UPDATE:  3:45 PM

Despite all the drama, EUR still looking like the bottom’s about to fall out.  All the players are hedging, talking about needing a few more days past Sunday (the most recent deadline for the miracle cure.)

Note the RSI trendline, still within the channel we’ve been watching.  And, of course, we’re up against the 200 day moving average. 

UPDATE:  12:30PM

Well…that’s the thing about 50-50 shots.  They don’t work out half the time.  For newcomers to the site, this is why I recommend stops.  Even harmonic patterns, which are considered to be successful 70% of the time, will lose you money the other 30% of the time.  

All successful traders set stops just beyond the expected move to cover those contingencies.   Because, regardless of what the tea leaves say, you never know when a Guardian article or MENA despot’s death is going to pop out of the woodwork.

Here’s what’s happened to DX.  The price action is obvious, but look closely at the RSI and the histogram.  The histogram, which had been forming a nice bottom, decided to put in a lower bar.  If it stands, this is a good indication that the channel is expanding.

Likewise, the RSI, which had been following trend line 1 until recently,  appears to be more heavily influenced by 2 and 3 at the moment.   We frequently see aberrations which require a little finessing, but this one needs resolution on a grander scale.  By that, I mean look at 2 vs 3.  In a day or two, RSI will have to decide between staying below TL 3 of staying above TL 2.  It can’t do both.

I’m inclined to leave the slope of the channel alone.  It’s been a very consistent guide to price action since Mar 08.  When prices have corrected out of the channel, they’ve resumed a few clicks to the right, in a wider channel or, to my eye, a parallel channel.    Here’s an example from Mar 2010.

In every case, defection from the existing channel has been the result of intersecting with an important fan line.  I’ve drawn in the obvious ones from the Mar 09 top (equity markets bottom) in red.  The line that stopped the Sep 10, Jan 11 and early Sep 11 rallies was broken on 9/21.

But, it came back for a backtest and continued back below that fan line on 10/12, finding support instead on the white fan line from the Apr 08 bottom.   DX is backtesting that line, too, although from on top — meaning it has a bullish (for the dollar) potential.

The two fan lines are seen here as A and B.  So, think of it as A trying to keep the dollar down and B trying to keep it up.  In the background, the inclination for the index to follow the same slope that’s been in place for years in the form of the channel.

We could bounce around in the triangle formed by both lines through the end of the year, committing to neither.  It wouldn’t be surprising, given the chop we’ve seen in the equity markets for several months now.

It’s also entirely possible that today’s drop is just a momentary excursion from the channel — typically a couple of days, or even intra-day.  The same thing has happened on numerous previous occasions.   But, unless we get a vicious snap back of today’s decline, we’re looking at a widening of the channel.

With that said, I’d be remiss if I didn’t at least mention the third possibility: that the dollar has gone as far as it’s going to.  If the Euro weren’t circling the drain, I’d take that possibility seriously.  But, there seems to be little chance of a EUR miracle; every such report has been proven optimistic and/or just plain false (still, the press gobbles them up like so many Halloween treats.)

But, it’s worth remembering, we are in a counter-trend rally — albeit it a very large one.  Even if we make it all the way to my 87 price target, we would just have completed a channel that started back in 1998 or so.  The DX’s strength is a function of other currencies’ weakness (the least dirty shirt.) 

It’s hard to say how long it will be able to retain safe haven status once markets everywhere are falling.  Some day in the not too distant future, EUR will be resolved for better or worse.  And, investors will turn their attention back to America’s sorry state of affairs.

ORIGINAL POST:

Just a quick post, as I’m traveling on business this week.  The futures 15-minute chart shows a definite topping pattern that’s a dead ringer for the pattern I found in most every major top for the past 80 years.  This one is on a much smaller scale, of course, but check out the details.

It works with both the fan line methodology and the 2-standard deviation regression channel [for background and derivation, see Update: Channel Surfing among others].  It finishes with a touch of the midline, just like 2007’s (the 2011 pattern finished at the 1-std dev line instead.)

It even forms a nice little head & shoulders pattern which, if it plays out, would be good for 45 points or so to, say, 1150.  We just happen to have a major fan line there which grazes several of the bottoms these past couple of months (purple dashed line below.)

