As we expected, there was no political breakthrough over the weekend.  There is plenty of talk about negotiations going better, but still no deal.  The markets are taking it in stride, with SPX down only 9 points at present.

The charts are a bit of a mess today, as Friday’s close threw a wrench into both the channels and harmonics.  ES clearly broke out of the two most likely falling channels, and closed just shy of the .707 retrace of the 1726-1640 drop.  It was the sort of move that either signals a new direction, or will be written off as a rule-breaker.

continued for members…

The SPX version…

Note the two different versions of the falling white channel.  SPX’s contains Friday’s rise, while ES’s treats it as slightly past the midline — with today’s drop as a back test.  I suspect the ES chart is correct.

For starters, both SPX and ES are back inside the rising purple channel — the 8-10th forgotten as though it never happened.  This is normally a fairly rare occurrence, but we’ve seen it happen several times in just the past six months.

While it doesn’t necessarily mean anything, it probably means we’re in for another test of the red “stair steps” channel — as well as a test of the top of a secondary stair step channel I’ve been charting — shown below in white.

It’s only really a channel if it leads somewhere.  So, like the red system dropping diagonally through the chart, it’s too early to tell what the longer-term implications might be.  But, so far, ES has shown that it “likes” to follow this channel’s slope to the downside — at least until bottoming out.

It started following the May 22 top, when ES fell 132 points over the following month.  The next channel line coincided with the .618 retrace of that move — but, of course, there was no reversal there — or anywhere along the ensuing 142-point rally (when ES blew through the red channel midline as well.)

But, after ES topped the “midline” of this channel, it turned and followed it down to the .500 Fib where it backtested the red channel midline (the yellow X) before taking off for it’s next leg higher — the 1.272 of the original white pattern.

UPDATE:  3:15 PM

If the above scenario plays out again, then ES is due to reverse at the .786 or .886 (1708 or 1716.64.)  Given the way things are going, I’d say the .886 is likely on deck — though a tag of the .786 and close below 1698 would count as a channel top tag, too.

So, I’d strongly consider shorting at 1708, with tight stops in case the .886 is the ultimate target.  The IH&S we’ve been tracking is live, and will confirm with a close above 1701.50 or so.  It targets 1759.50, which is right in the middle of the jumble of upside harmonic targets — the white 1.618 at 1767, the purple 1.272 at 1750, the pink 1.618 at 1754.59.

UPDATE:  3:45 PM

SPX and ES are both so close to their .786’s off the highs that I’d suggest taking a short position here.  The SPX chart in particular looks quite bearish, with the less aggressively bearish channel intersecting with the TL from 1994/2002 at the .786.  It’s a great short setup.

As usual, I’d not hold short overnight unless you have the ability to hedge or set stops.  There’s no telling what might happen after 1pm, though the fact that the last meeting was postponed without explanation is hardly a bullish development.  Look for an explanation after the close.