[Reprinted from June 29 Intra-day Post]

We closed up almost 11 today at 1307.41, coming within 3 points of overlapping [i] down, which seemingly everyone believes would invalidate the bearish count.  Other indices such as RUT and COMP did overlap this wave.   Here’s the daily chart again, with my original projections from a couple of weeks ago in red.

There’s absolutely nothing wrong with that above conclusion — as long as you’re positive that 1258/1262 was the termination of [iii] and not [v].    If it was [v], as I contend, then 1 is done and we’re in [c] of a corrective wave 2.  To me, the A-B-C move off the lows is pretty clear.  But, then again, maybe I’m off my bean.

I’m not ranting and raving about this count because I know more about Elliott Wave than anyone else.  Far from it.  But, as I’ve posted for several weeks now, this top is ridiculously similar to that which we experienced in 2007-2008.  I’m not going to bore everyone a restatement of the premise.  If you have no idea what I’m talking about, go back over the past month and read forward to today.  Deja Vu on June 6 is as good a place to start as any.

So, where do we go from here?  Am I turning bullish?  Absolutely not.  The intersection of all those fan lines and trend lines is still hanging out there at around 1322 or so (my favorite spoiler candidate is the trendline off the May 2 and June 1 highs.)  So is the target of the inverse H&S; set up at the recent bottom.  Also at 1322, we’ll have completed both a bearish Bat and bearish Crab patterns I talked about in the recent post about Patterns. 

Could we overshoot?  Absolutely.  Once the bears capitulate and/or the margin calls get to be too much, I can easily imagine a higher move.   As I understand it, the medium-term bearish case is still alive unless we exceed the May 2 1370 high.

And, given that most — if not all — of this bull has been attributable to Fed manipulation, who knows what else BB might have up his sleeves?  I’m certain they’ll try; not very sure at all that it’ll work.  Certainly wouldn’t bet the farm on it.

So, no, I don’t think we’ll establish a new high.  I think we’ll stop somewhere shy of 1330 and begin [i] of 3 of (1) of P[3] down.  I expect it to take us down to 1300  (any lower would make it difficult to trap more bulls.)  The bounce back up, the last bullish frenzy, will falter on or around July 15th (the 87th day) at the above-mentioned trend line — probably around 1310.   If this all plays out as expected, look for the low 1200’s from [iii] of 3 down. 

Once caveat:  many are calling this a wave 4 triangle, and I can see the logic in that.  If so, we hit the very same targets above.  Except, after the bounce from 1310 to that trend line, we keep on going.  The one thing that’s been consistent about this market is its propensity to leave the greatest number of options on the table as long as possible.    I’ll be watching for that possibility.  A study of previous tops tells me it’s a slim, but distinct possibility.

I’m reminded of Dennis McCarthy in the original (and best) Invasion of the Body Snatchers. 

The lesson there?  Just because someone rants and raves like a lunatic, they’re not necessarily crazy.

UPDATE:  6:45 PM PDT

We closed up almost 11 today at 1307.41, coming within 3 points of overlapping [i] down, which seemingly everyone believes would invalidate the bearish count.  Other indices such as RUT and COMP did overlap this wave.   Here’s the daily chart again, with my original projections from a couple of weeks ago in red.

There’s absolutely nothing wrong with that conclusion — as long as you’re positive that 1258/1262 was the termination of [iii] and not [v].    If it was [v], as I contend, then 1 is done and we’re in [c] of a corrective wave 2.  To me, the A-B-C move off the lows is pretty clear.

I’m not ranting and raving about this count because I know more about Elliott Wave than anyone else.  Far from it.  But, as I’ve posted for several weeks now, this top is ridiculously similar to that which we experienced in 2007-2008.  I’m not going to bore everyone a restatement of the premise.  If you have no idea what I’m talking about, go back over the past month and read forward to today.  Deja Vu on June 6 is as good a place to start as any.

So, where do we go from here?  Am I turning bullish?  Absolutely not.  The intersection of all those fan lines and trend lines is still hanging out there at around 1322 or so (my favorite spoiler candidate is the trendline off the May 2 and June 1 highs.)  So is the target of the inverse H&S; set up at the recent bottom.  Also at 1322, we’ll have completed both a bearish Bat and bearish Crab patterns I talked about in the recent post about Patterns. 

Could we overshoot?  Absolutely.  Once the bears capitulate and/or the margin calls get to be too much, I can easily imagine a higher move.   As I understand it, the medium-term bearish case is still alive unless we exceed the May 2 1370 high.

