I want to wish everyone a happy, prosperous and peaceful New Year.   The year ahead looks to be at least as “interesting” as 2011.   With the markets closed today, I thought I’d review a few of the patterns I’m watching.

First, an overview of the harmonic picture, starting with the biggest picture:

On the monthly chart, we just completed a potential right shoulder to a very large Head & Shoulder pattern that started with the 2000/1 top (the left shoulder).  Consider how the pattern aligns with the largest harmonic pattern (in purple, I’ll call it a Butterfly for now.)

The neckline, which tagged the .786 retrace in Mar 09 at 666, passes through the .886 at 565 in late 2016.  By drawing a parallel trend line across the shoulders, we can also construct a midline — currently around 1031.

I find this level interesting, because it’s reasonably close to the .500 Fibonacci level (1006) of the Butterfly pattern as well as the .500 Fib (1018) of a somewhat smaller Bat or Crab (in red) that began at the 666 level.  Also, note that reaching the 1006-1018 price level will complete a smaller H&S; pattern that features 1370 as the head and targets 773.  As we’ll see below, the smaller H&S; target is a stone’s throw from a Bat pattern target of 747.

The channel that’s formed by this H&S; pattern is aesthetically pleasing, but obviously portends a dismal economic picture  — a double-dip recession (for optimists) or potential depression.   Without getting into a protracted discourse on economics, this is consistent with my outlook on the economics picture.

Closer in, the picture is equally bearish.  Nestled within the large Bat or Crab pattern that’s been forming since 666 is a Crab pattern (in red) that began in August 2010.  It put in a Point B at the 1074 low in October, and would complete its 1.618 extension at 835 — just above the H&S; target of 773.

Please note I’ve made no effort to put these targets in proper time perspective, but am just showing price targets for now.

Closing in a bit more, a couple of Gartley patterns are forming.  The larger purple pattern is the better formed of the two, as the yellow pattern Point C exceeded Point A by 2 points.  This is not technically permissible, though I chart it anyway because these patterns often defy the odds and work out.

I’ve also charted some Bat and Crab alternatives.  The key is Point B, which for a Bat must be less than a .618 retracement and for a Crab can be anywhere up to the .886 Fib level.  Note that the yellow Crab completion at 1091 also completes the H&S; pattern that targets 735, so this is a very significant target.  It also coincides with the larger (purple) pattern’s .886 Fib level at 1099. 

Put all these targets together, and you get a boatload of significant price targets:

By themselves, not a lot of help.  But, with these in hand, we can construct a model that attempts to align significant price levels with significant time levels by using channels and the analog I’ve been tracking since May and the fractal since November.  More later on that.

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.

UPDATE:  JAN 3, 2012

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.

 

**************************

UPDATE:  7:30 PM

The analog and the fractal…

 

 

UPDATE:  10:30 AM

Like this past July, I find myself watching the growing disconnect in the analog and fractal day counts.  In the 2007/8 v 2011 analog, the match was very solid going into day 31/32.   But, on Jun 22, TPTB decided to flex their egos and announced a release from the Strategic Petroleum Reserve [see: Not Terribly Slick. ]  It was a stupid political stunt that took CL — which had already dropped from 115 to 95 in the previous two months — down another $6 for an entire week.

But, it temporarily set stocks (and the analog) back.  So, the Day 42 peak didn’t arrive until Day 46; and, the Day 52 peak showed up fashionably late on Day 57.   It also occurred to me back then that — thanks to the blogging of yours truly and others — the analog was not as well-kept a secret as it might otherwise have been.  Even back then, readership had crept up past 1,000 hits daily.

Imagine you’re a Wall Street Master of the Universe and some flunky analyst mentions to you at the July 4th picnic that a blog she follows is forecasting a 20% drop in SPX over the next two weeks.  After firing her for being so gullible, you might assign a VP or two to investigate said blog.  When they report back, you might go beyond your typical market manipulation strategic realignment in order to protect your long positions (or, at least get the hell out before your clients realize the theater’s on fire.)

If enough Powers That Be got a whiff of the smoke that threatened to render them Powers That Were, that could account for a collective buying spree in an effort to keep the dream (aka Stock Options) alive.  Alas, as the unemployed analyst (now a social worker) will tell you, it delayed but didn’t derail the inevitable 20% crash.

Flash forward five months.  The MOTU have skillfully strategically realigned manipulated the markets to the exact same prices seen just before the July down draft.  So, thankfully, their bonuses are intact (give or take a few thousand layoffs.)   What do you suppose will be their reaction when, whilst bagging a baroness in St Barts or an elephant in Tanzania (photo safaris are for wimps),  another chart like this makes it past the junk mail filter?

UPDATE:  DEC 30 — 4:30 AM

I believe we have at most two more trading sessions before the bottom falls out of this market.   The fractal and the analog are muy preggo, and are simply awaiting the procession of Bentley’s to return from the North Shore.  Come Tuesday, the MD’s will take their respective tillers and run this leaky ship properly aground.

Some of the charts I’m watching…

 

 

 

Note that the NYA has better form than SPX for analog purposes.   When seen stacked with SPX, the pattern is nearly identical.  One key difference is the lack of an overshoot on the latest 2nd peak.  This is more in keeping with the July pattern, and makes for cleaner harmonic patterns, as well.

I don’t often look at long bonds, but the ten year tsy’s pretty interesting.  For those wondering if yields can go any lower, the bottom of the channel is down at 1.40% – a logical turning point.

 

UPDATE:  3:20 PM

Just tagged the 61.8% retrace and formed a little rising wedge on the day.   That could be it for wave 2, although 1264 (the .786) and 1267 (the .886) are still on the table.    A benefit the higher targets is that we’d complete a Gartley or Bat pattern — giving us more momentum going into the next down leg.

For those of you who follow VIX, it’s interesting to note that even after today’s retracement it’s locked in a nice little rising channel that should see it break out of the very large falling wedge (green, dashed) it’s been in since August — probably on Monday.  It completed a 5-wave advance yesterday at 23.56 — a 16% increase in 3 days.

This would be about 72% of the time from inception to apex, compared to 76% for the last falling wedge.

With volume being so incredibly low, it’s cheap and easy for market makers to run stocks up and trap a few more bulls.  It’ll be interesting to see the ISEE call/put numbers at the end of the day.

