Futures are pointing up, the US dollar’s vacillating, the USDJPY got the bounce — could be another positive Tuesday.  We’ll go long on the opening, with the yellow H&S neckline and red midline as our target.

UPDATE:  09:36 AM

Just reached the intersection and will go full short at 1645.55.  The .618 of the drop from 1661.91 is a little higher at 1646.94, so I might be a little early.

It all depends on whether the white or the red channel is in charge.  The top of the white channel is appealing at 1653.53 (the .786), so I’ll take any move through 1647 as a signal that it’s in play rather than the red midline.  And, though there’s room for interpretation, the rising purple channel midline appears to be closer to the .618 as well.

The falling white channel has the benefit of three tags on the upper bound and a lower bound that perfectly captures the 1.618 extension of the initial drop from 1674 to 1640 where it intersects with H&S target (1608) and the bottom of the large purple channel later today.

But, the red channel lines up well with some important reversals as well as the two bottoms made yesterday and back on May 23.   A reversal here at its midline would support its dominance.

Pulling back a bit, it’s obvious that either channel can get us to the bottom of the rising purple channel.  The question is when, and at what price.

continued for members…

Note that the 1622 low was a measured move — almost exactly equal in size to the decline from 1687 to 1635 (the red pattern.)  In other words, a nicely balanced A-B-C correction.  So, it’s easy to understand the market’s reluctance to fall any further.

Yet, we can’t ignore the fact that the three of the previous four declines have reached the purple channel bottom before the rally resumed.

A decline to 1606-1612 would constitute only a 50% retracement of the rally from the last drop — hardly anything for the bulls to lose sleep over.

Recall that the purple channel recently lost its battle with the TL from 1994-2002, shown below as the dashed yellow line.  Since then, SPX has fallen a grand total of 3.85%.  A decline to 1606 would make for 4.8% — still not even close to bear market territory.

I don’t know when the channel will eventually fail — though any approach should be regarded as the potential last time. I suspect it’s the drop from whatever retracement we get from whatever bottom we make here that is likely to upset the bullish case.

UPDATE:  12:30 PM

As Airyk pointed out in the comments below, there’s a good possibility that we’re looking at a leading diagonal.  If so, SPX could bounce here and still head up to tag the white channel top at the .618.

I’ll take profits on this morning’s short and open an interim long position here at 1634.70 and see if it plays out.   Stops around 1633ish; C=A at 1633.63.

Just spitballing here, but a decline to 1633.63 could set up a C wave to 1648.32 — the .618 of the A wave from 1622.72 to 1646.53.  That would intersect with the white channel top and small purple channel midline early tomorrow morning — so a potential pop and drop.

If correct, the ultimate downside target of this move would be at the higher end of our range — probably around 1614 Friday morning.

UPDATE:  1:30 PM

Just stopped out at 1633.  I’ll take another stab at a long position here at 1630, the red midline.  That’s a pretty clear 5 waves down.  Though the white .786 is just below at 1627.82 and the purple .25 line is around 1628.60.  Stops around 1627ish.

UPDATE:  1:55 PM

Testing the white midline here.  I’ll add an interim short if we don’t bounce right back, and drop the long position altogether if we break the .886 at 1625.43.

UPDATE:  2:10 PM

SPX bounced to backtest the white midline, but couldn’t hold it.  I added a short position there at 1633 as discussed above, but will leave the long position in place unless it drops through 1622.72.

Stops on the short position at 1626.

UPDATE:  3:15 PM

Interesting day…and, I don’t necessarily mean that in a good way.    We’ll post a profit on the day, but it hasn’t come easily.  The leading diagonal still looks good, though there is still a distinct possibility that it’ll come apart with a plunge through 1622.72.

Note that the 1.618 extension (in white) of the rise from 1622 to 1646 is at 1608 — the exact level of the H&S pattern.  Only problem is that it would take SPX below the bottom of the purple channel.  And, it would have to happen immediately, because the channel bottom is already at 1608.80 and rising.

But, we’re back above the white channel midline.  As long as it holds, the odds are on a flat back to the top of the white channel/red midline at or near the red .886 at 1643.92 or, secondarily, the .786 at 1641.63.

It could even reach the purple .618 at 1646.94.  SPX came up just a little short of it this morning at 1646.53.  What a great ball-buster that would be, stopping out all the harmonics guys whose Crab Patterns to 1608 would be busted (with C>A) and then turning on a dime and plunging to 1612-1614.

Regardless of where it ends up, I think this wave will finish up around 1643-1647 early tomorrow morning and reverse.  It fit’s nicely with the DX chart, which still needs a .786 tag — having also come up just shy earlier this morning.

It shouldn’t be hard to accomplish, especially if SPX manages to make today 21 positive Tuesdays in a row.

The USDJPY is even cooperating, dropping to our target at the channel bottom but holding there.

So, barring any additional craziness in the next 15 minutes, I’ll hold long into the close and plan on shorting in the 1643-1645 range.

Though, I’ll take a little intraday short here to play the selloff designed to hook the shorts prior to the last wave higher.  Remember, most of them (us) are thinking 1608 and that Crab Pattern looks quite tasty.  In fact, if I’m wrong about all this, that will be the pattern I wish I’d played.

I’ll close it at the close, probably around 1630.

UPDATE:  4:00 PM

Closing the short at here at 1631.86.  Full long into the close.  More later.