LATER

Okay, so post-S&P; downgrade…  ignore everything I wrote today.  It doesn’t matter anymore.  I think.

Was this priced into the market?  Question du jour, possibly l’année.  My gut says it was.  I think most institutions that are required to divest themselves of anything less than AAA will do so over time, if at all.  Investment policies are, by and large, set by people who understand the downgrade doesn’t create new risk; it reflects existing risk. 

Those investors subject to specific ratings-related regulations (insurance companies, escrow accounts, etc.) are likely be granted exemptions in the case of instruments that carry the full faith and credit, etc.  Ditto with bank and brokerage capital requirements.

So, who’s going to dump treasuries?  China can tell you, it’s not easy.  There aren’t a lot of good alternatives.  After the dust settles, interest rates will probably be a little higher.  Bonds and stocks loath uncertainty, so will likely sell off very sharply, bounce back, then resume the declines they were pursuing anyways.

Going to do a lot of thinking about this over the weekend.  Should be a very interesting Monday!

EOD:  I’ll be traveling this weekend and Monday, and will probably not get a chance to update this blog until late Monday night.  Hope everyone has a great weekend!

Last note:  I’m thinking about starting a petition to change “the trend is your friend” to “the trend line is your friend.”   TL’s were very good to us this week.

UPDATE:  3:45 PM EDT

There are now no fewer than three IHS patterns setting up on SPX — two that have completed that indicate 1252 and another that might mean 1256, if they play out.

My best guess, heading into the weekend, is we’ll probably close fairly flat on the day, then pick up the “everything is just fine” mantra from Jackson Hole next week.  Investors counting on QE3 will likely be disappointed, and this week’s decline should resume.

This is all pure conjecture, of course, and is subject to revision based on today’s close and news over the weekend.  Economic news is light early in the week, with productivity on Monday and wholesale inventories on Tuesday.  Initial claims comes out Wednesday, and after today’s employment fairy tale news, will be closely watched.  Most attention, though, will be on the Fed.  Just the way they like it.

One last look at gold:  I really like this fan line configuration and divergence, and picked up a few GLD puts during the day.

UPDATE:  3:10 PM EDT

Consumer credit just came out at a 7.7% increase (June over May).  Non-revolving grew at 7.6%, while revolving grew at 7.9%.  If it were new cars or refrigerators that were charged, rather than groceries and electric bills, this would be good news.  Note the rather alarming increase of late.

UPDATE:  3:00 PM EDT

Insider sales disclosures are popping up faster than Berlusconi mistresses.  Here’s a couple that just went by:

$2.3 million in proceeds, from an exercise price of $35K.  $11.5 million for $200K.  Not shabby.  Guess I’d be thinking about cashing in, too, if my stock had done this in the past year.  You have to think they know their company pretty well.  Why do you suppose they’re dumping their stock en masse?

UPDATE:  2:00 PM EDT

Here’s the inverse Head and Shoulders pattern on SPX.  If it plays out, it could mean a bounce to 1253 — awfully close to the 1258.07 Fib level and our previous pattern low.

That makes 1258 my top candidate for this move if it really gets going.  What might really get it going?

As most know, the Fed meets in Jackson Hole next week.  According to Pimco’s Bill Gross, they will unveil the next iteration of QE — probably in the form of language designed to reassure investors that interest rates will remain low for a very, very long time.   Other Fed-watchers are wondering if something more stimulative is coming.

As damaging as it might be to the economy long-term, it would most certainly create some upward momentum for stocks.   Needless to say, anything less than a full-bore stim job by the Fed will send stocks and gold south in a jiffy.

UPDATE:  1:20 PM EDT

So, another bounce has arrived, courtesy of the ECB.  Seems they’re so impressed with how well QE has worked in the States, they’re going to run it up their own flagpole.

Like here, it will purchase a lot of bonds that no one else wants.  It will also inject a lot of cash into an otherwise credit constrained market.  And, it will save a lot of (especially German) banks that would otherwise be looking at unbearable losses  (by “unbearable” I mean not just unpleasant but capable of inducing systemic failure.)  And, like QE1 and QE2, QEe will do absolutely nothing to resolve the root causes of the coming Euro-zone implosion.

Whether this blip turns out to be more than 40 points is anyone’s guess.  Watch the Fibonacci levels, seen here in yesterday’s post…

…and both the Fib’s and the TL’s on the daily chart.

