The market saw quite a reversal yesterday afternoon.  After heading toward the usual last minute buy-the-dip stick save and an apparent Gartley Pattern, ES plunged below the Oct 3 low, likely confirming the red Crab Pattern.

It remains to be seen whether ES will flesh out the expanded channel I proposed yesterday, but the odds are increased with yesterday’s solid reversal.

SPX closed on the purple channel bottom.  And, while a drop to the .786 at 1675.04 or .886 at 1672.89 is clearly in today’s game plan, that’s not all the downside the market has in store.

First, a drop below SPX 1670 kills off the IH&S Pattern that looked so promising.  We’ll watch to see if the bulls defend that level.

And, of course, SPX already put in a reversal at the red .786.  So, while a stop at the .886 isn’t out of the question (the Plunge Protection Team has definitely not been furloughed) the greater likelihood is an extension to the 1.272 at 1664.59 for a Butterfly Pattern.

Remember, 1666.58 is the .618 retracement of the rise from 1627 to 1729. So, as we discussed yesterday, a completion of the red Butterfly establishes a likely Point B in either a Gartley, Bat or Crab Pattern on that larger (white) grid.

In other words, a reversal at 1666.58 opens the door to the white channel tag I’m expecting.  Does it mean the market will reverse at 1666?  Of course not. Breaking below 1670 would embolden the bears, and we could see some real momentum build.  A plunge to 1649 (the .786, a close 2nd in probability) or 1639 (the .886) wouldn’t surprise anyone.

There’s also the ever-present possibility that the market will suddenly spike higher on real or rumoured improvements in budget negotiations (always use stops.)

But, a reversal at 1666 is the most likely path if we’re ultimately going to see lower prices.  Why the italicized “if”?  From a harmonic standpoint, it’s anything but certain.

continued for members…

Remember, the larger pattern that began with the Aug 2 1709 high (below, in grey) might still be in play.  It’s certainly the scenario the bulls are pitching.

It should have been a Crab Pattern that extended to the 1.618 at 1760, as the only significant reversal was at the .382.  Even though there was no reversal whatsoever at the .786, it petered out at the 1.272.

Normally, a Crab Pattern can entail a small interim reversal at the 1.272.  A drop to the .786-1.000 range is quite normal.  But, this one  has obviously kept going, reaching the .500 as of a few days ago.  Is it enough to say the pattern is definitely dead?

Unfortunately, harmonics isn’t so black and white on this issue.   It’s probably dead, but — especially, given the Fed’s never-say-dive approach to the markets — it could go Zombie on us as soon as our backs are turned.

Stay tuned.

UPDATE:  11:04 AM

SPX just reached our 1666 target.  The red 1.272 of 1664.59 is just below.  As discussed, this is a great place for a reversal, so I’d risk a long position here at 1666 with stops around 1663.

If it pushes lower than 1663, then the 1.618 at 1657 is the next most likely stop.  On ES, the red 1.272 is at 1657.06 and the 1.618 at 1649.19.

The larger yellow .618 was up at 1663.61, so has already been breached.  The yellow .786 is at 1646.58 — hence, our interim target at ES 1646-1649 since Oct 3.

UPDATE:  11:45 AM

Both SPX and ES are shooting for the next lower level Fibs.  I’d go short again, looking for SPX 1657 and ES 1649, and if those don’t hold, SPX 1649 and ES 1646.

More later.

UPDATE:  3:42 PM

Don’t look now, but ES just tagged the yellow .786 at 1646.  Good time to go long — with stops in the 1643 area.

My base case from here is a bounce of around 30 points to backtest the broken purple channel around 1675, then a dump over the next week or so to ES 1597.

GLTA.