Charts I’m Watching: October 10, 2011


Hate to be posting this so late in the day, but I’m traveling on business and am just getting back to my room.

Today certainly put my bearish conviction to the test.  I haven’t felt so steamrolled since July 1st.  Under the 2011 = 2007 analog, that’s the day the market was supposed to run smack dab into the trend line from the May 2 top and, failing that, the .886 Fib on the Bat pattern that had set up since Jun 1.

After having been so accurate in calling a rapid rise to 1320-1330 from the 1258 lows (remember the choruses of “flash crash!”) I watched in horror as the market surged past my target.  It finally (mercifully) came to rest at 1356 — exceeding the TL and the .886. 

Of course, a couple of weeks later, my ego and my portolio were salvaged as the market finally topped (at a fan line) and dropped a bunch of points.  But, there were some lesssons there which, had I learned them, might have saved me some serious stress today.

First, consider all the possible entry points on harmonic patterns.  Had I chosen the May 2 high of 1370 for my Point X, I would have accurately chosen 1357.75 as my Bat Pattern .886 instead of 1327.

Second, I would have been less wedded to the TL off the May 2 high.  I was so positive we’d have an exact repeat of 2007 that I assumed the TL off the May 2 high had to be repeated.  If I had been more open-minded re the Harmonics pattern…

The lessons here?  I’m going to let the channel line float, telling me where it needs to be drawn instead of me telling it.  Second, I’m taking another look at the entry point.  If, instead of the Sep 27 1195 high, we’d used Sep 20’s 1220 as Point X, then our reversal would come in around 1203.  The Aug 31 high of 1230 would have indicated 1212.

I’m going to take a fresh look in the morning.  In the meantime, though, I’m looking closely at July 1 as a worthwhile guidepost to the next few days.

UPDATE:  3:20 PM

VIX looking like it’s ready to pop.

UPDATE:  1:05 PM

Just saw a chart of the EMA 50 that caught my eye.

Also, note that the internal trend line I mentioned this morning seems to be holding pretty well.  It’s a fan line from the 2007 top that connects with the Aug 15 & 16, Sep 7, 8 and 27th highs.  It’s marked in bold yellow in the above chart.

In terms of timing on the downside….  My original forecast from 2 weeks ago identified 1040 17th or so.   That would be roughly 150 points in 5 trading days from right here.  Normally, that would be a tall order.  In this market — very doable.  The trick will be getting things going on the downside.

Obviously, we’re at a critical juncture.  Any time a market seems poised to break out from a long established pattern — in this case, the channel it’s been in since July — one of two things will happen.  If it fails, like it did on Sep 16, we get things like 150-point declines.  If it does break out,  which I’m certainly not ruling out, the momentum could be substantial.

For me to believe that’s happening, I’d want to see a close above the channel at the very least.

UPDATE:  10:50 AM

Just completed a nice looking back test of the rising wedge.  The advance seems to have stalled out, with volume dying off and breadth easing.

While it could have a little more juice in it, this advance seems to be sputtering.  The inverse H&S; pattern would be very lopsided, with a tiny shoulder on the right side.  Stranger things have happened, but I wouldn’t put much stock in it without a more symmetrical shape.


We’ve reached last week’s .886 target of 1182.06, the logical place to reverse and complete wave 5 down of Minor 1 if this is, indeed, a Bat pattern playing out.

The alternative, of course, is that we’ve already started into Minor 2 and that this pattern will extend, closing beyond the channel.   Many EW experts, including some very good ones, are operating under this theory — having called 1074 the Minor 1 bottom.

But, my money is on this being an intraday push — like many we’ve seen before.  I’m going out on a limb and will start loading shorts.  My respect for the alternative viewpoint means I’ll keep a close rein on things — tight stops, etc.

There is an internal trend line that runs through about 1192.  If we overshoot on the Bat, it should provide a good line in the sand.


