EOD:  7:00 PM

The broken RSI trend line on the 60-min chart may or may not have completed its backtest.  If so, it was feeble, but may have been enough.  Regardless, the RSI hit a 6-month record high — significant in and of itself.  The hourly MACD also turned negative.

Another interesting development today, we completed a Bat pattern on the hourly chart and most of a Gartley on the 15-min chart.  The Bat is seen below in green.  The small purple pattern seen at the terminus (near the letter C) is a Gartley, better seen on the 2nd chart below.

On the 15-min chart, we can also see the makings of a symmetrical triangle.  These can break either way, of course, but the last symmetrical triangle we had broke for 100+ points to the downside.  And completion of this little Gartley could help it on its way.

Extrapolating out, a competed Gartley could also set up a little head & shoulders pattern that would ultimately target 1215.    I’m always on the lookout for H&S; patterns on the way down after a big run up like we had.  Given the interim stops along the way up, there’s a good chance we get some cascading H&S; patterns on the way down.

UPDATE:  3:15 PM

If we do hold at these levels and the reversal begins tomorrow, this is what a Gartley Pattern would portend.  Shown here on the 60-minute chart:

And, the daily chart:

I’ve drawn the downdraft to 1121 because it’s the .786 Gartley target.  But, remember, Gartley’s can extend as happened on Aug 1.  The decline stalled at the .786 (1279), resumed falling to the 1.618 (1200) where it stalled again, and didn’t stop falling until it had reached 1101 3 days later at the 2.618 extension.  Lots of money left on the table during that plunge, including by yours truly.

Just for grins, here are the corresponding values this go ’round:

If this is a 3rd wave down, any of those numbers is very reachable in the next few months.  Each of them is significant, too, corresponding with horizontal support or a major trend line.  But, I’ll address that topic if and when we head in that direction.

UPDATE:  1:50 PM

Just noticed the 60-min chart RSI has broken its trend line.  Not a good development for those waiting for more upside.  The MACD looks like it’s going negative by the end of the day, too.  With any luck, we’ll get a slightly higher high on the day, but a lower RSI on the backtest, setting up negative divergence on the 60-min chart. 

ORIGINAL POST  10:40 AM

This feels very much like the quiet before the storm.  Yesterday’s ramp is showing absolutely no follow-through as of yet.   Even the mainstream media, after a day of deep thinking, has realized that the central bank love fest, while leaving everyone feeling all warm and tingly for a day, is likely to result in an embarrassing new rash.

Here’s a quick look at our daily chart:

Note we’re reached the apex of the triangle we talked about so much over the past two weeks.  It’s formed by the trend line down from the Oct 27, 1292 high and another trend line up from the Aug 9 low of 1101.   I originally charted the apex as December 2 or December 5, but it looks to be about there now.

I’ve labeled this as Point C of a potential Gartley pattern that started with Point X at 1074, Point A at 1292 and the crucial .618 Fib Point B at last week’s 1158.   If the pattern plays out, the next stop is Point D at the .786 Fib level, or 1121.  This is a significant 10% move in the very near future.

Could we go higher?  Absolutely.  Many Elliott Wavers insist we will.  But, I have very strong reservations.

Take a look at the descending red RSI trend line.  Note that it’s stopped six advances in their tracks.  The only time the RSI broke through was the 1292 high, which I have always viewed as an overshoot.  We’ve bumped right up against it a 7th time.  The odds favor another downturn.

The purple RSI trend line, which has acted as support since August 8, was broken on Nov 16.  Since then, it been in back test mode.  Yesterday’s advance brought RSI all the way back to the line, but it couldn’t climb back on top.  This adds to the bearish case.

Tomorrow, of course, is the 150th day since the 1370 May 2 high.  In 2008, the 150th day was the beginning of the final 10-month, 50% plunge.  While the price comparisons have become less relevant over the past few weeks, the timing of several reversals has been in sync.  Here’s a current look:

BTW, the beginning of the end in the 2000 topping pattern occurred 157 days after the high.  The 2000 equivalent of our 1292 (day 125 in 2011) occurred on day 112.  There are other similarities, such as our July peaks (days 46 and 57), and some pretty major divergence in terms 2001’s days 67 – 112.