The only hitch I can see is that the pattern isn’t there on the cash index — only the futures.  In SPX, what would be the right shoulder is actually higher than the head.  Of course, that was the topping pattern formed by NDX, so it isn’t necessarily invalid — just not a perfect match.

I’d give this a 50-50 shot at playing out in the next trading day or two.  Like everything else these days, it’ll be at the mercy of the Euro Zone rumor mill.

Also noting the dollar is facing a decision — whether to stay in the channel or remain below the fan line it’s been testing this past week.  My vote is with the channel, meaning DX is ripe for a breakout.  I’ve been posting for a while now, so this is just icing on the cake.

The 60-minute illustrates the two paths quite clearly.

Good luck to all.

UPDATE:  2:40 PM

And, right on cue, the fan line that messed with a perfectly good plunge so many times already.   It’s the red dashed line on the daily chart below, seen here in close up.   I think its minutes are numbered.

ORIGINAL POST:

The dollar looks like it’s finally ready to break out (barring another Guardian news flash.)

More later.

Yesterday, it was The Guardian’s phoney “Euro Zone is saved” leak.  Today, it’s CNBC’s  “Housing Starts Jump 15%.”

Sure enough, when you dig into the story, you see that it was annualized multi-family starts that jumped (53%).  Single-family slumped — to a measly 1.7% annual increase.  Of course, that won’t stop the requisite bump in KB or Toll Bros.

Look two inches below the fold, where even CNBS reporters could have seen it, and you’ll see the sleight of hand that accompanies almost every economic headline that passes through the TPTB filter:  seasonal adjustments.  It’s the black hole of economic analysis from which even dismal news emerges as shiny as a new penny.

Year-to-date figures (which need no seasonal adjustments, unless you’re being metaphysical about it) reveal a 12% decrease in single-family starts over the same period in 2010.   But, “Single-Family Starts Plunge 12%” isn’t quite as cheery a headline, is it?

As I’ve said countless times in these pages and elsewhere, there is no recovery without a housing recovery.  Period.  Are you listening, Washington?

How do September 2011’s 37,700 single-family and 21,900 multi-family starts compare to the good old days?   In September 2005, those numbers were 1,747,000 and 303,000.

I guess we could be excited about the rebound in multi-family starts.  At least the millions of American homeowners being foreclosed on will have options.

EOD:  5:20 PM

AAPL earnings miss, EZ rumor crushed, negative divergence everywhere…tomorrow could be ugly.

UPDATE:  3:55 PM

I think this is a trap.  Even after the run up, no break in the 60-min or daily RSI trend lines, lots of divergence.  Adding to shorts.

UPDATE: 3:35 PM

The Guardian article, which apparently has a little hair on it.  Sixteen point rally in SPX vaporized minutes later.  How many of the previous 16 points were as a result of the article being leaked?

UPDATE:  3:05 PM

I show SPX, EUR and DX all completing Bat patterns.  If we can manage not to exceed 1230, everyone will need to make some changes to their EW counts.  If we melt up past 1230, they’ll be major changes.  The next logical stopping place is the 200 day moving average at 1234.

UPDATE:  2:35 PM

DX has completed a Gartley that should reverse this morning’s slide and send it back up to test the fan line overhead.

Note that it’s in a small channel that’s a corrective wave in a much larger channel, seen here on the 60-min chart.

Which is seen even better on the daily chart.  The RSI trend lines are a testament to how muddled the picture is.  TL 3 is fairly straight forward, calling for a continuation of the downturn.  TL 1 looks like it’s being backtested, although we could easily adjust the slope to accommodate the latest dip — as we often have in the past.  TL 2 definitely looks like it’s in backtest mode, with the turn already having been made.  Note the histogram has put in a bottom and the stochastic looks like it’s trying to turn.

The EUR/USD picture looks similar.

Naturally, we don’t know for certain about the large channel I show us bumping up against.  It’s possible it’ll widen, allowing for more upside.  But, it just so happens that the slope exactly matches that of several other channels.  It suddenly seems a lot less random.

UPDATE:  1:20 PM

Small Crab busted, will probably run up to complete the larger Bat at 1220.72 before turning back.

