A reminder: as discussed Friday, our focus on equity prices is now on the E-minis (ES.)  The overnight action is too important to leave out of the equation, and playing the cash markets only leaves anyone holding a position overnight susceptible to big moves without the ability to hedge or stop losses.

Although the E-mini can easily be margined, I don’t recommend it.  Our focus on finding and exploiting turning points in equity markets works well most of the time, but occasionally I miss a call.  In an unleveraged portfolio, this could mean a

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USDJPY has recouped some of its losses following the Bat Pattern completion Friday, but is still looking bearish.

DX is back to Friday’s low, but is holding so far at the large falling white channel midline, the red neckline and the rising white channel .236.

The E-minis are up 5 points this morning, but have yet to recover Friday’s losses.

I’ll go long on any sustained move through 1660, but otherwise remain short.  Any such move higher is likely to run out of steam at the .786 of 1661.43 or .886 at 1662.63 — though the white channel top is drawn through 1664-1665 and could attract an intra-day push while still holding.

A move through 1668, on the other hand, targets 1694 — the purple 1.618 — thanks to the substantial reversal (Point B) at the purple .886.

The key levels on SPX are the tagged .886 at 1664.72 from Friday, and the Aug 26 high of 1669.51 (the white .500.)

UPDATE:  7:00 AM

Going short here at ES 1665 and SPX 1666.  The falling white channel tops have been tagged, and ES just finally tagged the white .500 Fib.  Neither has exceeded the Aug 26 highs — meaning the purple Bat Pattern held.

SPX:

continued for members…

My apologies for the delay in the last update.  My normally reliable Mac just let out a big burp, freezing up and requiring a reboot.  Why can’t it do that after the market closes? 

Looking forward to the Mac product announcements this week, hoping the new Mac Pro release date is among them…

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My working thesis is still a sizable sell-off from here — probably to ES 1585 -1570.

It would complete an A:B = C:D pattern and flesh out the white channel from 2009.  A drop to the purple .886 at 1570.68 that backtests the grey midline (dashed( could come as early as next Monday Sep 16.

A milder drop that followed the white channel down (nestled in the top of the grey channel) would intersect the rising white channel bottom at the purple .786 of 1585.84 around Oct 3.

And, a move to 1585 would put the 2.24 of the drop from 1705 in the same neighborhood as the 2.24 of the 1685-1553 drop in May-Jun — and within 1% of the 1.272 of the Big Butterfly from 2007 to 2009 at 1837.26.

Note: a drop to exactly 1598.33 would put the 2.24 at the Big Butterfly 1.272.

The latest smaller scale Fib grid (in red) with its 2.24 at 1574, argues for the move to 1570.  It would be an even better fit if the current rally topped out at 1668 instead of 1665.25 — putting the resulting 2.24 at 1570.75.

Remember, 1667.50 was the Aug 26 high.  A move to slightly exceed it would stop out a lot of shorts who are playing the current Bat Pattern.  So, I’d leave stops a little looser than usual on this short position — say 1671.

The alternate view is that the larger white harmonic pattern set up by the 1685 to 1553 drop between May 22 and Jun 24 is still playing out.  The Aug 5 move to 1705 was in the process of tracing out a probably Crab Pattern to its 1.618 at 1767.

It holds that the dip from 1705 to 1624 is an over-reaction (almost to the .500 vs a more typical .786 or .886) and that we could see a 100-pt rise in the next week.

Which scenario is more believable?  I suppose the talking heads are right about it coming down to Syria and tapering.  Since both ES and SPX are up against the top of a well-established falling channel (white), we should have ample warning if our bearish stance proves wrong.

Someone holding long, on the other hand, would have to wait for a move below 1624 to confirm the downside case.  So, I’ll go with the short position, which not only fits my notion of what to expect in the event of a taper and armed conflict in Syria and the likely channel pattern.  It offers a lower “cost of being wrong.”

UPDATE:  1:55 PM

ES almost to the idealized 1668 target discussed above — (2.24 lines up with the .886 at 1570.68.)  Make or break time for the bears…

Bigger picture:

Should be a bunch of short covering above 1667.50, so we’ll not get too worked up over a slight stop-running overage.

I’ll take an interim long position on any sustained strength through 1669.

UPDATE:  2:02 PM

Just pushed through 1669, so the .618 at 1674.34 is now in focus.  Taking a long position here, with a good chance that we’ll be reversing again shortly.  Tight stops recommended.

USDJPY has barely moved, still.  I continue to see this as an interim top.

4:15 PM

SPX closed at 1671.71 — above the white channel top.  Ditto for ES.  So, either the way the channel is drawn is off (always a possibility) or there are higher prices in store.  ES has just a few points to go in order to reach the .618 from 1705 at 1674.34.  SPX’s is at 1678.08.

A strong reversal there could set up a Gartley to the .786, but at this point the better candidate is a Bat Pattern up at the .886 (ES 1695.85, SPX 1700.)

I’ll hold the ES position long overnight, but with stops in the 1665.60 area. It wouldn’t be surprising to see a breather after such a strong day, and either of the broken channels could use a back test.

FWIW, a reversal at the white .786 at 1687 would potentially set up a 1.618 at the 1585 down below.

GLTA.