But, the inescapable similarity is that day 157 completed a back test of the trend line off the pattern lows (the solid yellow line coming up from day 15.)  We’ve done the same here in 2011, and I expect the results to be similar.  The 2000 market lost 25% over the next 4 1/2 months, 35% over the next 10 months and nearly 50% over the following 20 months.  Here’s a better view of all three tops:

2000 Top and Back Test

2007/8 Top and Back Test

2011 Top and Back Test

Next, the parallel, downward-sloping channels (purple, dashed) that have guided this market since last February argue for a reversal right about here.  The line currently in play got the party started when it stopped the Feb 18 advance.

It subsequently stopped the April advance, several May declines, a June advance, the initial July decline and movements both ways of 8 of the past 28 sessions. There’s something very symmetrically pleasing about a trend line that extends from the first day to the last day of a market top.

Last, when we add parallel trend lines to those which define the above-mentioned triangle, we can see pretty nicely defined channels.  The pair of solid yellow lines guided the market up from the August lows.  The pair of dashed yellow lines have guided the decline since the 1292 high.  This channel also argues for a reversal at this point.

The day is young, but we’re establishing a candle pattern that looks suspiciously like those of Jul 22, Aug 22, October 28 and Nov 25.  I’ve taken profits on most of my long positions and am easing into an overall short position.  If I don’t see a resumption of the upside momentum muy pronto, I’ll likely set up for a fairly strong reversal in the next day or two.

Good luck to all.

Perhaps a better title would be:  Whadda you lookin’ at!?!

In a replay of September 15, the Fed has essentially offered to swap out US dollars for all the crappy collateral the rest of the world can throw our way.  Below, in its entirety, is my analysis from the last time.  Turn off CNBC and read; I promise it’s worth the 10 minutes.

Nothing has changed except the numbers, which are much bigger this time.  The punchline?  These things boost markets for a couple days, then look out below.  These are the interventions I found last go ’round:

                                                                         SPX              DX

                       December 12, 2007                 1512              75.92
                       low/high next 3 days               1445              77.49
                       low/high next 35 days             1270              77.85

                        May 9, 2010                            1164              83.07
                        low/high next 3 day                1156              85.57
                        low/high next 30 days             1011              88.91

                        Aug 24, 2011                          1208              73.72
                        low/high next 3 day                1121              74.55
                        low/high next 35 days             1121              78.30
                                  (so far)

When the September 15 intervention occurred, I concluded that “today’s rally isn’t justified.”  Sure enough, the 21 points we gained that day (and 11 the next) were followed by a 1-wk 100-pt plunge.  Twelve sessions later, we had lost 146 points to the 1074 low.

The lesson here is that if things are so bad that the Fed needs to resort to these measures, then things are very bad indeed (duh!)  And, it’s probably just a matter of days (Friday is day 150) before the rest of the world gets it.

The World’s Biggest Pawn Shop 

pebblewriter.blogspot.com 

Sept 15, 2011

On a day when Marketwatch warns…

We first started this back on December 12, 2007.  From the NY Fed’s research publication Current Issues in Economics and Finance, Apr 23, 2010:

We took Euros and Swiss Francs and Japanese Yen and NZ Dollars that no one wanted and gave them US Dollars in exchange.  These central banks could loan these valuable greenbacks to their financial institutions who would (theoretically) lend them out to (theoretically) worthy borrowers — keeping liquidity alive and jumpstarting the economy.  It would also (theoretically) put a floor under the foreign currencies’ values and keep them viable in the global finance marketplace. 

Back then, financing had dried up because several large banks, investment banks and a hedge fund in insurance company clothing (AIG) had failed or were in the process of failing.  They were failing because of a newly developed but widely circulated idea that loans ought to be backed by adequate collateral.  Those that weren’t probably weren’t worth all that much.

Today, financing in the Euro zone has dried up because the Euro zone, itself, is in the process of failing.  Some foreign and Euro-based investors are convinced that making loans there is throwing good money after bad.  As I blogged a few days ago:

Deposits by financial institutions in Germany off 12% since Jan ’10, 24% since Sep ’08.  France, oddly, not as bad at 6% and 14%.  Italy off 1% in retail dep’s (serious money’s already gone), 13% ($100B) by financial insitutions.  In other words, banks don’t trust each other.

Fitch says US Money Market funds cut lending to Euro banks 20% in last 3 months (Germany-42%, French-18%, Spain and Italy 97%.)  At $1.5 Trillion, MMF’s are a vital source of funding. 