There’s strong upcoming TL and Fib resistance at 1231, and additional Fib resistance at 1258 and 1269.

There’s also an inverse H&S; pattern that just completed on the S&P; futures.  If it plays out, it indicates 1249 or so on the upside.  Kudos to 200DayMA on Daneric’s blog for pointing it out.

Interestingly, Gold is not participating in this rally.  It completed a little head and shoulders pattern this morning that might well trigger either of two larger patterns.  If it plays out, GC could be on the brink of a nice tumble to the 1600 level or lower.  [see: All That Glitters].

UPDATE:  10:15 AM EDT

Got a great question from Zimzeb on last night’s post that I wanted to address…

“What potential development which would derail the 2007 analogy most concerns you right now?”

From a technical standpoint, I am slightly troubled by the divergence between yesterday and its 2008 equivalent.   But, my gut is that the faster/stronger move was simply because we were there, just 3 1/2 years ago, and we remember how nasty it can get.  Shouting fire in a crowded theater always produces a panic; we’re like an audience sitting in a theater where a fire broke out last week, and now someone’s shouting fire again.

Fundamentally speaking, there are some differences between now and 2007.  My crystal ball is no better than anyone else’s, but I think this will be worse.  At least back then, when TSHTF, the system wasn’t as stressed.  Total debt was only $9 trillion and inflation was nowhere to be seen.  I keep wondering, if I were BB, what would I pull out of my arse to make this all go away?  Policy is as accommodative as possible, dollar is cheap, inflation lurking out there somewhere…

I just don’t think there’s much he can do.  I’m sure he’ll try another QE at some point; but jeese, if it doesn’t work then we’re really screwed.  Right now, the threat of QE is all they have.   And, I just don’t think it would work a third time — even if they had the balls to try it. 

To me, 2007 was about over-leverage.  And, while there’ve been some adjustments, we’re still massively over-leveraged in many ways.   Big corps are sitting on lots of cash, but consumers sure as heck aren’t; they’re using credit cards for cash flow.  Homeowners, who kept the economy humming until 2005 through the miracle of home equity lines, don’t have any more home equity — let alone the lines.  And banks, if you look very closely, have massive understated — or, in many cases, unstated — liabilities that are just plain scary.

This problem started with housing, and it won’t end until housing is fixed.  In the meantime, every aspect of the economy that depends directly on housing — construction, finance, consumer credit, employment, consumer durables, municipal finances, property taxes (a biggie that no one’s talking about), education — those areas will take it on the chin until the root problem is solved.  And, just about everything else is at least indirectly dependent on housing.

In the 30’s, the New Deal offered recovery, relief and reform.  Our response, thus far, has been to send more boatloads of cash to Wall Street to replace the hundreds of billions they stupidly blew.  We’ve offered ordinary Americans no real relief; thus, the recovery ain’t happening.  And, as for reform, ask Elizabeth Warren how that’s going so far.

As we all know, the stock market isn’t the economy.  It’s not difficult for corporations to book increasing profits in the face of a poor economic backdrop.  Some, like Apple, have quality products that consumers demand.  Others, like GM, will channel-stuff the living daylight out of their dealers to keep the illusion alive.  But, most of the rest are ultimately dependent on industrial and/or consumer demand.

When that demand falls off, as it has in this country and the Euro-zone, those companies are up a creek.  They can play accounting, M&A;, tax and currency games to “meet expectations” but eventually someone has to be willing to buy something.  Who?  Right now, there’s demand in Asia.  But, will that hold?  How about in the face of a stronger dollar?  How about post-contagion when global demand falls off?  I suspect China has its own problems that we won’t know about until they’re patently obvious.

In my opinion, the only solution is to let the crash that started in 2007 play itself out.  That means hitting the great big red “reset button” and aligning debt with actual asset values, not to mention debt servicing capabilities.   It’ll be doubly difficult if rates bump up at all.   “Aligning” is one of those euphemisms that really means “write-downs.”  It means lower asset prices, stocks included.

ORIGINAL POST:  9:15 AM EDT

Jobs report just out, and despite ample evidence to the contrary, the Labor Department reports a decrease in the unemployment rate to 9.1% and the creation of 117,000 new jobs in July.

