Charts I’m Watching: Oct 23, 2013


All the fund’s accounts are open. I’m going through documents one last time and will send them out before the end of the day.  If you’ve already completed a accredited investor questionnaire and added yourself to the mailing list, look for an email later today.  With any luck, the first closing will be next Friday, Nov 1.

I’ll post more information tonight on the new website (not yet live) for those who haven’t yet signed up. Market posts will be “bare bones” for the next several days as I focus on answering questions and putting the final pieces in place.  Thanks, everyone, for your patience! 

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ES came within .09 of our interim target from Monday [see: CIW Oct 21] and is reversing nicely, though we’re a day behind the schedule discussed on the 17th.

The implications are that this sell-off might be a little less deep than I originally thought. Still, as we discussed yesterday, it should be steep enough to flesh out the red channel within a few days.

The dollar reverted to the pale blue .886 before falling back to a higher low, having been rebuffed by the falling wedge’s lower bound.  It’ll be interesting to see whether the equity plunge is frightening enough to produce a real dollar rally — or merely slow the bleeding.

SPX’s 90-pt plunge in late June (1654 to 1560, in yellow on the chart above) produced a dramatic spike in DX — which then continued to rally with stocks until they had recovered their losses.  For now, at least, the dip below the critical 78.725 has been averted.

I’m often asked why, if the larger harmonic patterns are so clear, one should muck around with the smaller patterns, channels, etc.  The rally from 1640 to 1754 demonstrates the value quite well.

The 110 points, alone, would have been a 6.7% return — not shabby for a 12-session holding period.   Yet, as the chart below shows, there were several reversals that were fairly “by the numbers.”  The purple .786 (yellow .618) provided a 20-pt reversal, and the purple .886 another 11 points.

Adding in those extra 62 points alone (the reversals and their retracements) would have boosted the 6.7% return to about 10.5%.  But, more importantly, the harmonics alone don’t tell the whole story.

Consider our forecast from July 15, when SPX was about to register a new all-time high.  Based on harmonics, I expected a reversal at 1712 (it came at 1709) and subsequent rally to 1765, followed by a 45-point retracement on the way to 1823 — all by late August.

A buy-and-hold investor would have done reasonably well with that forecast.  SPX came within 6 points of that 1765 target before reversing yesterday — a modest 4.6% gain from 1682.  There’s nothing wrong with 4.6% for three months (about 18% annualized.)

However, by simply paying attention to the channels, we were able to spot the trend shift in early August that signaled a deeper dip than originally anticipated.  That deviation provided an additional opportunity of 54 points (27 X 2.)  The September dip from 1729 to 1646 provided another 166 points of potential return.

Suddenly, a 77-pt or 4.6% potential return becomes a 297-pt or 17.7% return (about 70% annualized) — from simply tossing channel analysis into the equation.  By considering many other chart patterns, coincident developments in other securities and currencies, analogs, RSI channels and other, more traditional technical analysis, we’ve been able to do even better.

Let’s be clear on one thing: it is highly unusual for anyone to catch the absolute top and bottom of every major move.  We’ve done better than most, but I still miss a lot more than I care to admit.  But, that’s not important…because, it’s not our goal.

Our goal is simply to catch “most of the moves most of the time.”  This means developing the very best forecast we can and following it until it stops working.  Sometimes, it works for days or even weeks.  And, sometimes it works for all of five minutes.

The key is acknowledging when it’s not working — which means (1) having a discrete price level or chart pattern that provides a clear signal, and (2) setting aside one’s ego and admitting that the forecast was hogwash in the first place (by far the harder of the two!)

continued for members

UPDATE:  1:25 PM

The very most bullish interpretation of the channels suggests that this corrective wave could be done.  But, it’s not my favorite interpretation.

Why? Because of what happened between 2004 and 2010.  Check out the falling purple channel below.

There were other patterns at play, to be sure.  But, this channel system worked pretty well.  Move ahead to 2009-2013, and one gets a sense of just how amazingly well.

If we nest another channel within the top-most two channel lines, we see that the stair-stepping pattern continues on a smaller scale as well.  In each case, a key purple channel line provides the backtest point for another leg higher.

If the pattern holds, we should get a backtest of the latest channel line, too.  As far as I can tell, that would indicate the .886 at 1716 — assuming the rising purple channel holds, as it serves as the key intersecting pattern.

But, as we’ve seen many times in the past, these things often overshoot their targets.  While the yellow circle conforms best with the pattern, another tag of the purple channel bottom at the red circle (around the .618 at 1693) is a possibility.

The other possibility, if the bullish interpretation above proves correct, is that ES rallies from today’s slump up to the yellow 1.618 at 1767 before correcting.  If that were to occur, it would likely be Friday.

We’ll leave the rising red channel as is for now.  If it survives the next couple of weeks, it intersects with the rising purple channel midline and the big 1.272 at 1837 around Nov 7-8 — my current estimate for the next serious downturn in the markets.

For those wondering whether these channels should survive, the odds look good to me.

Don’t be surprised if ES reaches 1746.90 by the end of the day first — a .618 retrace of the decline since 1754.50.

I’m taking the rest of the day to review and send out documents to those interested in the new fund.  If you have expressed interest and filled out an accredited investor questionnaire, you should have documents today.

For those who haven’t yet done so, I’ll have a new questionnaire up on the new website later today.


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