The ECB can’t make up for all that, but it’s trying.  Italy – EUR 85B in three months; Greek and Ireland – EUR 100B each in August; Portugal – EUR 46B in July; Spain – EUR 52B in July.  Total lending so far = 7X Euro zone central banks’ combined capital.

Total exposure in loans from other Euro countries to PIGS: $1.7 Trillion.  Lots more in guarantees and derivatives.  

Total swaps outstanding under the 2007 program peaked at $580 billion in December 2008.  At the time, this represented about 25% of the Fed’s total assets.  The program was officially terminated in February, 2010.  As the April 23 Fed article points out, market conditions had improved and financial strains had abated.

Two weeks later, on May 9, the Fed announced…

Apparently the system wasn’t quite ready to stop sucking the liquidity teat.  The ECB immediately drew down $5.5B, bumping that to $500B in both August and October 2010 and finally zeroing it out in March 2011.

All was fine until last month, when the Swiss National Bank unexpectedly drew down $200B.  It was followed the next week (Aug 24) by the ECB and another $500B.

Then, today’s news, and a 20-point SPX rally.  Is this really that great a development?  Let’s look at how both the dollar and the stock market performed following previous manipulations.

                                                                         SPX              DX

                       December 12, 2007                 1512              75.92
                       low/high next 3 days               1445              77.49
                       low/high next 35 days             1270              77.85

                        May 9, 2010                            1164              83.07
                        low/high next 3 day                1156              85.57
                        low/high next 30 days             1011              88.91

                        Aug 24, 2011                          1208              73.72
                        low/high next 3 day                1121              74.55
                        low/high next 35 days             1121              78.30
                                  (so far)

Bottom line, each intervention did diddly squat for stock investors.  Today’s rally isn’t justified.

But, more importantly, we need to consider the more serious implications.  The Euro zone is obviously on life support.  The entire scheme is hanging by a thread, and we’ve been brought in to stitch it back together.  We, who just last month were in danger of defaulting on our own debt.

The Fed’s balance sheet, only $885 billion in Dec 2007, has ballooned to nearly $3 trillion.  And, every time we bail out another entity, whether it be Bank of America, General Motors or the ECB, we minimize the effect markets have on lending and borrowing and saving.  We impose a rationale which, in the long run, not only delays the inevitable but exponentially raises the stakes.

And, what happens when one of these sterling borrowers goes under?  The Fed article goes to great lengths to explain that we’re not taking crappy foreign loans as collateral.  No, we’re simply taking the currency backed by lenders who make the crappy foreign loans — loans that no lender in his right mind would make.  So much better, no?

The Fed Reserve article (published when the Fed thought the worst was behind us) details what happened the last time we did this. 

 UPDATE:  3:30 PM
We headed back up and are testing this morning’s high of 1239.99.  I would typically expect some negative divergence to set up before calling this the top.  Profit taking wouldn’t be a terrible idea,  especially as much of the action has been in the overnight futures lately.  On the other hand, I think there’s at least some more short covering to come.

UPDATE:  2:50 PM

We successfully broke through the red trend line, confirming the bounce off the longer-term yellow line.  This was followed by a backtest of both.   Market should return to 1238-9 and retest the day’s highs.

UPDATE:  2:00 PM

We’ve reached a decision point, as illustrated on the 5-min chart’s RSI trend lines.  The bottom yellow line has stopped 5 declines in a row.  If it’s to be 6, the market will have to rally through the red trend line.

UPDATE:  9:45 AM

Not sure I’ve ever seen a falling wedge break out quite this strongly…

It seems pretty likely, in hindsight, that the ISEE Sentiment Index spike I mentioned below was probably the result of all the financial system insiders who were privy to the central bank news doing a little insider trading.

To bulls, this announcement is mother’s milk.  It’s the ultimate solution to too much debt — create more debt!  Time, now, to analyze the deal, see how much oomph it really packs.  Who would be surprised if it was like so many past announcements — all hat and no cattle?

The RSI trend lines I discussed last night are playing out nicely.  RSI has blown through the lesser thin red line (Point 2) and is making a bee line toward the longer-term purple TL at Point 1.  The next test is whether it stops there, setting up a lower high, or it has the strength to bust through.

As we approach it, the trick is to shift to the 5, 15, and 60-minute charts for a sneak peek.  In the meantime, 1241 is the next logical rally target.  As discussed the past few days, it represents the .236 Fib level, a TL off the recent highs, one of our parallel channel lines.  And, it’s only 3 points beyond our Inverse Head & Shoulders target of 1238.