UPDATE:  DEC 29 — 10:20 AM

The bounce continues, with SPX up 7 to retrace almost 50% of yesterday’s losses.   I imagine we’ll go a bit beyond this and at least back test the SMA 200 at 1258.88 and the 20-period SMA on the 60-min chart at 1260.  The 61.8% Fib retracement is just above, at 1261.45.  But, be aware that many wave 2 retracements over the past several months have gone as high as the .786 and .886 levels.

This morning’s EURUSD rally appears to be running out of steam.  We completed a small, messy Butterfly pattern yesterday; it never quite reached the required .786 Point B, so is likely a Crab instead.  What we got, though, was a little breather at the 1.272 extension.

Looking at the 60-min chart, it’s obvious EUR is running into a buzz saw of overhead resistance and should soon resume its descent to 1.2464.

More later.

UPDATE:  6:00 PM

We closed at 1249.64, down 15.79 (1.25%) on the day.  It’s a pretty good start on what should be a very substantial decline.  We traced out a small counterwave from 1250-1254, but it’s not clear whether there’s more of a bounce in store.

More later.

UPDATE:  2:25 PM

Appears as though we completed the bounce.  Decline seems to have resumed as was indicated by RSI TLs (see 12:00 post below.)

UPDATE:  1:40 PM

Bounced at 1250 as expected.  Now, just tagged the RSI TL’s on 5, 15 and 60-min time frames at 1254.11, would be an ideal place for the decline to resume.

UPDATE:  DEC 28 — 12:00 PM

A nice kickoff for the decline we’re been waiting for…

We should expect to see a little bounce somewhere around 1250, as RSI bounces between a declining support TL (1) and an overhead TL of resistance (2) before resuming the downdraft to TL 3.

UPDATE:  4:15 PM EST

Signing out with an update of the fractal and analog charts.  I wish you all a great rest of the day.

While we’re looking a little hinky on the analog 2011 v 2008 comparison — with a day 165 that exceeds day 152 — I still have faith in its validity.

The most bearish trend line I can draw off the 1370 high is one that eliminates the shadow and cuts right through the July highs and connects with day 125’s high (July was an overshoot for analog purposes.)  That trend line was within 1/2 point of today’s high.  So, is it valid?

My preferred method for testing the validity of a trend line is to draw parallel lines (channels) and see if they also “work.”    I think they do — very well, in fact.

Another favorite method is to slap a regression channel on a chart and see how it compares.  The 1 standard deviation regression channel (beginning at the Feb 18 high) lines up almost perfectly with the trend line in question.  I fact, a few days passage of time will probably see them overlap perfectly.

The former channels and the regression channels all tie in nicely, by the way, with trend lines/ channels established in the 2007/8 top, so I’m inclined to give them the benefit of the doubt.

Today’s mostly overlooked news included the little tidbit that we’ll exceed our national debt ceiling Friday.  Perhaps some investors will revisit the uncomfortable fact that America’s debt problem is just as serious as most other countries — worse than many.  It’s fair to say that it represents a bigger challenge than does rising consumer confidence (without commensurate increases in income) an opportunity.  Should be an interesting week.

UPDATE 3:30 PM EST

Quick look at the EURUSD charts.  First, the big picture…

…and a close-up, showing the current channel segmented into three sub-channels.  Each represents a possible path within the same slope channel that’s contained all movement since July.  The current sub-channel is essentially the “slow lane”, dropping to the Crab target of 1.2464 (-4.6%) by Jan 13.

A quicker trip is entirely possible, but an arrival any later than mid-February would mean a break from the very well-established major channel.

And, last, the Butterfly and Bat patterns we’ve watching in VIX yielded a nice reversal today, with VIX up to 22.66 from its recent low (and harmonics target) of 20.33.

That 11.5% gain will pale in comparison to the move to 30+ in the next few weeks — easily obtainable as a target of one of the harmonic patterns and/or the latest falling wedge (dashed, red lines.)

UPDATE:  2:25 PM EST

Holding steady below this morning’s high of 1269.37.  On the currency front, the dollar appears to have completed its test of the major channel, and should start up any time now.  It bounced off a rising fan line (from Apr ’08) at Point A, then a falling fan line (from Mar ’09) at Point B.

The RSI channels offer a good indication of what to expect.  At Point 1, RSI bottomed – confirming the falling channel since July 12.  The parallel channel line, once drawn, gave us both an upside target (Point 2) and a means by which to determine if/when a breakout occurred.

In back testing the upper channel line from Point 2 to Point 3, RSI established a new rising channel, the upper bound of which is a continuation of a former trend line.  Now, at the lower bound of that new channel, RSI has run out of room on the downside and should rebound higher to test the upper end of the channel — as indicated with the yellow arrow.

The slope of the forecasted RSI move indicates a move to the upper bound in the next few days — which would correlate with DX returning to the channel midline in the same time frame.  I’m looking for the next move to (at least) 83.872 to complete the crab pattern at the 1.618 extension, although if the downward move in the markets unfolds as I expect, look for it to move much further.

With DX’s daily RSI at only 56.4, there’s plenty of room to run on the upside.  As the longer-term chart illustrates, RSI topped 82 in May ’10 and 92 in Oct ’08.  If the current channel holds, DX could reach the Bat pattern (and, a Crab) target of 87 (an 8.7% move) as early as next week and as late as mid-March.

At that point, it also reaches the upper end of the channel it’s been in since 2008.  I’ll update the EUR shortly.

UPDATE:  10:30 AM EST

Although we’ve pushed a few points higher on the opening, we’re still within a rising wedge with apparent divergence on multiple time scales.   Further, we have resistance up ahead with both the downward and upward sloping channels (intersecting at 1276) that have guided much of the past year.  Volume continues to be “holiday light.”

We’ve exceeded  Dec 7’s 1267.06, meaning we’re most likely in a more complex minuette (ii) of minute [ii] that should peter out before reaching Nov 8’s high of 1277.55.   It would look something like this:

In Elliott Wave terms,  it would mean we’re about to commence minuette (iii) of minute [iii] of Minor 3 of Intermediate 1 of Primary 3.  A third of a third of a third is a big deal, even if it is in Intermediate 1.  We can expect the downdraft to be ugly.

The alternative is well known and, from what I can tell, the more prevalent view:  that we’re still tracing out an extended Minor 2 that could take us as high as 1307-1320.   It’s definitely a possibility,  although the analog and fractal argue otherwise.  But, that’s what stops are for — right?

