The futures are pointing toward a 7-pt drop on the opening, which would take SPX to the .786 Fib (1677.61) we identified as our initial downside target yesterday.  We remain short from 1698 on Tuesday, but will look for a bounce there.

continued for members…

UPDATE:  10:05 AM

The bounce came early at 1680.31, which is roughly the .886 of the rise from the Jul 17 low of 1678.12 to 1698.17.

I won’t downplay the bounce, as it came close to the red .23 channel line.  But, all other indications are that it was premature — and further downside lays ahead.

The key will be whether the white midline can hold on any drop from here. If wave 3 (or C) is done, we’ll get only a backtest to about 1684.  Otherwise, we should see SPX continue down to 1677.61 or the .886 at 1674.91.

UPDATE:  10:41 AM

SPX is bouncing at 1684, so I’ll take an interim long position here with stops at 1683.75ish.

It appears SPX is focused on a channel that targets a midline that intersects the neckline at 1688 or so.  New charts in a moment…

The downward-sloping purple channel below looks like the pattern currently at work.  It’s not a bad looking channel, but the white system has ended up defining all the prior corrections.

If the channel holds, we could see SPX continue up to at least the midline where it intersects with the neckline of the yellow H&S at about 1688-1689.

Whether or not that bounce occurs, this channel presents an opportunity for further downside.  The bottom of the channel would make an excellent neckline for yet another H&S (in purple, targeting 1663) when, as I expect, SPX drops back through 1680 to tag the .786.

UPDATE:  11:05 AM

Just stopped out on the long position.  Back to full short at 1683.75 for the H&S completion at 1680ish.

Note that there are now multiple H&S Patterns from which to choose.  The purple should target about 1663.26, which is in the vicinity of the .786 of 1687-1560, which we discussed as our secondary downside target yesterday.

Of course, bulls can read charts, too.  And, you can bet they’ll be looking to defend against the H&S pattern playing out.  Remember, H&S need to close below the neckline in order for the pattern to be valid.  So, a quick tag of 1677 or 1674 and a rebound to close at 1680 would create maximum uncertainty — a favorite goal of MM’s.

Perhaps something like this?  Please feel free to weigh in, Wavers.

UPDATE:  12:37 PM

The bounce off the neckline just extended beyond the red midline.  I’ll take another protective long position here at 1685.  Stops at 1684.75.

It’ll probably fizzle at the purple midline at 1688, but it’s hard to be certain.  A stop shy of 1687.05 would look like a deep retracement of the drop from the purple 4, which would likely portend greater downside than 1677.

UPDATE:  12:45 PM

Just tagged the purple midline at 1688.38.  I’ll close the long position and revert to full short, but with stops at 1690ish.

UPDATE:  3:08 PM

I’m opening an interim long here at 1686.   More in a few…

I expect SPX to tag 1692, completing an IH&S in the next 30 minutes. But, it probably won’t be very clear whether or not it’ll play out tomorrow.  I’ll likely go to cash at the close.

UPDATE:  3:40 PM

For all the confusion in SPX this morning over 1680 v 1677, the eminis were very clear with a tag at exactly the .786 (following an earlier reversal at the .618) after 5 waves down.

And, the low was a perfect tag on the rising purple channel I’d already drawn from the 1553 low in June.

As much as I’d like to, I can’t say for sure whether or not the bounce off the day’s low and channel bottom will hold overnight.  So, I’d rather not take the chance.

My gut feeling is that SPX will play out as shown earlier, with a reversal at 1691 or so.  But, it could just as easily break out with a big gap up in the morning as has often been the case.

I’ll go ahead and close my interim long here at 1689 and go to cash for the night.

Remember, I will be traveling for much of the day tomorrow.  I’ll only be able to post up until about 10AM EDT.  And, it’s looking like I’ll be taking an actual vacation the week of August 5.  It’s been a couple of years, and this might be the last chance I get before the fund is up and running.  I’ll keep everyone posted as soon as I have any details.