We’re set to get a nice bounce here at the bottom of the purple channel — as revised in last night’s last post.

Based on where the futures are pointing, I’m not sure whether it will have legs or not.  But, I’m inclined to play along on the upside, but with relatively tight stops in case it peters out.

The EURUSD has rebounded nicely as we anticipated, but has reached a point of resistance at the midline of the rising channel at a price level that’s proven difficult to exceed since early March.

The daily chart shows a bounce off the bottom of the purple channel as expected, but plenty of overhead resistance in the 1.33-1.34 range if it’s able to break through 1.316 or so.  The .618 is up at 1.3341.

The dollar continues to tread water.  I’ve drawn a tentative new wider channel that might represent the expected range now that the rising white channel is officially kaput.

Remember, this decline is a backtest of the broken red .25 channel line.  If the decline continues on track, we could reach that channel line (at about the .red .382) in very short order.  It’s currently at about 81.74.

But, there’s no reason DX must retrace all the way to that line.  It has already back tested the purple .618 — a reasonable pullback after the Bat Pattern that completed at our 83.616 target back on Apr 4.

The daily RSI, in fact, shows strong support from the bottom of the rising purple channel and the .25 of the rising white channel.

The yellow midline on the RSI chart represents that dashed white channel midline cutting across the middle of the price chart above.  A thrust up through it should accompany the next big equities dump.  And, to my eyes, that’s the next major move.

Though SPX is safely back in the purple channel, it can’t go on forever — right?  Even if our most bullish scenario plays out, there would need to be pauses of more consequence than the past two sessions.

In that pullback, SPX reached the .786 of the 1539 – 1597 rally between Apr 5-11 (1552.36 vs 1551.88.)  The bullish case will consider that reversal as the full extent of the pause — a proper corrective wave that reversed at the bottom of a very well-defined channel dating back 5 months and 230 points.

If so, SPX should head up and push through the trend line extending from the 2000 and 2007 tops — currently around 1593.50 — on the way to its 1823 target.

The bearish case suggests we slap a Point B on that reversal and call it a Butterfly Pattern that targets 1523 or 1503.

So, which is it going to be?

continued for members…

UPDATE:  11:50 AM

Pulling back, the daily chart show a large rising wedge.  The lower bound (solid yellow) originated at the Mar 09 666.79 lows and connects the Oct 2011 and Nov 2012 lows.  The upper bound is the trend line that connects the 1994 and 2003 lows (also solid yellow.)

In addition, there are several channel systems that have been at work since the 2009 lows.

SPX recently tagged the top of the large yellow channel at its 1597 high, so it argues for at least a pullback.  The red and purple channels are a little more difficult to interpret.

The red channels gave a bullish sign when SPX pushed back up above the latest channel line to fall around the first of the year and retook 1474.  But, it has struggled to hold this line.  It fell below it yesterday, and just a few minutes ago pushed back above.

If the bulls can maintain momentum, the next higher red channel line crosses 1823 in July 2013.  Remember, 1823.42 is the 1.272 extension of the 1576 to 666 crash — and essentially the next higher major Fib line in sight.

If SPX back tests 1576 (my objective today) and continues to drop, losing the red channel, the bottom of the next line is currently around 1480 — just a tad higher than the Sep 2012 high of 1474.  Even in a bullish scenario, a backtest of 1474 makes a lot of sense.

The purple channels are the most bullish of the bunch.  The next higher major line is currently around 1655, and the next lowest is only at 1530.  They’re also interesting from the standpoint that a system of channel lines (light blue, below) drawn parallel to them have done a very good job of defining SPX’s moves since 1474 in Sep 2012.

This particular system, if it should play out, suggests that SPX reached its maximum potential, then reversed and fell back to the .75 line, where it merely experienced a normal bounce.

If 1597 is to stand as the high for much longer, I rather like this scenario.  But, it will require a drop below the 1553 and 1555 Fib lines I’ve discussed many times before.  Otherwise, we could play “how big is the retracement” to as high as 1592 before knowing what’s in store over the medium/long term.

A replay of the early 70’s scenario I’ve presented before called for a 3% initial sell-off, followed by several whipsawing, gut-wrenching pushes higher.  The drop from 1597 to 1552 was 2.8%.

The daily RSI picture isn’t a lot of help.  Though the yellow channel top helped call the 1597 high, we reversed below its midline and are closer to the .75 line after today’s bounce (1572.53 so far.)

A closeup shows several potential rising channels that could either spell the end of the downside or signal more to come.

Neither the red nor the purple is a particularly great fit all around.  Is SPX merely backtesting the bottom of the red channel or getting a solid bounce off the bottom of the purple?

Too close to call, but momentum seems to favor the purple — with a return to backtest the cluster of channel lines around 58.  A push up through that area would no doubt lead to another high on more negative divergence.

The reality is we have a series of lower highs and higher lows: a triangle with an apex around July 1 and a .786 time Fib ratio of mid-May.  Until a break out or break down comes along, we just can’t know for sure.  But, I found an interesting little pattern that suggests some possibilities.

This is a Fibonacci Time Ratio applied to the rising purple channel up from 1343.  It’s been a pretty good fit, with most of the highs/lows coming at significant Fib levels.   The 1597 high came at the .786 Fib line.

The 1.000 comes in mid-May — a date that keeps popping up in my forecasting — and the 1.272 comes right at the apex of the daily RSI triangle I mentioned above.

If we look closely at the .886 line, we can see that around the end of the month it intersects with: the bottom of the smaller falling yellow channel, the bottom of the rising white channel, and maybe even the .25 of the larger, rising yellow channel.

It might be nothing, but these sorts of intersections always catch my eye — especially when they fit with a time frame suggested by other patterns.  So, perhaps a continuing decline into the end of the month, a rally from there into the middle of May, then a more serious plunge into July?  I’ll be looking at this more closely.

UPDATE:  1:50 PM

SPX has reached 1573 so far — almost 50% of the decline from 1597 to 1552.  The actual .500 Fib is at 1574.97 and, of course, our backtest target has been 1576.  Only problem is the little channel that’s guiding this rally doesn’t cross 1576 until the end of the session – or early tomorrow morning.

Would anyone be surprised if we closed at 1575-1576 today, frustrating bulls and bears as to what’s next?  I sure wouldn’t.

UPDATE:  3:30 PM

We’re getting pretty close to 1576.  I’m not excited about sitting long overnight just in case this is a backtest as discussed before.

UPDATE:  3:45 PM

1574 is good enough for me.  I’ll close out my long position here  — another daily high/low at the close — and, go to cash overnight.

For those who can hedge overnight or are trading futures, I’d consider leaving the position open overnight with protection.  Otherwise, too great a chance of a reversal at or near 1576.

If I’m wrong and we push higher than 1576, the .618 is at 1580.25, the .786 is at 1587.77 and the .886 at 1592.25.  Any of these is perfectly acceptable as a corrective wave retracement — though a push through 1576 obviously adds to the bull’s case.