UPDATE:  DEC 27 — 2:00 AM EST

Merry Christmas, all.  I hope everyone had a blessed holiday, surrounded by friends and family.  As for my family, we had a frenzied trip to LA followed by several much more relaxing days up the coast.  I don’t mind at all that we’ve a short week ahead of us.

Friday was a surprise to me — not that the market rose, but that it rose above 1261 to complete an Inverse H&S; pattern.  The big question now, of course — what does it mean?  Are we automatically going up 134 points?  In short, no.

First, this pattern doesn’t constitute a bottom.  In fact, it comes at a point when we’re already up 185 points from the 1074 bottom.  That makes it a continuation pattern, which just doesn’t count as much.  On his Busted H&S; Bottom page, Bulkowski states that IHS bottom patterns fail 8% of the time in bull markets.  This is not a bull market, so the failure rate should be much higher.

We saw a number of failed continuation H&S; tops in August and September.  There’s no reason we couldn’t be seeing a failed continuation bottom here.  The last such large IHS pattern peaked (the head) on March 16.  In the next four days, we only saw 29 points out of the 82-point objective increase potential.

The other issue that troubles me is that we broke an important trend line connecting July 7 and Oct 27 highs.  That TL ran through 1262 Friday, but we closed at 1265.33.  The volume was extremely light, which diminishes the validity of the move.  But, the move might be enough to embolden the bulls.  There are multiple higher trend lines of resistance ranging from 1306 – 1328.

So, which way Tuesday?  For a hint, I’m watching currencies.  Thing have been quiet on the EUR front for several days; but, there are still downgrades out there in the near future.  A very small increase could be immediately ahead, but the next big move will be down as we run smack dab into the channel boundary.

The dollar is similarly poised for a sizable move, pinballing off fan lines on its way to 83.872.

I think it’s likely we’re seeing a very deep wave 2 retrace and the next step is down.  While .618, .786 and .886 Fib retracements are the most common retracements, there have been a few wave two’s in the past year that retraced virtually the entire previous first wave.  1.000 is a Fib number, too.  And, to do so on a low volume “vacation” day seems especially right.

Still, I think it’s still prudent to employ stops to protect against any further upside surprise.   More later.

UPDATE:  DEC 23 — 3:00 PM EST

Sorry for the delay in updating.  I’m sitting in a Los Angeles Starbucks with the world’s slowest internet connection — 150 kbps.  Playing havoc with TOS desktop.

Bottom line, we reached 1263.69, which technically completes the Inverse H&S; pattern.  We’re also within spitting distance of a double top, which is a four-of-a-kind to the Bat pattern’s full house.    On the other hand, we’re still well within a (slightly adjusted) rising wedge and all the other bear signals.  So, as the market loves to do, we’re going into a 4-day weekend with the maximum ambiguity possible.

We’ve got some real negative divergence going, and RSI has broken three successive fan lines on the 15-min, a big one on the 60-min chart.  Looking very precarious for the market…but there’s still that IHS to consider.  I think this is a bull trap, so I’m going into the weekend very short with some reasonable stops — just in case.

I’ll be out of pocket for the rest of the day, so this will be my last post today.  But, I’ll post either later tonight or tomorrow and we’ll see what the rest of the day brings.

Good luck to all.

UPDATE:  DEC 23 — 10:10 AM EST

I’m continuing on this thread to make it easier to follow the fractal story.  From a bear’s perspective, we’re dangerously close to the inverse H&S; pattern completion at around 1261-2.  From a bull’s perspective, we’re dangerously close to the .886 Fib level at 1259.69.

At the .886, we’ve officially completed a bearish Bat pattern — which is the full house to the .786 Fib level’s two pair.  Does it make me nervous to be flirting with the IHS?  Like the woman says, “you betcha.”   Although nothing is certain, the RSI trends, the rising wedge (right at the apex) and the completed Butterfly within a completed Bat pattern provide reassurance.  Some charts:

Remember the VIX charts from this past Tuesday?  It looked like we were completing a Butterfly pattern (purple) within a large Bat pattern (yellow.)  They completed at 20.88 and 20.66 respectively.  Yesterday, we reached both targets — along with the intersection of two important channel lines.

Two other tidbits…  Isn’t it downright poetic that the final leg down starts at 1258ish?  As we’ve discussed many times, this has been a pivotal level going back to the last top.

 

I also find it mathematically satisfying that the next leg down starts on December 27 — though it would be December if Monday weren’t a holiday.  As astute readers will remember, December 26, 2007 was the lip of a 230-pt crevasse.

More later.

UPDATE:  12:15 PM EST

Good time to update the fractal chart…  As Reason #9’s go, it’s a doozy.

The Dec=July fractal is complete.  We could start down any time, though I imagine the ugliness will probably wait until Tuesday (it is Christmas, after all.)  If the Crab that concluded in July were to repeat to the same extent and at the same speed, we’d be looking at 983 by Jan 10.   That’s a 21% drop in 3 weeks time.

And, finally, Reason #10:  the 2011 v 2008 analog.

There are two key differences: (1) the spikes around days 125 and 144; and, (2) the harmonic patterns.  In 2008, the market produced a Point B at the .382 Fib level in May, establishing a Crab pattern that paid off nicely with pushes to the 1.272, 1.618, etc. all the way down past the 3.618 extension at 666.

On Nov 25, 2011, we established a Point B right at the .618 Fib level, meaning this is at least a Gartley pattern targeting 1121.  From there, we’ll see.  But, there are other patterns such as the fractal shown above that argue for an extension to at least a Crab’s 1.618 at 940.

Whichever way this works out, it’s been an adventure.   I take no joy in being bearish, because if this forecast works out it means many more months — maybe years — of continuing recession or even depression.   I haven’t talked much about the economy lately, as I’ve tired of pointing out the obvious.

But, IMO, we’re hanging by our fingertips.  It would be quite the Christmas miracle if we somehow resolved our financial challenges and pulled ourselves up without a great deal of real pain.  I pray we can; but, unfortunately, I don’t think we will.

Many refuse to see it coming — wishful thinking, I guess.  Or, it just hasn’t affected them yet.  My Christmas wish is that friends/followers will at least take proper precautions — lightening up on equities, buying protective puts, etc.