“Created” is the operative word, as in “out of thin air” as the Dow plunged 500 points yesterday.   But, that’s okay, we know how the game is played.  The S&P; will likely run up 20 points, the Dow 150; the crises will have been averted.

Watch the key price levels we discussed last night.  There will be ample opportunities to play the bounce and/or establish new bearish positions.  No matter what unfolds today, the trend is still down.  Smart investors will remain glued to their computers and/or use stops.  More later.

I ran into a friend at the local coffee shop.  He knows I do a little trading and asked me that very question about an hour ago.  Where do you start?

First things first.  If you made a ridiculous amount of money this past month because you believed any of my posts since May 31 when I suggested this market had “significant similarities” to 2007, take a look at the section over there to the right entitled “if this blog helps you…”  

Take care of that.  Right now.  Write a big fat check to your favorite church, synagogue, PTA, nephew or struggling poet and put it in the mail before you think twice about it.  Karma is a powerful thing… best not screwed with.  And, if you see a homeless individual or kid selling lemonade on your way home, don’t be stingy.

While you’re at it, send $100 of your profits to the Michael J. Novosel Foundation.  George and the foundation help take care of reservists and guardsmen returning from some very bad places to civilian life — often missing a limb or two.  These were guys just like us who left their nice cushy stateside jobs for a quick one-year tour and had their lives forever changed.  Thanks to a government that’s quickly going broke, they often wait months for a wheelchair ramp or prosthetics that fit properly.  You can read more about Mike and Mike Jr. here.

Okay, with that out of the way…

There’s little point in rehashing what happened today.  Suffice it to say, I love rising wedges!  Despite continually taking profits off the table and hedging myself out the wazoo all day, I still managed to be up 60% on the day.  Stupid kind of returns.  I hope some of you did, too.

Today we officially deviated from the 2007 pattern in a very noticeable way. 

In two days, we did what it took 8 days to do in 2007.  We broke the previous low and, in just two days, reached the 161.8 extension of the last rise (I’ll refer to it as XA for now.)  It took eight trading days (Jan 8-17, 2007) back then.  And retracements?  We don’t need no stinking retracements.  At least, that’s the way it’s playing out so far.  Very strange.

We could look at this a few different ways.  It’s possible we’re going to drop straight to zero and not look back.  If you believe this, you’ve already swapped your computer for bourbon and ammo.  This does not apply to you, my friend.

It’s possible today’s market got a little ahead of itself, and will make the retracement in its own sweet time.  It’s also possible we’re due for a snapback rally tomorrow that’ll put hair on your chest (note to sister-in-law: it’s a metaphor.)  Let’s break it down.

In 2007, the market broke through its previous low, tagged the 1.27 XA extension, retraced about 56 pts to the .786 Fib level, loitered at the 1.618 extension before bottoming at the 2.24 XA extension.

From a harmonic standpoint, this was a pretty well-formed bullish butterfly pattern that produced a 56  point bounce at its 1.272 extension.  It then resumed its fall, completing a crab pattern good for a 20 point bounce at its 1.618 extension, and a 125-point, 7 day bounce at its 2.24 extension.  Anyone paying attention to the Fibonacci levels did pretty well.

Okay, 2011, time for your close up.

This is about as perfectly-formed a bullish crab pattern as you’ll ever see (at 1197.25).  Under normal circumstances, you’d be looking at a (practically) guaranteed return to at least the .618 retracement at 1295.  But, these ain’t exactly normal circumstances.

It wasn’t in 2007, either.  The 1.618 extension, remember was only good for a 20-point bounce; it was swifty followed by a 2-day, 80-point shellacking — setting up a 125-point bounce off the 2.24 extension that made savvy traders a few bucks.

Will this be a 20-point bounce, a 125-point bounce or a call to stock up on bourbon and ammo?   Per the Fibonacci levels, a 2.24 extension would take us to 1136 and a 2.618 extension to 1100.

The 87-day cycle with its average 11.06% cycle drop would take us to 1197.65 (welcome!); while, an average 13.01% cycle low would be around 1171.  Keep in mind, those are averages — not extremes.

Looking at trend lines, we have potential support at 1195 and 1155.  Horizontal support is also possible at 1200 and 1173 (from last November.)   And, the huge head and shoulders pattern we’ve been following indicates a downside of around 1145.

