below average volume), we’re in pretty much the same position as Friday.  We have reached some key harmonic targets, meaning a reversal could happen any time, now.  But, a logical alternate lingers just above at 1307.

As the chart shows, we reached the 1.618 extension of the small Butterfly (yellow) pattern yesterday at 1282.18.  A .618 reversal would indicate downside to 1261.50 — more than enough to close the 1268 gap from Dec 27.

The medium-sized pattern is a bit more problematic.  Its Point B slightly exceeded the .618, so technically it shouldn’t qualify as a Crab, yet it’s extended out to its 1.272 — which is neither fish nor fowl.   Crabs reverse at the 1.618, which is at 1306.50.  Remember 1307 is the alternate upside target we’ve kept an eye on since Oct 25.

Should we exceed 1292 (1288 according to more knowledgeable Ellioticians), 1307 becomes the primary target for completion of Minor 2 and resumption of the bear market.  There’s certainly ample bullish momentum, although the situations in Europe and Iran or any of the economic news expected out this week could change that in a hurry.

If we are able to reverse after closing the gap, we will likely continue higher in a rising channel that’s the equal of the falling channel that took us down to 1202.

But, note that the same price action still fits in a much more bearish rising wedge scenario too.  I’ve drawn it with a 1307 apex, but these things rarely go the distance (2/3 is common) and are subject to alteration along the way.

The currency picture continues to argue the bearish equity case.  EURUSD, despite its decent bounce yesterday, is following the exact same path we detailed last week and remains in the fast lane of a set of channels I drew months ago.  The channel and a fan line were tested but held.  If we break below the diagonal at 1.28-1.29, the next step should be down to 1.2464.

The dollar tested its rising channel, but so far has bounced back nicely.  It’s working on completing a Crab within a Crab that should see prices advance to 82.568 and then 83.872.

More shortly.

UPDATE:  3:45 PM

The financials have been a huge part of today’s rise.  But, a quick look at the daily XLF chart shows a bumpy road ahead.

Note the proximity of the upper trend line of the descending broadening wedge.  The last two times that TL have been tested, a severe sell-off ensued.  Note, also, the bearish Gartley pattern that’s formed since late October.  The .786 reversal is at 13.65 — a mere .18 above today’s high.

But, the most damning evidence of all is the RSI trend line.  XLF’s rallies have all come from a break of the downward sloping trend lines over the past two years.  Each of them eventually peters out when the RSI rises to the trend line from the Apr 2010 high (dashed, yellow.)  It’s obvious that the current rally has virtually no room to run.

In other words, this rally should be very short-lived.  I wouldn’t be surprised to see a shooting star candle on the day, followed by a test of the trend line connecting the recent lows.  If it’s broken, watch for XLF to trade sharply lower towards single digits.

UPDATE:   1:15 PM

This morning’s rise has convinced me to revisit the channel lines guiding this corrective Minor wave 2.  The chart below shows the original in red, along with the revised lines in yellow.  The dashed line is the channel midline — the point at which the SPX has currently come to rest.

I think these channel lines do a better job of capturing the highs and lows in Wave 2, even though they result in a midline overshoot in the first few days of December.   A good test for validity of channel lines is how well parallel lines worked in the past.  In short — very well.

Here’s a close-up of the new channel.  Note the 3-way intersection of the midline with both rising and falling background channels.  It won’t matter to Wave 2 anymore, but trend lines of the same slope will play a role in defining the Minor 3 bumps.

And, the longer term view of the revised corrective channels:

The fan lines from 2007 and 2009 (shown in log scale) do a very good job of depicting the two potential tops of Wave 2.  The red one indicates that a 1307-1330 top is a possibility, while the yellow one argues that the top is already in.  Some of you might remember the yellow line from previous posts, sometimes called the “fan line that just won’t quit.”

UPDATE:  9:35 AM

So, the 1.618 it is.  And, there’s the negative divergence on the 60-min chart, right on schedule.  And, the dollar is way oversold.  The big question is whether we’ll reverse at 1282.18 or push higher.

Any way you slice it, that makes for a pretty obvious 5 waves up from 1202.