If I’m wrong about the past 6 months research, I think the worst that happens is a little lost profits.  A stop at 1265-1270 should take care of the upside risk.  But, if I’m right, the trip down to the 700’s will decimate many more portfolios than the last go-round.  And, given the more precarious economic situation we’re in this time, the feedback effect on the global economy will be devastating.

I’ll watch these patterns over the next several days and let you know what I see.  In the meantime, good luck to all.

–PW

UPDATE:  10:05 AM EST

And, that’s within a point of my 1253 target — close enough.  I’m going to assume this is THE TOP until the market proves me wrong.  I may be early (usually am) but I think it’s time.

For anyone counting, it completes or establishes:

(1) a small crab that started Tuesday
(2) the .786 Fib retracement of the decline since 1267
(3) the apex of a rising wedge from the 14th
(4) a parallel channel line equidistant from the last
(5) an 88.6 Fib retracement of 1267 – 1158
(6) the 5th back test of a fan line off 1158
(7) negative divergence on the 5-60 min charts
(8) the 60-min RSI channel touch I mentioned below

Not saying it couldn‘t go up any more, it wouldn’t be unusual for SPX to dance around these levels — give or take a few points — for the rest of the day.  But, those eight arguments are pretty convincing in my book.

UPDATE:  9:35 AM EST

So far, so good.  1253 looks safe as the turning point.

We’re looking at a back test as well as a channel touch for the 60-min RSI.

And, there’s negative divergence on all charts through the 30-min.  Shouldn’t be long.

UPDATE:  9:15 AM EST

With a little bump this morning, we should be able to complete a small Crab pattern up to 1251, shown here on the 15 and 60-min charts.

It also completes a rising wedge and, most importantly, approximates the .786 Fib level (1253) of the previous decline.  This has been my favorite price target for the fractal.  This should be the last hurrah.

ORIGINAL POST:   2:45 AM  EST

Yesterday’s intraday recovery probably portends a positive open in the morning, but there’s plenty of economic news coming out (initial claims, GDP, etc.) that could easily influence direction and distance.

Our channel (white, dashed) was officially broken Tuesday.  Between it and the fan lines from the Nov 25 1158 bottom, it’s been pretty easy to anticipate this past week’s moves.  However, the push we saw Tuesday and Wednesday saw the last fan line broken to the upside and the previous fan line tested again.

In a vacuum, this is a pretty bullish sign.  But, look at the rising wedge that’s being developed (with the red dashed line added).  There’s also an increasing amount of negative divergence that spells trouble for the bulls.  Any pop in the morning is likely to be limited to 1251 (1259 at the most) and short-lived.

More later.

I’ll be traveling the rest of the week, so posts will be spotty.  Here’s a quick overview of the patterns I’m closely watching.  First, the Dec = July fractal we’ve been watching since Dec 7, seen stacked as well as combined on one chart.

At 1242, we achieved a respectable .618 retrace of the recent decline — which could be all we get.   But,  in July the retrace was 84%; and we could get as high as 1260 without completing the inverse head & shoulder pattern.  The .786 retrace would be 1253 and the .886 would be 1259.

And, here’s the analog that started it all — 2011=2007/8.  This one first came to my attention in May, although it was early June before I started charting it.  There have been some divergences, for sure, but the similarities are spooky.

The info is the same on each chart — just different ways of displaying it.  Although I was most interested in the day 150 equivalent, there’s a striking similarity between day 162 in 2008 and 160 here in 2011.

If the analog holds, we’d be looking at a 200 point SPX decline (1041) between now and the end of January.  The fractal leads to the same conclusion, with a forecast Crab pattern completion at 983. 

If all this interests you, go back and read the several “Another Fractal” posts since December 7.  Good luck to all.

UPDATE:  10:45 AM

The channel lines are shaping today’s action perfectly.  The question is whether we’ll add a few points and fill out the white, dashed channel above at 1251-1255.  VIX and DX could both use a little more downside to properly set up their rise, so I’m betting the market rallies just a tad more before the plunge.   But, be careful, we’ve technically met the requirements (with the .618 touch) for the downside to have started already.

More after the close.

The fractal we’ve been watching the last couple of weeks  Another Fractal: December 7] and [Another Fractal: Update Dec 14] is playing out very accurately.

As I noted in last week’s update:

Remember the fractal I posted last week?  It’s, um…, still here.   If it were to hold perfectly, it would do a .618 Fibonacci retracement of the 109-point Nov 25 – Dec 7 rise, landing at 1200 — then rise to as high as 1255 before a violent plunge to 980. 

From Dec 7 Post

From Dec 14 Post

We got the 61.8% Fibonacci retracement yesterday — touching 1202.37 in the afternoon meltdown.  This morning, we’re continuing to follow the pattern, thus far scoring a 27-pt gain to 1233.  Here’s what the fractal looks like today.

Now, as the rest of the investing world is forgetting about the troubles of the past few weeks, they’re starting to focus on the Inverse Head & Shoulders pattern up ahead.   As we talked about two weeks ago:

I think this would get a lot of people excited, just like similar moves did back in July and previously in December 2007.  Each of those IHS patterns trapped a lot of bulls when they came up 10 points shy of completion. [see: Ten Lousy Points.]

 So, where do I think this rise will land us?  The IHS pattern would complete today around 1261 or so.  Subtracting “ten lousy points” yields 1251 (1261 – 10 = 1251.)  But, that’s oversimplifying it, right?

In July, SPX retraced 84.35% of the previous dip in the corresponding period.  That points toward 1257 (64.69 * .8435.)

Then, there’s the Fibonacci methodology.  The relevant figures are:

Any way you slice it, the turn should come somewhere around 1251 – 1257  (1258 is a key number over the past year.)  And, it should happen quickly — by tomorrow or Thursday.  After that, watch out below.

There is corroborating evidence in the VIX daily chart.  Over the past five years, VIX has traced out very clearly defined channels.

Looking a little closer, it’s apparent that VIX has not only reached the lower bounds of three intersecting channels, but is nearing the completion of a bullish Butterfly pattern (in red) within the last leg of a large Bat pattern (in purple) at 20.88 and 20.66 respectively.

A frantic push to 1251-1257 on SPX could easily knock VIX down to 20.66-20.88,  finishing off both patterns and setting the stage for a strong rise in VIX to go with the stock sell-off.

