We got the sell-off in the dollar and the bump in the EURUSD we were expecting at the end of the day yesterday.  It produced a nice pop in equities on the opening.  The burning question now is whether the rally can be sustained in the face of an truly awful durable goods report or whether it will fail at the bottom of the white channel.

FWIW, EURUSD and DX have both completed little H&S patterns (EUR is inverse) that could help them on their current direction — up for the euro and down for the dollar.

DX looks to be ready to return to the bottom of the little purple channel.  There is a red dashed TL on the 15 min RSI that if broken, however, means at least another test of the larger red channel or even a break out.

 

The EURUSD has also completed its own little IH&S, and is threatening to go up and tag the upper bound of the purple channel.  Lots of headwinds there, though, as it lost the white channel it was in overnight.  If it reaches the purple bound, it will no doubt be as a back test.  In other words, don’t expect too much from it as the momentum is already damaged.

I can easily envision a rising wedge developing, using the red dashed line as the lower bound and the white channel bottom as the upper.  Such a RW would probably stall out around the big purple channel bound — the .786 of the wedge and the .886 of the last move down — around 1.2893.

The key will be holding the red dashed line.  If it’s lost, look for a parallel white channel line and the .886 of the recent run up to provide the next level of support.

But, the trend is down.  And, whether we reach the purple channel or not, the EURUSD is likely heading much further down in the near future.  Note that this is a counter-wave up in a larger channel down after EURUSD completed several major harmonic patterns.

The channel down, in turn, is part of a larger, upward-sloping channel up (white) that is clinging by its fingernails.  Depending on whether you include shadows on the daily chart or not, it’s either on the verge of breaking down or already has and is back-testing the channel.

I wish I could say I knew which way it was going to break, but as of this moment, I’m still trying to figure it out.  These inflection points are the hardest part of my analysis — not made any easier by an underlying fundamental issue of which government can devalue its currency the fastest.

UPDATE:  10:35 AM

The rising wedge just punted and EURUSD fell to the .886 as mentioned above.  In so doing, it has set up a little falling wedge (in white) whose apex is at the largest white channel shown in the above chart.  Look for a breakout of this FW, as a failure means EURUSD has lost the bigger channel — an event TPTB will postpone as long as possible.

If that should occur, however, best to be short just about everything except the dollar.

Speaking of which, the dollar is in the exact opposite position as the EURUSD.  It is trying very hard to break out of the channel down it’s been in for weeks. It just completed several major harmonic patterns and the larger trend should be up.

But, it also just completed a Crab Pattern and three rising wedges in a row that failed at that channel bound.  It’s having a very tough time moving forward.

The doji — candle of indecision — on the daily chart says it all.

Summary:

I think the dollar is going to break out, but not until at least a tag of the bottom of the little purple channel — currently around 79.50-79.60.

Obviously, it could fall much further than that.  The larger red channel should prevail over the smaller purple one.  But, the red channel doesn’t run out of room until Sep 8-15 or so — at which point it intersects with the white channel up (ideally the 10th at around 79.)

Remember, DX recently retraced .886 of its Feb-Jul run from 78.12 to 84.24 for a well-defined Bat Pattern.  And, a 1.7% reversal is unusually small for a large Bat Pattern (the red pattern below.)  As we’ve discussed many times in the past few weeks, the channels on DX are all pointing up.

I think the EURUSD is going to break down.  The current purple channel down is the result of tags on the red 1.618, the peach .886, the purple .786, the pink .500, and the gray .382 (below.)

The larger trend, represented by the big purple channel, is also down.

EURUSD tagged the top of that channel on Sep 17, and has been working its way lower ever since.  But, it doesn’t have to move lower until Oct 9-15 or so, when the white channel and purple channel intersect near the .786 retracement of the move down since Sep 17 (ideally 1.3097 on Oct 9.)

Even then, it probably won’t be much of a move.  Remember, we have an American president to re-elect, and you can bet your last USD that TPTB will do everything possible to maintain the status quo.