And, given that most — if not all — of this bull has been attributable to Fed manipulation, who knows what else BB might have up his sleeves?  I’m certain they’ll try; not very sure at all that it’ll work.  Certainly wouldn’t bet the farm on it.

So, no, I don’t think we’ll establish a new high.  I think we’ll stop somewhere shy of 1330 and begin [i] of 3 of (1) of P[3] down.  I expect it to take us down to 1300  (any lower would make it difficult to trap more bulls.)  The bounce back up, the last bullish frenzy, will falter on or around July 15th (the 87th day) at the above-mentioned trend line — probably around 1310.   If this all plays out as expected, look for the low 1200’s from [iii] of 3 down. 

Once caveat:  many are calling this a wave 4 triangle, and I can see the logic in that.  If so, we hit the very same targets above.  Except, after the bounce from 1310 to that trend line, we keep on going.  The one thing that’s been consistent about this market is its propensity to leave the greatest number of options on the table as long as possible.    I’ll be watching for that possibility.  A study of previous tops tells me it’s a slim, but distinct possibility.

Remember, just because someone rants and raves like a lunatic, they’re not necessarily crazy.

UPDATE:  11:50 AM PDT

The market’s taking a breather here as bears, especially EWers assume we’re starting wave 4 down.  There’s even a way to draw the trendlines so that looks to be the case.

I don’t think it is.  I continue to believe we completed wave 1 of (1) at 1258/1262 and are in corrective wave 2.  It should take us to 1320 (probably a little higher).

IMO this rally isn’t over until we reach the TL drawn off the 1370 high (see the chart below.)  Going short now should be okay in the medium/long term, but there is a better entry point waiting just a little higher.   VIX puts look like a steal here with SPX at 1202.

ORIGINAL POST:

Here’s where the market is this morning, with my original projections plotted in red.  SPX currently at 1303.  I’m expecting a backtest this morning, but otherwise still expecting 1320 in next few days.  Keep an eye on VIX, nearly back to 18.  I suspect we’ll end up closer to 16 by the end of the week as bears capitulate.  I’ll be looking for good entry points, preferably in the 15 range. 

I’ll try to post again at the end of the day.  Good luck to all.

Okay, folks, I need help from someone who knows a lot more than I about Elliott Waves (which is pretty much everyone.)

Anyone out there who’s looked at the 2007 EW count vs the latest from 2011?  Maybe one of you has charts from way back then, or can look at this and see all they need to see.

I’ve been pounding the table on the similarities in the markets for several weeks, now.  Except for the attempt to crash oil the other day, they could be twins.  At least cousins.

But, to my blurry eyes, the EW counts look like they could mesh pretty well too.  What say you?

UPDATE:  1:00 PM PDT

Should see a little backtest here, possibly down to 1292, before the next leg up.  We pushed to 1296.80, just shy of the 1298.61 and 1297.62 highs from the 14th and 15th.  So, natural for there to be some momentary indecision about whether we’ll be able to establish a higher high or not.  I continue to believe we will, with my target still at 1320 or so.

We’ll keep an eye on the technical picture, currently getting a little frothy but not necessarily topped out.  A 5-7 point  breather should relieve some of the froth and give us ample room to continue the push tomorrow.  Here’s the updated daily chart.  The path to 1320 and [c]/2, which looked so far-fetched two weeks ago…

is looking decidedly “near-fetched.”

UPDATE:   9:30 AM PDT

As we climb past 1290, two things.  First, a backtest is to be expected.  Second, keep an eye on the technical indicators.  Rallies tend to be contained at around 60 on the RSI.  Check out the asterisks on the chart below.  Also, note the diverging downward trend of the RSI and MACD/Histograms.  And, the fact that ADX is on the downswing – meaning the momentum is waning as the market rises.

Also, I forgot to mention earlier that we completed the H&S; pattern on VIX — the one with the upward sloping neckline.  Should give the bulls a shot in the arm.  The flat neckline pattern will complete at around 18 and should be just in time to trap some bulls into a falling market.

Stay groovy.  Meaning, as we approach 1300, it’s a good time to review stops and plan out the next couple of days.

ORIGINAL POST:

We’ve completed both a bullish inverse H&S; and a bearish Gartley.  Battle of the chart patterns.  Also, the hourly SPX is bumping up against its 200 period MA.  And the daily is bumping up against an important trendline drawn off the 5/5 lows.  It previously supported the market on May 17, 23-26, 6/1 and 6/2.  Turned to resistance on 6/3 and stopped the 6/21 and 6/22 rallies.

