Judging from the currencies, I think we could see a bit of a sell-off this morning, down to either 1426 or 1413.  I’ll take a small short position on the opening and monitor it closely for a reversal.

The dollar has pretty nearly completed a back-test of its recently broken channel that dates back to July.  In the process, it’s constructing a pretty well-formed falling wedge at the .618 retracement of its climb from 79.18 last week.

The EURUSD, in the meantime, has pushed up further into its back test of its channel at just beyond its own .618.  It has formed a rising wedge that suggests a pullback here.

UPDATE:  10:05 AM

That should do it for the upside.  Just tagged the channel line.  RSI failing to show further upside potential.   Will add to shorts here at 1438.  Stops just beyond the channel line (currently 1439ish) just in case.

Should have waited for that channel tag before going short.  But, the currencies got me excited and I pulled the trigger before double-checking the channel.  Darned emotions will get you every time.

If I’m right (now) about shorting, RSI’s little push above the red channel below will reverse and head south any minute.

UPDATE:  11:00 AM

DX is very close to breaking out.  I find that most wedges break out at a significant Fib ratio of both time and price from inception to the apex.   Time is usually at 61.8 of the way from inception to the apex, with the .786 and .886 as the next most common marks.

Price can be any of these, but I look for a Fib ratio within the wedge that matches up with other significant levels.  In this case, the .786 is very close to the .618 retracement of the recent 79.18 to 80.29 run that broke out of the channel and set up this back-test.

It’s also close to the .500 retracement of the dollar run-up from 74.86 to 84.245 between Oct 27, 2011 and July 24, 2012.

The trick in these exercises is getting the apex just right, as everything else is drawn around it.  Wedges can and do expand, and they fail a certain percentage of the time.  So, I rarely act on one without first finding corroborating evidence.

If/when the logjam breaks, look for a breakout to around 80 for starters — whatever lines up with 1426.34 on SPX.

UPDATE:  11:35 AM

The dollar and euro just broke through their wedges, and SPX broke down below the previous low to tag the 1.272 at 1427.04.  We should get at least a bounce here, as there was a reversal at the .786 up at 1433.51.  And, this is where it gets tricky.

My money is on a tag of at least the .618 at 1426.34.  If SPX falls any further, the 1.618 of this little pattern is right at 1422.43 — a fraction above the April highs.  I imagine the bulls will defend this level.

So, I’ll cover my shorts and go long here at 1426, with a stop at 1422 just in case.  I’m probably early, meaning I’m leaving money on the table.  If we break 1422.38, there could be considerably more downside — easily to the .786 @ 1413.

More in a few.

UPDATE:  12:40 PM

The market is in a quandary.  There’s unfinished business with several of the harmonic patterns and the big, white channel, but completing them means slicing off a good bit of the bullish case for folks who care about waves and such.

SPX would love dearly to go down and tag the big, white channel — simultaneously tagging the bottom of the small red channel, the mid-line of the gray channel, and the bottom of the expanded small white channel.

A rebound there (our target #5, around 1413-1415) would establish a new leg up on rather firm footings.  But, it would overlap the April 2 high of 1422.38 — confounding the EW bulls.

Then there’s the bane of everyone who charts the market:  shadows and the dilemma of log versus arithmetic scale.  Depending on how one draws the big white channel, SPX is either tagging important support or has broken it — at least intra-day.

But, I don’t think the Fed has pumped eleventy bazillion dollars into the markets… just to watch it evaporate three weeks before an election where their very jobs (nay, legacies!) are at stake.

Rest assured, the Plunge Protection Team is on Tactical Alert.  Snipers are positioned, and little red dots suddenly appear on the chest of anyone caught glancing at a sell button.

If you’re not sure, just look at AAPL.  Remember back on the 9th when it was down 13 points intra-day, 82 points since its 705 high?  I posted that 621-625 was critical support that should provide a rebound.  It wasn’t a lucky guess.

It was the bottom of one channel that’s guided the stock since 522 in May, another channel dating back to June 2011, the completion of a Crab Pattern, and the .618 of the 570-705 ramp from July – September.  The low for the day was 623.55, a level still not broached.

But, don’t be fooled.  Surviving this little scare does not mean everything’s fine.  Far from it.   If AAPL rebounds over the next few days — which it will — it has to climb past 705 just to negate a bearish prognosis (Point C must remain lower than Point A.)  Reversing at the .618 established a Point B for either a Gartley, Bat or Crab pattern that could take it back down (after the election) to 597, 583 or 487 respectively (the red patterns below.)

The worst joke of all would be on those who jump in with both feet at the new high of 706, only to run head on into a completing Crab Pattern at the 1.618 of 719.30 (the purple pattern above.)

UPDATE:  2:50 PM

Rebound has started in earnest, with SPX coming up on 1430.  The first big test is up ahead at the 60-min RSI channel line.  This is the channel we examined in the 10:05 post that signaled a reversal in the early morning ramp.

SPX should take it this time.  The price channel is currently at about 1433.

BTW, note that this morning’s 1425.53 low is the first in the past week exhibiting positive divergence — that is, a new price low was made in conjunction with a higher RSI low.