Friday marks the one-year anniversary of the new pebblewriter.com (I can finally stop calling it that!)  Despite all the twists and turns, it’s been a pretty successful year [see: RESULTS.]

But, I’m always on the lookout for ways to make it better.  So, please take a moment to share your thoughts when the 1st annual pebblewriter survey hits your inbox. 

It’s just a few quick quick questions regarding pebblewriter.com and a managed fund under consideration.  If you’d like to be on the mailing list once information becomes available, just CONTACT ME and tell me “put me on the list.” 

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Just how top heavy is the market?  According to a study posted by Albertarocks, complacency is at an all-time high.  The SPX:VIX ratio just tagged 138.37, topping even 2007’s peak.  To give you an idea how big a deal this is, that’s almost 3 standard deviations above the 30-month moving average.

This is the lap into which the Cyprus mess was dropped. With exquisite timing, the euro-bumblers have unwound all the feel-good kumbaya momo generated by Draghi who, we were promised, would do “whatever it takes.”

Never fear, though.  According to a note Goldman Sachs put out earlier: “…assuming the package is passed, the direct ramifications from Cyprus will likely be contained.”

Containment.  Didn’t we hear that word a lot when the Fukushima reactors were melting down… and when the London Whale was blowing up?  It reminds me of language back in late 2007, this from The Guardian:

The Wall Street bank Lehman Brothers dodged the worst of the credit crunch to achieve a 5% rise in annual profits to $4.2bn (£2.06bn), driven by tight risk control and impressive earnings from global equity trading.  A strong performance in the first nine months offset a 12% drop in profits in the quarter to November, when fears over the sub-prime crisis returned.

Chris O’Meara, the bank’s global head of risk management, said: “Although we have not emerged unscathed from the recent market turmoil, we believe we have done a good job in managing our risks.”

An analyst…said: “For many investors, it is not necessarily about beating expectations but the lack of skeletons in the closet of fixed income. Lehman seems to have fewer skeletons.”

The dollar is consolidating at the target level identified last Friday and is struggling with whether to continue in lock step with US equities or revert to its more traditional role (of late) as the risk-off instrument of choice.

While, the EURUSD — which had made a valiant effort to break out of a rapidly declining channel — is again testing its recent lows.

Not to worry, though; the FOMC meets today and tomorrow and is certain to have the situation, well, contained.

SPX almost reached the .786 retracement of the drop from 1563.62 yesterday before falling back to support at the purple channel midline.  Bulls need a strong move above 1553-1555; bears need a drop through that midline — currently around 1550.

Anyone playing the bounce from yesterday’s 1545 low would do well to keep an eye on the  channels for signs of a breakdown.  I remain short from 1561, but won’t rest easy until we can score some lower lows.

Yesterday’s reversal just shy of the .786 opens up the possibility of a Butterfly Pattern to the 1.272 or 1.618 extension of the recent 1563 – 1545 drop.  The 1.272 Fib is at 1568.65 and the 1.618 is at 1575.05 — one point below SPX’s all-time high.

It’s not that the market should trade through 1576, but the opportunity might prove fleeting and the target too irresistible for TPTB.

UPDATE:  12:00 PM

Finally getting some action — SPX just broke beneath yesterday’s 1545 low.  We’re seeing a bounce on the 1.272 of the drop from 1530 to 1485, but it will probably only reach 1545 as the market continues to drop.

Now that things are loosening up, I’ll hazard some more specific downside targets.

continued for members…

The red 1.272 at 1541.43 could provide a bounce if we get a backtest of the white 1.272 at 1543 or yesterday’s low of 1545; but, there was no .786 reversal up above, so there’s no reason to expect a Butterfly Pattern to play out here.

The next most significant support is the nexus of the red 1.618 (1536.73), the red .382 retracement of the 1485 – 1563 rally (1533.59) and the next lower purple channel line — currently about 1535.  That makes our next target range 1533-1535; but let’s expand it to 1530-1535 to include the last significant top from Feb 20.

UPDATE:  12:30 PM

Both of our red and our white channels are looking good so far, with the bounce at the 1.272 coinciding with the midlines of both.  This should provide a bigger bounce than I described above — maybe even as high as the original red midline around 1548.80.

