David Tepper was right.  There are only so many places in this world in which one can invest.  That will be true even if the Fed tapers back their $85 billion per month rolling bank bailout.

Tepper’s comments on May 14 helped spark a rally from 1633 to 1687 over the following week — at which point investors decided that it might matter after all.  SPX plunged to 1598 over the next two weeks.

Through yesterday, SPX had recovered a Fibonacci .618 of those losses — despite Bernanke’s apparent confirmation that tapering is coming sooner or later, and President Obama’s apparent announcement that Bernanke’s time is up, and despite turmoil in practically every other market around the world.

With the FOMC statement only 5 hours away, should we fear the taper?  Much of the market’s gains over the past 4 years have come from Fed intervention.  So, simple logic would suggest that the withdrawal of the mechanism that blew the bubble would at least allow the bubble to deflate a bit.

But, where would money go?  It’s not as though there’s an alternate universe with vast stores of undiscovered,  undervalued assets.  That’s the trouble with QE — the money has gone everywhere, and overpriced just about everything.

Even if the Fed disappoints today, money will eventually come back to the markets — at whatever price that may be.  If I were David Tepper, with a $15 billion hedge fund and $7 billion of my own to manage, I would probably view the world the same way.

But, those of us with slightly smaller balance sheets would do well to get out of the way – or even short the market.  It was true when Lehman and AIG went broke.  It was true when S&P downgraded the USofA as SPX was completing an analog.  It was true when SPX completed Harmonic Patterns in April [here] and September [here] of 2012… you get the picture.

UPDATE:  9:34 AM

We remain short from 1653.50 yesterday based solely on the tag of the .618 retracement (of the drop from 1687 to 1598) which happened to intersect with several other channel lines.

SPX completed the Inverted Head & Shoulders Pattern (in red, above) we’ve been expecting by finally closing above the neckline yesterday.  The pattern targets 1673 — near the 1.618 extension of the red harmonic grid and the .886 of the white.

It’s not unusual for IH&S Patterns to backtest their necklines, which in this case is down around 1642 — also the location of the small purple channel’s midline and the next lower Fib line on the white pattern: the .500 at 1642.71.

BTW, several members are fondly remembering Sep 14, 2012 when — the day after the FOMC announced QE3 — SPX ran up and completed a Bat Pattern at the .886 retracement of 1576 to 666.  In addition to raining on Bernanke’s parade, it provided a fabulous shorting opportunity [see: The World According to Ben.]

While a disappointing FOMC release could certainly send the market into a tailspin, there is no comparable harmonic pattern currently in the works other than the aforementioned .618 tag.  Markets often reverse at the .618, but corrective waves more frequently reverse at the .786 or even the .886 Fib levels.

UPDATE:  10:26 AM

Speaking of Fibs, SPX just arrived at the .618 of its drop from 1654.19 to 1646.94 — also backtesting the top of the grey channel.  This, or the .786 at 1652.64, would be a natural place for a reversal of the bounce from 1646.

Of course, there’s no guarantee that the drop to 1646 wasn’t the full extent of the drop.  A push back through 1654.19 would be cause to revert to a long position.

A quick hat tip to Airyk, who asked about the potential Butterfly Pattern at the 1.272 extension on the red grid at 1659.  Please note it would coincide with the white .707 Fib (1661.12.)  What’s even cooler, though, is that it happens to intersect with the purple TL from the 1994/2002 lows at…drumroll please…2pm EDT (as in when the FOMC statement is released.)

 

With a few hours left to go, we’ll resume yesterday’s discussion about the big picture — including a quick look at DX and EURUSD.  I’ll announce on this page when they’re posted.

BTW, one interesting scenario I’m looking at is a drop to the white .382.

It would make for a nice C=A corrective wave — without busting the rising white channel — for the bulls, and would set up a Bat Pattern down to the .886 at 1633.06 (the bottom of the small purple channel) for the bears.

It’s even pretty darned close to the large purple channel .25 line.  Something for everyone!

continued for members…

UPDATE:  1:32 PM

Just posted the DX update HERE.  As you would expect, it shows DX on the brink of either a big move higher or the loss of important support.

 

The key support levels are the .707 at 80.579, the .786 at 80.131, and the .886 at 79.563.  A breach of the previous 78.915 low would likely mean SPX is off to the races.

