Today’s action was a mix of misdirection that would make Hitchcock proud.  We were down 10 points early, locked in a channel aimed squarely at 1300.  But, we quickly rebounded and the channel morphed into a descending broadening pattern.  Then, that pattern started tracing out a little inverse head and shoulders pattern that promised a trip up to 1411.  After all those gyrations, we closed up one point.

While the door isn’t closed on the IHS, the pattern we were left with looks a lot more like an inverted roof to me.   These patterns tend to go back the way they came (but not always), so I’m inclined to believe it reinforces our earlier Crab diagnosis.

Beyond that, there was something to frustrate everyone today.  Bulls are no doubt disappointed that, after that barn burner of a comeback, we still couldn’t muster a higher high.  I mean, seriously, folks.  Eight cents is all it would have taken.

And, bears are no doubt disappointed there was no follow-through on the nice early-morning plunge.  Ten points is a good start, but to give it all up on light volume is pretty lame.

My take is that, as today’s doji implies, the market is undecided.  Lots of economic cross currents and uncertainty — but, what else is new?  It doesn’t help that it’s a holiday-shortened week and volume is very light.

The only changes from yesterday’s post are that the put-call ration hooked up a little, indicating a short-term top, and the technical indicators on the hourly chart have more clearly topped and are heading back down — at least for the moment.

We also have a little IHS on VIX, indicating a bump to around 17.80.  VIX was as high as 17.08 on the day and left a slight hook up on the daily stochastic and MACD — a condition that arose but couldn’t last on the daily SPX chart.

Although I follow primarily the SPX, it’s worth noting that the COMP and RUT are similarly positioned re the massive H&S; we’re watching develop.  The only difference is that they’ve already matched their left shoulders, and need only a nudge down to complete the pattern.  COMP’s target would be somewhere around 2315 and RUT about 685.

Also, for the record, there is a smaller potential inverse H&S; setting up on each of the indices.   On SPX, it would require a dip to 1311 and back to 1340 to complete the right shoulder.  I’ll keep an eye on it, but fully expect that any trip to 1311 won’t be a bullish sign.

I continue to expect a sizable downturn within the next week — possibly to 1299 or below.  If we establish a higher high, I’ll reassess.   Initial unemployment claims are due out at 8:30 AM EDT.

Back on June 27th, with SPX at1279, I suggested an upside target of 1322 [Patterns, Patterns and More Patterns.]  At that price, I noted, we would have completed a bearish Crab Pattern at the 3.14 extension of the BC leg.

At the recent high of 1341, we’ve completed a nearly perfectly formed Crab Pattern at a whopping 4.237 extension of the BC leg (an unusual Fib number — inverse of the .236 level.)

The initial target of a Crab Pattern is the .618 retrace of the AD leg.  Here, that translates into 1292.72.  Subsequent targets include a 1.272 retracement of AD at 1242 and a 1.618 retracement at 1214.   (As I mentioned in this weekend’s post, I suspect the initial drop will stall by 1299 in order keep alive the hopes of a wave 5 up.)

These targets dovetails perfectly with my “same as 2007” way of thinking in the near-term, and the resolution of the head and shoulder pattern developing longer-term.  Note the H&S; pattern target indicates 1146, close to the 2.618 AD retracement.

Looking at the hourly chart above, I think we’re about to start that next leg down.  Let’s call it a 3 of (1) of P[2].  We’ve got plenty of possible catalysts: Greece, the Portugal downgrade, coming employment data, the debt limit, etc.

I expect this move down to be fast and powerful.  I added to short positions in SPX and XLF near today’s high and long positions in VIX.  It’s still possible we go up and kiss 1345 for a proper double top, but I don’t think it’s necessary in order for the DT or H&S; pattern to be valid.

Good luck to all.

With all the (justifiable) recriminations aimed at rating agencies post the last crash, it’s more than a little ironic that they’re now being criticized for doing what we asked of them —  telling the truth.

In the past 24 hours, two huge bombshells.  First, Greece is no longer “fixed.”  According to S&P;, the restructuring, even though agreed to, is still technically a default.  The ECB will have little choice but to accept defaulted debt onto their books.

Now comes China, with word from Moody’s that 10% of their outstanding debt may be no good.

Since last week’s stock market run up was credited to the Greece issue being resolved, be prepared for some fireworks now that the picture has changed for the worse.

Friday’s close at just shy of 1340 was purely a function of the way we got there and does not represent a breakdown of the similarities with 2007’s top. 

There.  Got that out of my system.

Am I as confident as that makes me sound?  Ask me after Tuesday’s close.  I’ve spent considerable time this weekend thinking long and hard about extra 10 points the market tacked on last week.  Readers will recall I had a target of at least 1322, but left open the possibility of overshooting up to 1329 or higher.

So, what happened?  In a word, elasticity.  When our trusty government made a move on the oil markets, it threw equities for a loop, too.  As I anticipated in Not Terribly Slick, the pittance we theoretically saved at the pump was immediately overshadowed by a sizable drop in equities markets.