Although, note the inclined line running through the current price.  This is a fan line off the Aug 9 low that connected with a number of other lows on the way here.  It’s easier to see on the daily chart (dashed line.)

By my count, this particular fan line provided either a high, a low, an opening or closing price on 13 days over the past two months.  That, in and of itself, makes it significant and elevates it to a very likely influence on today’s action.

In fact, if we were to treat the Oct 14 and Oct 17 highs as a throwover, this fan line would make a pretty convincing line of resistance to any further advances.

It seems there are more than a few investors who aren’t sure what to make of the recent highs.  I’m strongly tempted to call the chances of an imminent lower low kaput.  This would fit better with the 2008 analog, as well as the most popular Elliott Wave count out there.

There are, however, a few issues (especially currencies) troubling me.  More in the next post.

ORIGINAL POST:

Crab just completed on the 5-min chart at the 1.618 extension, matches the .618 fib on the larger scale.

Downturn should resume here at 1211.

A concise, well-written economic analysis was just released by Hoisington Investment Management  Co.    Echoing the themes printed here over the past many months, they call for a negative 4th quarter 2011 and subsequent 2012 quarters. 

They cite slowing real GDP growth (H:1<1%), combined with surging unit labor costs (+4.8%) as leading causes for a decrease in business productivity of .7% annually.  A drop in productivity concurrent with rising labor costs will lead to increased layoffs, with attendant ripple effects. At the same time, inventory investment has risen to 1.18% of real GDP versus the average (since 1990) 1.0%.  In an economic expansion, this is fine; rising demand will pick up the slack.  But, in July and August, consumer good production increased at a 3.2% annual rate while real retail sales contracted at a 1.4% annual rate.  Oops…more contraction, more layoffs.

The report contains some facts that might surprise many readers.  For instance, although M2 has been increasing at a annualized pace of 20%+ of late,  it’s not due to QE2.  The real culprits are a shift from non-M2 assets such as commercial paper to (theoretically) more secure M2 assets, and a shift from Euro-based to USD-based deposits.

Also, as will come to no surprise, US debt:GDP ratio (350%) is better than  Japan (470%) and Euro Zone/UK (450%); but, we’re also better than Canada (410%.)  And, who knows what the true Chinese picture is, but the feeling is it’s fast becoming just as big a problem.

Good read.

UPDATE:  10:00 AM

The Dollar Index (DX) found support at the fan line we were watching.  There’s plenty of resistance up ahead, but the channel it’s in indicates a potential meteoric rise.  Note that this channel is at the exact same slope as every other from the past 4 years.

I expect a rise to the 87 area, sometime in the Dec 11 – Mar 12 time frame.  This part is tricky, as previous rises have channel surfed.  In the summer of 2008, DX accelerated when it shifted to a parallel channel to the left – not once, but twice.  Eventually, it returned to the original channel to complete the move. 

The Oct 09 – Jun 10 run did a bunny hop to the right, effectively slowing the pace of the rise.   The Oct 10 – Jan 11 rise fizzled after a respectable 10% run.  We’ll keep an eye on this one.

ORIGINAL POST:  2:05 AM

Updated chart on AUD/USD.  Start with a pretty cool 20-year trend line…

Toss in some neat fan lines, channel and some Fib retracements…

Makes a pretty compelling case for a reversal.

More later.

UPDATE 3:45 PM

More looks at the harmonic picture for SPX:

Note that we’re right at the .618 Fib from the big Gartley: 1228.  That also happens to be the 1.272 extension for the Butterfly pattern we’re within spitting distance of completing.  Coincidence?

For the Gartley, the target on the reversal is the .618 of the AD, which in this case is 935.  Now,  consider that 938 is our measured move target.  Hmmm…

UPDATE:  3:30 PM

And, the dollar chart to go with it.  I’m thinking the last leg up might be just [i] of 3, instead of 3 itself.

I can’t for the life of me figure out what’s keeping equities going.  All the signs are there for a huge plunge.  And, as extended as this thing has become, it should be dramatic.  And, it could happen any minute…or a week from Monday.

The timing is difficult, because the bull has overstayed its welcome.  I would expect a more rapid move back down, but I’ve thought that for days, now.  I’ll work on it more over the weekend.

