We got the bounce we talked about Friday afternoon, coming at the .618 of the last move up (the Crab completed Wednesday, in red) as well as the last wave down (in white, below.)

We discussed not playing this bounce until SPX has cleared 1420, which it did this morning.  Even so, I would be cautious in chasing after it.  While the potential is to 1429-1435, as detailed Friday, this is almost certainly just a bounce — nothing more.  And, the next wave down will be swift and severe — particularly if AAPL continues to show weakness this morning.

For those who opened a small protective position as we discussed Friday, the two most likely upside targets are a yellow channel line or a significant Fib retracement of the last wave down.

The tightest version of the yellow channel is shown below.  This version ignores the last 10 points of the mid-November plunge.  A stop at the 25% channel line would mean a bounce to only around 1423 — not much of a back-test for the just broken white channel or rising wedge (in purple, below.)

But a better fit, IMO, would mean including all of the mid-November bottom.  Under this scenario, the yellow channel midline at around 1428 (the purple .618) would be the more likely lower end of the range for the bounce — with a full .786 or .886 (1432-1435) retracement representing the upper end of the range.

If AAPL gets a bounce at 500 this morning, look for this scenario to play out — with SPX’s bounce forming a nice A-B-C wave into the shaded area below.  A stop in the shaded target area would get the downside going, with the next stop around the white .886 around 1402.

continued for members…

Please remember that as long as our forecast remains intact [see: Forecast Update] the downside risk is considerable, while the upside is limited.  Regardless of the what degree wave one considers the 1474 high to have been, the move from 1474 to 1343 was a first wave.

The rally off 1343 has formed a wave 2 — a corrective wave.  It retraced .786 of drop from 1464 and .707 of the drop from 1474 — which is perfectly normal for a 2nd wave.  But, the bullish scenario sees the Dec 3 1423 high as a Point B on the way to a Gartley or Bat Pattern completion at the white .786 (1446) or .886 (1460.)

I certainly can’t rule out this possibility — especially given the distinct differences between the 2011 and 2012 tops (in form, if not in substance.)  A love fest between Obama and Boehner could probably incite such a move — stretching the analog from a time and price standpoint.

UPDATE:  12:30 PM

An update on the intra-day…  SPX just reached the .618 retracement of the 1438-1411 wave down — right at the yellow channel mid-line we charted this morning.

There’s a very good chance the rally runs out of steam right here. But, we have no negative divergence yet, so I’d be a little cautious until we get a clearer signal.

UPDATE:  12:45 PM

Just took a quick look at the EURUSD — which finally tagged the .786 retracement of the Feb 2012 highs (1.3485.)  This marks the 4th attempt — the Sep 14 spike just missed.

How the euro reacts after breaching this level (it’s also the .382 of the 1.49 to 1.20 correction that began in May 2011) will be critical to the immediate future.  Given that daily RSI has tagged an important channel line (w/ neg divergence), and the pair has still failed to retake the largest white channel, I continue to consider this a back-test — which will reverse very soon.

1:20 PM

The dollar continues to loiter in the same price range it’s been in since Dec 4 — showing much less weakness than the euro has strength.

And, as we discussed Friday, its daily RSI shows strong channel support — not to mention strong positive divergence.

UPDATE:  2:10 PM

XLF is re-testing the .886 retracement of the drop from 16.39 on Oct 18.  Prices just tagged the TL from Feb 2011 (also a channel line) for the fourth time (sounds vaguely familiar…)

 

XLF also just back-tested the recently broken rising wedge.

The daily RSI is hitting resistance on one important channel, and there is negative divergence through the 4-hr chart (will be on daily, too, if XLF reverses today.)

continuing…