We tagged the two largest Crab Pattern targets on the charts yesterday: the 1.618 extensions of the 1370-1074 decline in 2011 and the 1474-1343 decline in 2012.

At this point, we’re waiting to see if SPX has the juice to also snag the white 1.618 at 1559.32 and/or the IH&S pattern target of 1565.  Both are perfectly legit, though they are of a much smaller scale and thus not as important in the scheme of things.

I’ll spend most of the morning laying out the downside scenario.  For now, support should be expected around the key channel lines such as the bottom of the white channel (currently at 1545), the purple channel midline (currently around 1540), and the small channel that’s guided prices since the breakout on Mar 5 (around 1549) that we’re just now reaching.

Note that the first two price levels are in the vicinity of significant Fib levels: the white 1.272 and the red 1.618.  A reversal down to a previously topped Fib level can be viewed as a backtest on the way higher, so the bounces are often significant.

The bounce off the bottom of the small white channel should provide a backtest of that channel’s broken .25 or midline but should fail by 1553.40.  When the little white channel fails, the yellow one should go quickly.

UPDATE:  1:55 PM

As expected, SPX bounced at the little white channel bottom and backtested its midline.  SPX is now testing the little white channel bottom.   The yellow channel bottom is just below at 1548ish and the purple midline is around 1541.50.  Each can be expected to provide a playable bounce, but we’ll decide when we get there.

Okay, back to the big picture…

First, let’s take a look at the Fibonacci Fans for SPX.  Over the years, they’ve done a reasonably good job of providing price warnings.  That is, prices tend to bounce along between neighboring lines until some catalyst — often a competing Fan Line — forces prices higher or lower.

At that point, prices tend to backtest the just-broken fan line and continue bouncing between the next higher or lower pair.

When the Fib Fan lines from 1994 were broken, for instance, prices typically fell to the next lower line — unless they fell two lines.  In either case, a break of one of those lines should have been taken seriously.

And, note how SPX has repeatedly bumped up against resistance from the very same line that finally provided support for bottoms in Oct 02 and Mar 03.  I presented it yesterday afternoon as a factor in our decision to go full short at 1555.15.

Looking at a close-up of the chart, we can see how the next couple of weeks might play out.

continued for members…

UPDATE:  2:15 PM

SPX just tagged the yellow channel bottom at 1548.50, completing a little H&S pattern that targets 1541.80.  We could get a decent bounce here if bulls work to nullify the pattern.  A push through the neckline (1549.76) might present an opportunity to play the upside.  Charts in a few…

Thanks to the many pops during last week’s steady melt-up, there are ample opportunities for H&S patterns on the way back down.  The just completed H&S pattern is pretty well-formed, but a bounce here at the channel bottom could make for a more balanced right shoulder — lining up with the Mar 11 1547 lows.

A bounce to 1553-1555 would work.  The only issue is that the small white channel has been broken, and might provide resistance at 1550.  So, playing this bounce should involve very tight stops.

UPDATE:  2:40 PM

I’ll take a crack at it here at 1549.75, with tight stops starting at the neckline.

Initial target is 1554.  Note the proposed falling channel (pink) the top of which intersects with the white midline at 1555.20 midday tomorrow.  It’s very speculative to draw a channel this early on in a correction, but all this one needs to gain validity is a stop at 1551 or so.

A reversal there would provide for a steeply declining channel to complete another wave down. A strong push up through it makes 1555 much more likely.

UPDATE:  3:27 PM

SPX just tagged 1553.17, the .618 of the move down from 1556.77 and 8 cents higher than the completed right shoulder.

I’ll take profits here on the intra-day long, but might jump back in if we get decent support at the channel midline (it currently intersects with the .382 at 1551.15.)

Remember that a reversal at the .618 sets up a potential Gartley at the .786 (1554.94) or a Bat at the .886 (1555.80.)  Watch for a push back up through 1553.51.

UPDATE:  3:54 PM

SPX just reached 1551.  I’ll take a long position here and see if we get one of the patterns mentioned above or higher.  Charts in a few…

Note that a retracement to even the .786 would bump up against the top of the pink channel.  What concerns me more, though, is the potential for higher prices.  SPX clearly fell out of the small white channel, then clawed its way back in.

Note that the 1.272 of this small harmonic pattern is up at 1559 — the same level as the 1.618 of the 1530-1485 drop in February.  And, the 1.618 is at 1562, 1-2 points from the target of the IH&S pattern completed on Mar 4.

Now, let’s take a look at the 60-min RSI chart, which shows good channel support at the earlier lows: the bottom of the yellow channel and the midline of the purple.  I’ll study this more over the next few hours, but this could well be a setup for a run higher to 1559-1565 on negative divergence (currently missing on the chart below.)

More in an hour or so…