More later.

ORIGINAL POST:  2:30 AM

“Picking up pennies in front of a steam roller” is the expression, meaning here pursuing small profits at the risk of being creamed by a larger trend.

We’ve spent a lot of this past week talking about potential upside targets — whether we might rebound to 1215, 1241, 1265, 1307, etc. before getting on with a rather nasty downside scenario.  But, let’s be clear that the potential 100 points of upside is nothing compared to the downdraft to come.

There are some very good arguments for a little higher bounce this week:  the gap to fill at 1209.43, room to run in the daily RSI, EW 2nd/4th wave alternation, the inverse head and shoulders pattern, a better-formed harmonic (Gartley) pattern.

There is also a perfectly good case to be made for the downturn to start right here, right now: the underlying economics, Europe, the bank downgrades, Fitch’s negative outlook, the 2008 analog, a competing negative RSI trend line, etc.

Those who wish to squeeze the very last nickel out of this rally might be rewarded by being patient a few more days.  Otherwise, it’s time to start considering short entry points.  Here are a few of the charts I’m watching.

First up, the IHS target which coincides with a TL off the recent highs, one of our parallel channels and the 23.6 Fib at around 1241.

Here’s the same target, shown as small Point B on the daily chart.  Small Point A shows the gap fill at 1209.43 — also the .382 Fib level.

The trend lines on the RSI chart have done an excellent job of signalling reversals.  Look at the chart below.  When the purple RSI TL was recently broken, it signaled the beginning of the 7-da7, 100+ point decline.  

Frequently, when a major TL is broken, the market attempts a back test.  Yesterday was a strong start towards that back test, but today’s action deflected its upward trajectory.  In fact, the market failed to clear a lesser TL extending off the peak associated with the 1292 high (the thin, red line.)

It leaves us with a virtual fork in the road.  If we fail to clear the thin red TL at Point 2, the market heads back down.  If we do break through, we could complete the back test of the purple line — thus allowing for a higher rally.  A logical point for the back test is Point 1, which is the intersection of the purple TL with the primary overhead TL (since Jan 11) that’s signaled all the important tops in 2011.

The 5-minute chart shows a similar approaching decision point.  The longer term TL supporting a move up is about to intersect with a slightly shorter-term TL supporting a move down.  These “triangles” always signal a break out, one way or the other, and bear watching at every time frame intra-day.

Another chart I’m watching is the VIX.  It broke down from a symmetrical triangle Monday, back tested the triangle, and fell throughout the day today.  Its RSI TL’s reflect the “coiling” action of the triangle and the recent drop through support.

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Last, an interesting data point.  I try to keep an eye on sentiment, and was surprised to see today that the ISEE Sentiment Index set a new high for 2011.  Today’s spike to 187 eclipsed the old 2011 high of 182 set on July 20 — two days before the start of the 250-point plunge to 1101.

The ISEE Sentiment Index is unique in that it measures only opening long positions — a clear signal of bearishness or bullishness if there ever was one.  I can only view this reading as a sign that we’re very close to the next plunge.

Tonight’s action in the futures tends to signal the same, although we could be seeing a B wave, given that ES is also carving out a falling wedge.

A reminder: Friday marks the 150th trading session since the May 2 high.  In 2008, day 150 was the beginning of the end.  GLTA.

UPDATE:  4:00 PM

Well, that was exciting.  Not!  Everything mentioned at 1:05 is still the case and, at this rate, will be the case for weeks to come.  I believe it was just too much to ask the market to maintain the strength of this morning’s rally in the face of the negative economic news, the American Airlines BK, conflicting soundbites from Fed members and Euro-gnomes, and incendiary iPhones.

VIX continued to slip, having yesterday completed its backtest of its triangle.

To me, DX continues to look like it’s backtesting the rising wedge it fell from yesterday.  Although, EUR/USD appears to be back in its falling wedge.  Hmmm….  Possibly just a divergence, a distortion the normal relationship between these two.

Last, a quick peek at NDX shows it’s working on its own IHS pattern.  Six points to the upside would complete, and possibly add another 3%/75 points of payoff.

UPDATE:  1:05 PM

Backtesting the neckline here…

…and, note the RSI trendline — should offer support for the next leg up.

ORIGINAL POST:

The Inverse H&S; I mentioned yesterday just completed.  The upside is 40 points or so, making it 1238.

There are a couple of obvious targets for the termination of this wave.

