ORIGINAL POST:  9:40 AM

We posted this chart early Friday morning [see: CIW Sep 28]:

SPX is selling off this morning, but should find support at the purple channel bottom around 1435-1436 and rebound…  If the channel does hold, preferably at the .786 or .886 of the pink pattern, look for the Gartley Pattern we discussed yesterday to complete at 1456.21.  Why?  Yesterday’s high was a perfect Fib .618 retracement of the 1463.20 to 1430.53 drop.

In fact, SPX reversed at 1435.60 minutes later, starting up right at our Point C.  That left the Gartley Pattern completion at 1456.2 (Point D) as our next target.  Don’t look now, but it’s not all that far away.

SPX just hit our interim target of 1450 — the upper bound of the channel it’s been in (and fell out of) for the past several days.  This also represents one of the larger red channel lines and is the Sep 27 top, so we should get a reaction here.

But, we will likely go higher.  Why?

Note that on the 27th, we reversed at the .618 retracement of the 1463 – 1430 drop.  This set up a potential Gartley Pattern at 1456 or Bat Pattern at 1459.

In the midst of that range is the .618 of the larger 1474 to 1430 drop at 1457.71. And, the top of the red channel is currently at, drum roll please, 1457.

In other words, we should get a decent downturn somewhere in the 1456-1459 area — with 1457 being my favored target. We remain long from 1437, but I plan on taking profits and playing the downturn at that point.  I’ll look for a shift in momentum first.

More in a few…

UPDATE:  10:10 AM

That’s close enough for me.  Going short here at 1457, with stops at 1460.

We could see one last spurt and tag 1459 or so, but I’d rather bank the 20 points we’ve earned in the past week and play the reaction.

continued for subscribers…

Note there is another way of looking at the upside since last week — a relatively flat channel shown below in pink.

Think of it as a rising channel within the falling red channel within the rising purple channel which is within the rising yellow channel.  It’s easier to see here…

And, the larger context here…

And, the much larger context here…

You can keep going with this…

But, it starts to lose its relevance to the here and now.

Back to that pink channel…  It resonates with a much bigger pattern seen below.  Note, the little pink pattern nestled there in the bottom 1/4th of a much larger replica of itself.

Prices are now roughly at the intersection of the rising pink channel and the falling red channel — within the context of the larger rising purple channel.

The pink channel (just parallel trend lines, remember) is relevant, as can be seen from the bigger picture.

So, I thought it would be interesting to go back and look at past incidences of this pink channel, and what happened when it broke down.  TOS makes this easy, as you can copy a pattern and drag it anywhere, preserving the exact same slope in log scale.

In 2009, in the midst of a very strong upsurge in prices, the pink channel signaled three separate corrections.

The first percentage is the ultimate decline following the channel break — the decline of prices below the bottom channel line.  The second in parentheses is the decline from the previous interim high to the next interim low.

They ranged from 7.3 to 2.5% once the channel broke for an average of 4.8%.  The decline from the interim high averaged 6.6%.  Not huge, but in today’s market a 4.8% decline off the SPX 1474 high would be 1380 or so — nearly 100 points.

In 2010, the breakdown of a pink channel was even more disastrous for the market.  The early part of the year provided two great shorting opportunities.

And, the middle of the year was just as good.

UPDATE:  1:00 PM

The sell-off since this morning’s high of 1457 is pausing here at 1448, the next lower red channel line — also the .500 of the last run-up (smallest purple pattern) and the .500 of both the largest yellow pattern and the red pattern.

It could reverse here, but I think there’s more downside ahead.  I’ll stay short, but continue to lower my stops.  We’ve made a nice 9 points since shorting at 1457, and I don’t want to be too quick to cover.

I’d like to see it reach the bottom of the pink channel at 1442 or so, the .786 of the latest move up and the midline of the red channel.  The bottom of the purple channel is at 1439.

UPDATE:  1:15 PM

SPX made it past the 1448 level and just reached 1445, the .618 of the rise since 1437 (small, purple pattern.)  There’s a much greater chance it will stop here, although there’s still downside potential to 1439-1442.

I’ve drawn a rising purple channel that reflects the upside case (within the pink and red channels.)  If this channel holds, we should get a bounce back to the 1447-1450 area.  This also represents the midline of a potential falling channel (in grey) that does a pretty good job of capturing the downside since 1457 this morning.

If we reverse there, it’s on down to 1439-1442.  So, I think the way to play it is to stay short, but lower stops to 1447ish until we see which case plays out.

The dollar suggests the move might be over, as it just hit its midline in the midst of a decline from the top of its channel to the bottom.

In fact, upon further reflection, I’m going to cover the short here at 1445 and go long again, with stops at 1442. I’m probably leaving money on the table, but I trust what the dollar’s telling us at the moment.

The bounce could be as small as 1452.  Charts in a few…

UPDATE:  1:55 PM

I think that was the right move.  The 1.618 of the decline from this morning is 1464.77 — right at our 1465.10 target for completion of the Gartley mentioned at the top of this post.  Recall this represents the .786 of the move down from 1474 to 1430, and would be the bullish interpretation of the .618 tag this morning.

But, that would mean a break out of the red channel that has done a magnificent since 1474 on the 14th — not a small matter.

More in a few minutes….

UPDATE:  2:05 PM

We have to watch the little purple channel discussed at 1:15 PM like a hawk.  In the past two weeks, breaks of this channel have dealt swift corrections twice — particularly when they followed a tag of the upper red channel line (15 and 33 points.)

UPDATE:  2:30 PM

I’m raising my stops again, to 1446.50.  The dollar looks like it wants to spike lower  (79.515) towards or shortly after the end of the day.  If so, we should get another spike up in stocks toward the end of the day.

UPDATE:  3:10 PM

Just got stopped out of my long position and going short, probably to 1439-1442 — the bottom of the pink channel. Will likely take another stab at longs there.  Favorite target 1440.14.

We’ll know it’s time when the dollar breaks down from its little rising wedge — seen here on the 5-min chart.  Note it’s done hardly anything through this entire sell-off in stocks.

There’s a good chance it’ll tag the purple channel midline one last time first — currently around 79.95, and head back down.

UPDATE:  3:37 PM

DX’s RSI has broken down from its rising wedge, price should follow within minutes. That’s good enough for me.  Closing out shorts here at 1442 and playing the upside on SPX. Initial target is around 1452-1456 tomorrow.

I can envision one last push lower on positive divergence, so I’ll set stops fairly loose — say 1439.  Keeping some powder dry just in case.

 

UPDATE:  11:00 PM

The market kind of interrupted the little channel study I was doing earlier.  I’ll yank that all out and put it into its own post asap.  Unfortunately, working all weekend on the payment system did a number on my back, and I’m currently a bit loopy on pain killers and muscle relaxers.

Of course, being up 1.25% on a day when the market was up .07% might argue that back pain helps my focus.  In any case, I hope to be back in commission in the morning.

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