The currencies played out exactly as we expected overnight — but the equities ramped anyway.

The eminis are showing +10 right now and are likely to test the Jun 19 high after a miniscule reaction at the .886 Fib level.

In so doing, ES have pushed up into the purple channel.  With the FOMC June minutes released tomorrow, it appears to be the only play the markets have: ramp as far and as fast as possible before BB reiterates the Fed’s intention to taper if/when.

I am a bit surprised TPTB don’t try to build more of a base for a meaningful rally.  I guess this falls into the category of “get while the getting’s good.”  Far be it from me to stand in the way.

A 10-pt pop on SPX doesn’t run into any resistance other than the Jun 18 high, so I’ll play along on the long side on the opening, but watch for any pullbacks near 1654.19.  The gap from Friday will apparently remain open for now.

A 10-pt pop also leaves SPX in no man’s land: 10 points shy of the .786 at 1660.03, but 5 points over the line separating the purple channel from reality.

UPDATE:  10:05 AM

The 10-pt ramp job has been pared back to a 5-pt rally that’s stuck at the purple channel’s lower bound.

I’ll go short here at 1646 on the off chance that we’ll get a back test of the white channel top and or gap fill down to 1632.  Tight stops on this one, though, as it might just as well be a back test of the broken purple channel bottom.

From a trading standpoint, this is a bit of a quandary.  If you expect the FOMC’s minutes to boost the market, the .786 and .886 of the 1687 to 1560 decline are just overhead to provide resistance at 1660 and 1672 respectively.

If you expect them to disappoint, we’ve already pulled back from the purple channel incursion and, despite what intra-day height we reach, are likely to close at the channel boundary.  What more is there?

I suspect SPX will remain in a trading range for the next 24 hours — with current prices pretty well indicating investors’ current expectations re the Fed.

If this situation seems vaguely familiar, it should.  On May 21, the market rallied on expectations that Bernanke’s testimony the following day would be bullish.  One of the biggest ramp jobs in recent memory followed that night, and SPX shot up 17 points in the opening hour on May 22, only to provide a great shorting opportunity at 1687.

The forecast I posted on the 21st called for a drop to 1600 in early June, followed by a .786 retracement to 1670 and a subsequent drop to 1560 before a rally to 1823 around the end of the year.

Here are the charts from back then [see: If It’s Tuesday]:

We got the drop to 1600 right on schedule.  But, instead of rallying to 1660 next, we got another leg down to our 1560 target two months ahead of schedule.  Now SPX is working on that retrace to 1660.

To me, the wave picture is a mess.  At 1560, we had a nice little A=C corrective move down from 1687.  A push above 1654 would certainly help confirm that 1560 is all the correction we’ll get anytime soon.

But, there are three potential problems that need to be overcome first:

1. SPX dropped out of the purple channel back on Jun 19
2. the currencies are positioned as though a correction is imminent
3. the white channel bottom was never tested

I’ll take the next hour or so to review the big picture.

continued for members…

SPX just broached 1650, so I’ll ditch the short position and go to cash unless we get a strong thrust lower (maybe from 1654 or a break of the red channel .75 line at 1650 — note the rising wedge.)

Here’s the chart I posted in the last Current Position update on July 1.  The .786 and .886 targets are both there, but didn’t call for reentry into the purple channel from last November.

Pushing into the purple channel in order to bag those targets now might be considered ballsy… or it might just be out of desperation.

I think the bulls’ goals would be best suited by establishing a parallel channel below the existing purple one — an expansion, if you will.  Remember, the purple channel guided SPX 25% higher (from 1343 to 1687) in 6 months.

The red channel that supercharged the last month of it took SPX from 1536 on Apr 18 to 1687 on May 22 — a 9.8% gain in 24 sessions.  Never mind that 120 of those 151 points came in the first hour of trading courtesy of gaps up following ramp jobs (164 points if we count the first two hours of trading.)  It did the trick, and no one seemed to mind very much.

The 1687 top came at the point where the red channel ran into the top of the purple channel.   The purple channel reasserted itself — until June 20.  All the previous corrections since last November limited themselves to the bottom of the purple channel itself (thereby creating the channel.)

This time we tacked on an additional 40 points on additional fears of the taper — almost retracing 88.6% of the red channel’s rise.  It wasn’t enough to reach the bottom of the white channel; but, it took plenty of air out of the markets.   It largely silenced those criticizing the Fed for having blown a new bubble — some of them to the point where they reverted to Fed cheerleading.

