Impressive ramp on the better-than-expected NFP numbers, but there’s still the matter of strong overhead resistance — reinforced by a RSI chart that looks rather daunting.  We’re back in the very dangerous territory of two days ago.

If we can push through, the land of milk and honey lies ahead.  Otherwise, things could get very ugly, very fast.

We’ll review the options in the charts below.

SPX is approaching the TL off the 1422 highs, which currently stands at 1492 — just about where we topped out Monday.  If it can break through there — which in addition to a new high would mean breaking out of the purple channel it’s been in since early May — then it will likely go on and complete the Bat Pattern (the .886 below) instead of just the Gartley (the .786)  it just completed Monday.  Note the two Point D’s on the chart below.

Then there’s that dashed purple line just above the Point D’s.  That’s a trend line off the Oct 2007 high of 1576.  Breaking it will clearly take some doing.

The important immediate test is the previous high of 1391.74.  A failure to break this level leaves open the very real possibility that we’re working on a pattern to the downside.  Yesterday’s dip to the .618 of the small purple pattern could easily be the Point B of a Gartley or Bat that complete at 1342 or 1336 respectively.

Either of these targets could fit nicely with the continuation of the whipsawing we’ve seen over the past six weeks.

As was the case with the eminis RSI above, the SPX shows the duality of our situation. If the RSI can break through TL #4, it has #3 just above (probably correlating to 1394 or 1404.)  But, if it can’t, will TL #5 hold?

The channel up has become very wide and still presents two possibilities: the solid yellow lines or the dashed purple ones.  Yesterday, RSI tested yellow #5 before rebounding to close within the purple channels.

I don’t have a strong feeling one way or the other regarding which way we’ll go.  My gut feeling is we’ll head down, but I’ll remain in cash until the picture is a little clearer.  A break of 1392 would get me interested in going long again, except for that darn 1394 TL.  If we can break convincingly through 1394, I’d be marginally more comfortable — but still worried about 1404.

Getting interested in the downside is much simpler.  If we fail to top 1391, 1380 would be a good trigger point.  I’d set my sights on 1342.  It takes very muddled picture to keep me in cash, and that’s exactly what we have.  It very much reminds me of July 2011 — except back then I had a great analog to help me get short before the plunge.

 

UPDATE:  11:45 AM

So, we broke 1391.74 and the market has really… done nothing.  Not the usual response you get with a new high.  I guess we’re not the only ones seeing the risk involved here.  Note the TL #4 tag on RSI.

While the new high didn’t result in fireworks or a balloon drop, neither did it seem to have ushered in the apocalypse.  Has the downside harmonic pattern evaporated?

Point C must technically be lower than Point A.  But, of course, a slightly higher high (0.28) doesn’t preclude a move to the downside; it simply can’t be an orthodox Bat or Gartley.

One could make the argument that it’s a 100% retracement of the (AB) move down — and 1.000 is certainly a Fibonacci number.   In fact, many such “patterns” go on and behave exactly as though the Point C had been a lesser retracement.  So, let’s not toss aside that possibility unless we see prices climb up into the mid 1390’s or so.

One quick note on going to cash yesterday…  It pains me to have missed this morning’s 25 points.  Truth be told, my hunch yesterday afternoon was that we’d complete another leg down in the ongoing whipsaw that we’ve seen over the past six weeks.  But, I really try to avoid hunches.  And, if I’m ever tempted to play one, I try to describe it as such to the pebblewriter community.

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I’m on the mailing list (but don’t subscribe) to a popular analyst type.  He’s a former hedge fund guy who now charges $3,000/year for his prognostications — a little rich for my blood.  He’s a wonderful writer and globe trotter whose daily missives from exotic locations are a treat.  Yesterday, his email informed me that his trade recommendations had clocked a 50.9% return since inception.

I thought “wow, this guy really is good!”  (we’re up 53% since inception and I haven’t noticed anyone else in our neighborhood.)  Turns out his inception is December of 2010 versus our March 22, 2012.  His YTD 2012 number is a very respectable 10.7%, “ranking it among the top five performing hedge funds in the world.”

I understand through a mutual friend that he has 1,500 subscribers to his trade service, earning him a cool $4.5 million/year.  Yikes!   At only four months old, pebblewriter has 1/10th the subscribers, and charges 1/4th the membership fee — which means it isn’t close to being my sole means of support.

Several of you commented and sent messages yesterday about how useful it was to have regular updates throughout the day.  Regular readers know that yesterday was an anomaly.  I’m more of a swing trader than day trader.  And, I think most of you are, as well.

If you’d like to see more of that kind of posting, let me know.  More importantly, spread the word.  I don’t really want to have 1,500 members.  But, if we were to double to 300 or so, I could focus more on posting intra-day and less on feeding my growing daughters.

A few of you have taken advantage of the referral deal: for each new annual member you refer, your membership is extended by 3 months.  So, four referrals is good for an additional year.   You might be more comfortable with a mention on another widely-read website such as Zerohedge.  Either way, helping me helps you.

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This morning’s service ISM numbers were generally positive, but like the manufacturing figures reflect several worrisome trends.

I’ll come back to this as time permits.

 

UPDATE:  12:50 PM

I wrote earlier about hunches.  Here’s one for you.  Please treat it as you would a tip on a horse, and do not bet the farm.  I’m putting on a little short here at 1394 — the yellow dashed trend line off the 1422 high.  I’m putting on a very tight stop at 1398.

I don’t like the tone of today’s run up, and I like the odds of a meaningful reversal in here.   I also find the McClellan Oscillator worrisome.

I also wonder if we’re seeing a back test on the dollar.  Charts coming in a few minutes…

First, consider the EURUSD pair.  The euro is rallying on vapor this morning.  I mean, is there any reason to believe Draghi can muster the backing necessary to saddle the haves with more debt to bail out the have-nots?

I read an interesting article dissecting Draghi’s speech yesterday.  Long story short, the guy thinks the EZ will seek to further devalue the euro in order to boost exports.  It would be appealing to the Germans, who would love to export more Beemers.  And, it wouldn’t take much effort.

The short-term picture might look positive, especially if this seemingly bullish break-out is able to hold.

A reversal today, however, could be very bearish.  If we retreat from the purple channel line, the picture looks bleak.

And, in case you’re wondering about the dashed red and purple trend lines we’re backtesting, they can be seen better on the weekly chart.  Both have been very influential in the past.

Last, the harmonic picture still holds out the possibility of a Butterfly, with a Point D down around 1.10 — which would also mean a tag on the big purple channel lower bound.

What does this mean to the dollar?  I’ve been messing around with the long-term channel lines for the past few weeks — pushing them this way and that in order to figure out exactly where they belong.

The least amount of massaging yields the following placement — a back test of the long-term purple channel line, and a bonus back-test of one of the white channel lines.

The harmonic picture shows potential upside, too — with a potential Bat Pattern that completes at 87 in the works.

But, it’s not at all clear to me what the timing would be.  Ideally for the status quo, equities will see-saw higher, peaking in early November.  The dollar would probably be bottoming at that point.

So, getting to 87 means it happens pretty darned quickly, or takes its time — waiting until after the election.

Again, this is all speculative.  I’m not at all comfortable making bets based on how accurately I’ve drawn a 20 year channel.  Kind of like a Mars shot: a degree or two off and you’re sailing into the next galaxy.   A strong next few days could quite easily undo this hunch.

I’m going to sign off for the afternoon.  My daughter has a horse show that I’m looking forward to — having missed the last one.  If anything changes, I’ll try to post before the close.  But for now I’m content to take a small short position into the close.

GLTA.