ORIGINAL POST:  09:25 AM

UPDATE:  09:30 AM

SPX overshot our initial target by just a couple of points yesterday, reaching the channel 25% line at 1497.29 before getting the bounce I expected at 1499/1500.  Note that SPX completed a Bat Pattern down to the .886 in the process (larger white pattern.)

The .618 Fib of the decline from 1530 is up ahead at 1518.09 — also the 1.618 of the 1422-1266 decline last summer (1518.57.) It intersects with the channel midline either later today or early Monday.

Daily RSI reached the white midline as we expected, and is currently backtesting the purple midline. It’s still too early to say whether the new falling channel I sketched in yesterday is legit or not.

The dollar is backtesting the channel line it broke through Wednesday after completing a Butterfly Pattern (the small white grid) to the 1.272, but the 1.618 awaits at the confluence of the purple 1.272 and red .618 up around 82.1-82.2 after the backtest is complete (not yet, I think.)

The big question: what happens after the backtests are complete?

continued for members…

Instead of one or the other, it could be a combination of the two scenarios I posted yesterday.

Consider a backtest to the purple channel midline, followed by a drop to the channel bottom at around 1490. As we discussed, this would suck in the many bears who would load up on shorts with the breaking of 1495, only to set up a Crab Pattern at 1555.

The key, of course, would be holding the channel bottom after completing a pretty obvious H&S Pattern.  But, this wouldn’t be terribly difficult if the drop below the neckline were intra-day.  Remember, the H&S is only valid with a close below the neckline.

This is pure speculation, of course.  If the weakness of the past couple of days can’t be overcome with the spectacular PR campaign being waged by the Fed at this very moment, and the sequester plays out as I expect it will, then there’s plenty of downside ahead  — with no new highs in the works.

Re the campaign, did anyone happen to catch the Bullard appearance on CNBC?  IMO, this unprecedented cheerleading is proof of just how worried the Fed is about the effects of sequestration. The Fed is desperate to convince us that QE can counteract any such effects, and that QE will be here for a long, long time.

Four prominent economists, including former Fed governor Mishkin, have released a paper today concluding that the Fed could lose control of monetary policy:

“The combination of a massively expanded central bank balance sheet and an unsustainable public debt trajectory is a mix that has the potential to substantially reduce the flexibility of monetary policy,” the economists write. “This mix could induce a bias toward slower exit or easier policy, and be seen as the first step toward fiscal dominance. It could thereby be the cause of longer-term inflation expectations and raise the risk of inflation overall.

This unfavorable fiscal arithmetic might tend to push the Fed toward delaying its exit from the extraordinary easing measures it has taken in recent years; it could even affect decisions this year about how much further to expand the Fed’s holdings of longer-term government securities…The Fed could cut its effective drain on the Treasury significantly by putting off asset sales and delaying policy rate increases. But such a response would presumably feed rising inflation expectations.”

On hand and available for interviews, recent Fed addition Powell argued that there is no risk the Fed would alter its exit plans to avoid the drop in remittances ($89 billion in 2012) that would accompany an end of QE.

Rosengren (Boston) insisted that QE is “lowering interest rates and providing more economic growth” and “returns the economy to full employment and an inflation rate at the 2% target more quickly.”

But his most interesting comment, IMHO, was his analysis of the actual boost QE provides to the economy: $750 billion in QE cuts long bond rates by 20-25 bps.

“The benefit of this large a reduction in long-term rates is a cumulative gain in real GDP, relative to the base, of 1.6% or $260 billion…In our model, such a purchase also results in a decline in the unemployment rate of 0.25% or 400,000 jobs.”

So, there we have it — the number of jobs created by the largest central bank intervention in US history. By his math, each of those jobs required the purchase of only $1,875,000 in bonds.

 $750,000,000,000 ÷ 400,000 = $1,875,000

This analysis is usually where I start to lose it.  Even if you buy the argument that the Fed is conducting QE to reduce unemployment (I don’t), is this a cost effective way to do it?

Consider the crumbling infrastructure in the US.  $750,000,000,000 would provide an annual salary of $48,000 to over 15 million workers who could be out repairing highways, bridges and schools.  According to BLS, there are only 12.3 million total unemployed Americans.

Spread the total $3 trillion in QE around a bit, and you could theoretically pay for plenty of much needed projects, employ most every American who’s been thrown under the bus by his elected representative, and still put a few hundred billion into alternative energy research to reduce dependence on foreign oil — which might just mean fewer military romps in the Middle East.  Just thinking out loud…

UPDATE:  1:50 PM

The rebound is coming along nicely, nearly reaching the .500 at 1514.12 moments ago.  There are a few different channel possibilities in the works (the rising purple channel is the primary one guiding the upside since 1343.)

According to the falling red channel, we should see some resistance at these prices as the 75% line pushes back.  The red channel top crosses the .618 at 1518.09 around 10am Monday morning, meaning we might face a decision as to whether to stay long into the weekend or not.  Ugh…

The falling white channel indicates things could move even slower, with the cross occurring later next week.  Speaking of crosses, the recently broken 10-day SMA is currently at 1517.33 — probably a little closer to 1518 by Monday.  A backtest would be expected after the break such as occurred over the past few days.

UPDATE: 3:30 PM

Quick update on AAPL…  Recall that it recently found support at 435 at the bottom of the white channel and 25% line of the yellow channel [see: Feb 12 update.]

As I posted back then:

My best guess at this point is a test of the purple channel bottom around 450-455, followed by a test of the white channel top around 495.  This is all predicated on a neutral to slightly lower broader market; a big sell-off below SPX 1474 changes things, as would a push up to 1555.

It also precludes any significant product announcements, cash bonuses to shareholders, dividend increases, etc.  AAPL is clearly subject to huge event risk in both directions.

Also, remember a close above 473 today tilts the tables somewhat.  I can easily envision a rally to 492 to close the gap from Jan 16.  Note the purple trend line at 480ish, easily in reach if prices merely remain in the small rising channel.

We never got that close above 473 after Feb 12.  Instead, we got the dip to test the channel lines down around 450  — where it currently rests.

AAPL should hold the yellow channel line as long as the broader market doesn’t fall apart — which, as I discuss above, is still up in the air.

The former 492 target is barely doable if it breaks out very soon, say, Monday.  Otherwise, look for AAPL to remain in a trading range (triangle) between the yellow channel line and the falling white channel until the broader market makes a move one way or the other.

Beware of drops through the channel line; a break of the yellow line would likely mean a drop to the 1.618 at 409.15.  And, naturally, a break out of the white channel would mean much greater upside.

SPX continues to edge closer to 1518 – reaching 1514.50 moments ago.  I won’t be surprised if it happens in the last few minutes of the trading day, and will probably revert to a short position if it does.

continuing…