ORIGINAL POST:  9:25 AM

We remain long from yesterday at 1442, and appear likely to hit the lower end of our initial target of 1452-1456 around the opening bell.  We are entering dangerous territory at 1450, and tight stops are a great idea.  This could easily be a pop and drop, so I’ll use tight following stops on the way up.

Here’s the potential problem.  The dollar is presenting two legitimate channels.  If the purple one holds, SPX’s spurt this morning will not last.  If we’re working on reaching the red lower bound, then DX should fall to 79.598 or even 79.515 and all is well in short-land.

I’ll start with a stop of 1450 and work from there.

 

UPDATE:  9:40 AM

Got stopped out within a minute of posting that.  Gone to cash for the moment.

Here’s the other thing I saw that concerned me.  Right after the opening, RSI was pushing that solid white trend line visible here on the 15-min chart.

And, here on the 60-min chart…

Meanwhile, EURUSD is bumping up against resistance on its 60-min chart.

And, the dollar RSI had tagged important support at two lower channel lines.

UPDATE:  10:10 AM

SPX gave up all its gains and is essentially flat on the day. I remain in cash, waiting for a clearer sign.  Here’s an update on that 60-min RSI chart.

We broke the initial (purple) TL, and found support at the yellow.  We then had a back test of the purple, followed by a drop back to yellow — which as of a few minutes ago, was also in danger of being broken.  A break could signal a return to the 1430s.

UPDATE:  11:30 AM

I’m taking advantage of the lull to finish that channel study I started yesterday.  I’ll post it as soon as possible, as I believe it provides some great info on the direction over the next several weeks.

UPDATE:  11:45 AM

Just got a crack in the pink channel bottom, and a break of all the RSI TL’s discussed above.  Look for a bounce/back test off the purple channel bottom around 1439.50.  I’ll look to play the back test for a potential short.

DX just tagged the bottom of the red channel, and immediately bounced back to where it was.  Here’s the 5-min chart, showing very good support off that channel line.

And, the RSI close-up.

UPDATE:  12:12 PM

Scratching my head here…  the SPX 15-min RSI shows equally strong potential in both directions.  I’m going to try a small long here at 1441 with tight stops, say 1439.80ish, in the belief that the purple channel will hold.  It it breaks, I’m short.  Be aware that this might be nothing more than a back-test of the broken pink channel.

If it’s only a back-test, it should run out of steam shy of 1445.

UPDATE:  12:45 PM

The DX RSI is back to testing a channel midline (purple, dashed), but in the midst of a falling wedge that matches that of the price index.  The red channel correlates with the price channel we’ve been following since the 14th, and shows the rising trend.

The small purple channel shows what might happen if DX runs into a brick wall at that yellow mid-line.

Recall that the dollar completed a Bat Pattern on the 14th at the bottom of a long, well-developed channel.  It has since retraced only a little past the .707.  If the red channel since the 14th is the first wave up after that Bat Pattern completion, we should get a corrective wave.

If so, we might get one more push higher within the latest move down — just to scare equity longs, and then the channel will break down — with a DX push to at least 79.515 and potentially lower.

Let’s back out and review the big picture.  The dollar is caught between two competing huge, long-term channels. The purple is falling; the red is rising.  In 2008, DX got very close to its 1.272 at 68.947.  It might still be trying to get there, in which case the purple pattern should dominate.

I tend to think the downside is done, and we’re working higher – in which case the red pattern should dominate. There was a time when the euro was viewed as the dollar killer.  I own a couple of books advising folks to sell all their dollar assets and put them in euros.

More in a few…

UPDATE:  1:45 PM

DX just tagged the upper bound of a potential falling channel (purple) that could take it down below the red channel if my above theory were to play out.  If the channel is close to correct, this rise should peter out at the red channel line just above around 79.78.

If this should happen, look for a nice rebound for stocks, perhaps as high as the red channel top at 1454ish.

The other obvious possibility is that this morning’s plunge — which has Point B written all over it — could help set up a Butterfly lower.