Should at least take a breather here while the bulls work up more courage and the bears consider drawing another line in the sand.

SPX is off to a strong start, up 11 at 1279 with Personal Income about where it was expected, positive rumblings on the Greece problem, and a White House pow-wow to try to break the debt ceiling impasse. The way we’ve started, I expect today to leave a bullish engulfing candle on the day.

Last Thursday’s high was a .618 retrace of Wednesday’s high, and we’ve retraced .786 of the rise from Thursday’s low.  In other words, we’re about 3/4 of the way through a Gartley Pattern.  It sets up for a possible reversal at 1290.69 (.786) or 1294 (.886) with a .618 target of 1276.

Gartley?  Crab?

But, the downturn may not be that substantial.  If momentum remains strong, we will have completed an inverse H&S; we’ve been working on since June 10.  The upside potential would be 1320.

At 1320, the CD leg in the Gartley Pattern mentioned above would also have extended to 1.618 of the XA leg and 3.14 of the BC leg — a perfectly-formed Crab Pattern.    But, look what else happens there: a big, fat Bat Pattern that’s retraced 78.6% of its June 1st high at 1345.

Bat Pattern?

If you read this weekend’s post Cliff Diving, you know that a bounce to 1320 would be perfectly in keeping with historical retracement activity and would reflect very accurately the price action when the 2007-2008 market topped.

I was telling someone just last night that I love it when various indicators come together, pointing toward the same result.  These harmonics-based possibilities rely on certain things coming together — chief among them, now, that we complete the IHS at 1290.  But from there, it seems like a reasonable roadmap to 1320 that would catch a lot of bears off guard.

As regular readers of this blog know, 1320 is the intersection of lots of important trendlines.  You can read more about it here.   The bulls will be popping champagne and lighting cigars with $100 bills again, anticipating new highs.  Won’t happen.

I expect the resistance provided by the line down from the 1370 top to stop any further advances cold and mark the termination of Wave 2 of (1) of P[3].  The completed Bat and Crab patterns will also point the way down.

The initial target would be 1291, the 61.8% Fib level.  Aside from a brief bounce, we should head down to test and ultimately break through the previous lows at 1258.

I’ll be traveling most of the rest of the week, so won’t have much time to blog unless something big happens to change my viewpoint.   Have a great week everyone.

While there is plenty of speculation that this will be the week we experience a flash crash, I don’t think it’s likely.  And, if it should happen, it won’t be the market disaster that many expect — for the simple reason that such severe drops almost always retrace significantly in a relatively short amount of time.

This time could be different, but as a technician I keep my distance from such thinking.  As regular readers of this blog know, I’ve been banging the “all market tops are alike” drum for a while (previous posts here and here.)

As I posted on June 22, I view the current market as particularly similar to 2007 both in terms of the run-up to the top…

2007 vs 2011

…as well as the price action within the top itself:

Date:  6/22/11

In my opinion, we’ve completed wave 1 of (1) of P[3] down and are in the process of tracing out corrective wave 2, which should take us back to the midline of the channel created over the past four months.  This is a count similar to 2007’s, in which there was also dissension over the initial impulse wave count.

2010 – 2011

Since Feb 18 High

That midline currently stands around 1324 or so.   The simple average of the most recent high (1370) and low (1258) is 1314; but, I’ve been more focused on a broadening channel running roughly parallel to a simple regression channel with boundaries of +/- 2 standard deviations.  My channel is drawn off significant highs leading up to the current pattern and is explained here.

After the 10/11/2007 peak, that market dropped 10.8% in 31 days.  It then recovered to its channel midline in just 11 days.  This represented a price retracement of 68.8% in 35.5% of the time it took to reach its low.

These numbers are very consistent with other significant declines.  I looked at market drops since 1987.  I started with the crash of August 1987 and worked my way forward, setting a threshold of a minimum 7% drop within 35 trading days or so.  I chose the time periods in a rather unscientific way — I eyeballed them.  It’s quite possible I missed some or included some that shouldn’t have been, but the results were fairly consistent.

Some of the declines were significant in the short run, then extended on for a longer period.  August 1987 was one such decline, as were March 2002 and April 2010 (I show both short and long periods for comparison purposes.)

As can be clearly seen, the minimum retracement of one of these significant declines was 35%.  The average was 56% — which supports my assertion that markets tend to retrace to their midline before leaving the topping pattern.  Viewed from a Fibonacci standpoint, the most common retracements were 50% (12), 61.8% (11), 78.6% (3) and 38.2% (2).

