Getting a nice sell-off following the completion of the Bat Pattern we were tracking yesterday.  Shown below on the eminis…

The downside path is clear.  But, bulls will probably go for the obvious IH&S with what should be a decent bounce somewhere around 1495-1500.

The dollar reached our 82.136-82.281 target from several days ago, and the EURUSD has lost another important level of support: 1.30.

More in a few…

UPDATE:  09:40 AM

SPX opening down sharply…Note that it turned yesterday at 1525.34, only 36 cents from one of the two targets we identified just before it opened at 1515.99.

The market didn’t fall out of bed overnight, so I’ll take a long position on the open this morning in anticipation of tagging the .786/.886 combo at 1521.11/1521.19 or the .886 at 1525.70.

I remain full short from 1525.34 (the 2:20 update for members) but will play any bounces as mentioned above.

The key level today is 1496 – the bottom of the purple channel.  If this is broken, lots more downside where that came from — especially if the previous low at 1485 is taken out.

UPDATE:  10:00 AM

Nice post on Zerohedge earlier: You Rarely Know You’re in a Recession Until it’s Too Late.

Referring to an ECRI report, ZH makes the following points:

1) Think back to 2008, a couple of days before the Lehman failure. Looking at the data in hand, you would see GDP growth at about 1% in Q1 and 3% in Q2. More specifically, Q2 GDP growth had just been revised up on August 28 from 1.9% to 3.3%, sparking a 212-point Dow rally that day. http://www.nytimes.com/2008/08/29/business/29econ.html?_r=0

2) In March 2001, 95% of economists thought there would not be a recession, but one had already begun.

3) No economist predicted the 1990-91 recession beforehand.

4) Hardly any economists recognized the severe 1973-75 recession until almost a year after it started. Indeed, that recession began with the ISM at 68.1, and payroll jobs growth did not turn negative for eight months.

5) In 1970, unaware that the economy was nine months into recession, none other than Paul Samuelson said that the NBER had worked itself out of a job, meaning that improved policy expertise had made recessions very unlikely.

6) In three of the last 15 recessions – specifically, in 1980, 1945, and 1926-27 during the Roaring Twenties – stock prices remained in a cyclical upturn.

ECRI has caught a lot of crap for their recession call last Fall.  I know the feeling, as most economists I know (yes, I travel in exciting circles) think the worst is over.  I wish I shared their optimism.

I mention this because of the positive ISM Mfg Report released this morning.  It’s being cited as proof of expanding activity.  Remember, the PMI is a survey of purchasing managers’ opinions about their business.

They read the same newspapers and websites, watch the same TV, and are subject to the same MSM brainwashing as the rest of us.  A better than expected snapshot in time of their opinions does not mean the economy is just fine.

UPDATE:  10:35 AM

We got a bounce off 1501 — pretty close to the 1495-1500 range where we expected it.

Any push back into green territory would be cause for an intraday long with tight stops, but not for giving up shorts.

We just hit the .500 Fib of this morning’s decline, and the .618 is at 1516.63.  The top of the white channel is up ahead at 1518.50.  Any of these would take the index positive on the day.

Would that mean the correction is over?

continued for members...

Consider that the dollar broke out of its month-long channel this morning, and that the EURUSD just backtested its last channel line of support.  Would that be enough to ignore an IH&S Pattern?

Here’s the beachfront property swampland they’re trying to sell us:

I know it’s a busy chart, but zero in on the dashed yellow line running horizontally near the top.  That’s a potential neckline which if closed above, would target 1565.

The neckline is currently around 1425 – only 7 points higher.  I would reluctantly close my shorts if we close above it, but maintain my longs on a very short leash.  In the end, it would be just as valid as the traditional H&S pattern we just completed on Monday (dashed red line) which targeted 1436.

According to Bulkowski, one of the best pattern guys around, H&S patterns work out about 2/3 of the time.  It sure seems like the recently completed pattern was busted, but technically it isn’t dead.  The right shoulder on Feb 25 was 1525.84.  Yesterday’s peak was 1525.34, 50 cents less.

Technically, all we (potentially) did was establish a 2nd right shoulder at about the same height as the 1st.  Note that the same thing happened on the left side – two shoulders side by side: 1514.41 on Feb 1, 1514.96 on Feb 5.

Since we just reversed nicely off the top of the white channel that connects the 1530 and 1525 tops, I’m leaning toward the idea of a MMMM pattern (massive market maker manipulation.)

Okay, I admit I just made that up. But, it has a nice ring to it, no?  I think TPTB know sequestration is going to happen, and it ain’t gonna be pretty.  I think they know could easily knock the market down a bunch.  What better way to shake out all the bears than to negate the H&S pattern and erase a big sell off as they just did?

The other possibility is that TPTB really do intend to get to new highs on DJIA and SPX.  We all know they can do it, and mobilizing the Plunge Protection Team this morning might have been the first step.  The second would be cobbling together some kind of BS bi-partisan agreement on the sequester later today.

It might not even accomplish anything, but if the puppets on CNBC talked it up enough, they might even sell it as [sarcasm alert] the “greatest thing since the fiscal cliff solution!”  Why else do they have Warren Buffett scheduled for three hours Monday morning?