Looking at the confluence of all those numbers, I think the Fibonacci levels merit the closest watch.  But, to be on the safe side, I’m marking all of them on my charts.  I’ve also taken the precaution of hedging my bets — literally.  I’m still short, of course, but I’ve added some slightly out-of-the-money calls that will largely protect me from a rally. 

And, rallies are to be expected.  Many similar plunges have been followed by 40-point rebounds the next day, tripping stops and plundering profits all the way up. Who among us doubts that TPTB are gathered around $75,000 taxpayer-funded antique mahogany conference tables, dreaming up ways to safeguard the country’s future their stock options?

One last thought… for anyone out there who’s positive that the worst is over, consider the weekly chart.  Ignore the jumble of TLs and patterns.  Focus, instead, on the RSI, histogram and stochastic picture.  We are far from oversold.  Very far.  Compare 2011 to 2007 and you’ll see what I mean.

If I have any more bursts delusions of brilliance I’ll write more later.  In the meantime, do your homework, make nice with Karma and stay groovy.

Gold had a couple of pretty strong reversals yesterday and today.  Recall we saw a rising wedge and bearish butterfly pattern completed on the daily chart that indicated GC might have run out of steam [original post here].

Since then, it blew through the proposed D point of 1646.80 on the way to 1684.90.  But, this morning, it fell sharply, tagging 1642.20 intra-day.  It’s also set up some striking divergence on the 60-minute chart.

I have no idea what the cosmos has in store for gold long-term.  But, this pattern is a recipe for at least a short-term correction.  It is likely falling in sympathy to the equities markets, but all those nasty margin calls have to paid somehow.  And, it’s psychologically easier to sell positions in which you have huge gains.

Given that many of my fellow doomers have defensive positions in gold, it’s worth at least taking a look at protection.

Charts from original post:  AUG 2, 2011

Back in May, I posted a study [see:  Sure, It Works in Practice] that found a 87-day cycle that did a pretty good job of predicting significant downturns.

I haven’t posted the chart in a while, so here it is again for anyone who’s been watching.  The predicted 30-trade day low of 1197 happens to correspond with where I think we might find the next level of support.

Keep in mind, that figure is based solely on achieving the average 11.03% decline that the study has found.   This one could be better or worse.

I’ll add to this post after the close today.

UPDATE:  2:15 PM EDT

Something’s gotta give…  We’re in a falling wedge within an expanding wedge, with loads of divergence and retesting the earlier lows.

UPDATE:  12:15 AM EDT

Market seems to have found support here.  Only influence I can see is the Nov 5 2010 high of 1227.  We’ve made a new bullish falling wedge…a few times, now.  Have had a backtest and are possibly retracing, but risk still off the charts.   If it plays out, could take us back to 1245+.

UPDATE:  11:50 AM EDT:

Next major support isn’t till 1200.

ORIGINAL POST:  10:30 AM EDT

The rising wedge seems to have paid off nicely, with prices falling back to the base as per the script.  Like yesterday, the trend line off the Feb 18 high saved the day (so far.)  It’s the orange dashed line on the daily chart below.

The big question is whether this is “b” of a corrective wave, or the next impulse subwave.  We did make a new low, so caution is warranted.

We’re still due a [iv] wave sometime soon.  My original thought (as of a couple of weeks ago) was August 11 (the purple line.)  This was based largely on the 87-day cycle — it should mark an important high.  But, it also dovetails nicely with the 2007 topping pattern.

BAC reached the bottom of its rising wedge this morning.  It tagged 9.32, even better than the 9.40 I was looking for.  I sold my remaining August 11 puts at 1.65 for an 83% gain in 9 days.

At 8.89, it would complete a bullish crab pattern that would also coincide with the bottom of its channel. Might take another look at playing the upside, but doubtful.

First, I don’t expect the market to make any serious advances anytime soon.  Second, if I changed my mind, I wouldn’t play the upside with BAC.

ADDENDUM:  10:35 PM EDT:

Thanks to ewtnewbie for this question on Daneric’s excellent EW blog:

Pebble, love your stuff.  I’m glad you cleaned up your Fib chart–it was getting hard to read.  I haven’t redrawn mine yet, but are you thinking today as ‘a’ up, with ‘b’ and ‘c’ to come to get to 1270ish–or time to add to shorts here at 1260 for sub-1230?

Your comparison chart shows that the topping action in 2007 had a multi-day retest of the neckline, but only wicks above it, no closes. If that holds true this time, we not see 1270 on a closing basis. Just something to think about. 

