In the wee hours of June 11, I pondered the possibility that the e-minis were forming an Inverse Head & Shoulder pattern [see:  Big Picture.]  I posted this chart, which showed that the target of such a pattern would be 76 points away from the presumed neckline — the exact same distance as the just completed orthodox H&S target from its neckline.

Of the road ahead, I wrote:

I’ve spent a lot of time lately agonizing over whether we’ll go back up and produce a new high.  The harmonic picture suggests we’ll put in a lower high — a point C which, less than A at 1419 (on ES, 1422 on SPX), would get the party started to the downside.

I can only imagine the amount of good money bears would throw away on puts and the like, trying to anticipate whether it was going to be a .618, .786 or .886 retracement.

Once we approached 1420, though, the momentum would shift to the bulls and an enormous amount would go into positioning for the upside.

What if it were simply a double-top?

Well, here we are.  The e-minis tagged 1420 about 45 minutes ago.

UPDATE:  10:00 AM

SPX completed its own “double top” just after the open.

This was as deep into the rising wedge we’ve been talking about as possible, and on the same day (but, not the same way) we speculated about last week [see: Moment of Truth.]

But, of course, it isn’t a double-top if prices keep rising.  Currently, the daily RSI shows no negative divergence whatsoever (although it’s present on every shorter time frame.)  If we blow through 1422, the upside targets are numerous.

continued…

As we discussed yesterday, breaching 1422 would be cause for me to abandon my shorts and play along on the upside.  I don’t take this decision lightly, but exceeding 1422 kills off all the harmonic patterns that rely on a Point C lower than the Point A of 1422.

Naturally, 1422 now becomes an important floor.  A break to the downside would be as meaningful as was a break to the upside and would be cause to again reevaluate.  A great tool for monitoring our position is a rising wedge forming on the 15-min chart.

The best target I can come up with going forward is the one right in front of us: 1433.  It’s the purple pattern on the chart above, and 1433 is the 1.272 extension of the drop from 1356 to 1074.  It’s also well within the bounds of the rising wedge — which features an apex of another potential upside target: 1451.  Note that 1451 is the 1.272 of the 1370-1074 drop (the red pattern above.)

The potential for whipsaw in this range is very high. At the very least, we’re due for a backtest of the 1421.05 Fib we just broke.

For those who are unnerved by frequent trading, this is a great time to be on the sideline, brushing up on your golf game.  There is a high potential for a failure of the breakout, and if so we’ll be short again (I’m watching that little wedge — with a current lower bound of around 1417.90.)

Remember that although the harmonic picture changes with the push above 1422, a double top is still very much on the table as long as we’re within a few percent of it.  Many technical analysts consider 3% to be an acceptably close range.  A 3% push would equate to 1464.

Regular readers will recognize 1464 as the 1.272 extension of the latest pattern — the drop from 1422 to 1266.  SPX put in a decent Point B at the .786 on July 30.  So, it would qualify as a solid Butterfly Pattern — especially if 1421-1422 holds.   And, it would still qualify as a double top.

Just 8 points higher is a Fib level I’ve had my eyes on for a long time: the .886 of the drop from October 2007 (1576) to Mar 2009 (666.)  But, first, let’s see if we can hold the current levels.  If we can, I suspect the following channels will provide solid trading opportunities.

 

UPDATE:  12:20 PM

Taking a look at some of the other indices…at least a couple of which argue for a reversal (meaning a more immediate double-top for SPX.)

COMP finally completed the Bat Pattern we’ve been watching for weeks, as well as the 3100 measured move target we discussed yesterday [see: Wedgie Alert.]  Its high for the day so far is 3100.54.

NYA tagged its fan line we discussed over the past week and overshot the smaller (in red)  Bat Pattern’s .886 of 8098.

The larger pattern has an .886 of 8201.72.  Neither is more compelling than the other IMO.

more in a few…

UPDATE:  1:25 PM

SPX just broke the wedge.  So, it’s back to the short side here at 1418.50 with an initial target of the channel line (around 1408-10 today.)  Be aware, however, that we could re-enter a triangle pattern of repetitive (and frustrating) whipsawing.  Seriously, if you don’t like jumping in and out, this is the time to hit the links, the lake or the beach.

UPDATE:  2:50 PM

I’m watching this little channel to the downside, looking to see if we’ll get any bounces along the way.  One likely spot would be the .886 at 1413.78, but I wouldn’t even think about playing the upside here unless we’re able to break the little channel.   Even then, it would likely be a very short-term trade — perhaps to back-test the wedge?

It’s starting to take on the look of a falling wedge, but it’s so narrow that it’s quite likely to widen at some point and assume proper channel form.

UPDATE:  4:00 AM

Not a lot to add at this point.  This is still one of the most confounding markets in recent memory — with SPX still threatening higher and lots of other indicators pointing down.

By the time all was said and done, the dollar (DX) dropped back through the long term channel line (purple), but it tagged the .886 at the same time — so, we’re likely to get a reaction here.

Note that although the dollar has given up .886 of its rise since June 29, the EURUSD has regained less than 70% of its drop during the same period.  Also, the .886 is a legitimate turning point (Bat Pattern) while 70% really isn’t.  If EURUSD can survive a likely backtest of 1.24, it stands a good shot at completing the Gartley we’ve anticipating — target 1.2552.

The dollar’s primary direction is still up.  Our medium-term target is still the .886 at 87.076 (which is also the 1.618 of the Crab Pattern.)