For those wondering, there’s no specific justification for the expansion of the red channel to the left.  It could just as easily expand to the right; but, since I expect more downside first I see that as relatively less likely.

Over the weekend, we discussed the possibility of a series of small dips before the next leg higher to the 1.272 as occurred in early 1972 when that market was deliberating between a double-top and a leg higher.

The dips grew progressively larger, ranging from 2.2 to 5% which, today, would equate to 35 – 78 points of the 1563 top.

A 35-point decline would fall very close to the 1533-1535 target range discussed above and, again, intersect with the .25 purple channel line.

The bottom of the purple channel, on the other hand, is around 1513-1519 (depending on when it’s reached.)  The falling white channel and red channel intersection ranges from 1519 early tomorrow morning to 1524 on Friday afternoon.

The red .500 Fib is at 1524 and the white .786 is at 1521, so let’s call that target range 1520-1524.

• Target range #1:  1530-1535
• Target range #2: 1520-1524

Needless to say, if prices fell two purple channel lines rather than three, it would be more bullish for the market.  A drop to the channel bottom, however, would represent more solid support.

In terms of strategies, I’ll probably try to play a bounce at one or both of these targets — looking at the technical picture if/when we reach them.

The second target concerns me the most, since there are significant support levels just below it: the yellow 1.272 at 1510 and the red .618 at 1515.  Either would be in range of a sudden downdraft that was aiming for the channel bottom.

The 60-min RSI shows potential for both outcomes — with the purple channel representing a steeper decline than the red.  But, I’m open to either.  With the FOMC wrapping up tomorrow, there’s certainly the possibility of a larger than normal break in either direction (though, it would certainly be a shocker if they threw fuel on the bears’ fire.)

This market is moving fast enough that the next five points to the downside could happen in a matter of seconds.  So, I went ahead and tweeted a trade alert, just so anyone who likes to play along can be prepared.

UPDATE:  2:30 PM

SPX got within 2 points of the red 1.618 (1536.73) and bounced nicely up to the .886 at 1546.84.  The top of the white channel is at 1550, but SPX should run out of gas short of the red midline around 1548.

If the market ultimately moves higher in the next few weeks, I’m leaning toward an interim downside goal of 1515-1518 sometime between late tomorrow and Monday.  A reversal there would put a 1.272 Fib line up at 1576.81 in the next few days (and, as early as Thursday or Friday.)

That’s a rapid move, but doable during a week full of big macro news and an FOMC meeting.  Following the fiscal cliff “fix” early in the purple channel’s life, SPX moved 64 points in two days.  And, a 64-pt measured move from 1515 would be 1579.

But, it would require that equities get going to the downside very soon.  Tomorrow’s FOMC action is more likely to produce a rally than a sell-off, and a rally would be a lot easier if 1515 were already in the bag.

Another interesting possibility from a timing standpoint would be a FOMC disappointment, followed shortly after by a Cyprus “fix” courtesy of the ECB/LTRO.

If the dip to 1515 weren’t intra-day, it would signal lower lows such as 1474 or 1500.  Note that 1515 is the .618 retracement of the 1485 – 1563 rally.  It’s already beneath the bottom of the purple channel, which would thus be broken.

A reversal at 1515 to, say, back-test the broken purple channel bottom or red midline would set up a Gartley at the .786 (1501.83) or a Bat Pattern to the .886 (1493.97.)

As we go into the closing minutes, SPX is toying with breaking out of the falling white channel.  Even the 60-min RSI can’t make up its mind between reversing at or pushing up through the top of the purple channel and red midline.

Gotta catch some sleep.  I’ll try to post more later tonight, but I have a pretty full evening ahead of me.

Thanks to everyone who’s already returned their survey.  I appreciate the feedback!

UPDATE:  8:20 PM

Quick aside…one of the many survey responses that really rang true for me was the critique that I sometimes finish off an update with “more in a few…”  and then never post any more comments until much later, or even the following morning.   It happens way more often than I care to admit and it’s something I plan to work on.

