Lots of warning signs this morning.  The futures are absolutely flat at the moment.

The USDJPY is backtesting our new yellow channel midline after having completed two large H&S Patterns.

I’ll take a short position on the opening, with stops around 1644.  I’d like to see if SPX can push up through its neckline, or whether it again acts as resistance.

UPDATE:  9:41 AM

I show two small rising channels fighting for control of the near-term results: the white and purple.  Both have room to the upside, but both also offer interim resistance — as does the falling grey channel — which is an excellent fit as a corrective influence.

The small red harmonic grid shows a potential Butterfly or Crab Pattern down to 1617 or 1610, but it would bust at 1646.51.

UPDATE:  10:14 AM

SPX looks like it’s breaking out.  I’ll switch to the long side here at 1643.40 for a likely bump up to 1650-1653 — if it can break through 1646.50.

There’s a very good chance SPX will bounce around in the vicinity of the neckline now that we seem to be caught in the tractor beam of tomorrow’s Fed announcement.

The IHS Pattern is quite bullish, but confirmation requires that SPX close above it.  A break through 1646.50 would be a great start.  The next resistance is at 1648.69, then our interim target of 1650-1653.

UPDATE:  11:40 AM

SPX just breached the 1648.69 high, so there is little in the way of upside resistance from a harmonic standpoint.

We could see a reaction here at 1651-1653 — possibly as far back as the neckline at 1642. So, set your stops accordingly.

I’ll try a short-term trade here with a short position at any break through 1650, tight stops at 1650ish.  This might well be premature, as the white .618 is just above at 1653.20.

I started to review the bigger picture yesterday, but was interrupted by the late session volatility.  Let’s pick up here where we left off.

continued for members…

My basic thesis [see: Current Position] as of Jun 3 was that 1687 marked the beginning of a corrective wave:

My current forecast starts with an assumption that we began a corrective A-B-C wave at 1687 that should eventually take SPX down to 1555 in late August.

The current A wave should drop to 1600-1606 in the next day or two in the wake of the H&S Patterns that completed May 30.  There, at the bottom of the purple channel, my lead scenario is for a Wave B bounce that retraces .886 of the drop from 1687 — about 1677 — sometime around the middle of June.

This would be followed by a C wave down to 1555 that sets the stage for the final wave up to 1823 sometime between mid-November and the end of the year to complete a large Butterfly Pattern — the 1.272 extension of the drop from 1576 to 666 between 2007-2009.

The A wave reached 1598 three days later, and has since bounced up to 1648.69 — about 2/3 of the way to our 1677 target for the B wave.  The actual .886 of the drop from 1687.18 to 1598.23 is 1677.04.  The light blue 1.618 is at 1673.79.  And, the current IH&S I’m tracking points to 1673 — close enough for government work.

There are alternatives (as always.)  This morning, we bumped up above the .25 line of the purple channel that has guided SPX since 1343. The midline, currently about 1665, has already topped the .618 and .707 of the 1687-1598 drop, so the next potential major turning point is the .786 at 1668.14.

Interestingly, the intersection between the purple midline, the .786 Fib and the top of the little white channel is tomorrow at about the time the Fed announces.  The .886 intersection would be later in the week.

TRADE UPDATE:  12:40 PM

Just got stopped out on the short.  So, back to full long here, stops around 1648.  Will probably try again at the .618 at 1653.20.

UPDATE:  1:00 PM

SPX is about to tag the .618 Fib of the drop from 1687 to 1598.  It’s also the intersection of the little purple channel top, the little white .75 line, and the (adjusted) grey channel top.  The grey .886 is just above at 1654.65.  I’ll likely re-short at 1653 if given the chance.

Back to the forecast…  If SPX reverses at the .786, it will most likely be the result of disappointment with the Fed’s statements tomorrow.  If, on the other hand, the reaction is positive, then SPX should have no trouble tacking on another 27 points. Yes, the stock market has turned into one big coin toss.

Today’s rally has the feel of a ramp job. QE expectations are low, as it seems like most polls are picking up on investor doubts regarding its value (other than inflating financial assets.)  Combine that with more talk of Bernanke’s retirement, and the taper seems like a certainty.

Perhaps today’s levitation is a last ditch effort to ramp the market higher just in case tomorrow’s news ain’t pretty.

Assuming we reverse off the .618 this morning, my best guess is another overnight ramp job to the vicinity of the .786, followed by a spike up to the .886 that quickly reverses — something like September 14, 2012 in the wake of the last QE announcement.

TRADE UPDATE:  2:13 PM

SPX just tagged the white .618, so I’ll short here at 1653.50 — stops around 1655ish.

A backtest of the neckline (1642ish) wouldn’t be out of the question.

UPDATE:  3:55 PM

I’ve struggled with this for the past hour, but I’m going into the close short.  I find the currency picture compelling, though not very straightforward.

Indications are that the markets face a small pullback between now and tomorrow afternoon, followed by a significant rally and then a larger pullback.  I’ll post updates on each separately throughout the afternoon/evening.