The white channel is rising almost as fast as the purple channel, and is currently around 1530.  I show it crossing 1553/1555 in early August — that’s still a key area to the downside — those important Crab Pattern completions. Another downside target is the intersection of the falling yellow channel and the rising white channel.

TRADE UPDATE:  2:15 PM

I’ll try a short position here at 1654 as discussed earlier.  Tight stops are advised.

CONTINUING W/ BIG PICTURE…THE BULLISH VIEW

I keep coming back to the white channel because tagging it — or not tagging it — will make the difference between when and whether we reach SPX 1823 — the 1.272 extension of the drop from 1576 to 666 in 2007-2009.

A tag immediately after this current move runs its course would be helpful to the bulls, as it would further back test the resistance the market blew through at 1553/1555.

I assume the bulls will hold just short of 1654.19 in order to suck in a few more bears prior to tonight’s ramp job.  If they close it back around 1646, the daily candle would look like a failure to take the purple channel.

A shot up to 1660 to tag the .786 (or 1672 to tag the .886) tomorrow morning might even close below the purple channel bottom.  The spike on May 22 did much the same thing — establishing the new high and busting the red channel all in one 38-pt swing.

Reaching 1672 tomorrow would set up an A-B-C wave down to 1545 if A=C, or the previous low of 1560 if C=.886 of A.  Either way, tagging the white channel bottom gives SPX some breathing room for another leg up.

Is tagging the white channel bottom essential?  No.  Look closely, and you can see that the current rising red channel is the same slope as the previous one.  Remember, that one took prices up 10% in about a month.  A 10% gain from here would be 1823.  The red channel could reach it in late August where it intersects with the top of…the purple channel.

This would constitute a 16.8% rise from 1560 — slightly more than 1.618 times the original red channel.

THE BEARISH VIEW

This one is a little easier, but we could use a little help.  Take a look at the daily chart, and it’s obvious we won’t really have made a dent in the purple channel unless we close above 1647.  Ditto for tomorrow.  We could write this off as a nice little back test that was capped off by Bernanke reiterating his intent to scale back QE.

The wavers could label the rise from 1560 a ground-rule wave 2 and we could get on with the dreaded 3rd of a Wave 3 down.  It’s harder to do if we break 1654.19, but I’m sure the wavers would find a way to label it — some sort of diagonal zig-zaggy thing.

The white channel bottom could easily be reached by the 15th in the 1536 – 1550 range.  At that point, we could get the bounce up to 1823  — then 18% away — or merely bounce and head down to test other channels such as the red at 1474 in early September.

Much depends on how tomorrow goes, especially: (a) whether or not SPX breaks 1654.19, and (b) how the market reacts to the Fed minutes and Bernanke’s discussion.

I’ll go to cash at the close tonight — hopefully with a few points profit, sooner if SPX reaches 1646 or breaks 1654.19.    I’ll play along with any ramp job in the morning, and wait for the FOMC news to participate in any breakout or breakdown.

We haven’t talked much about fundamentals lately.  Between the ramp jobs and massaged data, it hasn’t seemed all that important.  But, the economic picture remains pretty much the same as I’ve written about before.

There is a recovery for those with a seat at the QE banquet: banks, investment banks, institutional buyers of real estate, sellers of moldy old financial crap, etc.  For many others — upside down homeowners, savers, retirees on a fixed income, annuitants, the unemployed (especially long-term), the foreclosed, the countless others who can’t tap the gravy train — there is no recovery.

QE has reinflated some asset values — real estate, the stock market, bonds, etc.  And, clearly it will have to be undone at some point.  Whether that begins tomorrow, on July 15, or at SPX 1823 — I don’t know.  Until then, investors need a place to park their money where they can try to keep up (or recoup some of their losses.)

So, the market will continue to go up, even if it requires the blatant manipulation of twice weekly 10-pt ramp jobs.  It remains to be seen how/when inflation creeps into the picture, but rising interest rates will do just as much damage.

Once the stimulus is removed or tapered, there will be a rush to the exits.  Whether it’s a mild correction or a rout will depend on TPTB’s reaction.  If they’re prepared — as in June — it probably won’t get too bad.  If they’re not — as in July 2011 — it could be very ugly.

Stay tuned.