The futures point to a 10-point sell off for SPX on the open — perhaps enough to tag the Fib levels we discussed yesterday.

There’s perhaps a 50:50 chance we’ll move slightly lower before reversing.  Note that on the small purple pattern, 1370.63 marks the .500 retracement of the 1266 to 1474 move.  Right there with it is the .886 (red pattern) of the 1354 to 1474 rally — at 1368.31.

And, of course, 1370.58 was the May 2011 high.  A reversal here would likely be seen as bullish by most investors who care about wave structure.

The e-minis completed a little Bat Pattern, reaching the .886 of Friday’s 1363.50 to 1388 rally.

My  view has been that either the .786 Fib of the 1576-666 crash (target #1) or this lesser Fib level (#2) — which also represents the May 2011 high — would catch the falling first wave.  I charted both (see the member section) in our Nov 6 forecast [see: The Morning After.]

We got a good bounce at 1380, but as I’ve noted over the past several days, the wave down didn’t quite look complete.  A reversal here would likely remedy the situation.

UPDATE:  11:20 AM

SPX got within 76 cents of the .500 Fib at 1370.63 and, more importantly, stayed above the May 2011 1370.58 high as expected.  We’ve had a strong reversal and just reached the .886 of the 1391 to 1371 dip.  We should see a pause here and put in a distinct Point C before continuing higher to our next interim target of 1403.75.

Just for grins, I pulled up that chart from Nov 6 to see how well the market followed our forecast.  Funny how things worked out…

UPDATE:  2:30 PM

We got the reversal we were expecting at the .886, along with a pullback to 1382 (the higher of the two C’s we proposed early this morning.  We’ll know the rally is proceeding once we exceed Point B at 1388.81.  It would also help enormously if SPX could close above 1381.60 — the 200-day moving average.

I’ve spent the last several hours fine tuning the analog forecast in order to provide some guidelines as to what to expect in the next leg up.  There’s a lot to factor in, so bear with me if this gets kind of technical.

For those not terribly interested in details, I’ll finish with a chart summarizing the next few moves.

continued for members…First, I expect the next week or two to look something like this.  As mentioned earlier, Point D of the little Crab Pattern shown (labelled in white) should pay off to the 1.618 at 1403.75.  This price level is very close to the neckline (purple dashed line) of the latest H&S pattern which is around 1404, and a .382 of the last significant decline — from 1464 (from Oct 18) to 1371 — at around 1407.

The timing is hard to say.  I’ve sketched in a potential channel, but since the move up isn’t even established yet (not until we exceed our Point B) it’s very speculative.  If the channel is close, D could come as early as today or as late as the 19th.  Note that this Friday is OPEX — meaning, we can typically expect rallies to come sooner rather than later.  So, I’m going to assume D arrives Friday, if not sooner.

The channel, shown more clearly in the chart below, is parallel to four others (in red) that have come before.  The first, from late August to the 1474 high, set the tone for the rest — which followed it somewhat loosely for 30-40 points.  More importantly, they helped identify when a rally was coming to an end.

Note that these little red channels fall neatly along the channel lines of a larger parallel channel that encompasses all of them — shown below in purple.

If things really get going fast to the upside, there’s no reason SPX has to pause anywhere between here and 1435.  But, that would be unusual.  I mention this interim Point D for traders who like to anticipate daily swings.  The other Fib levels are clearly marked, too.

There are three potential Fib targets for the whole leg up — the .618, .786 and .886 of the 1474 to 1371 decline at 1435, 1452 and 1462.  They each fit in our time frame of Nov 20-Nov 29.

Each has more going for it than just Fibs.   Target 1 is at the intersection of two important channel lines — the rising white channel from 1074 and the falling red channel from 1474.

Target 2, besides being at the .786 of the 1474 to 1371 drop, is at the .886 of the 1464 to 1371 drop.  It’s also on a trend line (in purple) connecting the Sep 14 and Oct 18 highs.

Target 3 is on a trend line that connects the Sep 14 and Oct 5 highs.  It’s also near the same price level as the Oct 18 high.

Coming up, a look at how these targets compare to the period on which we’re basing our analog.

But, first, an update on this little late-day sell-off.  Remember that in harmonics, as in Elliott Wave Theory, every wave up is typically followed by a corrective wave down.  Harmonics usually calls for a retracement of 61.8-88.6% of the prior move.  This makes Point C’s notoriously difficult to place — as that’s a big range.

As a result, we often don’t know whether a bottom has been reached until we’ve sweated bullets watching the first wave up being chipped away at.  Anyone who bought in at this morning’s low of 1371.39 was justifiably ecstatic when prices topped 1388 — and is probably a bit dejected at the current 1375.

But, remember, this is to be expected.  It’s the market makers’ way of shaking out weak hands — just like a smart card player who flashes a quick smirk when he’s holding a crap hand.

We just bounced off a very significant Fib line.  Lots of people know it, including the lovely market makers.  Nearly 300,000 out-of-the-money Nov SPY calls changed hands today — most of them probably near the highs of the day.  These expire in three days.  By knocking prices back down at the end of the day, the market makers are buying those back at pennies on the dollar.  It’s how they do business.

Unless you’re an experienced and nimble trader, stay away from options — especially out-of-the-money options that expire soon.   The NOV 139 SPY calls were off 46% today; but, the December 137’s were off only 11%.  And, IMO, never ever hold into expiration week unless it’s truly play money.  It’s akin to throwing cash up into the air and expecting more to fall back down.

Okay, with that said, let’s get back to the analog.  Does another do-nothing day hurt it?  I don’t think so.  Remember, we have over a week to gain roughly 60-70 points. That is, we need some fits and starts in order for the time/price targets to work out.  We also have a lot of negative sentiment to work off.  The news cycle has been particularly suckish lately. I’m reminded very strongly of  2011.

Though prices are almost back to Nov 9 lows, 60-min RSI is much higher for noticeable positive divergence.  And, it’s following a rising channel similar to each of the past upswings that, again, ranged from 30-40 points.

 

 

 

 

 

continuing…