Friday’s close was uglier than we’ve seen in quite some time.  After completing several H&S Patterns, SPX should continue lower.  The question is whether or not it will first backtest any of the necklines — not necessary, but to be expected.  I’ll be looking for the right entry point.

SPX didn’t stop or bounce at any key Fib levels on its way south Friday.  It stopped going down simply because the market closed. So, any push lower will be cause to play the downside — regardless of the extent of the opening bounce.

Once SPX breaks lower, I’ll be looking for opportunities to play the inevitable bounces.  There will probably be several of them; so, swing traders and buy and hold types should stay focused on our ultimate downside target.

UPDATE:  9:40 AM

The index just moved into negative territory.  We’ll short here at 1631.60.  Charts in a moment, but the next potential Fib support is at 1626.54 – 1626.73.

UPDATE:  9:46 AM

Updated 60-min chart…showing the most likely operative falling channel in white.  This morning’s bounce on the opening backtested it, but it was less than convincing.  We’ll set stops at the midline (around 1633.50) just in case.

UPDATE:  9:54 AM

ISM survey and construction spending data is coming out at 10AM.  We’ll see if the market can push through the white midline on the news.  If so, the purple midline and yellow neckline are up around 1644-1645.

UPDATE:  10:02 AM

The data shows continued weakening, which should squelch the Fed tapering talk somewhat.

On the heels of the data, SPX just tagged our Fib target levels, so we’ll play the bounce here at 1627. Tight trailing stops starting at 1627.

Again, the key to sustaining any bounce will be a move back up through the white midline — now at 1633.  We’ll set our objective at 1644 — the purple channel (from 1343, Nov 2012) midline and the broken neckline of the largest H&S Pattern (in yellow.) It would also represent a 50% retracement of the move down from 1661.91 on May 30.

The ISM PMI Index came in at 49.0 versus expectations of 50.9 and last month’s 50.7.  The picture is fairly negative across the board, with employment clinging to a barely positive 50.1 reading.  In short, not the sort of report that would support the bullish economic forecasts being tossed about by the MSM lately — but, exactly the kind of report QE fans were hoping for.

UPDATE:  10:27 AM

The bounce reached as 1637.28 so far.  We just got a sharp downturn back to the white midline — likely just a backtest, a B wave in an A-B-C corrective wave to 1644ish.  But, any sustained push below 1633 and I’ll likely put a short position back on.

No sooner typed that than the index moved through the midline.  I’ll add an interim short position for a little deeper retracement to probably around 1628.07 – 1629.11 (.886 and .786 respectively.)  A move below 1626.89 and I’ll abandon the long position.

UPDATE:  10:36 AM

Just tagged the .786 at 1629.11, might still reach 1628.07.  I’ll set stops here on the short position just in case this is the full extent of the move.

UPDATE:  10:41 AM

Just took out the previous low, so full short at 1626.88.  We should get a bounce at the purple .25 at 1625, also the scene of the red 1.618 at 1626.54.  We came up just short of it earlier.

UPDATE:  10:47 AM

Taking another stab at a bounce here at 1626.   I’ll play the stops a little tighter this time.

Any move through 1625 is cause to resume full short, but I’ll likely pull the trigger a little quicker this time.  I’m disappointed to have missed the top with the last bounce — which didn’t even retrace .382 of the drop from 1661.91. This latest dip, which as mentioned actually tagged the red 1.618, also tagged the purple 1.272 and the purple .25 line.  So, if it can hold 1625, it could be a more substantial bounce.

But, it’s hard to justify from the standpoint of the falling white channel, which already backtested its midline.  So, either it won’t bounce much or the white channel is off a bit.  We’ll find out shortly.

UPDATE:  11:24 AM

Not much of a bounce at all.  Resuming full short here at 1625. Charts in a moment, including where I expect this downturn to finally reverse.

continued for members…As we discussed Friday, the bottom of the purple channel is at 1606.  This is also the location of the red 2.618 (1604.68), the purple 1.618 (1611.63) and a 1.618 extension (in grey) of the move from 1687 to 1635.

At 1600, SPX will have dropped 87 points or 5.15% from the 1687 top.  Many of you probably heard, as I did, lots of talk of a 5% correction from the MSM over the past couple of weeks.

If the move down from 1687 was an impulse wave, SPX would currently be in the 3rd of a 3rd wave down — which would typically be much more vicious than we’ve experienced so far — even on a lower scale.  This move down is about as vicious as a chihuahua with a case of diarrhea: it keeps leaking lower — but there’s no real bite to it.

The reversals are also coming at odd places.  And, the volume is pathetic.  Things almost got out of control Friday, but the bulls were saved by the closing bell.

In short, this feels much more like the A wave of a lengthy and frustrating corrective wave — probably a flat.  I anticipate it will tag 1600 or 1606 later today or early tomorrow, then begin a deep (probably .886) retracement back up to 1675ish to complete a B wave by June 21 before turning lower to tag 1555 or 1576 in late August/early September.

If I understand my flats correctly, this would likely take the form of a 3-3-5.  So, the idea of a 1.618 extension to 1600 makes a lot of sense.

UPDATE:  12:05 PM

SPX just broke up through a TL connecting the earlier highs.  I’ll play along on the upside here at 1626.  Tight stops.  The top of the red channel is currently around 1634.

UPDATE:  1:16 PM

Looks like SPX is running out of steam.  I’m going to pull the plug on the interim long if it loses the little white channel.

UPDATE:  1:30 PM

Pulling the plug here at 1628.  Full short again.  Stops at 1630ish or red channel top and white channel midline.

UPDATE:  2:00 PM

SPX just pushed up through the white and red channel lines at 1630 — also completing another little IH&S that targets 1638ish. Back to the long side, stops at 1629ish. charts in a moment.

The actual target is 1638.54.  The .382 of the drop from 1661.91 is 1637.69, so I’ll assume we’ll reach the 1638ish level.  If so, we’ll have another potential IH&S on our hands with a neckline that connects from there back to this morning’s 1637.28 high.

This pattern would target 1652-1653.  Note that the .786 of the 1661.91 to 1622.72 is at  1653.52 — so a pretty good fit in terms of the retracement.  The bulls are no doubt looking for such a scenario to play out.  Yet, a stop below 1640 would make more sense if the current bounce is a wave 4 of C in a 3-3-5 flat on the way to 1600-1606. The .618 of 1661-1622 is 1646.94, which would work nicely.  We’ll just have to wait and see.

In the meantime, SPX has broken through the white midline and the top of the falling red channel, so I need to redraw some channels.  Back in a few…

UPDATE:  3:25 PM

SPX has paused here at 1635.24, just below the 1635.53 low on May 23.  But, May 29’s 1640.05 should be the level that matters.  After 1635.53, SPX faces the white .382 at 1637.69.  I’ll look for a potential reversal between there and the IH&S target at the EOD.

The steady slog higher will entice some bulls in at the end of the day, but watch out for a close at the high.  It might be the perfect way to bait bulls into a long position prior to a resumption of the slide in the morning.

UPDATE:  3:48 PM

Closing the long position and going full short here at 1639.  I’ll hold it overnight unless we break 1640.05 before the EOD.

UPDATE:  4:00 PM

No, I didn’t pull the plug at the close — despite the last second overlap with 1640.05.   I could be wrong, but I feel pretty good about the downside case from here — perhaps on the opening in the morning.

For one thing, SPX is a few cents away from the .75 white channel line.  The RSI charts also promise a reversal.  The 60-min RSI is tagging the top of the red channel and the .75 yellow.

And, the 5-min RSI just tagged a midline at a very overbought level.