If so, there’s a good possibility (but, not necessary) that DX would move higher in search of a Point C first.  The red channel midline — where it intersects with the larger falling red channel — is an area that intrigues me.  It would occur around 3am EDT right at 80.

If you’re long, let me remind you to use stops.  This is a very dicey situation.

Another RW on DX?

UPDATE:  2:30 PM

SPX just spiked lower, tagging the red channel mid-line and rebounding. I’m inclined to give it some leeway here, and will hold on to my longs just a little longer, maybe down to 1438 or so.  The midline will be my guide.

Potential falling wedge on the 15-min chart to match the rising wedge on DX?

If it plays out, that should be about it for the downside.  DX at 79.825 and SPX at 1439.01.

 

UPDATE:  3:30 PM

Barring any further drama, let’s get back to the long-term DX charts.

continued for members…

Over the past 8 years or so, the red and purple channels have each had their way with the dollar.

Following the April 2008 low, at the intersection of the bottom of the two, DX rebounded sharply — retracing to the .382 Fib.  It then completed a big fat Gartley pattern, retracing that move to the .786.

BTW, I’m nervously going into the close still long, unless something wacky happens in the last minute or two which would have me go to cash overnight.

DX then retraced a Fib .886 of that move for a big, fat Bat Pattern — ending at the top of the purple channel (Point D.)

Only to turn around and complete another Bat pattern, retracing roughly .886 of the previous move back down.  But, here, something odd happened.

When it completed the Bat at the .886 of , DX wasn’t at a channel line.  So, it zipped on down and tagged a purple channel line before reversing again.

Then, something even stranger happened.  Instead of traversing to the upper bound of the purple channel again, DX reversed at the red channel mid-line and came back to tag the bottom of the red channel at the 1.272 for a well-formed Butterfly Pattern.

Having completed that, DX promptly reversed and headed higher, bouncing like a pin ball off the purple and red channel lines along the way.

There was a Bat completion last October after the big equity dump in July-August.

This was followed by a Crab pattern that completed at the 1.272 — technically a no-no.  But, look at why DX stopped there — the red mid-line.

To atone for such a grievous error, DX gathered its strength (at the purple channel mid-line!) and pushed higher, momentarily squeaking past the red mid-line to complete the purple Butterfly at its 1.272 and the red Crab at its 1.618.

All’s well that ends well…except it doesn’t end there.  If we look closely, we can see that Point B of the purple pattern (it’s X for the red pattern in the chart above) really fits better as a .886 retracement.   This would indicate a Crab Pattern that completes at the 1.618, not a Butterfly.

Butterfly Point B’s occur at the .786, while Crabs’ can be anywhere from .236 to the .886.  And, Crabs complete (Point D) at the 1.618 extension (or more), while Butterflies can complete there or at the 1.272.

Even selecting an alternative Point B leaves us with a Crab.  So, what gives?  Why is DX breaking the harmonic rules?

It’s a trick question.   DX can still go up and tag that 1.618 to complete the purple Crab pattern at 87.058.  In fact, if it does, it would fit with the red pattern, which would simply be extending its Crab to the 2.24.

Furthermore, 87.058 is within 2 pennies of the .886 retracement of the June 2010 to May 2011 drop, shown below in white.  In other words, by reaching 87, DX would complete:

• the white Bat Pattern
• the purple Crab Pattern
• the red Crab Pattern, and…
• a tag of the purple channel top!

There are other harmonic targets that intersect there, too, such as the .786 of the Nov 05 to April 08 drop at 87.93 (in green below.)

And, it doesn’t take much effort to see that the top of the purple channel and the next higher red channel line intersect there — sometime between mid-November and January, depending on how you draw the channels.

Another fun fact:  the white channel I’ve not mentioned till now, which neatly captures the rise since the 72.86 low in May 2011, reaches 87 at about the same time — as soon as mid-December.  Or, putting it another way — right after the election.