UPDATE:  3:05 PM

Look what the great and powerful Oz has up his sleeve.  I haven’t seen very many charts this compelling lately.  Fan lines rule!

Note how decisively the fan and channel lines intersect at the key turning points.

I don’t think there’s much doubt we’re about to see a massive downturn any day now. 

UPDATE:  11:05 AM

ECRI’s numbers just out.  Weekly Leading Index annual growth rate very ugly at -9.6% — worst since Sep 2010.   ECRI has already called for a double dip recession that government intervention cannot prevent. The full report will be out shortly.

UPDATE:  10:45 AM

I’m also watching AAPL, which just completed a Bat pattern with its gap up and is working on one of several bearish candle patterns.  Check AAPL’s RSI, too.

ORIGINAL POST:

Look for this run up to crap out at the same fan line that stopped the Aug 31 and Sep 1 moves — currently around 1220.

The last time we had a pattern set up like this was Sep 16, 19 & 20th, when we formed a double top with the same huge negative divergence and same three candles.  If this gap craps, we could see a similar reversal to the 1.618 on the downside — in this case 984.

Spud put a question to me yesterday regarding the proper wave count.  There are so many different theories that have been proposed by people much more experienced than I —  It’s times like these that make me want to ignore EW all together!   Seriously, I’ve lost more money trading some expert’s count than any other single source of information (e.g. EWI’s silver forecast?)

Having said that, I think EW can be extremely helpful in raising questions about possible next moves, and is certainly helpful in trying to ascertain where in a larger pattern we might be.  It’s just that right here, right now, I can point to five competing counts — all perfectly logical — that could be right.  The only sure thing is that 80% of them are wrong!

So, I’ll throw my count into the ring:  an expanding ending diagonal.  It’s rare, but it seems to fit with what’s going on.   Guess we’ll find out soon.

Spent the entire day back testing Trend Line X (red, dashed.)  Should start back down now.

More later.

UPDATE:  4:30 PM

SPY provides an interesting peek at the big picture harmonic situation.  Note that the Gartley target is 93.87.

Take your pick of parallel channels.  None of them look particularly bullish.

I’ll update the “Path to 350” chart to reflect the obvious widening of the channels for this rally.  Hopefully will finish it by later tonight or tomorrow morning.

UPDATE:  3:00 PM

Backing out, trying to get a sense of the big picture…

Closing in…

And, the DX picture, on which everything seems to hinge at the moment…

The fan lines from the Apr 08 lows (the white lines) connect with each significant reversal as DX fell from its Mar 09 high at 90 to its November low at 74.  I draw them, then see if they ever come into play down the road.  Most of them do.

The one that passed through the Nov 09 low, for instance, is right around 77.7 today — just a tad away from today’s low labelled as the end of wave 4.  Note it also provided guidance for the Jul 12 high – labelled as the end of wave 1 (it’s also Point B in our Crab pattern).

Likewise, the fan lines from the Mar 09 top (the red lines) connect with each significant reversal as DX climbed from 74 in November to almost 89 in June.   Again, most of them come into play.  The one that passed through May 7 2010 marked the recent Oct 6 high, labelled as the end of wave 3.

We saw a well-formed Bat pattern play out at very near the .886 Fib level at 80.635 — also at the intersection of two fan lines.  Now, we find ourselves at the .50 Fib level, wondering if the Bat might go on and extend to form a Crab pattern.

If so, DX should extend to the 1.618 Fib at 87.058 — also the location of an important fan line off the June 10 high.  It would also exactly match the .886 retrace off that June 10 high.  All this to say…I think DX has a big move ahead of it, from 77 to 87.  I’m working on the time frame, but I’m fairly confident it’ll be very soon.

More later.

UPDATE 12:10 PM

We appear to be leveling out around 1210.  The hourly RSI line — already at overbought levels — has been broken and appears to be backtesting.

ORIGINAL POST:

We’ve reached the .886 fib on the largest of the three potential Bat patterns we discussed yesterday.  It’s not a well-formed pattern, but the completion is at 1203.