For all its blustering, Wall Street knows that Obama & Co. has been very good to it.  A new guy, even though one of the 1%, is an unknown.  There’s an abundance of risk as it is.  And, suppose Romney has to cater to the Tea Party?  Slashing government spending wouldn’t do much for equities.

more in a few…

UPDATE:  1:00 PM

Speaking of equities… SPX just broke through the midline of the white channel that’s been guiding prices down since the 14th — the 1444 level we mentioned yesterday.  We should get a back test to the midline around 1444.24.

While that could be all the upside we get today, I believe there is more ahead.  I’m watching the red RSI fan lines off the recent bottom for a hint as to how much of a pause we’ll get.

The 60-min RSI also shows the potential for a slight retrace.  RSI broke out of the purple and red channels and the red, dashed TL, but has the white channel to contend with.

And, the daily RSI presents a few choices…

But, just like the plunge the past couple of days, the move likely isn’t over until we see (in this case) negative divergence on at least some time frames, and it just isn’t there yet.

The dollar shows we just tagged a small (white) channel within the purple channel at a .618 of the move up since Tuesday.  It would be normal to get a little pullback here — perhaps setting up a Gartley Pattern later today or tomorrow at the .786 of 79.526 and a tag of the purple channel bottom.

The DX 15-min RSI broke through a little TL of support (white) and is back-testing it — with the red TL below as the likely ultimate target.

 

UPDATE:  1:55 PM

Still no signs of negative divergence anywhere.  EURUSD is pausing here at the 1.272 of its probable Crab Pattern targeting 1.2943 — though there’s a .618 at 1.2932 that might catch it first.

Note, we’ve broken out of the purple channel and have retaken the original white channel up.  It intersects with that .618 pretty close to 4:00 PM Eastern.

If we get more of a pullback — say, off the white channel top — look for RSI to dip to the little oval as prices tag the lower channel boundary.  Still, no divergence…

UPDATE:  2:20 PM

Potential EOD target for SPX looks like 1453.11 (the .618 of the drop from 1467 to 1430) or 1457.71 (the.618 of the drop from 1474 to 1430.)  I’ll be watching DX and EURUSD and their respective targets, and will likely take profits at that point.

Of course, if we break down from the channels/wedges beforehand, that would also be a good time to take profits.  Remember to watch RSI.  Prices can break down from wedges, only to come back and tag the apex.  RSI is usually a good indicator when that happens.

I don’t know if anyone was stupid enough to overpay like I did for those SPY Sep 144 calls a couple of days ago  (.50?), but they expire tomorrow and they’ve doubled in price.  Just saying…

UPDATE:  2:35

DX and EURUSD both just departed their wedges slightly.  But, stocks haven’t reacted.  Delayed reaction?  Or, maybe just too many bulls on the loose (and short covering)?

UPDATE:  3:07 PM

Now, we’re properly set up for some negative divergence on SPX, EURUSD and DX.  SPX just tagged the midline of its little white channel up.  Look for support from the red, dashed RSI trend line?  If not, widening of the channel…

UPDATE:  3:20 PM

If we are going to get one last push, it’s just about time.  SPX has back-tested the 1444.24 midline and has fleshed out a potential channel on the 5-min RSI.

UPDATE:  3:52 PM

Here we go, big move by market makers.  Stocks dip big, while currencies are going nowhere.  Next 10 minutes should be interesting.

I suspect this is about options.  Look for things to break loose after 4:15, when SPY options close for the day.

UPDATE:  7:30 PM

Thanks for the kind words earlier, folks.  One of those days when everything turned out okay, but it was a tortured path, to be sure.  I apologize for not answering disqus posts intra-day, but there was simply no time.  I had my breakfast around noon, and will be enjoying my lunch at supper time.

Needless to say, we missed the full extent of the downside by selling early, then compounded the error by buying a little early.  Even so, we caught the vast majority of the move and are looking good going into the quarter-end tomorrow.  We had a little late-day market manipulation, so I took profits on some positions and remain long overnight.

I’ve been pouring over charts all afternoon and found some interesting stuff that will have to wait until after lunch/dinner.  I’ll send out an email when it’s up.  Stay tuned…