The average retracement time was 38% of the time it took to decline in the first place.  The frequency of common Fib’s was 50% (9), 38.2% (7) and 61.8% (4).  Like the price retracements, this jibes with common perceptions about market moves in general.

If 1258 was indeed the low, the decline we’ve seen since May 2 took 32 days — very much in keeping with the study averages.  In those 32 days, this market lost 8.2% — a little on the low side, but within the study range.  If we perform per the historical averages, the market will retrace to its midline of 1322 within 12 days — or, July 5.

My own charting — based on comparisons to 2007 — indicates Friday the 1st, which would be 11 days.  Pretty close.  My price target of 1324 is also pretty close to the 1322 the study indicates.  A move to 1322 would also be a 78.6% retrace of the 6/1 1345 high and a 50% retrace of the 5/2 1370 high.

If it plays out as I expect, we’ll have also completed a bearish bat pattern (since 6/1).  The initial price target would be the .618 retracement, or 1297.  And, a continued decline would complete a huge H&S; pattern indicating downside below 1200.  But, we’ll deal with that in the coming days if the pattern develops as I suspect.

The one thing this study doesn’t spell out is whether 1258 was the low.  This could be one of those 35-day patterns that loses 20%.  But, I don’t think so, but we’ll know in the next few days.  Just know that, if it is, we’ll bounce back accordingly before diving straight for 666.

Can we retrace 54 points in 5 days?  Sure.  We’ve had two 20-point days in the past 9 trading sessions.  And, most technical indicators indicate we’re somewhat oversold (more on that later.)  The market seems very news-focused lately, so I suspect a positive trigger relating to Greece, the Fed, the debt ceiling or economic indicators expected out this week.  Also, Friday is options expiration for the quarterlies, so keep an eye on OPEX related anomalies.

I’ll try to update the technical picture before the opening tomorrow.  In the meantime, plenty to think about.

As regular readers of this blog know, I’ve been banging the ‘market tops are alike’ drum for a while  (previous posts here and here.)

I view 2007 as particularly similar to the current market.  In my opinion, we’ve completed wave 1 of (1) down and are in the process of tracing out corrective wave 2, which should take us back to the midline of the channel created over the past four months.

After the 10/11/2007 peak, that market dropped 10.8% in 31 days.  It then recoverd to its channel midline in just 11 days.

This market took 32 days to drop 8.2% to its recent low.  It had retraced 35% of its total decline in 4 days before plunging back near its lows late last week.  A return to its midline of about 1326 would mean a 61% retracement of the total drop.  It has 5 days to complete the climb if it’s to match the 2007 pattern.  52 points in 5 days.

At 21 days down from the May 2 top, this market retraced 58% of it’s then 4.3% drop.  It went on to drop another 87 points, or 6.5% over the next 11 days.  Total drop: 8.2% in 32 days.

Fourteen days after the 10/11/2007 high, that market retraced 72% of its then 7.2% drop.   It went on to drop another 117 points, or 8.3% over the next 17 days.  Total drop: 10.8% over 31 days.

UPDATE:  7:25 AM PDT

SPX just completed a little Gartley pattern on the 5 minute chart.  Didn’t think it would fly, as the B didn’t quite make it to .618.  It might take us down to the .382 line at 1272 before we start up.

I’ve been watching the 5 minute chart intra-day, as it has an uncanny ability to forecast short-term turns on its RSI.  A touch near 20 almost always marks a bottom, and 80 or above a top — though it can and does “overshoot” when the momentum is strong.

 ORIGINAL POST: 6:50 AM PDT

The market nearly succumed today following a dramatic test of the All One Market hypothesis.

In a lame attempt to curry favor with voters, the administration waged war on high oil prices.  They brought a peashooter to the front lines, but their first shot hit the market right between the eyes.  In a move as carefully orchestrated as the silver take-down in May, oil fell a swift 5%. 

Ah, but the law of unintended consequences.  Stocks fell in lock step, matching oil’s decline to the minute [see: Not Terribly Slick].  And, the $800 million which might be saved over the next week or so of lower crude prices was quickly dwarfed by $50-100 billion in market losses.  Oops.

Luckily, Benny and the Jets came to our rescue (was there ever any doubt?)  The Plunge Protection Team dispatched trucks of cash to every street corner in Manhattan, free samples for anyone promising to buy a share or two of stock.