Point A is 1215, the Nov 1 low that fits most of the EW counts I’ve seen.  Point B would create EW “problems” but fits from the standpoint of the channels that have guided much of the past nine months as well as a TL off the recent highs.

If we count the 1292 high as A of wave 2 instead of the completion of wave 2, it opens up lots of higher possibilities which I have discussed at length over the past week or two.  We’ll revisit these if/when they come into play, but the highest point I can see making a lot of sense is the 1307-1313 range.

Remember, anything above 1292 would merely be completing a wave 2 — not a bull market resumption.  The trend is still down, and I see nothing on the horizon to change that.

Note that Friday’s low completed a .618 Fib retrace of the 1074 – 1292 run, meaning it’s a very likely candidate for a Point B in a Gartley pattern.  A typical Gartley would put in a Point C somewhere between here and 1292 (points A or B from the top chart would do nicely) then drop to the .786 Fib level at 1121 before reversing again.  We’ll keep an eye on it.

UPDATE:  1:30 PM

Rally showing great breadth, could go quite a ways before erasing the recent oversold technicals.   Spit-balling here, but the potential inverse H&S; pattern setting up could be good for 40 points or so.  It would intersect with a TL off the 1292 top as well as one of our channel lines and the .618 Fib retracement of the 1292 to 1158 decline.  We’ll call the target 1241 for now.

The bullish Bat pattern we’ve been watching on AAPL is playing out nicely.

UPDATE:  1:10 PM

VIX, well off its lows of the day, appears to be backtesting the triangle it’s been in for about a month.  Looking back to August, VIX has established a sloppy downward sloping channel of sorts.  The bottom of the channel might act as a magnet if this rally were to gain steam.

ORIGINAL POST:  9:45 AM

Interesting stopping point for this morning’s bounce.

Popular opinion (and my gut) has it that 1292 was the wave 2 top. However, we’re keeping an eye on the 2011 v 2008 comparison.  Day 150 (since the May 2 1370 top) is Friday, December 2.  While prices have obviously diverged from the 2008 pattern, this past Friday’s low (day 145) matches up to a reversal on day 144 in 2008.  Might day 150 still be significant? 

More later.

UPDATE:  11:30 AM

The futures held the 1.618 line of 1167 until about 20 minutes ago, while SPX’s opening sliced through its 1.618 at 1177 like a hot knife through butter.  Now at 1164, is the rebound idea dead?

EUR and DX are both pushing the bounds of their respective wedges (and Gartley’s).  If stocks are to rebound, we need a reversal right here, right now.   There aren’t any good harmonic supports at these prices, but there are a fan line and trend line worth taking a look at.

Note the regression channel in the 2007-8 time frame.  It perfectly captures the highs and lows of that top.  I constructed some trend lines with the exact same slope and laid them over the 2011 top, connecting important highs and lows over the past year.   The slope is important, because it lends credence to the notion that these lines are legitimate, rather than the product of my bias.

The two lines have thus formed a channel, the centerline of which is drawn as the dashed line.  It’s worth noting that this centerline did a number on the Mar 16 decline, but was exceeded by the wild swings we saw in August and September.

Today’s plunge has paused right at the centerline, which might be significant.  It has also reached a fan line drawn off the Mar 09 lows through the Aug 9 low.  Either or both of these lines could act to arrest a further decline, but there’s no reason they have to.

In short, the case for a rebound is hanging by its fingernails.  If either of these lines fail, there’s not a lot of support until 1115 (horizontal), and then 1100 (fan line off the Oct 4 low and also the .886 Fib.)  Keep an eye also on the positive divergence on the 5, 15, 30 and 60 min charts.

ORIGINAL POST:  1:05 AM

Just completed a perfectly-formed bullish Crab pattern on the futures at the 1.618 extension of 1167.25.

Yesterday, SPX came within 4 points of completing its own Crab (1181 v 1177.)  So, it could be considered to have completed (96% of optimal AD.)

On the other hand, SPX closed at 1188 today.  If the current decline in the futures market (-13) were to hold overnight, that would result in a more precise Crab pattern completion in the 1177 area — a gap down that immediately reverses if the pattern were to play out.

If the SPX Bat pattern plays out, the most common potential targets (depending on which Point D is valid) are:

As mentioned yesterday, EUR/USD is very deep into a falling wedge and DX is very deep into a rising wedge.  AUD/USD is also very deep into a falling wedge.  Combined with the above patterns, conditions are ripe for a reversal of the past week’s weakness.