Sorry, sometimes I go a little overboard with the TLs.  But, sometimes I think one is done affecting anything and delete it.  Then, surprise!, right back in the soup. 

Gotta tell you, the question re a-b-c is my biggest challenge with EW (aside from the dain bramage.)  I’m always wrong with the size/scale of corrective waves, thus leave labeling to those much more capable.  In fact, it’s probably why I dove headfirst into chart patterns, TL’s and harmonics…no labeling!   With that disclaimer out there, my guess is today was the whole enchilada.  Probably not “big” enough, but that’s pretty much what happened in 2007 so it’s good enough for me.

As far as 1270, you’re probably right.  I looked at this a little closer after reading your question.  Bottom line, we’ve extended almost exactly the same from the 6/16 to 7/7 move as we did the equivalent 2007 move (11/26 to 12/11.)  The bounce in 2007 was to the .786 level.  Today, that would equate to about 1279.

Looking at the 5/2 to 6/16 move… the equivalent 2007 span (10/11 to 11/26) extension was right about 115%.  The fib retrace was about .85.   Now, we’re just a smidge past 115% down, and .85 would take us up to around 1273.

I can’t really argue with 1273 or 1279, as that’s where I’ve shown the bounce going to for the past two weeks.  It’s also where my regression channel -2 std dev line is.  But, I’m a little troubled by the idea of that big a bounce.

Hence, the only reason I’m not completely committed on the short side just now — and the reason I took the trouble to play the bounce today.  I can see the bounce stopping right here and now, or tagging that line on the backtest.  But, seeing as how it’s a difference of only 20 pts in the scheme of a 100+ point swing, I can live with the ambiguity.

END OF DAY:  8:45 PM EDT:

Trying really hard not to get distracted by the intermittent noise.

Standing firm,
weathering the storm,
sticking to the plan,
staying the course,
keeping the faith…

UPDATE:  3:40  PM EDT:

Tagged the 1260 IHS target, a little over the 1258 resistance.  Watching a rising wedge getting close to its apex of around 1265 (the other IHS target, hmmm…)

Also seeing a divergence between price and RSI/histogram.  Time to add to shorts.

Looking at the candle we’re likely to leave on the day.  Hammer is a popular candle, but not always a good indicator.  Bulkowski has a good discussion.

UPDATE:  1:45 PM EDT:

Getting awfully close to 1258.  Will go ahead and close out the longs I was playing the bounce with and start scaling in some shorts.  It might indeed go higher in the short run, but I’m fairly certain it’s going lower in the medium/longer term. 

UPDATE:  12:45 PM EDT:

Two little inverse head & shoulders patterns setting up on the 1-min chart.  Might be the boost we need to do a proper c leg of the a-b-c here.  Targets are 1260 and 1266.  I’m watching for a break above 1252 on the upside or 1240 on the downside before adding more to any positions.

Although, it’s likely 1258.07, now that it’s been broken as support, will act as resistance to any further bounce (see below.)

UPDATE:  11:00 AM EDT:

Playing the bounce off the crab here.  Initial target 1257, then 1270.

UPDATE:  10:30 AM EDT:

Market down 12, looks like more to come.  Next logical place to pause is TL and completion of bullish crab at 1233.

UPDATE:  10:05 AM EDT:

ISM not as bad as it could have been..  Index fell from 54.6 to 53.3.

Factory orders came in at a 0.8% decrease instead of -1.0%.  briefing.com does a great job of graphing the trends.   Here’s the report, available here.

UPDATE:  9:50 AM EDT:

Reached the important 1249.50 level of support; this would be the logical place for support to come back in if it’s going to. I imagine any bump we get will be limited to 1268 or so.

The factory orders and ISM non-manufacturing data is due to be released at 10.  Factory orders are durable goods (got it last week – bad) and non-durable goods like food.  Given the food inflation we’ve had, the non-durable aspect of factory orders might compare positively to expectations of -1.0%.

We saw the  ISM manufacturing numbers come in barely positive last week.  I don’t expect services to be any better, especially given the reported layoffs in the financial sector.  The market’s looking for 52.

ORIGINAL POST:  9:25 AM EDT

The Swiss cut rates to 0%, trying to halt CHF meteoric rise…

And, the rest of the currencies vs S&P; futures…

More later.

