Yesterday’s close was ugly, exceeding the bottom of our SPX downside target range by 2.49 points.  It looked like a nice bounce at 1381 — the .786 of the 1576-666 crash from 2007-2009.  Then, perhaps aided by AAPL, the market faltered and closed at the low.

We’ve had a little follow through this morning, but so far prices have firmed above the 1370.58 May 2011 high — a level I have thought important to hold for the bullish case to remain (somewhat) intact.  And, remember, they need it to remain intact.

This market continues to push the boundaries, selling off nearly as far as it can without breaking the last of the plausible upside patterns — the rising white channel.

While we got in a tad early, we remain long from 1381 yesterday, and should see a nice rebound in the coming week if our analog continues to hold.  I’ll post some charts, along with key levels and indicators, below.

continued for members…Okay, lots to look at today.  If you’re looking for the bottom line, we’re still long — targeting 1430ish on this move up before the big selloff.  Feel free to ignore the rest of this post.

BTW, for those who have posted a question on Disqus in the last few days, I’ve gone back and answered several.  If I didn’t get to yours, and it’s still burning a hole in your brain, please re-post.

First, here’s the channel (in yellow) that, by now, is obvious to just about everyone who cares about such things.  Note that we just hit a little resistance on the 2nd lowest bound — the 25% line.  A break below the very bottom yellow bound would be very bearish and would likely convince me to go short — not to mention re-evaluate the analog.

Remember, every analog always works forever — until it doesn’t.  This one will be no different.

But, if our analog plays out, that channel will morph dramatically in the coming weeks.  Consider what happened in 2011.   The small red channel that took SPX down to 1311 on May 25 (marked as “1”, the equivalent of today under the analog) was pretty well-defined.

There was a nice move up to the channel top at 1345 that just about everyone thought would go higher (including me, I was looking for the .786 tag at 1381.50.)

But, the rally failed.  SPX fell to 1258 over the next eleven sessions (#2).  Note, this move completed a Bat Pattern at the .886 of the small purple harmonic grid.  It came very close to 1247-1249, which would have completed a Crab pattern (at the red 1.618), a .618 tag on the grey pattern, and a test of the Mar 16 bottom at 1249 (remember Fukushima?)

For those who wonder why I have so many harmonic grids on the charts at one time — this is why.  Prior to the reversal at 1258, some might have expected another 10 points of downside to those other targets.

Note:  I was following a different analog back then and the rising white channel was pretty clear, so I had gone long on the 12th or 13th.  The subsequent dip was courtesy of a gimmick to knock oil back a few bucks by releasing some of the Strategic Petroleum Reserve [see: Not Terribly Slick.]

Anyway, when the reversal finally came at #2, it fleshed out the channel some more.  Same slope, just bigger.

The new channel would have sufficed if the subsequent rally had failed at 1320 — at a trend line off the 1370 top — as many expected.  But, it rallied on up to complete a Bat pattern at 1356 and reversed– setting up a back-test and move higher, right?  The channel below made perfect sense… up until the point when the back-test failed to produce a new high.

Having fallen back through the channel, it was time to redraw it once again.  Here’s the one that actually ended up working (in purple).  Note, the bottom of the channel that led to #2 ended up being the mid-line of the final product.  And, the 25% and 75% lines do a decent job of capturing the significant reversals along the way.

It’s interesting to see what happened with respect to the different harmonic grids.  The initial big dump landed at #3, the 2.24 of the purple grid, the 3.618 of the red grid, the .786 of the white grid, the .707 of the yellow grid, the 1.272 of the gray grid and the .500 of the large purple grid (the 1576-666 crash.)

By the way, on its way down SPX reacted at the purple .786/red 1.272 (bouncing 34 points), the yellow .382/purple .618/grey .707 (bouncing 28 points) and the purple 1.618/red 2.618/white .618 (bouncing 50 points.)  Clearly, the fib levels mattered to Mr. Market.

Afterwards, we had almost two weeks of very stressful 20-70 point daily swings culminating in a final plunge to Point #4 — at the white .886 and yellow .786.  Importantly, the final version of the channel came into play for that last low.

Two things everyone should take away from this walk down memory lane: (1) ignore any Fib level at your own peril; and, (2) broken channels don’t die, they just fade away — frequently in a bigger/badder reincarnation.  Note how the big purple channel influenced the late August and early September highs, and the November lows.

UPDATE:  3:45 PM

Next, we’ll look at the implications for the current market.  But, first, a quick look at today’s action.  Looks like a spinning top on the daily candle, indicating indecision.  The white channel seems pretty legit; the red is just a wild guess but it gets us to where we want to go.

I kind of expected more of a corrective wave before heading up — perhaps down to the .786 at 1377 or .886 at 1375. But, a .707 retrace will work if that’s all we get.

 

 

 

 

 

 

continuing…