Does that mean the bear isn’t playing out yet?  Not at all.  In my opinion, there’s still at least a 50% chance that 1292 was the high and we’re on our way to huge losses.  However, the flip side of that 50/50 equation is the possibility that wave 2 isn’t quite done.

It’s days are numbered, though.  If it’s going to happen, it has to be pretty much immediately.  So, be careful.  Needless to say, a 100+ point rally between now and December 5 would trap an awful lot of bears.

Of course, if we get a garden variety .618 reversal up to 1239 or so, we’ll have a very nice spot at which to add to existing shorts.  Such a move, BTW, would tag a TL off the Oct 27 (1292) and Nov 8 (1277)  highs.

Looking at the big picture, there is a possible road map taking shape on the daily chart.

The only problem is that this Harmonic pattern is neither fish nor fowl.  It reverses at the .786, which would indicate a Butterfly pattern.  That would also imply a completion at the 1.272 at 1433 or the 1.618 at 1530.  I don’t consider either of those targets as even remotely possible at this juncture.

Bat patterns complete at the .886 Fibonacci, in this case 1324, which would also be in line with a trend line off the 1370 top through the Jul 7 high.  But, Bat pattern points B aren’t supposed to exceed .618 of the XA distance.  The .786 we see here should disqualify the pattern.

Another way of looking at it is the place Point X at the 1370 May 2 high, which results in a Point B at a little higher than the .618 Fib — making it a Gartley that completes at a .786 Fib — in this case 1307.

Of course, there needn’t be a harmonic pattern at play in order to identify a reversal target.  Wave 2’s often retrace to the .618, .786 or .886 Fib levels.  While the .618 ship has sailed, .786 and .886 in the 1307 – 1324 range are valid targets.

It’s also worth noting that the original Gartley pattern, first introduced by H.M. Gartley’s Profits in the Stock Market (1935), made no reference to specific Fibonacci levels.  They’ve been added over the years by practitioners.  In the meantime, patterns that don’t quite fit the mold, but which are based on common Fibonacci levels, can and do play out all the time.  We’ll eventually find out what’s going on here, but for now we’ll just have to wait and wonder.

UPDATE:  3:50 PM

An updated look at the regression channel since the top…

Looks like the midline should provide a good turning point, although a similar spot in 2008 fell quickly to that declining market.  Re 2008, next Friday is 2011’s 150th trading day since the May top.  This proved to be the ultimate turning point in 2008.

Could we have a sharp rally in the next seven trading days?

ORIGINAL POST:

Market trying to make up its mind…

VIX channel evolving into a triangle.

SPX:  came within 4 of the 1177 Butterfly target, probably close enough to indicate the next move is up, but the near term is still a bit muddled.  I’m still mostly straddled here, with near-term bullish positions and longer-term bearish.  The RSI TL’s point to a breakout one way or the other before today’s close.

If the Butterfly does play out, the reversal at the 1.618 extension (1177) instead of the 1.272 means the .618 AD retracement target is 1138 instead of 1146 we talked about the other day.

The EUR falling wedge we were watching has the look of having broken out, but the move isn’t very convincing yet.  We got a backtest, but the initial subsequent rise hasn’t impressed me.

It would be too easy to slide the upper bound of the wedge up an smidge, and consider the whole thing to have not broken out at all — YET.  Either way you look at it, I see a wedge that’s due to break out.

Similarly, DX has established a nice rising wedge that reaches its apex on Friday, meaning it should break to the downside before then.

In sum, this feels like a consolidation, with bears trying to work up the courage for another push down — but just not able to shake the feeling that they’ll get trapped yet again.  And, bulls, wondering if Hopium might have finally exhausted itself in the avalanche of negative news.

But, we are clearly due for at least a decent rebound in the short run, possibly something more, before the next leg down.  And, for diehard bulls, there is still room for a larger C wave up before we consider wave 2 “done.”

UPDATE:  11:50 AM

Watching the falling wedge set up on EUR/USD:

The Butterfly I’ve been watching overshot the 1.272 extension, but the decline seems to be running out of steam.  We’ll see if the 1.618 extension at 1177 has any better luck.  That would also mark the 2.24 extension for the Crab pattern.

We’re also seeing divergence on the 5 and 15-min charts.  I took a stab at a few OTM calls for what could be a nice snap back.