Not only did oil rebound to a higher price within four days (I thought it would take five), but the equity markets rebounded as well.  But, the steady climb I expected (we were so on track) off the 1258 low was thrown off track.

Four days into the rise, when the market had retraced 40.5% of its decline (comparable to 2007’s 48.7%), it should have done the Fibonacci shuffle for a 38.2% pause (34% in 2007).  Instead, it retraced a whopping 77% of its rise, falling from 1298 to 1267.

Not only did this give yours truly a nasty case of indigestion, but it made the whole rebound idea seem somewhat foolish.  For us to reach our 1322 target by Friday, we’d have to gain 55 points in 5 days.  Of course, we did it in 4 — reaching 1321.97 last Thursday.

For anyone who’s ever cracked open a quart of Ben & Jerry’s when they’re famished, it’s easy to understand what happened next.  The market hauled anchor, hoisted all sails and sailed right past the Point of Reason.  Should we have stopped at 1329?  Sure, why not?  But, that was 11 points ago.  It’s time to stop living in the past.

From here, I’m expecting a tumble to around 1299, possibly by the end of this week.  It could go as low as 1286 in this first push, but I’m expecting the higher number simply because it provides the most ambiguity: the bulls could regard it as a corrective [iv] of 1 of wave 5 up.   This market has seemed hell-bent on preserving ambiguity as long as possible whenever possible.

I know, I know.  It’s a short week, and everything points up.  But, I didn’t listen to naysayers at 1298; what makes you think I’ll start now?  It’s entirely possible we start the morning up a few points, possibly kissing horizontal resistance at 1345.  We could even have one relatively flat day as The Force and the Dark Side battle for control.  But, we are heading down — and, soon.

Last Friday’s move is analogous to 5/31, when we printed a big, fat 14-point gain — also above the 50-day moving average.  That day, we also violated another downward sloping trendline off the May 2 high, and the bulls were out in the streets, beating their chests.

The next day, June 1st, we were down 31 and didn’t stop until we’d lost 87 points.  In the 2007 pattern, the market dropped 88 points in the five days following its equivalent of last Friday.  So, don’t think it can’t happen.

BTW, for those looking for more details, I redrew the fan lines off the March ’09 and August ’10 lows to eliminate the candle shadows.  This allows us the extra 11-12 points we’ve already booked.   Additional guidance includes the 78.6% Fib Line (off 1370 highs) at 1346.50 and that horizontal resistance at 1345.20 (double top, too.)  In addition, we’ve reached the limit we established on the daily RSI a couple of weeks ago, and most of the technical indicators I watch on the hourly charts are overbought; many are already hooking down.

I continue to view the latest move up as a backtest to the fan line from the March ’09 lows.  If things go according to plan, we’re tracing out a massive head and shoulders pattern with an objective target of 1146.  We should be down to 1220 inside of 6 weeks or so.  I’ll leave the original forecasted market trend lines up just for grins.

p.s.  For anyone whose kids are bugging them to see the movie Monte Carlo, it’s cute — but not about statistical models, as my daughter had led me to believe.  Just thought you should know.

UPDATE:  July 2, 2011

Friday evening’s subpoena of BofA CEO Moynihan is a great reminder of the many lingering legal problems all the banks still face.  It might give even bullish investors pause about the wisdom of trying to ride the financials any further.

Regular readers will recall I have been extremely negative on the financials for several months now.  From a fundamental standpoint, there is little in the QE-less, higher interest rate world to suggest sustainable profitability is probable, let alone possible.

But three weeks ago, when XLF completed a bullish Bat pattern, I suggested we were in for a rebound (see below).   The pattern called for an upside of 16.55, but I felt the rise would be contained by the channel it’s been in since Feb 18.  Now, it’s closing in on our target and a nearly 7% profit.

There are other reasons besides the channel, however, to question whether XLF can go much further.

First, the fan line it broke through on June1(which had been providing support) is now prepared to pose substantial resistance.  It’s the yellow dashed line below.

Also, at Friday’s high of 15.66, XLF completed a bearish Bat pattern that has a target below 15.

Last, the 200-day moving average looms overhead at 15.69 — 3 cents above Friday’s high.   On the hourly chart, the RSI is well into nosebleed territory.  Along with the histogram and the MACD, there’s an obvious hook to the downside. 

The BofA subpoena announcement came after Friday’s close, so the markets haven’t had the opportunity to react.  Given that, and the technical indicators we’ve looked at, I’m expecting a sharp reversal.   The financials can then get back to that zombie shuffle we all know and love.

ORIGINAL POST:   June 6, 2011

Update on Financials: Getting Off Cheap

If the reported settlement of $20 billion is all it takes to get the banks out of their foreclosure fraud liability, we should see a pop in the financials.

I’ve been watching a bullish Bat pattern evolve in XLF.  While I’m very bearish on the financials (and the market in general), a settlement could provide a short-term boost that leads the XLF and the overall market higher over the next few days.

