I hope everyone had a great weekend. Friday morning [see: Channel Tilting] we looked at the big picture, a breakdown through some key support levels — most notably the purple channel that guided SPX from 1343 to 1687 between Nov 2012 and May 2013.
This continues to be the elephant in the room from a chart pattern standpoint.
DX, EURUSD and SPX came very close to the target levels posted Friday morning. I was looking for 83.075 for DX. This morning, it reached 83.05 — just shy of the white .618 and purple .75 line.
After breaking channel support, EURUSD almost reached its .618 at 1.3032.
And, SPX acted pretty much as expected:
I suspect it’ll reverse around 1598 and head down to 1580, then possibly to 1568 and finally 1553. Don’t know if it’ll all happen today, but those are the key levels I’d be watching for.
It rallied on the opening to reach 1599, then fell to 1578 before bouncing to close at 1592.
This morning, we’re getting the next leg down. SPX just arrived at our 1568 target, the .786 of the 1536 to 1687 rally. It should at least pause here, and could get a nice Fib bounce (1577ish?) The real target is 1553, though.
I’ll play the bounce here at 1568.32, but with tight stops in the (quite possible) event that the bounce turns out to be nothing much.
UPDATE: 9:55 AM
Just got stopped out on the interim long position, reverting to full short here.
BTW, if 1568 sounds familiar, it’s because we talked about it on Jun 17 as the initial target in the downside scenario [see: This Time Really is Different – members section.]
The downside case is just a matter of degree. At 1598, SPX recently retraced just shy of .618 of its rise from 1536 (Apr 18 low) to 1687.
It also came within 4 points of the trend line connecting the 2000 top of 1552 and the 2007 top of 1576 — which is more of a bullish argument, really (looks like a backtest of an important TL.)
In any case, a drop to the .618 indicates the potential for either a Gartley, Bat or Crab Pattern — which would complete at 1568, 1553 or 1442 respectively.
Now that we’ve reached our initial target and are closing in on our second, we’ll update and review this scenario.
continued for members…
The rest of that scenario from Jun 17:
If SPX should prove unable to exceed the Jun 1648 high, then there’s a nice potential Crab Pattern that would support the idea of a drop to 1568. It would begin at 1598 (Point A above) and top out at 1648 (Point B above) and its 1.618 extension would be 1567.05.
A drop beyond 1568 would most likely extend to 1555 for starters. This is approximately the .886 of the rise from 1536 to 1687, and also the .382 of the height of the entire purple channel: 1343 to 1687.
Between the two more immediate downside cases, this is the more compelling. It’s a major Fib level of a much bigger pattern. And, it would also represent a bullish backtest of another major Fib level: the 1.618 extension of the plunge from 1370 to 1074 in 2011 (1553.39.)
The .886 in question can be seen in white on the chart below. It’s a little difficult to see because, as noted back on the 17th, it’s overlapped by those other Fib extensions.
Assuming that SPX reaches 1553/1555 later today, we’re presented with a bit of a problem: the white channel bottom. As of today, it’s way down at 1515. Because SPX got here ahead of schedule, we have to wonder whether it will hold or not.
It’s a good enough turning point on its own merit: the .886 of the rise from 1536 to 1687 and the .382 (yellow) of 1343 to 1687 (the purple channel rise.) On the yellow grid, 1515 corresponds to the .500 Fib.
This means one of two things will likely happen:
- SPX gets a big bounce at 1553 and returns to tag the white channel bottom after Aug 9 (when the white channel bottom intersects with 1555); or,
- SPX dips below 1553 on this move — possibly today.
UPDATE: 1:10 PM
I’ve been studying the question I raised above, but in the meantime SPX is getting a nice bounce going. Since it’s poking back above the .786 at 1568.38, I feel compelled to take a protective long position just in case. Upside potential is probably the underside of the grey channel at 1577ish.
Friday’s low was 1577.70 — which makes a good wave target on a small scale. And, if I have it drawn correctly, the falling purple midline crosses the bottom of the grey channel at about 1576.70. Keep in mind that 1576 was the 2007 high, so SPX is likely to react strongly anytime it’s in the neighborhood.
UPDATE: 1:45 PM
There’s a possibility that this bounce will reach higher, but we just reacted in a place that confirms a suspicion I’ve had regarding the channel the market might be considering — shown in white below.
I’m going to close my long position here at 1574, as 1553/1555 is still very much on my radar.
But, I’ll re-open it with any move through the bottom of the grey channel (1576ish) with a potential target of 1591-1593.
The midline of the red channel (the one I’m expecting to play out) intersects with the midline of the more bullish white channel at 1593 or so, and a move to that level would close the gap at 1591.17.
Also, 1593.77 is the .618 of the same pattern where the .786 was 1568.38. A reversal from the .786 to the .618 is quite normal, even when the eventual move is to the .886. And, of course, 1593.98 would be a .886 retracement of the drop from Friday’s high.
Last, don’t forget about the white dotted line lurking behind the white .618. This is the TL connecting 1552 and 1576 (the 2000 and 2007 highs.) SPX obviously exceeded it in April, but fell back through as reported on Jun 20. Today’s rally can legitimately be considered a backtest of it.
The biggest hitch in the plan is Friday’s low of 1577.70, so watch for a reaction there one way or the other.
UPDATE: 3:10 PM
SPX has reached 1586.45 so far, still 5+ points to go till the targets mentioned above. It seems as though it might close in the vicinity of the opening — leaving a big dragonfly candle for the day and creating a great deal of uncertainty for those expecting lower prices.
Needless to say, this is another complication to add to our 1533 or 1515 dilemma. I’ve been studying the charts feverishly, and (in addition to a headache) have come up with a plan of sorts.
If SPX closes near our targets, I’ll likely close the long position we added at 1576 and hold the short overnight. This feels very much like a corrective wave and I see no reason for it to go further. The RSI channels are still bearish. The EURUSD still has further to fall. And, DX still hasn’t properly tagged the .618.
It looks like a messy close. I still suspect a bump up to 1591-1593, but am not so confident that I’m excited about holding long overnight. There’s plenty of short potential left, but I wouldn’t be surprised if we get a rally on the opening tomorrow. For nervous types, best to close out now and take another shot at it in the morning. Otherwise, hold short but don’t sweat the overnight ramp job.
Since my inclination is to maintain a short core position but also hold an interim (short-term) long position overnight, I’ll go to cash here at the close (unless there’s a big dip or spike.) They would net each other out anyway.
My expectation is that SPX will gap up to 1591-1593 on the opening, then drop like a rock.
But, drop to where? I’d love to be able to say with certainty, but I have a full afternoon of meetings and conference calls and probably won’t be any fresher later in the day. I’ll take a fresh look in the morning.
GLTA.