I know what you’re thinking…. we can’t have a panic sell-off without a huge dollar rally.  What’s happening with the dollar?  Here’s our well-worn daily chart, showing all the major channels and fan lines over the years.

The close-up of the current channel shows the recently completed crab pattern and subsequent (today’s) reversal.  I’m expecting a drop back to the fan line we just cracked.   It might correspond with a touch on the channel wall, but more importantly, it’ll drop below the psychologically important 80 price level (which was tested today.)

It’ll appear to be a game changer, but it’s a dollar bear/stock bull trap.  As the harmonics show, this downturn in the dollar is simply the payoff from a little Crab pattern (purple).  The bigger prize is the larger Crab pattern (in red) that completes at a minimum of 83.872.

I say “a minimum” because the similar move in 2008 blew out to a 300% extension vs the garden variety 161.8% that qualifies as a Crab.  I don’t know how high this thing can go, but I do know it won’t start with an “8.”

It’ll correspond with a huge sell-off in equities that initially sends SPX to 1181, and thereafter to 983 (if the fractal plays out exactly as July.)

I’m out the rest of the day.  Good luck to all.

UPDATE:  2:15 AM

The low for the day was 1202.37, just a smidge above the 1200 target.  Volume was on the light side, but this is the week before Christmas.   As mentioned earlier, we have positive divergence all over the place.  So, 1200 still fits as an interim bottom — although the lower target of 1190 (the .786) is still a legitimate alternative.

The channel we’ve been following this past week runs into a much larger upward sloping channel tomorrow or Wednesday.  I expect a bounce either here or 1190, and then a more dramatic downdraft to follow.  Stay tuned.

UPDATE:  3:40 PM

Within 3 pts of our 1200 target and the .618 Fib level.  As expected, there’s positive divergence on every chart between 5 and 60 minutes.

UPDATE:  2:00 PM

We dropped through the fan line and are in the process of back testing it.  The channel ranges from 1220 down to 1190 today, so lots of possibilities.  1200 is the .618 Fib of the 1158 to 1267 rise, so it remains our most likely short-range target.

Too early to say, but it appears as though we’re setting up for some positive divergence, meaning SPX will register a lower low while the RSI doesn’t dip to the same extent.   The outcome would likely be a rebound in SPX to match the RSI numbers.

And, an updated peek at our Dec=July fractal…

The daily chart shows the approach to the .618 Fib and the large up and down channels.  Just eyeballing it here, it looks like a completion of the inverse H&S; pattern would have to happen by Wednesday in order for it to remain inside the downward-sloping (white, dashed) channel.

That fits my timeline just fine.

ORIGINAL POST:  9:45 AM

So far, a replay of the past several days.   Positive action in the futures overnight, gap up, gradual sell-off.  Either the channel or the back test of the last fan line runs out of time today.

More later.

The Night Before Christmas (Legal Style)

Whereas, on or about the night prior to Christmas, there did
occur at a certain improved piece of real property
(hereinafter “the House”) a general lack of stirring by all
creatures therein, including, but not limited to a mouse.

A variety of foot apparel, e.g., stockings, socks, etc., had
been affixed by and around the chimney in said House in the
hope and/or belief that St. Nick aka St. Nicholas aka Santa
Claus (hereinafter “Claus”) would arrive at sometime
thereafter.

The minor residents, i.e., the children, of the
aforementioned House were located in their individual beds
and were engaged in nocturnal hallucinations, i.e., dreams,
wherein visions of confectionery treats, including, but not
limited to, candies, nuts, and/or sugar plums, did dance,
cavort, and otherwise appear in said dreams.

Whereupon the party of the first part (sometimes hereinafter
referred to as “I”), being the joint-owner in fee simple of
the House with the parts of the second part (hereinafter
“Mamma”), and said Mamma had retired for a sustained period
of sleep. (At such time, the parties were clad in various
forms of headgear, e.g., kerchief and cap.)

Suddenly, and without prior notice or warning, there did
occur upon the unimproved real property adjacent and
appurtenant to said House, i.e., the lawn, a certain
disruption of unknown nature, cause, and/or circumstance.
The party of the first part did immediately rush to a window
in the House to investigate the cause of such disturbance.

At that time, the party of the first part did observe, with
some degree of wonder and/or disbelief, a miniature sleigh
(hereinafter “the Vehicle”) being pulled and/or drawn very
rapidly through the air by approximately eight (8) reindeer.
The driver of the Vehicle appeared to be, and in fact was,
the previously referenced Claus.

Said Claus was providing specific direction, instruction,
and guidance to the approximately eight (8) reindeer and
specifically identified the animal co-conspirators by name:
Dasher, Dancer, Prancer, Vixen, Comet, Cupid, Donner, and
Blitzen (hereinafter “the Deer”). (Upon information and
belief, it is further asserted that an additional
co-conspirator named “Rudolph” may have been involved.)

The party of the first part witnessed Claus, the Vehicle,
and the Deer intentionally and willfully trespass upon the
roofs of several residences located adjacent to and in the
vicinity of the House, and noted that the Vehicle was
heavily laden with packages, toys, and other items of
unknown origin or nature. Suddenly, without prior invitation
or permission, either express or implied, the Vehicle
arrived at the House, and Claus entered said House via the
chimney.

Said Claus was clad in a red fur suit, which was partially
covered with residue from the chimney, and he carried a
large sack containing a portion of the aforementioned
packages, toys, and other unknown items. He was smoking what
appeared to be tobacco in a small pipe in blatant violation
of local ordinances and health regulations.

Claus did not speak, but immediately began to fill the
stockings of the minor children, which hung adjacent to the
chimney, with toys and other small gifts. (Said items did
not, however, constitute “gifts” to said minor pursuant to
the applicable provisions of the U.S. Tax Code.)

Upon completion of such task, Claus touched the side of his
nose and flew, rose, and/or ascended up the chimney of the
House to the roof where the Vehicle and Deer waited and/or
served as “lookouts.” Claus immediately departed for an
unknown destination.

However, prior to the departure of the Vehicle, Deer, and
Claus from said House, the party of the first part did hear
Claus state and/or exclaim: “Merry Christmas to all and to
all a good night!” Or words to that effect.

