The US dollar bounced off the .886 of its Sep – Nov 2012 run…again.  This is the fourth time it has found support in the 78.725 – 79 range, though each subsequent bounce has been lower than the previous one.

The result is a descending triangle that arrives at the bottom of an uptrend (the white channel below) and a 2nd back-test of the latest channel (red) that was originally broken out of on Jan 2.

The primary driver has been euro zone weakness, with the EURUSD back-testing the midline of the white channel after a bull run that equaled that of this past Aug-Sep.

Though, the yen is also pitching in — reaching our secondary price target well in advance of the forecasted date range.

SPX was off over 10 points this morning, making our decision to short Friday at 1514 appear to have been the right move.  SPX is heading toward the next lower purple channel line, where it will likely get at least a bounce in the 1500-1501 range or the .886 Fib at 1498.77.

The question is whether the market is just taking a breather or beginning something more significant.  I’ll spend the next hour or so examining the road ahead.

continued for members…

The harmonic picture is pretty convincing.  SPX came within 1 point of completing a large Crab Pattern (red) at 1415.24 and 4 points of a slightly smaller Crab Pattern (purple) at 1518.57.

It completed a textbook Butterfly Pattern (yellow) at 1510.19 and a small Crab Pattern (purple, at the 2.24) at 1509.86.

It also clearly completed an ending diagonal with a very nice tag of the yellow Trend Line that connects the inception of the largest red pattern with its 1.272 Fib level at 1422 on Apr 2, 2012 and its 1.618 at 1515 on Friday.

Obviously, the bearish case will require the undoing of a ridiculously steep moon shot that has sent SPX up 171 points since mid-November.

It’s difficult to forget the impetus behind the entire move: the “resolution” of the fiscal cliff crisis over the low-volume New Years’ Day holiday weekend.  The market spurted ahead 24 points on Dec 31 and another 36 on Jan 2 on news that the crisis had been averted.

Obviously, only half the crisis was even dealt with — much less averted. The other half — the sequestration which will throw a wet blanket over the “economic recovery” — is just around the corner.  It’s anyone’s guess what Congress will do, but would it surprise anyone if we get yet more can-kicking?

If so, the big question is whether the bond market still has the capacity to react to a continuing $1 trillion (or more) budget shortfall.  When the Fed owns such a large percentage of the bonds and has the means and the intent to prevent a ramp up in rates, this has the potential to be an incredible showdown between free market forces and government intervention.

UPDATE:  11:40 AM

SPX just reached the .886 retracement of the 1498 – 1514 rally between Jan 31 and Feb 1.  For those looking for a place to play a bounce, this is a likely spot.  I’ll leave the core short in place, and place a bet on an intra-day long at 1498. Very tight stops are in order.

A likely target is 1503-1504 which marks the large purple channel line, the small white channel line and the .618 Fib.  A move beyond that would likely run into resistance at the .382/white channel midline intersection.

Of course, a H&S pattern in here would really help the downside case.  So, a bounce in the 1495-1498 area would be nice.

UPDATE:  3:50 PM

After several fits and starts, SPX managed only 1501.06 before reversing and completing the little H&S mentioned just above.  It targets 1479ish.  Our interim long position is stopped out at the neckline for a 1-pt loss and the core short remains in place.

We’ll want to see a close below the neckline to feel completely (as much as one can, anyway) comfortable with the short.

This 1479 target is a bit of an odd duck, as it doesn’t line up with a lot of other important levels.  The one that pops out is it is the 1.618 extension (1478.83) of the 1446 to 1398 drop from Dec 18 to Dec 31 (small purple pattern.)

A reversal there at the 1.618 could be considered a normal retracement in a larger bullish move, so I have no reason to doubt the price target (i.e. it would fit with both the bullish and bearish case.)

1479 intersects with the 2.00 extension (white grid) of the last leg up (1496.76 to 1514.41); but, I should say the 2.00 is not my favorite Fib level for Crab Patterns.  The 1.618 of the white pattern on the other hand (1485.85) intersects with the purple channel midline early tomorrow morning, so this seems like the safer bet for any immediate follow-through to the downside.

1479 also intersects with the purple channel’s 25% line on Friday, so it might represent the target of the subsequent wave down — if indeed we get a reversal at 1485-1486 that, say, back-tests the neckline — something like the purple line on the chart below.

The main problem I have with the H&S pattern just completed is the shape.  While it looks perfectly legit on a 15-min chart, backing out to a 60-min chart shows how the two little shoulders are much smaller than what looks like could be a larger left shoulder.

If we connect today’s low with the Jan 31 trough, we get a nice-looking neckline that would produce a better-looking H&S pattern following a bounce up to 1507ish in the next day or two.

This is pure speculation, but such a pattern would probably complete in the 1490-1495 area and would target 1475 — just above the Sep 14 high of 1474.51 and also the bottom of the purple channel on Feb 18-19.

The daily RSI indicates additional immediate downside, but it’s not clear as to just how much: the bottom of the latest white channel, or the purple mid-line?  The Nov 14 and Dec 31 bottoms came w/ virtually no positive divergence — a simple tag of the channel bottom.

Or perhaps this is a great big head-fake — a breather — as indicated by the chart below.  Here, I simply grab the last red channel down that guided Feb-June 2012 and extend it into the present time period to look for cyclicality.  From this standpoint, the current move down appears like a back-test.

I have to run out for a few hours, but will try to post more later tonight.

GLTA.