The dollar is taking a breather after a strong reversal off the latest .886 and channel bottom, but appears ready to break out.

The EURUSD back-tested the broken channel line and rising wedge lower bound, and is likely about done.

SPX fell 19-pts after we shorted last Friday.  We positioned for an intra-day bounce, but SPX added only 4 points before falling back to complete a little H&S pattern at the close.

continued for members…

The futures indicate a larger bounce is imminent, so I’ll take another intra-day crack at a larger right shoulder as discussed in the last post of the day.

UPDATE:  9:40 AM

SPX just tagged 1505 — the 75% line of our proposed channel from yesterday — which means it also pushed through the 75% line of the larger purple channel.  This is also the .500 of the move down from the top.

I don’t expect this bounce to exceed the .618 (1507) of the fall from 1514.41, so will be looking for signs that it’s time to exit.  The proposed shoulder line is at about 1507.60.

ISM’s Non-Manufacturing PMI is due out at 10AM, so we’ll keep an eye on how the market reacts.  The December numbers are shown below:

UPDATE:  9:55 AM

Just tagged the shoulder line at 1507.71, so I’m keeping one eye on the exit.  Trailing stops are a good idea in here.

UPDATE 9:57 AM

Closing out my intra-day long at 1508, will consider jumping back in if PMI is a beat.  Full short here.

UPDATE:  10:00 AM

PMI down from 55.7 to 55.2 and versus consensus of 55.6.  January’s numbers:

Employment, prices and export orders grew at in increased rate, but overall activity slowed and inventories and backlogs are actually contracting.

Remember, the PMI is a survey, so it measures opinions — which seem universally rosy lately. Are things really as positive as in 2006, or are business owners falling victim to the MSM’s drumbeat of optimism?

Note that the latest downturn — not yet reflected on the chart below from Briefing.com — leaves yet another lower high in its wake on the total index.

If that sort of chart looks familiar, it should…

UPDATE:  10:40 AM

I was premature in closing out my intra-day long position, as SPX just tagged the proposed channel upper bound near the .786 at 1510.26.  This had been on my original target list, but I thought the PMI miss would have more of an impact.  We’ll see if this Fib holds.

This morning has been quite the roller coaster.  It simply wasn’t possible to keep up with charts, posts and tweets all at the same time — not to mention my own trading.  In such circumstances, those playing short-term moves will do best to simply keep refreshing the screen.

The president is due to speak at 1:15 this afternoon — apparently to ask Congress to do a little more can-kicking.  Sounds like a positive for the economy to me (not,) but the market will probably love it.

UPDATE:  1:30 PM

Obama’s speech as expected, the market should move higher here.  I’ll play along on the upside on any strength through the .886 at 1512.20.

UPDATE:  2:10 PM

Just tagged 1512.20 and it looks like higher prices ahead. I’m back in with my intra-day long.  A move through 1514.41 would make 1518.57 look very likely.

The RSI is still ambiguous.  Daily RSI has tagged the 75% channel line (purple) and shows plenty of downside potential in each of the white channels.

While 60-min shows more upside potential — both on negative divergence.

DX continues to look bullish on both time scales.

As some have pointed out, this is a heavy month for POMO — the Fed’s Permanent Open Market Operations.  Today was the second day in a row of heavy purchases – with $1.5 billion in 30 year bonds purchased by the Fed — another $6 billion to go over the remainder of this week, $11 billion next week, $9 billion the following week, and $11 billion the next.

Can the dollar hold its value in the face of artificially repressed rates?  More in a few.

In the meantime, SPX just surpassed the previous high of 1514.41.  I’m closing my short position and am fully long, with an initial target of 1518.57 where I’ll consider another short.

Note that we’re sneaking up on the RUT’s two 1.618 Fib levels and a 1.272 Fib at 920.95, 933.28 and 941.16 (though the large white pattern’s 1.618 at 1033 is also a strong contender should the SPX and RUT diverge.)

And, a push to SPX 1518.57 would likely correspond with a DJIA rally to 14,144-14,200 that would complete a variety of harmonic patterns – not to mention a double top.  Note the red Butterfly pattern below has completed…

The other targets wedged in there include the purple 1.618 at 14,144.27, the small white 2.618 at 14,145.69, the larger white 1.618 at 14,201.84 and of course the double top at 14,198.10.

Note that nothing has really changed since I first identified these targets on Jan 25th [see: Dow – Double Down?]

We’ve had a mixed bag of earnings, a mixed bag of economic indicators, and another 1 1/2 weeks of QE and MSM hype.

If there’s an Achilles heel in harmonic trading, it’s the gray area between a deep retracement (say, .886), a double top and a new high.  We saw this happen on a larger scale once the market topped 1460 in the 36-pt rally on Jan 2.

The fiscal cliff “deal” was meaningless at best.  It was a low volume rally on a day when most of Wall Street was away on vacation (the equivalent of a recess appointment.)  But, TPTB pumped it for all it was worth and it stuck — in spite of pretty solid indicators such as negative divergence to the contrary.

We saw the .886 beat, then the double-top fail, and now a Butterfly reversal at the 1.272, a completed H&S pattern and a potential H&S pattern fail.  That’s a lot of roadkill for a rally on vapor.

Some harmonics traders stay away altogether from the .886-1.1 range for that very reason.  I’ve been one of them from time to time.  This time, it seems like there’s ample technical and fundamental support for a reversal, so I’m wading in anyway.

I’ll put up some charts later tonight to illustrate — including two analogs I’ve been studying.  In the meantime, hang in there.  And, if the thought of a fourth 18-20 point reversal in a row is too much to bear, this isn’t a bad time to be in cash.