I don’t really follow gold, per se.  But, seeing that it made a new high today (1646.80), it seems like a good time to take a look at the technical picture.

Gold has been in a rising wedge for over three years — a long time, in technical analysis-land.

A couple of other things can be seen from this chart.  First, there is apparent divergence between price and technical indicators.  Notice that RSI, MACD and histogram all sloping downward while prices have continued to advance.

Also, at today’s high, GC completed a bearish Butterfly Pattern.  These sometimes extend beyond the 161% level, but that’s the most common D point target.

Also common in Butterflies is a rather strong reversal.   The initial target would indicate a drop to the .618 level of 1533.  But, Butterfly patterns frequently correct to a 1.618 extension of the XA leg, meaning a downside to 1350.  The “middle ground” 127.2 extension target is 1413.

Placing a bearish trade in a red hot market takes a lot of nerve — and tight stops.  And, gold has acquired an elevated status lately — given the US debt issues.  But, the harmonics patterns have been very accurate the past several months across markets.   We’ll see how this one plays out.

UPDATE:  1:00 AM EDT

Posting this pretty late at night, only because I needed a long walk on the beach after a day like this.  Don’t know about you, but my head’s still spinning.

We got exactly the move I was looking for; just didn’t expect it all at once like that.  The goal was 1250 by Friday, as has been indicated on my charts for the past 2 weeks.   This could mean there’s more momentum here than expected, which might indicate a deeper drop.  On the other hand, it could mean we’ve achieved the capitulation that’s typical of a short term bottom and bounce (sorry… temporary cessation of crash-like behavior).

We saw a good amount of divergence toward the end of trading, especially on the 60 minute chart.  And, we’re just 5 points away from horizontal support from the Mar 16 low.  We also nearly tagged the TL I’ve been expecting to bring a pause to the decline.  And, last,  S&P; surprised no one by caving (see the 1:40 post below) on their downgrade threat.

Add that all up, and I made the decision to take some profits on almost 1/2 of my positions — a little bit at the 1265 level (my H&S; target) and a bit more at 1258 (the Jun 16 low.)  I thought we’d get more of a bounce at 1258, and I’d have a chance to buy back in a little cheaper.  Instead, I’ll be looking for a good spot in the morning, maybe around 1268 or so.

If I’m wrong, and we get no bounce at all, I’ll likely chase after it like a drunken fool with about half the funds I pulled out today (leaving the rest on the sidelines just in case.)

I know we’re technically oversold.  I know there are others who see this as a huge buying opportunity.  I know the put-call ratio is probably through the roof (not even looking tonight.) 

But, I am fairly well convinced our economic goose is cooked.  Has been for a while…but the secret’s out.  And, now that our own little crisis is averted for another 15 minutes, we can start worrying about the train wreck across the pond.  So, yes, I’m as bearish as ever… at least until further notice.

Bottom line, I’m gonna “dance with the one what brung me.”  The 2007 pattern has worked beautifully till now, and I see no reason to abandon it at this stage.

UPDATE:  1:40 PM EDT

We hit our H&S; 1267 target (see below), bouncing at 1265.59 just a bit ago.  Whether the bounce has any more juice in it or not is unclear to me.  But, I did take profits on a small percentage of my portfolio.

My best guess at this point is we close somewhere between 1269 and 1274 today, then trade in a range of 1250 and 1275 through the end of next week before turning down in earnest.  But, as we near a potential turning point, the exact time and place of the turn gets a little murkier.

I’m not really looking for a bounce any higher than that unless: (1) unemployment numbers are miraculously better, or (2) S&P; and Moody’s follow Fitch’s lead and leave the credit rating alone.  We can only imagine the level of pressure they’re getting from Washington.  And, who would be surprised if they caved?

UPDATE:  11:00 AM EDT

The H&S; pattern is playing out nicely so far, with SPX down to 1275 and gaining momentum.  We might run into some resistance at the -2 std dev line of our regression channel, which is also yesterday’s low (bottom purple dashed line.)

If we can break through, the dashed red trend line has offered fairly strong resistance in the past, but will fail — either today or in the near future.

For those wondering when/where/how big the bounce…. the comparison with 2007 suggests it will be limited to a 38.2% Fib retrace.  Based on yesterday’s low of 1274.73, that would mean 1301.91.