The EURUSD has almost reached its .707 at 1.34272, climbing to 1.3414 yesterday morning — while SPX waited until 5 hours later.

The pair also features channels — of resistance — that could bring about a reverse here, the .786 (1.3502) or the .886 (1.36) depending on reaction to the FOMC announcement.

Today’s pattern looks like a cup and handle on the 5-min chart — indicating a possible rise back to 1.3414, a dip, then higher.

SPX has broken slightly above a TL from this morning’s high, but not enough to matter just yet.  Just MM silliness…

 

From a trading standpoint, I’ll play along either way.  We’re currently short, but will switch to long on any break up through the .618 at 1653.20.  A drop through 1646.94 would mean additional downside.

Stay tuned.

UPDATE:  2:03 PM

SPX just moved through the price level we discussed earlier — the white .382 at 1645 — and tagged the bottom of the red channel.  Note that this takes it below the bottom of the small white channel and the small purple midline — in addition to the .25 of the larger purple .25 line.

 

Look for support at the red, dashed TL at 1642 — the neckline of the IH&S pattern.

UPDATE:  2:11 PM

I’m going to try a long position here at 1643, stops at 1640ish.  Note that 1642.71 is the .500 of the largest white pattern (1687-1598) so a drop from the .618 to the .500 would be considered a mild corrective wave (except for the speed – nothing mild about that.)

In general, staying back above the white channel bottom and/or purple channel midline would be reason to stay long.

UPDATE:  2:37 PM

I haven’t heard anything terribly damaging to the bullish case just yet — either on the QE or interest rate front.  The dollar has broke out somewhat — hitting 81.445 off a low of 80.615.

But, SPX is still above its initial low, and has bounced higher than the  the white channel bottom and the purple midline — and VIX is currently off .93.

SPX just tagged the IHS neckline almost exactly.  My stops are at 1640, but the white .618 at 1639.45 is clearly in sight now.  I’ll give it a little more wiggle room, but short on any move through the .618.

UPDATE:  2:56 PM

Just pushed through the .618, so shorting again with a target of the .886 at 1633.  Charts in a moment.

UPDATE: 3:00 PM

Long here again at 1633, stops at 1632ish.  Note that in addition to the white .886, this is also the red .618, the bottom of the purple channel and our target from 3 hours ago (see above.)

Note that the 1.272 extension of this drop from 1654 to 1633 is 1659.89 — the same level as the red 1.272 mentioned earlier. And, the 1.618 extension is 1667 — one point away from the .786 of the 1687 to 1598 drop.

Either would appear to be a reasonable upside target if SPX can hold 1633.

More later.

UPDATE:  3:38 PM

Prices have rebounded from 1633 to the neckline at 1641.46.  SPX won’t be out of the woods until they break above this resistance and back above the purple .25 line at 1645.

A drop through 1633 would likely bring the white .618 at the purple channel bottom into view — 1625ish.

The USDJPY has also reached a point of resistance, but is safely back above the yellow channel midline.

The EURUSD has found channel support and has held the previous high of 1.3242 – so far.

 

I’ll stay long into the close.  The immediate downside risk is mostly likely the purple channel bottom at 1620, but the .618 at 1625.69 and another channel line at current prices might also offer support.

It’s the .25 line of the rising white channel that’s bottom most on the chart and should be easier to see once I’ve cleaned up the charts a bit.

 

UPDATE:  4:30 PM

Pretty wild day all around.  Things were moving pretty fast there at the end.  I intended to short with a drop through1633, but SPX bounced back to it with only 5 minutes to go. The final five minutes caught me trying to chart and post and trade all at the same time.

In the end, I realized that even if I was wrong on the exact downside, we should get a decent bounce off those support lines in the morning.

And, the currency and VIX charts look reassuring — especially the RSI charts which show the closing prices will most likely be reversed pretty soon.  DX, which has essentially bounced from the .707 to the .500, looks like it will find resistance to any further upside.

 

 

And, the EURUSD, which caught channel support as discussed above, essentially retraced the red 1.272 to 1.000 and should get RSI support here as well.

 

I have to take a break for a bit, but will be back later to send out fund info and do a little more wrap up.