I need about 5-6 hours of sleep per night to be at very my best during the trading day.  But, between family activities, sports, etc, I often end up working till 12-2am before turning in for the “night” — which is really more like 3-5 hours (the market opens at 6:30am on the West Coast.)

The adrenalin of the market keeps me going strong until the close when, intending to take a quick lunch break, I sometimes end a post with “more in a few…”  Those are the times, especially when the market has been crazy the morning after too little sleep (or none, like last night) when I just can’t rally.

I will strive for better accuracy in these offhand comments, as I’m sure some of you are left wondering whether I meant a few minutes, a few hours, a few days…

Other times, during market hours, I get sidetracked.  I’ll start to chart something, then discover something more interesting or puzzling that takes me in a different direction for a while.  Again, I’ll try to choose my words more carefully.

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With that out of the way, let’s talk about the current big picture.  I’ve written a lot lately about what happens with harmonics when we exceed a .886 retracement.  Bottom line: it’s the second hardest part of investing with harmonics (forecasting bottoms is probably tougher.)

Once the .886 Fib is topped, we have several primary possibilities:  a double top (100% retracement), a 1.272 extension, and a 1.618 extension.  The 1.272 extension (Butterfly Pattern) is suggested by an earlier reversal (Point B) at the .786. The 1.618 extension (Crab Pattern) is suggested by an earlier reversal (Point B) anywhere between the .382 and the .886.)

[NOTE: If these concepts are confusing to you, you’ll save yourself a lot of confusion by reviewing the explanations under the learn>harmonics tab on the home page.]

Life is much easier when there are multiple harmonic patterns that intersect in a narrow price range.  They tend to reinforce one another.

This is happening now.  The 1.618 of the 1370-1074 correction in 2011 and the 1.618 of the 1474-1343 correction last fall are within two points of each other at 1553 and 1555.  But, both of those are only about 20 points away from the previous all time high of 1576.  So, the cosmos is confused.

SPX made significant reversals at the .618, the .786 and the .886 Fib levels on the way back from 666 in 2009.  So, Butterfly and Crab Patterns are on the table.  But, obviously, we’d first need to clear the previous high of 1576 — and that would mean ignoring last week’s two significant Crab Pattern completions at 1553 and 1555.

There are, of course, other chart patterns such as several decent-looking channels, a huge rising wedge, the IH&S target, a measured move, etc.  If they all pointed to one primary outcome such as at the .618, .786 or .886, my charts would look nice and neat.  There would be very little readjusting and second guessing.  But, they don’t.

This is why I’m drawn to the 1972 analog discussed late Sunday (another sleepless night) and shown below. After reaching the .886 of its 35% decline from the Dec 68 highs, SPX spent the next 3 months giving up 15%.

When it bottomed at 90, it shot back up 15% in only 7 weeks (sound familiar?)  It was now at the .886 again and had completed a gigantic IH&S pattern targeting 135ish.  Because of the .886 Point B, there was a good argument for a rally to the 1.618 at 132 (agreement with the IH&S.)

Of course, it never got there (until 1980, after first crashing 48% and giving up all its gains back to 1962.)  It ran out of juice instead at the 1.272  — quite unjustified from a harmonic standpoint, as there was not .786 Point B reversal.

The economic backdrop was somewhat similar to today’s.  The US was winding down a long and costly war in Vietnam (reducing stimulus spending) at the same time that troubles in MENA were ramping up (Arab-Israeli conflict.)

The oil embargo sent oil prices soaring, which touched off horrific inflation, sky-high interest rates, etc. etc.  Cue the crash of 73-74, which made the two previous ones look mild by comparison.

That period when SPX approached the previous high, highlighted below, just seems awfully possible here.  I’m not too happy about it, as it could be a real ball-buster.  But, I think it bears watching.

In 1972, it meant increasingly large swings as SPX tried to resolve its quandary — much like we seem to be experiencing today.  I’ll continue to work on it, or course.

In the meantime, I’ll also keep an eye out for any smaller patterns that might confirm a larger move in either direction (such as the 1515 bottom setting up 1576 posted above.)  These are ideas I’m trying on for size, and by no means should be taken as gospel.  But, you already know that.

I have to run out to watch the girls’ choral concert, but will post more on this tomorrow.

GLTA.