That’s also where the regression channel  -1 std dev line is now, and where the 50 day SMA will be in a couple of days.  There’s also a pretty good trend line intersection at that same level.    It’s anyone’s guess whether it’ll reach that high, but I’d put it at 50-50 if a bounce began right now.

Naturally, the .382 level changes if we make new, lower lows.

UPDATE:  10:40 AM EDT

SPX continues to slip and slide, reaching 1279 — near its opening low.  In so doing, it has completed a little head & shoulders pattern, indicating a downside of 1267.  Should play out in the next 15-20 minutes.

ORIGINAL POST:  10:15 AM EDT

Still watching the ES vs USD/CHF relationship, which does a great job of showing how well equities and the dollar continue to correlate.

I show the Swiss Franc because it has performed the best relative to the dollar and is as strong a currency as there is.

Here it is, compared with the DX, which is a basket of non-USD currencies — primarily the Euro (58.6%) but also including the Yen (12.6%), Pound Sterling (11.9), Canadian Dollar (9.1%), Swedish Krona (4.2%) and Swiss Franc (3.6%).

The chart suggests that, while the USD continues to slide vs the CHF, it seems to have bottomed relative to everything else — particularly the euro.

UPDATE:  3:00 PM EDT

In coming back to the -2 std deviation line of our regression channel at today’s low of 1274.73, we’ve finally completed one of the H&S; patterns I’ve been following.  This one has a sloping neckline (blue, dotted), and is the 2nd cousin to the one everyone’s been watching.  Here’s a peek:

The other, better-known but equally valid pattern has a flat neckline and completes at 1258.07.

The only practical difference between them is the price objective, which is established by the distance between the pattern high and its corresponding neckline value — about 112 points.

The first pattern objective, therefore, would be 1163, and the second would be 1146.  Either will help get us to the new lows coming later this week.

In terms of targets and timelines, we’re still following the 2007 script.  The direction and speed has been spot on, as the purple line above indicates.  This is the exact same trend line drawn 10 days ago and has done a remarkable job of showing us the way.

We might get another pop up when the debt deal is finally done, but the anti-deal sentiment is so strong now, it’s hard to imagine more than 20-30 points if that.  It’s more likely we go down and test the 1258 lows before any meaningful bounce occurs, probably to backtest the -2 std dev line (purple dotted) before beginning the next wave down.

UPDATE:  12:40 PM EDT

Thought for the day… The argument has been made that US stocks are able to advance in the face of a crummy US economy because “the stock market isn’t the economy.”  How many times have we heard that refrain?  US companies are global now, and conduct 40% of their business in other countries where everything is hunky dory.

With PMI confirming a pretty ugly global economic picture (see below), it seems that argument isn’t quite as compelling.

UPDATE:  11:45 AM EDT

SPX thought about respecting the Gartley .786 retrace and TL at 1282.92, but it looks like the economic news is just too overwhelming.  Here’s the daily chart.  Note we’ve broken through the trend line from the last lows I mentioned in yesterday’s post (yellow dashed line).

Next up is the TL from the Apr 21 gap (orange dashed line.)  It’s stopped plenty of declines before, but its days are probably numbered.  

And the 60-minute.

UPDATE:  10:45 AM EDT

As I mentioned in yesterday’s post, the last two times the US PMI came in negative like this were May 2 (the 1370 high, prompt reversal) and June 2 (a 31-point decline in SPX.)

The Eurozone PMI report came in even worse than the US.  It’s worth a read.

UPDATE:  10:10 AM EDT

The ISM Manufacturing Report on Business came in every bit as negative as I expected.  The PMI is at 50.9, a 4.4 point decrease and well below the 54 the market expected.  It totally negates June’s increase.  The breakdown:

Import/export activity was up slightly.  Every other category fell off, indicating a slower rate of growth, or outright contraction.  New orders contracted for the first time since June of 2009.   And, backlogs and customer inventories are contracting at a faster rate.

The 50 point level is the division between growth and contraction, so the index still represents a slightly positive outlook.  But, the trend is clearly moving down again, indicating a contracting economy in the very near future unless something dramatic happens on the upside.

Here’s a link to the full report.  The non-manufacturing report is due out Wednesday morning.

ORIGINAL POST:  July 31, 2011

Looking ahead, here’s a comparison of the USD/CHF vs ES reaction to the debt ceiling “news”…

More later.