ORIGINAL POST:  9:15 AM

If the cash market opens where the futures currently are, we’ll complete both the Butterfly and Crab patterns I pointed out last week.  If they play out, look for a strong rebound over the next several days.

To be clear, I would view such a move as leg C in a corrective 2nd wave, not the resumption of the bull market.  In fact, even though these patterns are clear and incontrovertible, there’s a pretty good chance that they produce a hiccup rather than a full-fledged reversal.

Any reversal should run its course within the next two weeks — most likely by December 2-5.

The Butterfly (in red) finishes at 1198.52 (the 1.272).  The smaller bullish Crab pattern (in purple) completes at its 1.618 at 1201.71.  

Potential Targets:

Butterfly:     .618 – 1246 
                   1.272 – 1298                 
                   1.618 – 1325

Crab:           .618 – 1242
                  1.272 – 1284
                  1.618 – 1307

UPDATE:  12:05 PM

The market seems to be in full OPEX mode, with every attempt at a breakout — up or down — quickly aborted.  At this moment, it’s pushing toward the downside, which is a good reason to revisit the harmonic picture.

A bullish Butterfly pattern (in red) that began Nov 1 finishes at 1198.52 (the 1.272).  While, a smaller bullish Crab pattern (in purple) that began Nov 9 finishes at its 1.618 at 1201.71. 

There is also horizontal support around 1200, not to mention obvious round number support.  While yesterday’s 1209 low might be close enough to consider these patterns completed, I would normally look for a more precise tag before playing the rebound.   Given that this is OPEX Friday, and MM’s are under water after yesterday’s plunge, I won’t be surprised if we see a ramp job kick in if we get any closer to 1200.

If they play out, initial (.618) targets for a rebound would be 1246 and 1242 respectively.  Common extension targets for the Butterfly would include the 1.272 at 1298 and the 1.618 at 1325.  Higher targets for the crab would include the 1.272 at 1284 and the 1.618 at 1307  — the same value as the 78.6 Fibonacci retracement of the 1370 to 1074 plunge.

Also note that current prices would make a very good Point B (about .382) for a much larger harmonic pattern with Point X at 1074 and A at 1292.  A leg up to 1242-1246 would make for a nice Point C.

ORIGINAL POST:  4:30 AM

Ages ago, on November 9, I expressed my frustration at being unable to more definitively discern the market’s next move.  From that post:

My favorite two scenarios are that: (1) wave 2 is over and we’re on our way down; or, (2) Tuesday’s high at 1278 (and a .786 Fib level off 1292) is a Point B that’s part of a larger Butterfly pattern.  The downturn I’m expecting Wednesday will lead to a higher low (Point C) between 1215-1238 that reverses for a final rise to 1307-1313 around December 5 (day 150 from the analog.)

I went on to cover my ass explain:

The key is where Point C lands.  It could go as low as A, but shouldn’t be any lower (with rare exception.)  In fact, 1215 is my defacto line in the sand to determine whether we have one last leg up or not.

There are all kinds of reasons this turd of a market should turn down right here, right now — without apologies, without looking back.  The arguments are clearly laid out in all the financial newspapers and websites.  Heck, you’ve been hearing them from me for months.

But, then there’s the fact that we couldn’t push convincingly through 1215 yesterday.  I know, we hit 1209 intraday, but we closed at 1216.  Coincidence?  Maybe, but it’s also possible that the triangle I’ve been harping about was one of the 46% that break downward, establishing a decent Point B in a larger A-B-C leg that’s heading for 1307-1313 on December 5.

For now, I’m going to consider that “line in the sand” as bothered, but not broken.  At the very least, we’re due for a bounce off of 1215.  Whether it’s an OPEX-infused backtest or a larger leg up is still up in the air, in my opinion.

We have positive divergence on the short-term charts; VIX is forming a falling wedge; and, surprisingly (not), a new rumor about some marvelous financial engineering that will save the Euro, once and for all (it won’t.)

And, finally, my gratuitous attempt to blind you with science…  The 2008 v 2011 analog I’ve been reporting on since last May says wave 2 isn’t over until day 150 — about 10 sessions from now.

All I’m saying, folks, is this is belt and suspender territory.  I’m short as can be, but I bought a nice little insurance policy yesterday that leaves me effectively straddling the market in the short run.  I may leave some profits on the table, but just in case Friday isn’t the big downdraft so many others are predicting, I’ll sleep better going into the weekend.

Good luck to all.