UPDATE:  9:15 AM

We got slightly more of a move than I expected from the EURUSD, with a rise to the .886 (instead of the .786) and a perfect back test of the last fan line to have been broken.

Consequently, the eminis have reached the 1.618 extension rather than the 1.272 which is much more typical of Butterfly patterns.

A similar move in SPX after the open would result in 1282 (the 1.618 extension) rather than 1275 (the 1.272).  It would also almost certainly produce some striking negative divergence across the board.  Can we still gap and crap before 1292 is endangered?  ISM manufacturing data will be released at 10AM. 

ORIGINAL POST:  JAN 3, 2012 1:30 AM

[note:  this post was originally appended to the last Fractal Update post — which was getting a little unwieldy.  I’ve left it both places so as not to confuse folks even further.]

Looks like SPX left us with a Butterfly setup last Friday.  If it plays out, it would reverse around 1275.01 — which is dangerously close to a key Elliott Wave price level (we also have a well-established downward sloping channel line there.)

Note that the Nov 8 high was 1277.55.  Depending on how one counts the move off the 1292 top, 1275 is too close for comfort to that previous high.   It’s also just a few cents off the .886 retracement of the 1292 to 1158 move.

Here’s how the EW count appeared to me last week.  I wrote that we were about to commence Minuette (iii) of Minute [iii] of Minor 3 of Intermediate 1 of Primary 3. 

If we break 1277 (but not 1292) it means the move from 1292 to 1158 was Minute [i] of Minor 3 , with the three wave retracement to 1277+ being Minute [ii].  This actually makes more sense, as Minute [i] in Minor 1 was 112 points.  It’s likely that the same degree move in Minor 3 would be as large or larger.

If we exceed 1292, then we’re likely tracing out the final 5 waves of C of Minor 2 which, as readers will recall, takes prices up to the 1307-1320 area.  Whichever way it breaks, we’re either in Minor 3 (my top preference) or about to enter it.  It should be significantly uglier than Minor 1, which took the S&P; 500 down nearly 300 points (22%) in five months.  A 22% decline from Friday’s close would take SPX down to my short-term target of 983.

European stocks had a big up day, today, with the DAX up 3% and the CAC up 2%, both on light volume.  The DAX was boosted by a marginally better PMI reading which still indicates contraction rather than growth — particularly in the area of new orders.

The following are notes on the Euro from The Big Picture, posted earlier today:

    Last, just a quick observation on the Euro.  Note how the fast lane we talked about last week is marked by a series of decisive breaks of parallel trend lines.  A reminder, this channel is exactly the same slope as the past three two, so I’m inclined to give it the benefit of the doubt.

These are worth watching, as lately they are highly correlated with breaks in the US equity markets.  EURUSD seems to have established a new on on the 29th at 1.2857.  It has since rebounded somewhat, and could be tracing out a Gartley whose .786 Fib is at 1.3032 — right up against the channel boundary.

Whether it rebounds higher or not, a break of the dashed trend line is a great indicator of a bigger downdraft to come.  In the end, I expect EURUSD to fall faster than its sub-channel, crossing into the next one down at an accelerated rate as occurred in the last wave down in September.

The ideal spot would be tomorrow, Jan 3, as that’s the peak of channel as it intersects with the trend line just broken.  A full back test to the above-mentioned .786 Fib would be the perfect fit for a robust reversal.

I’m still expecting completion of the Crab pattern (in purple) at 1.2464 sometime around mid-January — a 3.5%+ move that would correlate with a 10%+ move in SPX.

A couple of interesting news/opinion blurbs in the past few hours:

The IMF, stating that the 50% haircut that was supposed to alleviate the Greek debt crisis is likely not sufficient.  This, combined with the Spain not-so-near miss of its economic target on Friday should give Europtimists pause.  According to Lagarde, the IMF will likely lower its global GDP outlook.  As the article points out:  “growth is a key factor in determining whether a country can escape from a heavy debt burden.”  Yes, and in an obvious corollary: “growth is practically impossible when a country is overburdened with debt.” 

More later.