The pattern targets an upside of 16.55, but a return to the upper end of the channel is likely all we’ll see.

One note of caution for traders: this pattern’s CD leg is currently approaching a 2.00 extension of the BC (1.94 at today’s low.)  Bats can also extend to 2.24 or 2.618, which would result in continued downside to 14.6 or 14.24 respectively.

That would drop XLF out of the channel, which is entirely possible.  Experienced harmonics traders look for a confirmed move in the anticipated direction before placing trades, and place stops to limit the fallout from the 30% failure rate.

UPDATE:  10:05 AM PDT

XLF (currently 15.6) finally joining the action on the upside.  But low volume and a declining ADX…  I think it’s about to get smacked down by its 50 and 200 day moving averages.  Also within a few cents of completing a bearish Bat pattern.  Initial target is below 15 in the next two weeks.  It should remain in the falling channel it’s been in since February, so the upside should be limited to  15.7.  Possibly a little early, but can’t resist initiating a small put position here. August 15’s at .21 are calling…

In the meantime, watching for a good entry point on SPX.  I wouldn’t mind initiating a short position here, but would feel more comfortable waiting for some confirmation — a nice red candle on the 15 or 30 minute chart, for instance….

UPDATE:  7:05 AM PDT

SPX just had the little spurt we were talking about yesterday, hitting 1329.51.   I think that should do it for the upside.

ORIGINAL POST

/DX has been in a falling wedge for a year, now. 

Since early May, however, it’s been stuck in a rising channel.  As can be seen below, they intersect this month.  So, it’ll have to choose.  Staying in the channel means breaking out of the wedge.  Staying in the wedge means breaking out of the channel.

As the longer running pattern, I’d give the nod to the wedge.  But, my gut tells me the channel will provide strong support until either a breakout to the upside or the wedge forces things back down.  Bottom line, the dollar looks to rise for at least the next few weeks. But, we’ll keep an eye on it.

Descending broadening wedge on VIX hourly.  rising wedge on SPX hourly???  negative divergence rsi vs histogram.  Inverse etf, falling wedge. Gartley on SPX daily?  neg diverge on rut/comp/nasdaq.  hitting 50 sma all over the place. overbought.  Right shoulders building all over the place.  vix lower BB.

UPDATE:  11:00 PM PDT

Not much to add.  Just looking at chart patterns… and see what looks like:

There’a a bearish Bat pattern setting up on XLF in another .10 or so; VIX horizontal support at current prices, a falling wedge and descending broadening wedge on VIX hourly, bumping the -2 bollinger band on VIX, negative divergence between price action and RSI and histogram on SPX, VIX, RUT, COMP and SPX, overhead resistance from 50 SMA all over the place.  Right shoulders developing on SPX, RUT, etc.  They go back to February and are starting to look fairly well formed.   Good luck, everyone!

ORIGINAL POST:

What seemed laughable two weeks ago actually happened today, as SPX reached 1321.97 intraday — 3 cents shy of our 1322 target drawn back on June 16 by studying trend lines.  In so doing, it is within spitting distance of its IHS target as well as completing bearish Bat and Crab patterns.  It also reached our statistical target and bumped up against the trendline which should limit the rally to these levels.

VIX also dipped below our target of 16, reaching 15.88.  I currently view any dip below 16 to be a good buying opportunity.  But, keep in mind, the decline not only hasn’t been confirmed yet, it hasn’t even started. 

It is possible (not necessarily likely) that we’ll overshoot in the morning — possibly as high as 1326-1329.  But, from there, the likely direction is down — either tomorrow or Monday.  I’m expecting 1285-1300 within the next week or so, followed by a strong bounce back up to the 1315 area by July 15th and a subsequent dive to the low 1200s.

My confidence in this pattern unfolding over the next month is about 75% — less than I’ve had over the past several weeks.  I hope to spend more time studying the charts later tonight and will try to clarify things.  But, I’m traveling this week, so might not have the time.  The patterns to which I’ve referred are discussed in detail in various posts over the past several weeks.

What seemed laughable two weeks ago actually happened today, as SPX reached 1321.97 intraday — 3 cents shy of our 1322 target drawn back on June 16 by studying trend lines.  In so doing, it is within spitting distance of its IHS target as well as completing bearish Bat and Crab patterns.  It reached our statistical target bumped up against the trendline which should limit the rally to these levels.

It is possible (not necessarily likely) that we’ll overshoot in the morning — possibly as high as 1326-1329.  From there, the likely direction is down — either tomorrow or Monday.  I’m expecting 1285-1300 within the next week or so, followed by a strong bounce back up to the 1315 area by July 15th and a subsequent dive to the low 1200s.

My confidence in this pattern unfolding over the next month is about 75% — less than I’ve had over the past several weeks.  I hope to spend more time studying the charts tonight and will try to clarify things.  But, I’m traveling this week, so might not have the time.  The patterns to which I’ve referred are discussed in detail in various posts over the past several weeks.