The futures have reversed big overnight gains thanks to Draghi’s candor and hesitancy to throw the quantitative kitchen sink at the EZ economic weakness.  The eminis, which were up to 1616.75, have settled back to about flat to slightly negative.

The EURUSD hit our target of the white .786 at 1.3148 with ease and is bumping up against the white channel .25 line fairly deep in a rising wedge.  Further gains to the .886 or higher might be in store, but might not be as easy to come by.

The dollar has pushed below key support at the purple channel bottom and red channel .25 line and its own rising wedge is in danger of breaking down.

We covered our short position near the close yesterday after SPX reached our primary target of 1608, but noted the distinct possibility of a drop to 1593.

I’ll play along with any weakness on the opening, as that possibility has not diminished in the least.

But, the line in the sand is about 1605, and I do expect at least a bounce if not an outright reversal.

More in a few…

UPDATE:  9:33 AM

I’ll revert back to the long side here at the channel bottom (1606), with stops at 1605.  Charts in a moment…

UPDATE:  9:45 AM

That was a very quick tag at 1605.19 — close enough.  The key to the upside will be breaking out of the falling wedge, while support is well-defined by the intersection of the two channel bottoms.

I’ll leave the grey harmonic grid up until the coast is clear.  It is motivated by the larger purple grid’s .618 (from 1536 to 1687) which would be expected to provide a substantial bounce if reached intraday.

The 15-min RSI shows the resistance to be expected (white midline) at the wedge’s upper bound….

…while the 60-min RSI supports the idea of a bottom here — with slight positive divergence indicated.  I won’t consider SPX out of the woods, though, until it can break through the dashed, red trend line emanating from the 1687 high.

It’s the daily RSI that should make the bulls nervous.  A break of the white channel midline (dating from Oct 2008) would have dire consequences, as there’s very little channel support until the bottom of the rising purple channel.

The three previous times that RSI dropped through the purple channel’s .25 line signaled the biggest downturns of the past two years:

• the July – August, 2011 plunge from 1343 to 1101
• the April – June 2012 drop from 1422 to 1266
• the September – November correction from 1474 to 1343

SPX has tagged the purple price channel that began at the Nov 2012 1343 bottom three times since then.  Each mini-correction’s rebound was marked by a tag on the purple RSI channel’s .25 line.

This current correction — while about the same magnitude as the others — is the first to show negative divergence.  That is, this morning’s 1605 low is higher than the previous 1536 low, but came with a lower RSI value.

That, coupled with the fact that it already broke down below the .25 line that supported its cousins, should have bulls on edge.

UPDATE:  10:45 AM

From the big picture to the small…SPX has formed several small H&S Patterns that point in various directions. The first two busted, but the latest hasn’t yet.

Suffice it to say the picture remains muddled, and will until a break above the dashed yellow TL (the falling wedge) or below 1605.

But, the harmonic picture points to a test of 1600 (a Butterfly Pattern), so I’ll take an interim short position here at 1610 and see if it plays out.  Stops at the yellow TL (about 1612-1613) ought to do it.

The pattern would bust at 1614.64, though the TL provides an earlier exit.  So there’s 4.64 max points of downside risk versus 20 points of upside (down & back.)  Even at 50:50 odds, I like those numbers.

UPDATE:  11:18 AM

Though SPX is creeping up on our stops, DX just completed a Bat Pattern at the bottom of a well-defined channel.

I’m inclined to give our little short position a little leeway and see how the rising wedge breaks.

I’ll close the long position and go full short here at 1612.64, stops at 1614.65.

UPDATE:  11:45 AM

Here’s an even better entry point — the .886 of the drop from A to B, with stops at 1614.65 just above.

UPDATE:  12:05 PM

So far, so good.  We should get at least a bounce here at the former low, but things are looking good for 1600.  Of course, there is an alternative which I find very appealing.  Butterfly Patterns typically complete at the 1.272 or 1.618 extension.

But, like Crab Patterns, they can extend even further… for instance, the 2.24.  If the 1593.47 price point there doesn’t ring a bell, please see this morning’s first post.

continued for members…

UPDATE:  12:28 PM

Playing the bounce here at 1599.35 with an interim long, stops at 1599.

UPDATE:  12:45 PM

Just backtested the broken yellow channel bottom.  I’ll close the interim long here at 1603.53, but will likely pick it back up again with a move through 1605.20.

UPDATE: 12:50 PM

I’ve been watching the USDJPY this morning…  The pair has backtested and plummeted out of the channel it’s been in since last September.

I imagine there’s a whole lotta’ unwinding going on right about now…

UPDATE:  1:05 PM

I’m going to add that interim long back on here at 1602.88.  It might just go to 1605, but it’s worth it if only for protective purposes.

The bottom of the purple channel is around 1607 — near the .618 retrace of 1607.69.  And, the upper bound of a falling channel here is around 1608-1610.    I’d likely drop the short altogether with any move beyond that.  Tight trailing stops are advised.

UPDATE:  1:20 PM

That was the .618 retrace and the purple channel backtest.  I’ll try closing the interim long again at 1607.29 and go full short for 1593.77.  Stops at 1610-1611ish.

Here’s some detail on the move up from 1598.23.  Looks like 5-3-5 to me.  But, it could just as easily be 5-3-iii of 5.  That’s why I avoid trading based on Elliott Wave.

If it exceeds the .618, the .786 at 1610.39 looks like the most likely target for any further upside.  But, keep an eye on the .886 at 1611.94.

UPDATE:  1:50 PM

There’s the .786 tag for a Gartley at the top of the little red channel.  The bounce should be about done here.

RSI updates:

UPDATE:  2:50 PM

Just broke through the 1614.64 top, so I’ll take an interim long here, with stops back at 1614.64.

Looking at the currencies, I think they’re all about to reverse their crazy swings on the day.  The dollar is way oversold and just completed a Butterfly Pattern.

The EURUSD is quite overbought at channel resistance.

The USDJPY is getting a bounce, but has further exposure to 94.98 or 93.83.

The XLF has exposure to backtest the 1.272, channel midline and white channel bottom at 18.89ish (-3.2%.)

And, RUT is back testing a .25 channel line and channel midline at once, with additional exposure to the 1.618 at 949.15 (-2.6%.)

UPDATE:  3:30 PM

I’m closing the interim long here at 1619 and will go full short again.  I’ll set stops around 1623.50.

There is considerable harmonic resistance at 1622.50, and the little red 1.618 is at 1623.26, right next to the yellow midline.  I think this bounce is overdone, and don’t want to be long overnight.

It appears to me it’s a bounce off a round number and backtest of the broken midline on the daily RSI — nothing more — so the downside potential is large.

If I’m wrong, I think the immediate risk is only a few points.  If I’m right, there could be a good 12-15+ points to the downside tomorrow.