I spent most of the weekend on fund business, charting and updating performance (posting shortly), so there are still a few of you waiting for answers on whether your annual memberships are charter or not.  My apologies for not getting to that, but I’m postponing any fee increases until I have time to research that — hopefully in the next day or two.

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ORIGINAL POST:

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…

UPDATE:  1:00 PM

We’re getting a push past 1554, so I’ll take an intra-day long position and see if I can snag a few more points between 1555 and 1559.  I’d suggest either very tight stops or maintaining a core short position as high as 1561 or so.

More in a few…

UPDATE:  1:33 PM

Just pushed up over 1555, tagging 1555.15 a moment ago.  15-min RSI at 70.  I’ll try closing out again here and going full short.  A push through 1556 and I’ll tag along again.

UPDATE:  2:30 PM

SPX just tagged 1555.55, nice catchy number that would be easy to remember…and only 2 cents from the upper Crab Pattern target.  Good time to double-check stops if you’re still long or have some profits on individual positions you’d like to protect.

UPDATE:  2:48 PM

SPX just pushed above 1556 for about 10 seconds.  I’ll hold off on another intra-day long position until it can sustain for at least a minute.

I wanted to show another interesting chart, though…

In the mid-90’s, the market saw a lot of volatility.  From Apr 93 to Jan 94, SPX surged 11.6% before reversing and plunging 9.7% (completing a Bat Pattern in the process – purple below.)

It then added 9.7%, finally reversing within .10 of another Bat Pattern target (white pattern) and then dropping 7.3% to complete the third and final Bat Pattern (red pattern.)

By the time it completed that third Bat Pattern in a row, some might have become believers in harmonic patterns and anticipated a 4th at the .886 of 473.63.  But, on the day the market might have reversed at 473, it shot up instead — touching off a 5-year, 225% rally to 1552.

My point isn’t to pound the table on Bat Patterns.  If you didn’t believe in them by now, you probably wouldn’t be reading the members-only section of this website.

Nor is my point to scare the crap out of you for being short — although a little fear is always a good thing.

My point is to show that Dec 9, 1994 — the day the final Bat Pattern completed and the rally began — was a significant day.  Okay, maybe one more thing…

If we were to ignore every single pattern on the 20 year weekly chart and draw a single trend line from the 442.88 low on that day to the 1370.58 high on May 2, 2011, we’d get a chart like the one below.

Now, the fact that this trend line (which also comes within 4 points of the 2002/2003 lows) intersects the two largest Crab Patterns currently in the works within 3 points of the 2000 high might be a coincidence.  But, I’m inclined to think not.

I think it probably matters, and will assume it means a top.

I will not be chasing the end-of-day rally we are sure to get, but will go into the close comfortably short, waiting to see if the market can prove it has higher prices in store.  I suspect it will be no more than a few more points, if that.

Stay tuned…