Charts I’m Watching: October 10, 2011 — 17 Comments

  1. Great post Pebble.

    It's early but if the wedge I spoke of yesterday is playing out we should get down to 1170-1180 and hold. Then another pop to the 1200-1210 are before selling off hard. I still think that sell off holds around 1140 but if not then the massive sell off you are looking for could happen. That would mean some really bad news over the weekend and some huge red daily candlesticks.

  2. Thanks Pebble, I think you are doing great. You, Ciber/Cibor? and Neely are the three I read calling for significant down rather than an ABC correction or something similarly passive. Others, including the crowd, seem to be calling overall for last Tuesday to be the low into the new year.

    My guess would be that an ABC would take us into 1140/1150 as a target, but we would know if that is likely by the pattern and angle of descent if/when it happens. I'm playing light short until the situation clarifies, though there would be huge money to be made if you guys are right going forward the next four days or so.

  3. FYI……………

    Should the wedge play out and Pebble's target get hit………….it would be the mother of all A-B-C moves.

  4. Ok now the bearish view to back up Pebble's call……………

    If we turn down tomorrow to say 1175 and hold………we still have room for another move up to slightly higher (1200ish) in a pretty big rising wedge on the daily.

    I still think it's a stretch and we don't make a lower low but it is there.

    I'm just saying……………

  5. Dill,

    Looks that way………between here and 1204 seems about right to me.

    You have to keep an open mind here though and Pebble has some pretty compelling stuff here as usual. I would not bet against him.

    That being said…………….it's my view that he has the direction right but may be off on the depth. So my guess is that the lows are in at 1075 and I'm playing for the pullback to 1140-1150 before we RIP higher. If pebble is right so much the better for me 😉

  6. Stopped out of my shorts at break even and reshorted at the close.

    We shall see but we are pushing the envelope for a major decline, I am now short with the INS H&S; target in mind.

  7. ckorey …

    Your call on the IVS H&S; and the fall back to 1140-1150 looks to have some merit given the unusually high volume in the SPY OCT 115P today.

    pebble great site and I am one the new readers that his helped your hits increase since last week.

  8. The vix was hanging tough the whole day even though the 300 points mov. It did get weaker into the close though. 1195 was almost hit at the end. Will this invalidate the drop to 1040 you are expecting?

  9. And close above the trend line…………….

    IVS H&S……………this; should complete the shoulder.

    If it holds to form we should fall back to the upward sloping neckline at about 1140-1150

  10. When do you think this selloff will bottom? Next week or when it hits 1040? Another blog I read on technical analysis is also saying that there will be a massive selloff later on this week into next. But after the selloff, it will be rally time again. Do you see that in your cycle work also?

  11. Thanks and yes most H&S; have failed recently but the inverse H&S; have played out well.

    My feeling is we will get a correction but something huge would have to happen to sell off 150+ points and reverse a 18:1 up day like today.

    That being said I am open minded as well to your massive sell off.

  12. ckorey: okay, I see which one you meant. Thought you were referring to the left shoulder on 9/22 when you mentioned a neckline of 1140. (I use the term neckline as Bulkowski does, meaning the trend line that connects the armpits.) Your IHS could play out; if so it would mean 90+ points to the upside. The reality is we've had multiple H&S; patterns stall (so far) this past two months — patterns more prominent than this. Until we break 1195, I have to consider that those are the ones still in play. But, I'm open minded.

  13. With great respect……………….

    While I just shorted a few min ago for a trade (so we are on the same side) I disagree with your view on the inverse H&S.;

    If you look at a daily chart we have two almost equal shoulders with a slightly slanted neckline at 1140 or so.

  14. There would have to be some pretty bad news right around the corner for it to drop over 150 points from here.

    My guess is the ivs h&s; plays out.

  15. And then there is the inverse head and shoulders that looks like it's forming with a neckline around 1140ish.

    Very tricky in here…………