This morning’s post started out as an observation from a long-time member (hat tip to Beach Justice) and turned into a meaningful detour.

PW – Does the candle pattern off of the recent 1400 low look a lot like the candle pattern from Sept 6 to Sept 24 to you?  We have a couple big green ones, one smaller green one on top that hit the high, then a bunch of tiny consolidating candles before it moved lower.  Also, always good to see another Ghostbusters reference, love it [2nd hat tip!]

I took a look and was impressed by the similarities.  As BJ pointed out, they had very similar form.  But, it went beyond that.

The September 2012 high was a big Crab Pattern that measured 77.95 from top to bottom and took 17 sessions from inception (the interim high at 1426) to the top.

The latest high is also shaping up as a Crab Pattern.  It’s been going for 19 sessions and measures 75.85 points (so far.)

Interestingly, had the first pattern stopped on a dime at the .886 Fib retracement of the 2007-2009 crash (i.e. 1472.43), it would have measured 75.86 points in all.  Hmm….

Not one to believe in coincidences, I set out to look at other tops over the past few years.  This is where it got really interesting.

In May of 2011, SPX completed an important top that looked sort of familiar.  That’s the same sized shaded box, BTW, just for comparison purposes.

This Crab Pattern top also took 17 sessions to complete and ranged 75.88 points. Hmm…

With all that out of the way, let’s turn our attention 2007 — the really interesting double top.

These two were slightly smaller in price range (68.96 and 71.72 points) but still lasted 16 and 17 sessions.  The first completed a Butterfly Pattern rather than a Crab.  I attribute this to the horizontal resistance stemming from the 2000 top at 1552.87 (red, dashed line.)

I find it very interesting that the 2nd top came in the wake of a completed Inverted H&S pattern — much like what happened on Jan 2 of this year.

There was a fifth pattern that looks somewhat similar: April of 2012.  By transposing the shaded box over this pattern, we can see that this one is slightly larger.  It slightly exceeded the 1.618 extension, completing a Crab Pattern in only 13 sessions, then moved sideways for a few days, reaching its 1422 high near the 2.24 extension in a total of 23 sessions.

I suspect this was the result of the proximity of two competing harmonic patterns and the lack of a nearby major Fib level.  The closest was the .786 at 1381.50 — which this pattern tagged at the entry point to the topping pattern.

The dip and subsequent rise to complete the Crab Pattern crossed back over the .786 Fib, and offered two viable alternative targets that likely confused many harmonics watchers [it did me, as detailed in All the Pretty Butterflies.]

So, what does this all mean when the market is set to establish a new high that breaks the pattern?

continued for members…

These tops, while eerily similar, have ultimately been driven by: (1) the small Crab Patterns they incorporate, and (2) the tendency of markets to respect the double top, regardless of the impetus behind their rise.

I believe it’s very likely we’ll see a replay of the 2007 double top: technically a new high, but a double-top that still respects the .886 Fib of 1472.34.

Assuming we break through 1474.51 on the opening, I’ll play along with an intra-day position.  But, I’m prepared to go full short again at 1478.83 — the 1.618 of the current Crab Pattern.  It could be the last leg up and the top all in one as occurred in 2007.

More in a few…

UPDATE:  9:35 AM

SPX just reached 1478, but with negative divergence across the board and a total lack of conviction.  I’m closing my intra-day long position here at 1478 and will resume full short.  A strong push through 1480 will be cause to switch sides.

The dollar has not made new lows, though there’s the risk that it’s just back-testing the last leg down (the yellow TL.)

And, the EURUSD — which has not made new highs — just completed a little Bat Pattern.

Even the USDJPY, which I keep hearing is “breaking out” has yet to exceed the recent blowout top at some important longer-term resistance that is still on tap to produce a meaningful reversal.

UPDATE:  1:00 PM

I’m really torn over holding short at this point.  The signals are mixed, to say the least.  There are two 60-min RSI channels that say the party is over, that topping the target Fib levels was an intra-day excess.

If we were closing at these levels, however, I’d feel very differently.  I might even feel bullish if I could find any positive divergence anywhere…

…or, SPX broke out of its rising wedge…

…or the EURUSD hadn’t completed a rising wedge withing a rising wedge and a Bat Pattern within a Bat Pattern — all on negative divergence…

…or, the Dow had made new highs and wasn’t bumping up against the midline of a 3 year old channel…

…or, NYA hadn’t just formed a double top with May 2011 while tagging the midline of its channel from 2011 and a Butterfly 1.272…

…or, VIX had broken down below support in price or RSI…

…or, RUT wasn’t tagging its RW apex, a channel line and RSI channel lines all at once…

…or, COMP wasn’t about to complete a Bat Pattern from its Sep 21 high and had just tagged an RSI channel midline and upper bound at once…

…or, if the super amazing unemployment new claims “beat”  wasn’t a lie heavily seasonally adjusted (to the point of being laughable)….

…and the Philly Fed Business Outlook survey numbers hadn’t fallen off a cliff…

 

…or, if the super amazing building permit “beat” wasn’t a lie seasonally adjusted (also to the point of being laughable.)

December permits matter because most investors are looking to accelerate expenses into the current year, and the several month lag between pulling a permit and having units ready for occupancy by the prime moving months the following summer.

Here’s the unvarnished truth about December permits over the past 20 years.  Single family permits dropped from a high of 113,800 in 2004 to a low of 24,600 in 2008.  Since then, permits have been climbing back, with obvious fits and starts.

2012 was obviously a huge improvement over 2011.  And, you would expect that.  First, the population has continued to grow and families continue to form.  They need someplace to live.  And, since permits in the past 6 years are only 39% of those in the prior 6 years, there is demand.

Second, there is capital available.  If you’ve ever been involved in construction or even known a builder, you know that if they’re not building they’re not making money.  There is certainly some additional benefit to selling units when prices are up.  But, cash flow comes from the markup earned when building — not thinking about building, and definitely not from staying out of the market.

 

In short, if you’re not building you’re going out of business.  So, when capital that’s not excited about 1.5% bonds or a stock market at 5 year highs comes along, you jump on it — whether or not you believe the market is really stronger.  You take the project (even if it means a projected loss) because you want to keep your crew together, the lights on, and maybe – just maybe – the market will improve the way all the talking heads keep saying it is.

As Cheerleader in Chief, Bernanke hopes that enough people believe his BS to create a self-fulfilling prophecy.  Buyers might take the plunge, builders will have product ready, bankers will make loans (and clear out some of their REO) and…voila!…the cycle will take off.

And, like any con game, it could really come together.  So, where’s the rub?

Take a look at the data below.  Single family permits are the lowest since April, and this is the first December in five years that didn’t either hold the line or spike up.  If everything’s going so well, where’s the December spike?

 

UPDATE:  EOD

Lots of great questions and comments today.  I’m looking forward to addressing them, as well as doing an EOD wrap up.  I have to run out for several hours and won’t be able to address them until later tonight.  Catch up with you all then…