DISCLAIMER: Please accept without obligation, express or implied, these best wishes for an environmentally safe, socially responsible, low stress, non addictive, and gender neutral celebration of the winter solstice holiday as practiced within the most enjoyable traditions of the religious persuasion of your choice (but with respect for the religious or secular persuasions and/or traditions of others, or for their choice not to practice religious or secular traditions at all) and further for a fiscally successful, personally fulfilling, and medically uncomplicated onset of the generally accepted calendar year (including, but not limited to, the Christian calendar, but not without due respect for the calendars of choice of other cultures). The preceding wishes are extended without regard to the race, creed, colour, age, physical ability, religious faith, choice of computer platform, or sexual preference of the wishee(s).

UPDATE:  3:40 PM EST

Looks like our 4th OPEX in a row closing around 1220.  Coincidence?  I think not.

UPDATE:  12:45 PM EST

In basketball, the expression would be “get that **** out of here.”   Investors just rejected the spike to 1230 in a big way, taking us back to flat on the day.

Take a look at the RSI trend line I proposed several hours ago.  I thought it might be a back test of a broken TL, and that’s exactly what happened.  Even an alternate TL drawn without considering a back test has been broken, and from here the market is all but certain to drop.  The only thing holding it up at this point is the fan line off the 1158 lows.  If that breaks, 1200 will be get in a jiffy.

That was a 15-pt assault executed specifically to shake weak bears out of the market.  Puts were sold, shorts were covered, etc. — all so market makers wouldn’t have to take a bath on their underwater positions.   When people talk about market fundamentals and efficiencies, they’re ignoring these games that TPTB play every day.

Notice we back tested the former fan line a second time.  The same thing happened in the closing 90 minutes on the 17th.  We spiked 16 points to 1267, only to give back 36 points the following day as the market was establishing the channel in which we now find ourselves.

A fall back to the channel bottom from here would land us right at 1200.   The channel’s declining about 6 points per day, so Monday’s channel bottom would be a little lower, etc.  My top three candidates for the bottom, in order, are 1200 (.618 Fib, channel line, round number), 1181 (.786 Fib, channel line) and 1171 (.886 Fib, channel line.)

My top scenario is still a tag of 1200.  I anticipate RSI will break the alternate line when SPX breaks its fan line, then skirt along the top of the purple channel without reentering it. It’ll fall some, but not enough to reflect the 20-pt drop in SPX, setting up positive divergence for one last trip back up to a number just shy of the IH&S; completion (around 1255.)

UPDATE:  11:00 AM EST

Well, we’ve gone to 1230 — as noted below, the highest level we could go without breaking the back test and/or the channel.  While there’s plenty of downside pressure, the market seems content to sit here for now — typical of OPEX Friday.  It’s analogous to a race where the participants line up a few feet from the finish line and wait for the starter’s pistol. 

It gives us a little time to review the bigger patterns in the daily charts.

You can see our current little channel drawn with white, dashed lines.  These channel lines, BTW, are at the same slope of many others we’ve drawn over the months, so they’re probably fairly reliable — which means a break out of the channel in either direction will be significant.  It also means the next step up should halt at a parallel channel.

This is worth knowing, because if the fractal between Oct – Dec and Mar – July means anything, the next channel up could be the upper bound of the major channel that takes prices down a few hundred points starting next week.  [Of course, if the fractal (and the 2011 v 2007/8 analog) really hold, the start down began at 1292 — in a sense, the equivalent of May 2’s 1370.] 

Note the slope of the small white channel we’re in now is the same as that of July’s.  Note, also, the Fibonacci retracements in each time frame.  In July, the retracement was to the .618 level.  This time, we’ve reached the .500 level, and the .618 level is down below at 1200 (hence, the call for a dip to 1200 before the final push up.)

More later.

UPDATE:  9:50 AM EST

SPX gapped open to match the futures, but immediately started drifting lower.  For now, it just doesn’t have the juice to break out of its channel.  The RSI has broken out of its primary channel for the third time.

Notice the three little spikes that have corresponded with tests of the upper channel boundaries.  This latest one could be viewed as a back test of the RSI trend line off Wednesday morning’s lows.  It falls in a line with the two previous spikes, and has the effect of potentially setting up a positive divergence if the market will ever get on with the dip to 1200 I expect (post OPEX, it now appears.)

SPX itself is repeating the back test of the trend line before it, and could go as high as 1230ish in its attempt without breaking out of the primary channel.

More later.

ORIGINAL POST:   9:20 AM EST

The Gartley we saw complete on the e-minis yesterday has extended to a Bat pattern, meaning the overnight ramp job should reverse, still within the its channel.

The falling wedge has disappeared with yesterday’s and last nights sideways action, leaving an extension of the same channel that’s been guiding prices lower since Dec 5.  It clears the way for lower prices in the coming days.  Although, today is OPEX (options expiration) Friday, when anything can happen but typically nothing does.

Looking at the 60-min chart, it appears as though the RSI trend line has broken through its rising support.  So, the table is set for a decent drop.

I’ll post some SPX and currency charts shortly.

 **************

for Curiousmind….Poss fractal for DX? We’re off to a good start.  A similar move off the bottom would indicate a 2.618 extension up to 95.882.  The obvious divergence with the dip between Oct & Nov, vs 2008’s price going parabolic at that point.

UPDATE:  12:45 PM

I have to be out the rest of the day, but here’s what I see going on right now.  We’re still in backtest mode on just about everything.  SPX, in particular, is testing the fan line we talk about below.  If we drop below 1214, look for a downdraft to 1200 or lower.

EURUSD completed a bearish Bat pattern this morning, reversing right on the .886 Fib level.  Since then, it’s fallen back some but is still loitering around 1.300.  I look for it to fall off more as stocks decline.  Note that it reached its intraday low of 1.2957 around 4am, when the SPX futures were right at 1200.

A return to these levels during cash trading hours would satisfy the ideal fractal conditions perfectly.  It would also complete a falling wedge with positive divergence for SPX, and complete a bullish Bat or Crab pattern for EURUSD.  In other words, promising conditions for a return to SPX 1255 and EUR 1.32-1.33.

I’ll post more later after the close.

UPDATE:  11:30 AM

The market caught a bid, and flirted with a return to double-digit gains.  It’s more likely, though,  just backtesting the last fan line.  The decline over the past few days has been a textbook example of using fan lines in technical analysis.