The DJIA, which was down 234 at one point, closed down a relatively tame 60.  SPX closed down 3 instead of 25.  And King Dollar, up almost 1.5% since yesterday’s close, fell back to a more princely .6% gain.  Almost every index I watch left either a bullish hammer or a shooting star on its daily chart.

For the faithful who read and believed Deja Vu All Over Again and Deja Vu All Over Again, Again, this was an enormous buying opportunity.  Consider the June 132 SPY calls, which traded as low as .02 and subsequently rose to .12.   I hope at least a few of my brothers in arms felt as I did and added to their longs at 1265.

Although the politicos threw us a curve, the topping pattern is still intact.  There was some question as to when the B in the A-B-C corrective wave would make its appearance.  The trend line off the 4/21 gap was doing a great job yesterday and up until just after I posted about it last night, but obviously got clobbered by today’s action.

The pattern found a substitute support trend line — the latest fan line from 10/31/10 that was formed when we put in the 6/16 low.  It’s seen in the above chart, running from (1) to (4).  If history repeats, and it always does, this line will come into play again in the next week or two — probably as support at Point B and resistance as we’re backtesting from Point D.

Also, note how the various numbered points generate meaningful fan lines.  Point (1) is the intersection of an important low with the trend line from the Mar ’09 lows.  Its top line provided primary support from 3/16 to 5/16.  Once the market dropped through it on 5/23, it acted as resistance for the backtest — determining the 6/1 interim high of 1345.   The middle fan line from Point (1), also our Mar ’09 trend line, will define Point A.  And, the bottom fan line has, as already stated, saved the market’s bacon on two occasions: 6/16 and today.

Examine the other fan line points of origin.  Point (2)’s top line determined the 4/8 and 5/2 highs.  Its middle line, the 3/16 low and future Point A.  And, its bottom line coincided with the 6/16 low. Note that each subsequent origin point has its own sphere of influence, but they often intersect. 

These points of confluence are especially important to market action.  Examples include Point (4) and future Point A.  I’m expecting another near the backtest of the channel bottom and will probably move Point D to reflect that once it’s revealed.  My best guess is that the 4/18 low will act as a point of origin, possibly determining Point B and the backtest intersection point.

At 7:30 pm PDT, the futures look to erase all traces of today’s debacle.  Tomorrow should continue what would/should have happened today.  I fully expect to reach Point A in the next several trading days.  We have a bullish hammer candle and very positive technical indicators that should see us to at least 1300 tomorrow. 

At that point, we will have completed a (somewhat lopsided) Inverse H&S; pattern that has upside potential to 1328.  The rising wedge I was following obviously paid off with today’s plunge, but we may have established a new one with a wider base.  I’ll be watching it, as a similar pattern played out at the equivalent point in 2007.

A strong opening tomorrow should also complete the H&S; pattern I’ve expected in the VIX.  Believe it or not, the potential target here is 11 — a number we haven’t seen since 2006.  We looked at this pattern here and here.  While I don’t believe we’ll actually reach 11, the mere completion of the H&S; will generate a lot of bullish enthusiasm.

I expect it to drive the market to Point A with enormous enthusiasm.  Even after we pull back, most will expect it to be a corrective wave on the way to a new high.  It will be the last and bloodiest time anyone’s tempted to BTFD for a very long time.

Stay tuned.

The White House’s brain trust thought this would help?

US Plans to Release 30 Million Barrels of Oil From Strategic Reserves

http://www.cnbc.com/id/43508255

Come on, guys; everyone knows that markets are very much in sync these days.  This little stink bomb took crude down $4 and an already fragile market down another 20 points.

While lower gas prices will please the guy filling up his Suburban this morning, his joy will be somewhat tempered by the margin call he’ll get from his broker this afternoon.

Let’s suppose the market does rebound as I expect it to.  There’s still the issue of the Strategic Petroleum Reserve being, well… strategic.  While not a very good defense against crazy things happening in the Middle East, at least it was a defense.  Sort of.

And, then there’s the arbitrage — in this case, a negative one.  This is oil we bought for a lot less money when the dollar was stronger.  When and if we replace it, it’ll be at a much higher price with a much weaker dollar.

If lower prices stuck around for awhile, I’d say it’s worth it.  But, 30 million barrels, even though it sounds like a lot, isn’t.  It’s about one day’s supply.  If the effects last for a week (unlikely) the $4 per barrel savings translates into $840 million theoretically saved (30MM x 7 days x $4).  The bad news is that the DJIA alone lost $50 billion in value (1.5% of $3 trillion) since news of this stunt leaked out around midnight.

This is a political gimmick that’s been tried before and always, always fails.  Always.