Needless to say, an 8-pt (10%) rise in the dollar wouldn’t be terribly healthy for equities.  DX moved almost exactly that much, for instance, between May 2 (Point A) and Oct 3, 2011 (Point B.)  That was a 10.4% spurt; this would be 10.6%.

I’m sure I don’t have to remind everyone what the S&P 500 did between May and October 2011 (- 21.6% for those who were on another planet.)  I’m sure I also don’t have to remind everyone how quickly “The Powers That Be” could become “The Powers That Were” if the market were to take a 300 point dump between now and November 6.

Those cynics among you (and I know you’re out there) might suggest this means that they’ll keep the floating crap game marvelously efficient market on an even keel in the hopes of maintaining the status quo.  Far be it from me to argue with my members — the most intelligent to ever grace a financial blog.

All I can say is that if it walks like a duck and quacks like a duck… it’ll probably crash as soon as the crooks get themselves re-elected (okay, maybe a few weeks later — just so no one catches on.)

For a while, now, I have written about an important Time Fib line coming up in February.  Sometimes those mark an important high, but they can also mark an important low.  So, I’ll park my forecasted Point D there for the time being.

So, what does all this mean for the here and now?  If the market’s going to plunge 300 points, it would be a simple matter to short.  But, who knows what might happen between now and then?  Maybe we’ll get another leg up to 1518 in the meantime, just to win Wall Street’s allegiance. It would be nice to capture some of that.

It’s one thing to know it’s coming; and, another to make the most of it.  I have no shame, so I’ll take a stab at a forecast.  The only thing we know for sure is it won’t look like this.

So, let’s try to anticipate a few turning points: upcoming channel lines, Fib levels, etc.   First, the move up from A has created a nice, clean channel.   Most harmonic patterns have more of a distinguishable Point C that gets closer back to A than the channel has provided.

We also have the election issue to consider.  So, there’s a very bullish (for stocks) case to be made for a leg lower than Sep 14’s.  The logical place, IMO, is the purple channel line.

It’s at the .500 of the move up from the very bottom, and .618 of the move up from Oct 11.   There are also two .618 Fib lines there from the trip up.  It would also have the benefit of faking out those who play the continuation Head & Shoulders pattern that would be formed.  The purple midline is around 78.2 on election day, and a nearby red channel line is at 78.5.  So, let’s put a pin in 78.30 around the first of November.

From there, it’s a simple matter of picking a channel.  I’m assuming that at some point just after the election, concerns about the Fiscal Cliff will finally kick in, and the ramp higher will be on the order of those we saw in 2008-2009.

The yellow one replicates the slope from November 2009; while the purple one is the same slope as that from April 2008 .  Each would be quite capable of arriving at our Point D of 87.07 by February.

Incidentally, note the yellow triangle formed since June 9, 2010.   The Fib .786 of the time span from then to the apex on May 25, 2013 is next week on October 8 and the .886 is January 23 — only three weeks distant from the mid-February time Fib.

The less bullish case for stocks would involve DX falling to retrace .886 of its move up from 78.725 on Sep 14.  Such a move would intersect around 78.9 — also the 1.618 extension of the move up from Sep 18.  Further, if prices were to arrest here at 79.955, DX would form a H&S that also targeted the 78.9 level.

The uber-bullish case for stocks would be a much larger drop in DX to the 74.50-76.12 range around the end of the year for another tag of the red channel bottom (an .886 retrace of the move off the bottom.)  But, this seems a bit extreme to me.

Putting it all together with the middle case, we get a forecast that looks something like this.  The alternative is similar, with just a smaller initial sell off for DX.

I’ll take a fresh look tomorrow, along with some models as to how equities would perform in each case.  In the meantime, it looks like DX is off to a good start. From 13 hours ago (the 2:30 update):

If so, there’s a good possibility (but, not necessary) that DX would move higher in search of a Point C first.  The red channel midline — where it intersects with the larger falling red channel — is an area that intrigues me.  It would occur around 3am EDT right at 80.

At 3:04 am, DX did something interesting…

I’d love to stay up and see how it turns out, but a guy’s gotta sleep sometime.

More in a few hours.