Charts I’m Watching: Nov 16, 2012

6:00 AM EST

I’m on the road today, so posts will be a bit spotty.  I attended a very cool angel group meeting in San Francisco last night (greetings all!)  And, my daughter Kimberly works at ILM, so I had the pleasure of hanging out with her while in the city.

Today is the day we should find out if our current forecast will hold water, or is simply all wet.  The market began the latest downturn on the day and very close to the price we expected, but the plunge has been more aggressive than the 1368-1370 we first anticipated.

In retrospect, reaching the middle Head & Shoulders target was more important than remaining within the existing channel — as this chart from a week ago today shows.

The S&P futures are currently off 5 points, not terribly surprising after yet another volatile day where prices were weak most of the day, and failed to break out every time they had the opportunity.  But, I’ll be surprised if they don’t open positive.  Why?

The dollar, having broken down from a rising wedge after reaching 81.32 Tuesday, has back-tested all the way back to 81.32.  But, it’s done so on negative divergence.  That is, its RSI is markedly lower than was the case with the previous high.

The 60-min RSI is also bumping up against a trend line off the recent high — after having done the same on the lower end.  Combined, the two RSI trend lines form a triangle — meaning a trend change is likely just ahead.

The EURUSD is also struggling to break out.  It offically broke out of its falling wedge only a few days ago, but thus far has not been able to make any further headway.  But, like the dollar, the 60-min RSI indicates a reversal from current levels.

More later this morning…

UPDATE:  9:43 AM

We got our positive opening — just barely.  The question of the hour is whether the decline is over.  As discussed yesterday, stocks have reached the Fibonacci-driven 1344-1348 target range we established a couple of days ago:

  • the 1.618 extension of 1396 to 1474 at 1348.39 (white)
  • the .786 retrace of 1309 to 1474 at 1344.63 (red)
  • the .618 retrace of 1266 to 1474 at 1346.11 (purple)

A turn here would be perfectly acceptable, since a nice large Crab Pattern has completed.  Yet a tag of the important .618 Fib at 1346.11 would add additional impetus and importance to the bounce.  Harmonic patterns often overlap.  But, when they do, it’s usually the larger pattern — which often incorporates more significant highs and lows — which prevails.

We also like to see positive divergence when an important bottom is established.  Tuesday, when SPX bounced so convincingly off the 1371 level, the 60-min RSI was much higher than it was at 1373.

When the market bounced at 1365, it marked both a channel bottom (red) and a channel midline (purple), but there was no positive divergence relative to the previous bottom of 1371.  Needless to say, it wasn’t the bottom.

SPX RSI fell out of the red channel altogether, and is trying to establish an uptrend (the white channel we speculated about yesterday.)  But, I think it will have a much easier time of it if it can reach a new low (such as 1346 or lower) while showing a higher RSI value.

UPDATE:  10:05 AM

And, there it is.  We just tagged both targets 1344 and 1346 in one fell swoop.  If you’re not already, it’s time to get long. I’m back in with both feet this time, stops at 1339.99 wouldn’t be a bad idea.  Charts in a minute…

I don’t always provide specific stops.  But, I’ll  make an exception here.  The bottom of the channel SPX has been in all week (red) is currently around 1341.50.  A tag on the bottom wouldn’t be out of the question.

While we’re on the topic of stops, the reason I don’t always provide a specific number is because stops are, in essence, trades.  I don’t recommend specific trades because I don’t know your liquidity, risk tolerance or level of experience (and, my attorney would fire me.) The membership of pebblewriter includes everyone from hedge fund principals to day traders to retirees trying to avoid the next crash.

My original forecast obviously called for the drop from 1434 to stop at around 1370.  Obviously, the market had other ideas.  Most day traders know to bail on losing positions.  If you buy in at 1368 and the market later plunges below that level, you usually don’t need someone to tell you your position is now underwater and it’s time to sell.

Investors with a slightly longer-term horizon (including most swing traders) who wish to catch most of the moves most of the time don’t mind being a little early to the party.  Getting in 20 points too high is fine, because they’re focused on a target 100 points higher (not our forecast, by the way.)

As we discussed earlier this week, a great example was the June 4 low.  I nervously posted June 1 that I was going long at 1287 [see: Why I’m Buying.]  Riding SPX down to 1266 the next session was gut-wrenching and I felt like crawling in a hole.  Two weeks later, when we’d added 100 on the way to 208 points, it was a faint memory.

There have been times when it made sense to day trade this market, especially when we’re range-bound within a fairly predictable pattern.   I did a lot of it in September and October and nailed more than my share of targets, including forecasting and getting out at the very top.

But, when besieged by random 20-point swings, I try to take a longer view.  It’s especially true when I’m trying to come up with good forecasts on the fly.  And, I find day-trading exhausting — too much brain damage, especially while trying to blog about it.  Those looking for an alert to every 5-10 point swing should look elsewhere.

Pebblewriter members include some of the smartest traders I know.  I trust our day-traders to know when their buy-in has been breached, and that it’s time to either bail or ride it out.  For those who choose to ride it out and later regret it, I hope you’ll vent your frustration in a more productive way than haranguing this humble servant as he’s busy trying to help you make money.

