ORIGINAL POST: 9:45 AM
There are three crucial dates coming up that will determine much of the market’s direction in the coming months — culminating with the FOMC press conference on the 13th. I expect we’ll continue to bounce around in the general vicinity of current prices for the next 9 days.
UPDATE 10:25 AM
If 1397 holds, however, it leaves open the possibility that we’re working higher (the red pattern) and just established a Point C. Given the implications, I’m 50:50 as to whether TPTB will allow lower prices to set in just now.
My gut is that a nice meaningful drop would give better cover for whatever central banking goodies they have in store, while higher prices would make things more politically difficult. We’ll find out shortly. Watch your stops.
If we successfully back test 1400 and 1397 falls, we could get a nice big downdraft. Targets include the H&S target of 1370. But, that’s unlikely to happen very quickly. We have the above-mentioned purple channel line as well as one of our yellow channel lines of support at 1389 — just above the 1.618 at 1387.07.
A reminder, this kind of day trading is decidedly not what pebblewriter.com is all about. But, as long as market is bouncing around — being held hostage to the three events depicted on the above chart — we might as well try to pick up a few points here and there. Twenty points per week on the SPX would equate to 5% per month — a very respectable outcome.
UPDATE: 1:30 PM
The 15-min chart is showing a possible turning point — end of the back test or break out?
The markets have settled down a bit, giving me a chance to update some other charts. The dollar is again testing the midline of its little contra-wave channel.
As we discussed Friday, its RSI has completed the back test of a falling wedge that indicates higher prices (thus, probably lower equity prices.) An important fan line (7-11) drawn from the recent RSI high has been broken, although a lesser one (7-12) is immediately ahead of us. Breaking this line will likely correlate with breaking through the center line of the price channel — ushering in a test of the channel high or at least a back test of a key Fib price level.
This is normally a pretty reliable indicator. As can be seen from the last system of fan lines, each broken fan line led to a nice bump in DX. But, back tests can be substantial. When the first fan line was broken at Point 1, the RSI back tested that line all the way to Point 2. In so doing, however, it established the larger channel (in white).
Another fan line break at 3 led to a nice bounce; and, the next back test (at 4) put in a higher low which led to a substantial rally. Note that Point 7 represented negative divergence. DX reached a higher high (84.245 v 83.67) but RSI didn’t. Point 7 also represented a tag of the upper channel bound.
It might have signaled an upward breakout, but for that negative divergence. All things being equal, this is a bearish indicator. And, in fact, it was accurate. DX’s RSI began a trip to the other side of the channel, completing it at 10 on a back test of the Point 9 fan line break. Since then, we’ve been consistently breaking up through and successfully back testing those fan lines.
Again, if we can break the fan line running from 7 to 12/13, the dollar should rally nicely. But, check out the white channel in the context of the bigger picture and you can see the fly in the ointment. Yep, that’s negative divergence between Point A and Point B versus DX’s price increase during the same period.
It goes to show how confused the signals are at the moment — and why a sizable drop in the dollar (probable rise in the euro and stocks) is still very much on the table. If it plays out that way, look for DX to test the red channel line again — currently around 80.75 — or even the next lower red channel line below 80.
We have two days until the ECB announces its monetary policy decisions (7:45 EDT on the 6th, with the press conference following at 8:30.) If the past is any guide, we can expect a pop in the euro around the announcement.
I wouldn’t be surprised to see this rally in DX continue till the RSI channel midline, probably around 81.46-81.64 on DX, at which point an ECB announcement sends it back down to test the lows — resulting in a tag of the 1.272 and/or .5000 at 80.83-80.88. Any immediate disappointment out of Frankfurt would, of course, clear the way for a trip to the RSI channel upper bound — probably at DX 81.86.
Many ECB announcements have provided very short-term pops in the euro. So, I would hesitate to jump on the band wagon as long as the German Constitutional Court decision on ESM is still hanging out there (expected Sep 12.) And, with so many divergent voices arguing for different outcomes, don’t be surprised to see some very negative comments regarding accommodation in the interim.
UPDATE: 2:10 PM
Channels and a RW for EURUSD.
UPDATE: 2:30 PM
Raising stops to 1404.6. SPX has broken through our presumed red channel and appears heading for the .786 at 1406.59 or the .886 at 1407.87. Will keep stops close behind.
UPDATE; 2:40 PM
UPDATE: 2:55 PM
When we first discussed the red downward sloping red channel, I noted how narrow it was — and how it was likely to expand, much like the channel down from April to June did (it features the exact same slope.)
Sure enough, today’s action presents some alternative channels that, while not negating the original red one, provide some guidance as to the interim moves that might serve to widen it. In addition to the red channel (CH1), we have a white one (CH2) and a dashed yellow one (CH3). The latter are less steeply sloped, and thus give SPX room to expand the red channel if that’s in the cards.
If SPX reverses before the close, it’ll likely be back to the Fib 1404.62/lower fan line. At that point, it could leave a big spinning top for the day — the perfect way to show the market’s indecision.
UPDATE: 3:30 PM
It’s worth noting that SPX has retraced a Fib .786 of the decline from 1413 since Friday. Any time I see a stop at the .786, I’m thinking Butterfly Pattern. While the 1.272 extension of this pattern (in purple) would land at 1417.59, the 1.628 extension would take SPX to 1423.31 — right next to the .886 of the next larger pattern at 1423.25 (seen in red.)
While that could easily mark the end of things, leaving 1426.68 as the high, another possibility is 1423 (on ECB announcement day?) would mark a Point B in a larger Crab Pattern — the 1.618 extension of which is 1445.
We’d end up with a scenario something like this:
This is pure conjecture, of course, but it sort of fits with my notion of how the Central Bank sweepstakes might run — a modest ramp into Thursday’s ECB announcement, followed by realization that: (a) “it’s” a stupid idea that will never work; or, (b) “it” won’t work without a favorable German court ruling.
If we get a favorable ruling, it would be bullish going into the FOMC press conference. If not, markets soften (but not too much, as the Fed will surely save the day.)
I still believe the Fed would like to not have to bring QE just yet, if they can avoid it. It doesn’t matter so much who injects liquidity into the markets, as long as someone does. Benny and the Jets would surely prefer it be the Europeans.
UPDATE: 3:45 PM
It’s been a good day playing the swings, so I’ll go to cash at the close — setting a stop here at 1405. We tagged the lower fan line as discussed in the 2:55 post above.
UPDATE: 3:55 PM
Covered at 1405. Cash for the night.