Crab Dip

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Back on Jan 23, after the Sep 14, 2012 high of 1474.51 was exceeded, a post [HERE] asked “now what?”  We turned to harmonics for the answer, eyeing two prominent potential Crab Patterns:

My leading harmonic forecast is for 1509-1515.  I can’t imagine getting this close to 1500 and not snagging it for the trophy case.  And, I like the idea of dancing with the harmonic patterns what brung us.

My secondary goal is slightly higher at 1553-1555, so there should be opportunities to jump back in and capture most of any upside above 1520 if/when appropriate.  Such a move would likely follow a reversal from 1509-1515 back down to 1474ish and would constitute a fifth wave rather than the ending diagonal suggested above.

The Fibonacci levels mentioned above can be seen on a chart posted a few days earlier [CIW: Feb 19] discussing the likelihood of a measured move to 1551.12.

On the chart above, the distance from (2) to (3) is 207.77.  Adding 207.77 to the 1343.35 low (4) yields 1551.12 – right there with those 1.618 Crab Pattern completion points. If SPX can break through 1530.58, there are no other Fib levels between there and 1553.

Remember, 1472 constituted a Fibonacci 88.6% retracement of the 1576 – 666 drop and completed a 5-year, 800-point Bat Pattern, prompting a decision to short the S&P 500 at 1474 [See: World According to Ben.]  The ensuing 9% drop translated into a 25% return.  And, we’d racked up another 14% on the rebound from 1343.

Above 1474, though, was the especially tricky part of harmonics: the price range between the .886 retracement and the 1.000  (a double-top.) It was tough being bullish in the face of the sequester (and all the other usual threats to the future of the human race.)

So, we hedged our bets (often quite literally) by making the market prove to us it had additional upside for each new leg up.  I often hazarded long positions only intra-day, sometimes while holding a core short position.  It made for a lot of trading, but I didn’t trust the market’s seeming invincibility.

But, the market proved itself, busting two normally very reliable H&S patterns, threatening a well-formed rising wedge, constructing a very unusual channel and ignoring a whole slew of economic troubles along the way.

And, here we are.  Friday’s close at 1551.18, a whole 6 cents above the measured move target of 1551.12, leaves SPX only a few points shy of the last major harmonic targets at 1553.39 and 1555.57.  It’s close enough for the patterns to be considered completed.

I’ll take one last stab at 1553/1555 if the .25 purple channel line here at 1548 can hold, but let’s be very cautious (tight trailing stops) with this move.  As Friday’s post title suggests, being long at this point is tantamount to the proverbial “picking up pennies in front of a bulldozer.”

The above chart is quite messy, but note the two 161.8 Crab Completions at 1553.39 (red) and 1555.57 (yellow), the IH&S target at 1565 (yellow) and the small white Crab Pattern 1.618 at 1559.32.  Any of these would do as far as the upside goes, with preference being for the 1553/1555 level given the patterns’ prominence.


UPDATE: 12:18 PM

We’ve almost completed the larger Crab Pattern at 1553.39, the 1.618 extension of the May – Oct 2011 decline from 1370.58 to 1074.44.  It’s possible we’ll sneak a little higher to tag the other 1.618 at 1555.57 — the pattern derived from the 1474 – 1343 sell off last fall.

But, I’m happy booking the 5 points from this morning’s longs and re-shorting here at 1553.29 … and, waiting to see whether the market can push higher.

I’d leave stops a little loose to account for the possibility of the higher Crab Pattern completion — perhaps 1561 or so.  I might also risk an intra-day long if SPX pushes beyond 1554.

It’s backed off a bit in the past 10 minutes, but daily RSI just reached 70 and, more importantly, tagged a trend line off the two previous highs.  I don’t believe the channel drawn below will hold, but the upper bound/TL drawn is compelling — especially on negative divergence.

Also, though we haven’t looked at VIX (below 12!) much lately, it’s worth noting that its daily RSI just tagged the bottom of a well-defined channel.

Not many investors watch or even care about harmonic patterns or RSI channels.  So, it’s not unusual to feel quite isolated, even vulnerable, when trading at the turning points they suggest.  All I can suggest is: (1) turn off CNBC; (2) don’t tally your profits just yet; and, (3) let a few very close friends and relatives know what you’re doing.

Sure, the pattern could always bust (about 30% do…make sure you tell your friend that, too) and you’ll be the laughing stock.  But, trust me, it’s better than running into a friend who just lost thousands in the market and wonders why you didn’t say anything…

The 15-min RSI channel we were watching on SPX Friday is shaping up nicely, but does show the potential for a few points higher.

One last push back up to the white price channel mid line could reach 1559.32 if it started right away.

Coming up, a review of the downside case and likely targets.  Continued for members


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