They want us to send in questions?  Here’s one for you, Warren.  How devastated will you personally be if the market tanks by 30%?  That’s right.  You’re still a billionaire. You can ride out any multi-year blip in the market.  For the rest of us who are thinking about starting a family or retiring, buying a house, or have a kid starting college next year, that 30% will make a enormous difference.  But, I digress.

The bottom line, folks, is that TPTB are doing exactly what any of us would do if we were hired to save the economy.  Given our clueless/hopeless/corrupt political system, the Fed has set out to keep the economy alive (and take care of their friends on Wall Street, of course.)

If they can pour enough money into the market to keep it rising and interest rates at zero, somehow resurrect the housing market, and allow optimism to creep back into the picture, they might even pull it off.  I put the odds at 20:80 or so.

It would be a very simple matter (for pebblewriter members, at least) to sit down and plot out the economic reports that need to come out, the headlines that need to be delivered on schedule, and the patterns that need to be busted in order to manufacture a rally to 1555 – especially when you can also legally inject $20 billion into the markets on a moment’s notice.  Toss in a Wall street dominated, obedient MSM and it’s child’s play (I’m talking about you, October 27, 2011.)

 

Some assume that their ability to do it means it’s inevitable.  It’s not.  How else to explain the many massive meltdowns since 2000?  Every once in a while, things get out of hand.  And, like the boy trying to plug all the holes in the dike, sometimes they run out of fingers.

Our job isn’t to rail about the manipulation (okay, so it does help a little), but to figure out what’s coming next and profit from it.

UPDATE:  1:15 PM

SPX just cleared the white channel top again.  More worrisome from the bearish perspective, though, is the appearance of a rising channel.  As mentioned above, I’ll reluctantly jettison shorts if the pattern completes, though I wouldn’t be at all surprised if this is another fakeout.

Keep an eye on the channel lines – particularly the white channel top currently around 1517.  SPX topped it intra–day yesterday, but obviously couldn’t hold it.  The yellow, currently around 1515.80, has been breached and back-tested, possibly setting the stage for higher.  Bulls need it to hold.  Bears need it to fail.

UPDATE: 3:05 PM

SPX has given up the new rising small white channel midline and larger white channel top , but is still holding above the yellow 75% channel line.  A break of 1515.75 and I’ll probably close my long position. A break back up through the white midline and I’d say we’re in for 1531.83 — a Butterfly completion at the red 1.272.

The most likely downside scenario (still my leading scenario) is a drop to the purple channel bottom (now 1497.75) into the close.

It’s been a while since we studied the Dow.  Back on Jan 25 [see:  Dow: Time to Double Down?] I wrote about Dow Theory and the last time the Dow didn‘t confirm the Transports — July of 2011. As everyone knows, the Dow still hasn’t bested its previous highs, though it’s been threatening for what feels like forever.

As we noted in January, the previous high of 14,198, is right in the vicinity of the top of the big purple channel dating back to May 2010, not to mention a whole mess of Crab completion Fibs:

• the white 261.8 at 13,917.50
• the white 1.618 at 14,201.84
• the purple 1.618 at 14, 144.27
• the red 1.272 at 13,985.65
• the white 261.8 at 14,145.69

They’re a little easier to see on this daily chart…

…and, the 60-min chart:

At yesterday’s high of 14,149.15, the Dow bagged two of the last remaining Crab Pattern completions (the white 261.8 at 14,145.69 and purple 161.8 at 14,144.27.)

The only one remaining is the white 1.618 at 14,201.84.  This is the 1.618 extension of the 18% plunge from 12,751 to 10,404 from July to October 2011 — the last major Dow Theory non-confirm shown above.  Interestingly, it’s only 3 points higher than the all-time high.

So, technically, if DJIA precisely tagged this 1.618, it would have made a new high.  Or it could come up a few points shy of each and still be considered to have made a double top and completed a Crab Pattern… but not set a new high.  Or, it could– well, you get the point.

Note that back in July 2011, the DJIA daily RSI showed significant negative divergence.  We’re seeing that same pattern again today, with RSI well below the Jan 29 peak (DJIA 13,970) and the Feb 19 peak (DJIA 14,044.)

Note also that the rising white channel on the daily RSI not only recently broke down, but RSI itself is stalling here at the purple midline at 56 – hardly a bullish value.

If the market heads higher in the next few minutes, I’ll change my stripes.  But, as of right now, I’m planning on closing my longs here at 1518 and going short into the weekend.

UPDATE:  3:50 PM

Closing my longs here at 1518 and going full short.

One last chart before I take a break.  The 4-hr SPX RSI, making a nice back-test of the recently broken channel.

More later.  I have some 10-year-old girls to mold into the next LA Sparks…

LATER:

Had a nice chat with a friend this afternoon and the following truism came up in conversation about whether to be long or short right now…

I can’t say for sure what Monday will bring, but if you suddenly came into $1 million, would you put it into stocks right here at the top? If not, then maybe you should be defensive with your current holdings — either in cash or hedged.  It works the other way around, too.

It’s a good question to ask yourself anytime you’re not sure what to do with a current position. If the answer is “I’m just not sure,” then perhaps it would make sense to at least lighten up.  More later.