Note how each trip to the channel bottom (white, dashed line) produces a new interim low.  If we draw a line between that new interim low and the most recent significant low — in this case, 1158.66 — we have a fan line.  We’ll mark the point of intersection “A” and the fan lines as the purple dashed lines.

After each new low, the market bounces (otherwise it wouldn’t be a low, but a one in a series of lower prices.)  When that bounce reaches the fan line from the previous Point A, it “tests” it.  These backtests are all marked with a Point B.

Sometimes the backtest reaches all the way to the previous fan line; sometimes it doesn’t.  But, wherever it runs out of steam, it’s now headed back toward the fan line it just created.  Occasionally it’ll bounce there; but, regardless, when it breaks through that fan line it can fall hard and fast.

I mention all this because this morning’s rally is clearly a backtest of the previous fan line.  For it to have any staying power, it must break through that fan line and reach higher highs.  Otherwise, it’s doomed to drop like a rock right through the fan line it just created.  That line runs through about 1212 right now, so watch that price level.

BTW, I’ve added a TL (solid powder blue) to the chart connecting today’s and Tuesday’s highs to create a falling wedge. If it holds, it has an apex of around 1181 tomorrow.   This is our secondary downside target, but falling wedges rarely fall all the way to their apex.  I’m still looking at 1200 as a more likely target.

More later.

UPDATE:  10:35 AM

The fizzle is on. We’ve given up most of this morning’s gains and are fast heading towards negative territory.   We reversed right at the .382 Fib (1225.6 v 1225.65 predicted) and closed yesterday’s gap in the process.

EUR’s bat pattern reversed as expected, with a nice bounce off the upper bound of the channel.  Ditto for the dollar.

Check out the RSI on the 30-min chart.

Each trip between the channel lows and highs suggests a trend line that connects the lowest values in the pattern.  As long as RSI remains above the trend line, everything’s good.  But, as RSI approaches the upper boundary of the channel, it has to “decide” between obeying the trend line or the channel.   The channel, being longer and stronger, has ruled so far.

We’re approaching the upper channel boundary again.  So, keep an eye out for a break in the trend line.  It’ll be a clear signal of further downside.  Conversely, a break out of the channel will be very bullish.

ORIGINAL POST:   9:30 AM

The market is going to open up this morning, but will it be enough to break the downtrend? 

We discussed the possibility of a falling wedge in EURUSD yesterday.  While EUR is up .5%, it’s possibly just expanding the wedge into a channel.  We’ll see whether it can break out of the solid yellow channel, and whether its RSI remains below the fall-back trend line.  On top of all that, the 60-min chart shows a completed Bat pattern, indicating a reversal at 1.3050.

The dollar, likewise, has had a nice move but hasn’t broken down yet — necessary for a significant stock rally.  Its RSI trend line is intact, and it appears to be backtesting the .500 Fib line.  We discussed yesterday the unlikely possibility that DX would zoom through this important Fib line in 24 hours, while the .382 line took weeks.

If this is a back test, and if EUR is still safely in its channel, look for this morning’s rally to fizzle.  In fact, the channels on SPX are still very much intact.

The SPX price channel is unbroken, even after a 13-pt gain — as is its RSI channel.  A breakout of either of these would mark a shift in momentum.   As currently drawn, the price channel could accommodate a rise to 1237 or so.  But, I don’t think we’ll reach it just yet.  We’re likely going to test the .382 Fib at 1225.65 and the 20-period SMA (1226) and back off from there.

This morning’s bump does a slight amount of damage to the fractal pattern.   If we are heading up, I’d rather it have happened following a lower low than yesterday’s 1209; but, it’s not necessary.  The 1200 figure is a Fibonacci ideal, meaning a 61.8% retracement of the recent rise just like we saw in July.  Yesterday we reached 55%.  It’s close enough, but would pencil out better at the higher Fib level.

If this morning’s rally does fizzle and we head back down, 1200 is well within the current channel’s boundaries today.  But, taking a full day to get there would put us slightly behind the fractal’s schedule.

Unlike the 2007/8 analog, this fractal isn’t running by the same clock.  About 2 days go by in the current pattern for every 3 in the Mar-July time period.  So, a comparison isn’t quite as precise.  I had expected the rise to start by options expiration Friday (tomorrow), salvaging market makers’ portfolios.  But, looking closely at the chart, I think the top of the coming rise should come around Wednesday of next week, give or take.  That leaves plenty of time for a 50-pt ramp job.

More later.

Remember the fractal I posted last week?  It’s, um…, still here.   If it were to hold perfectly, it would do a .618 Fibonacci retracement of the 109-point Nov 25 – Dec 7 rise, landing at 1200 — then rise to as high as 1255 before a violent plunge to 980.  As for the rise, OPEX Friday would be ideal, but anytime in the next few sessions would fit.

A 275 point plunge is nothing to sneeze at.  So, I’m posting this again in the hopes that having more eyeballs on it will help verify its veracity.   The above chart shows the comparable points.  The charts below provide a better idea of the scale of the moves.

If you just plain don’t believe in fractals/analogs, that’s okay.  But, before you blow it off, consider these posts I made in July after discovering the comparisons between the 2007 top and the 2011 top in late May.

       July 20:  http://pebblewriter.blogspot.com/2011/07/merry-christmas.html
       July 21:  http://pebblewriter.blogspot.com/2011/07/pulling-trigger.html
                      http://pebblewriter.blogspot.com/2011/07/so-far-so-far.html
       July 26:  http://pebblewriter.blogspot.com/2011/07/all-aboard.html
       July 26:  http://pebblewriter.blogspot.com/2011/07/happy-new-year.htm

I suppose you could say it worked out pretty well so far.

The one caveat:  this market hasn’t gone exactly as the last.   We had some pretty significant deviations around days 125 and 144.  We could have another deviation, too.  Although the odds are fading, there’s a slight chance we’ll reach up and tag 1307-1313 instead of 1255 before heading down in earnest.  If we surpass 1266, this entire forecast will likely need a major revision.

There’s also the possibility — given all the problems facing markets worldwide — that the whole thing takes a big, juicy dump right here, right now.  No black swans required.

Bottom line, keep your eyes peeled.  If this fractal holds much longer, there is significant risk ahead for anyone not paying attention — and potential rewards for those who are.

UPDATE:  6:00 PM

Fresh from the “How ‘Bout That?” department, Citi’s FX Technical Group is out with some analysis naming 985 as a potential target based on a comparison with 1978.  You can read the article here.