One of these days, I might go back to managing a pool of money for others.  I did it back in the 80’s, managing risk arbitrage portfolios — mostly with options.  Black Monday was interesting (I had more difficulty calming down my firm’s management than I did my own clients.)

But, in the meantime, each member is responsible for his or her own trades.  I can only tell you what I’m doing, and what I expect.  What members do with that information is entirely up to them.

I have to run out for a few minutes, but will post more later.  Trade safe.

UPDATE:  12:45 PM

SPX is facing its first real test since this morning’s bottom — the upper bound of the red price channel.  There is one minor Fib here, and no other major channel lines that I can see.  So, I expect enough of a pull back to create a right shoulder for an inverted H&S pattern, then a nice follow through to the upside targeting 1380ish — the 1.272 of our just-completed Crab Pattern.

Remember, this is a first wave up.  Second waves can retrace anywhere from .382 to .886 of the initial move.  Since the first wave up was substantial, there is potential for a drop to 1345 (the .886), though I think 1350-1355 is more likely.  Here’s what I’m seeing:

UPDATE:  2:20 PM

We got the reversal we were expecting right at 1361.40.  SPX has given up 6 1/2 points of its gains — about to the .382.  This is enough of a drop to create a right shoulder for our IH&S pattern.  But, there’s a good chance we’ll go lower first.

1350-1352 would be a healthy .500-.618 retrace, would make for a very well-formed pattern, and would nicely back-test an internal channel line.  But, remember, anything down to 1343.36 leaves the upside intact.

The 60-min RSI chart we examined earlier this morning has developed nicely.  The rising white channel I proposed several days ago is really starting to take shape.  We broke out of the falling purple channel and will probably back-test it as well as the rising white channel mid-line — as we complete the right shoulder of the IH&S.  More in a few.

UPDATE:  2:40 PM

Looks like the IH&S right shoulder just completed right in the middle of our target range of 1350-1352 — back-testing the channel line for a nicely balanced pattern.  Remember, these patterns are only valid after closing above the neckline — currently around 1362.50.  So we’re not out of the woods until we clear that level.  Of course, first we need to clear the red channel.

Those who’ve been paying close attention will remember 1381.50 as the .786 of the 1576-666 crash.  So, there’s an extremely good chance we’ll get some sort of reaction there.  It’s also the .786 of the last wave down from 1391 to 1343.

I always get excited about .786 reversals, as they frequently lead to Butterfly Patterns that extend to the 1.272 or 1.618 Fib level — 1404 and 1421 respectively.  Remember, 1404 is the neckline of the recently completed H&S pattern that got things going to the downside (the purple neckline below.)  I have had my sights set on it as a turning point (or even final stop) for this move off the bottom for quite some time.

Another interesting thing about the .786 at 1381.50 is it is in line with two previous interim highs and a few interim lows.  It’s a channel line with a nice pedigree, but let’s come back to that later.

If we react there, it would also make a very serviceable neckline for yet another IH&S pattern that happens to target 1420.  Note that 1420 is in the vicinity of [drum roll please…] a ridiculous number of important price levels:

  • the .618 of the Crab Pattern that took us down to 1348 (white)
  • the .618 of the 1474 to 1353 (purple)
  • the .236 of the 1266 to 1474 rally (also purple)
  • the April 2 high at 1422
  • the .886 of the 1433 to 1343 plunge (red)
  • the 1.618 of the 1391 to 1343 drop (smallest purple pattern)

I will have much more to say about the revised forecast — including how 1420 might figure in — this weekend.  Having successfully made it through the day on three hours of sleep, I’m ready to drive home to see mi familia.  Great charting and sleep deprivation don’t exactly go hand in hand.

Looks like we’ll probably tag or even close at the red neckline, just to keep folks in suspense over the weekend.  I remain comfortably long, and look forward to collecting a free lunch Monday courtesy of my friend Tom who’s visiting from NY (provided he followed my advice this morning…)

One little reminder…many of you have taken advantage of the opportunity to save $200 off the price of an annual membership by making a donation to the Red Cross in the wake of Hurricane Sandy.  I intend to keep the offer open until Sunday, so tempus fugit.  More details HERE.

Have a great weekend, everyone!


Charts I’m Watching: Nov 16, 2012 — 6 Comments

      • Not defending PW, but reminding you that he is expecting a BOUNCE, not a return to new highs taking out 1475.  I’m not sure a daily divergence occurs until a significant bottom kicking off a new upward leg in the market that threatens to make new highs.

        Furthermore, I don’t see daily chart indicators that show lower readings vs. June’s 1266 low either.  Show me lower lows than those, THEN I’ll get concerned that we go test that level.

        JMHO.  GLTA.

  1. Travel safe PW and enjoy your holiday week.  Let’s see 1420 within the next few weeks please.  🙂

  2. I am in long as well..fingers crossed…Thanks for the suggested stop point…I realize this is my responsibility…winds and losses!