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Investors around the world were apparently shocked to hear Bernanke repeat what he and other Feds have been saying for months: they’ll likely cut back on bond purchases if the unemployment picture improves.  Talk about risk-off…

Between that acknowledgement and the recognition that things aren’t so rosy in China, markets have continued to sell off broadly overnight, with the eminis currently down to the purple channel bottom at 1608. For more on China, check out Zerohedge’s great articles starting with THIS ONE.  For more on the Hindenburg Omen recurrence, check out Albertarocks’ excellent coverage HERE.

The two previous dips have exceeded the channel bottom, so the important issue is whether or not we get a bounce here.

The dollar obviously did, as expected, reverse at the .707 Fib.

But, it should find tough resistance at the intersection of two channel midlines and a .618 of the 84 to 78 slide.

SPX fell to our 1633 target toward the end of the session, but the bounce didn’t hold.  This morning, it appears very likely that SPX will join the eminis at the purple channel bottom which, once again, becomes the line in the sand. 1608 is an important previous low for bulls to hold.  The critical level is 1593.

I will short on the opening, but be prepared to switch sides once there.

UPDATE:  9:36 AM

The decline appears to be slowing as we approach 1608 — the previous bottom and the red TL from 1994/2002.  Bulls should take a stand here, so I’ll play a bounce at 1608.

Just tagged 1608.34, which is good enough for me.  Full long here with obviously very tight stops.  For additional support, we have the red .886 at 1604.61 — though these patterns are already quite messy.

As long as 1608.07 holds, this can be characterized as a very deep retracement of the rally from Point C.  Any breakdown and that pattern loses all credibility.  Either yesterday’s 1654.19 high becomes our new Point B or, if 1598.23 is taken out, we’re looking for a new Point A altogether.

We have several important economic reports coming out at 10am:

• NAR’s existing home sales
• Philly Fed survey
• Leading Economic Indicators

Judging from the market’s skittishness, I would imagine that poor results would bolster investors’ expectations re the Bernanke put.  But, I suspect the PPT is standing by just in case…

UPDATE:  10:05 AM

Apparently the NAR didn’t get the memo, and reported very strong results: +4.2% to 5.18 million units. This won’t help the bounce.

The Conference Board is playing ball, however, with a 0.1% increase versus 0.2% expectations — perfect for the “bad news is good news” paradigm.  But, is it enough to offset the rosy housing numbers?

Oops… the Philly Fed’s survey numbers were very positive — also a negative for a market addicted to QE.

Needless to say, a drop through 1598 would change everything — as opposed to the many things that will change with a drop through 1608.07.  Coming up, our revised forecast with the three most likely scenarios.

continued for members…

UPDATE: 10:20 AM

SPX just broke through 1608 but is holding at the red .886 of 1604.61.  For anyone who was unwilling to jump in at 1608, this is a low risk entry point — with the previous low (stops) just below at 1598.23.

Here’s an updated chart:

 

The 1598.23 low came very close to the .618 (1593.77) of the rally from 1536 to 1687.  While the market makers could really screw over a lot of bulls and reverse things at 1593.77 — after clearing all the long stops at 1598 — this general area is now likely to form a Point B for a pattern that points lower.

BTW,I realized when going long at 1608 that SPX could fall further towards 1598 — especially with the .886 at 1604 — but didn’t feel that shorting for 4 points was worthwhile.  Knowing that a break of 1598 would likely mean a drop to only 1593.77 presents the very same 4-pt problem.

But, what the heck.  I’ll set stops at 1598.22 and go through the exercise anyway.  There’s always the possibility that the .618 won’t support a market that’s suddenly in freefall (from all the tripped stops.)  It’s the possibility of things getting out of hand that makes me question whether the MM’s will take the chance.

My attempts at catching this falling knife no longer focus on a return to 1677.  It could certainly still happen, even with a 99.99% retracement to Point C.

But, every hour spent below the purple channel bottom increase the odds that our Point X was really a Point A and Point A is really a Point B in a Bat Pattern (or more) that began down at 1536.