UPDATE:  1:20 PM

Update on EUR and DX.  Both are in a wedge, but with scant signs of divergence yet.  We could see a reversal any minute, but the key is whether there’s a break out — not just a move within the wedge.

My best guess is EURUSD is going to want to back test the psychologically important 1.30 level.  Note the solid red line now just below DX.  That’s the fan line we talked about last night (this morning!?!).  It runs from the April 08 lows through the Feb 14 and Oct 4 highs.  We should expect at least a little back test here.

UPDATE:  12:20 PM

DX appears to be backtesting the 1.618, otherwise still going strong.  Note the RSI seems to be testing its trendline.  The next move should be higher.

This correlates with the opposite move in EURUSD.

SPX trying to dig in, here.  It appears as though we broke the white channel and are backtesting it.  The RSI channel story indicates further downside.

But, I’m also keeping an eye on some potential resistance from a previously established channel.  It’s not a great channel, having been penetrated on both the upside and downside.  But, it might come into play here.  It’s shown below as the purple lines.

UPDATE:  11:25 AM

As we approach the .382 Fib of the 1074 — 1292 advance (1209.43) it’s probably a good time to review the harmonic picture for SPX.

I have two patterns shown on the chart above.  The purple pattern is a Gartley in the making.  Point B hit the .618 retracement exactly, and the .786 looms up ahead at 1121.

The red pattern is either a Bat or a Crab.  We don’t know yet, because with a Point B at .50 (its current position) it could be either.  A Bat would target the .886 at 1170 and a Crab the 1.618 at 1091.  I must admit, I favor the Crab pattern, because 1091 coincides with a huge H&S; completion target as well as one of our intermediate channels (the white dotted lines.)

If it reverses at its .618 (1200), it’s likely a Gartley with its own .786 target (1182.)  If it continues as far as the .786 at 1182, it’s a Butterfly with a target of the 1.272 extension at 1129.   One critical requirement of a Crab is that its Point B come in at less than a .618 retracement of the XA leg.  So, Gartley’s can and do extend to become Crabs — meaning, again, the 1.618 extension to 1091.

At some point in this decline, we’ll take a meaningful pause.  The dollar and euro need to consolidate, too.  DX spent three weeks consolidating around the .382 Fib level, and so far a mere 24 hours around the .500 level.

A logical spot would be a backtest (of everything) at around 1200.  I think it’s psychologically important to investors and, as mentioned above, it’s an important .618 Fib retracement of the powerful advance we saw between Nov 25 and Dec 5.

But, wherever we do reverse, it’ll be to set up a Point C in the smaller, red pattern and begin the more serious decline to Points D on both patterns.  One point to remember:  a rebound higher than 1266 means we’re likely going to put in one last high (1307-1313) before the next wave down.  I don’t expect it, but I feel obligated to keep mentioning it until it’s out of the picture.

There are two other dangers lurking out there for bears.  I still think there’s a good possibility that, on any meaningful rally, we’ll get close to completing an inverse head & shoulders pattern — just to shake out some bears and trap a lot of bulls.

I talked about this extensively last week; a bounce to 1255 or so would do it.  Note that 1255 would correspond with the TL (yellow, dashed) off the July highs.  I’ve drawn the IHS neckline as a solid yellow line.   See the Dec 9 post for charts of this and the several previous fake-outs.

If we were to reverse here at 1209, a .786 retrace would get us to 1255.  From 1200, a .786 retrace would reach 1252.

We’re also nearing the lower boundary of the channel that’s guided the upside since the 1074 lows (the broad, red channel.)  We could easily see a decent bounce here, as it also represents a major fan line.  Note how the three previous fan lines off 1074 (the yellow, dashed lines) provided a bounce before they were eventually broken.

UPDATE:  10:45 AM

SPX tagged our 1213.28 target (1213.21…close enough) and is lingering in the 1215 range.  It’s not oversold on any of my charts, but is pausing after completing the Crab pattern at the 1.618 extension, backtesting the yellow channel and tagging the white channel. 

I’m watching the 5-min and 15-min charts (note the RSI channel) for signs of a reversal, but the bears are still driving this bus — for now.

This is always the hardest part of investing, for me — letting profits run.  The temptation is to take profits in anticipation of a turn, but as we’ve learned so many times over the past few months, this market has been marked by excesses and throw overs.

Ron Walker has an interesting technique, where he watches moving averages on the 5-min and 15-min charts intra-day.  In an ideal falling market, the 10-period MA would be lower than than the 20 which would be lower than the 50 — the “moving average trio” he calls it.

It works pretty well, except when we get into periods of chop.  Then, one can look to the 15-min chart and observe the same MA’s.   When they get out of align (e.g. the 10 crosses above the 20) it’s a sign of a shift in momentum.  I like to also look at RSI trend lines and channels, as they tell a similar story in a different way.  Confirmation is always good.

ORIGINAL POST:

Between the horrid Italian auction (6.47% on 5 yrs), China hitting US car co’s with duties, etc… it’s possible that’s all the consolidation we’re going to see at all those 1.618 Fib extensions mentioned yesterday.   Crabs can and do continue out to larger extensions (2.0, 2.24, 2.618, 3.0, 3.618), it’s just that the 1.618 is the most common reversal.  Best to keep a close eye on things and see where the momentum takes us.

Next target on EUR/USD is completion of another larger Crab at 1.2464.   Although, we’ve backed away from the channel boundary, so there’s potentially more time for the pattern to complete.  I don’t think it will, but it could take as long as the end of January and still stay within the channel.

The dollar is also surging past its 1.618, with the next harmonics target the 1.618 of the larger Crab at 83.872 (the 3.00 ext of the smaller Crab.)

SPX is working on its own little Crab pattern that completes at 1213.28.

Here’s the medium term picture on SPX.  This morning’s decline clearly took us out of the channel (yellow, dashed) that’s guided the downside since Nov 30 and the upside since Oct 27 (the longer of the two yellow, dashed trend lines.)

Monday, I proposed a new, steeper channel (shown in white) to guide the downside.  Its slope is around 30 pts per week.  Now, we’re already bumping up against the lower boundary of that channel, too.  We also just hit the above-mentioned 1.618 target of 1213.21 – so things are moving fast.

More later.