An overshoot wouldn’t be surprising, given the strength of this rally.  Some call it a short squeeze, and I’d have to agree.  It’s happening on very low volume, so it hardly qualifies as a major turn.  I’d normally expect a quick backtest, but the slope of this advance means a backtest could extend beyond the apex of the rising wedge itself.  Wouldn’t be surprised to see it shoot beyond 1210 intra-day.

Recall that 1203 is also the level of the fan line connecting the 2007 highs to the Mar 16 low.  The next higher line in the sand is our old pal Trend Line X.  It stopped the Aug 31 and Sep 20 rallies.   It can be seen as the dashed yellow line at 1210 above.   The close for the day should be at 1207 to 1210 range or less, regardless of how high the intra-day rally takes us.

If I’m wrong, then the fail-safe level is the Sep 20 price of 1220.39.  Any higher close than that would probably invalidate my notion that we still have a lower low to put in.

As I mentioned yesterday, this rally feels a lot like those in July.  The start of the climb off the June lows had been delayed by the release from the Strategic Petroleum Reserves, and the act of catching-up led to so fast a rally that it overshot my goal by a good 25 points.

This advance feels extreme, especially coming on such low volume.  On the other hand, we’ve seen the rising wedge expand on us twice.  We’ve overshot my original 1182 target by over 20 points.  The momentum is clearly with the bulls.  It’s entirely possible that I’ve missed this call, and 1074 was the end of Minor 1.

Reaching 1040 by Oct 17 is looking increasingly difficult.  But, I’ve been in this position before — notably on Jun 26 [see: Cliff Diving] when I found myself very much alone, calling for a reversal to the upside.  Regardless of how it turns out, it’s never a good feeling.

UPDATE:  12:20 PM

Updated Bat pattern, assuming new Sep 20 entry point of 1220.  The .886 is at 1203.79 — just above our fan line (see below) shown here as the highlighted yellow dashed line.

Big Picture

Medium CU

Close Up

And, a quick look at the tech picture…

1 Year

Close Up

A wedge that looks like it wants to break, negative divergence out the wazoo and an RSI TL that refuses to yield.  Shouldn’t be long…  (pun intended.)

MICROSOFT READY TO POP?

Just noticed an interesting chart: a rising wedge along with a completed Gartley.  If that old college chum in Redmond or your hair stylist hasn’t sold her MSFT yet, might be a good time to give her a call and suggest she sell it and put the proceeds into TZA.  As in right now.

ORIGINAL POST:  10:20 AM

I’m looking at channels, trend lines and fan lines, trying to make better sense of yesterday’s rise.  I remembered that I was ahead of the crowd in calling the break of the trend line from the Mar 09 lows — only to discover that some others used arithmetic rather than logarithmic scales in their charting. In that instance, it was only after we broke the arithmetic scale TL that others saw what I had been seeing.

I prefer log because it’s the method that takes into account the obvious compounding of advances and declines.   The effect can be significant over a longer period of time.  It also might be the cause for my frequently being a tad early.  That might be what’s happening here.

The past five years, charted in the logarithmic scale that I normally use.

Here’s the same period, logged in arithmetic scale.

See the difference?  Here’s a close up, w/ log:

And, without:

In the log scale chart, there’s not really an appropriate fan line through yesterday’s top.  In arithmetic scale, it’s clear as day.

Also, note the 30-point difference in the target of the bottom-most fan line — the one I have been using to triangulate our 1040 target.  It passes through the very significant 4/26/10 high.  In arithmetic scale, the same fan line indicates a 1010 target.

The intersections with the 2010 horizontal trend lines take an interesting turn, too.  The log chart:

And, arithmetic:

There are clearly implications for the speed and distance of our next move down.

In the meantime, we’re left to ponder yesterday’s huge move up on pathetic volume.  On the arithmetic chart, the fan line from 2007 through the Mar 16 low provided yesterday’s high and might well cap any further advance.

On the log chart, that fan line is several points higher, say 1201 — which is very close to today’s intra-day high.  I can see it putting the kabosh on any further upside, too.  Both cases are good for the bears, and both provide cover for yesterday’s higher than expected run-up. 

So… to log or not to log?  Which is correct?  I’ll revisit this question after the next move is resolved. In the meantime, there’s a rising wedge with negative divergence with my name on it.

More later.