If so, we should expect a nice backtest of the purple channel from 1600ish — perhaps as high as 1636 or so — followed by a decline to the .886 at 1553 in late July or early August.  This has been our forecast for the downside for several weeks, though I expected a bigger bounce than the .618 off the 1598 lows.

Recall that 1553.39 is the 1.618 extension of the 2011 drop from 1370 to 1074.  And, 1555.57 is the 1.618 extension of the 1474 to 1343 swoon that started in September 2012.  And, should it surprise us to learn that the Fib .382 of the 1343 to 1687 rally is 1555.22?

Let’s look at the 3 most likely scenarios for the next few months.

The bullish scenario is that the white Bat pattern plays out.  SPX comes to its senses (stays north of 1598), leaps back into the purple channel and goes up to tag 1668 or 1677.  In such a scenario, SPX merely backtested (1) the red, dashed TL from 1994/2002 and (2) the TL off the 2000 and 2007 highs.  It’s the light blue dotted line below that’s hard to see because it’s hiding behind the white .618 (which makes that 1593.77 tag later today a real possibility.)  SPX would reverse off 1668/1677, but just enough to set up the next leg higher to 1823.

The slightly less bullish scenario is that SPX backtests the bottom of the purple channel  — probably where it intersects with the grey channel top around 1537 on July 1 — and reverses to complete the Bat Pattern at 1553 we discussed above.  At that point, it reverses again and resumes its climb to 1823.

The bearish scenario is that SPX bumps up slightly here, but continues its slide to the white .786 (1568) or .886 (1553) and doesn’t catch a bid — extending to the .618 of the 1343 to 1687 rally at 1474 (yes, as in Sept 14, 2012) and ultimately to the .886 at 1382 (yes, the .786 of the 1576 to 666 drop — where May 2011 should have topped out.)

It’s all easier to see (in yellow) on a larger chart.

UPDATE:  2:21 PM

So, 1593.77 it is.  Going full short here, with stops back at 1600ish.

UPDATE:  2:31 PM

There’s the .618 tag.  Back to full long here at 1593, stops at 1590ish. Next support if 1593 breaks isn’t until about 1582 – the grey channel bottom.

UPDATE:  2:54 PM

Back to full short here at 1591.  I can’t imagine SPX coming all this way and leaving the grey channel bottom untagged.

The only problem with it, though, is it’s in no man’s land from a harmonic standpoint — which means the most bearish scenario might be gaining momentum.

We wondered earlier whether 1598.23 or 1593.77 might be the true Point B in a harmonic pattern.  Since we’ve dropped (only slightly, so far)  through the .618 at 1593, it increases the odds that 1598 was the true Point B at just shy of the .618, and that 1654 was Point C (technically, Bat Patterns must have a Point B at less than the .618 — not greater than or equal to.)

If so, we’re currently working on the final leg of the pattern — a trip to Point D at the .886 of 1555.  A secondary option is the .786 at 1568; but, Gartleys require a very precise tag at the .618, and 1598 was obviously off a bit.

However, if this is a corrective A-B-C wave down with AB=1687-1598 and BC=1598-1654, then A=C at a C of 1565 — very close to the .786.  So, we’ll see.

In the interim, I’m expecting the current leg down to reach 1576-1579.  1579 is a small 1.618 extension (white above) and 1576 is obviously the 2007 high. The SMA 100 is also currently at 1576.87.  A bounce up to 1611 or so could follow, but ultimately there is plenty of harmonic risk down to the .786 at 1568.

UPDATE:  3:55 PM

We’re getting a bounce here at the close, but I’m going to hold short overnight.  I see additional exposure down to the .886 itself in the morning — especially with margin calls (got gold?) and all…

Interestingly, DX has held fairly steady and has yet to retest this morning’s highs at the intersection of the channel lines.

I have to run out for a meeting, but will have post more this afternoon.  Lots to talk about.  A reminder, I will be on vacation tomorrow.  I should get a chance to post a little in the early morning, but will be on the road throughout the market hours.

Till later…