As we anxiously await Bernanke’s big show, the market is putting on a little show — reaching the 1409 target we mentioned yesterday (and then some.)

If Bernanke disappoints, as nearly everyone now seems to think he will, that should just about do it for this retracement.

As I’ve posted for the past several days, I’m largely in cash (save for a small speculative short position that’s strangely barely moved this morning, and to which I’m adding at 1410.70.)

More after Bernanke’s comments.

 

UPDATE:  12:30 PM

The EURUSD hit our 1.2617 target this morning.  We first ID’d this level on August 22 [see: Charts I’m Watching], and it looked very touch and go up until this morning’s ramp.

We could even go a bit higher to tag the 1.618 of the little red Crab Pattern — which is the .886 of the larger yellow Bat Pattern at 1.2666.  Most of the time after EURUSD 60-min RSI peaks, we get another lesser RSI peak that corresponds with a higher price peak (known as negative divergence.)

But, the daily RSI is still back-testing the channel its been in for over a month (note the negative divergence on the daily) and fell out of on Aug 29.  I see RSI closing at or below the white channel and falling back to find support — initially at the purple channel line before breaking down further.

A break thru the bottom of the white price channel (currently at 1.2388) will confirm the downside thrust has continued.  Until then, there is plenty of support at the various channel lines.  I don’t see an immediate plunge in value — probably not until the German Constitutional Court ruling on the ESM on Sep 12.

Note that we’ve officially exceeded the red dashed channel line by a bit.  If we get a reversal today or even in the next few days, this is of little consequence. The channel has been violated temporarily before in its battles with the purple channels.

UPDATE:  12:45 PM

The dollar has come very close to hitting our target this morning, falling to 80.96 versus our target range of 80.83-80.88 also discussed on Aug 22 [see: Charts I’m Watching.]  Like the EURUSD, one last thrust lower to complete the tag is possible if the past custom of positive divergence were to repeat.

The daily RSI has probably broken out of the falling wedge it’s been in since May.  In any case, we’re at or very near the bottom for the dollar.

Recall that we’re in the final stages of a pullback in a larger uptrend with potential over the next few months to 87.076.  For those with the patience to ride out the inevitable swings, this should be a relatively safe place to earn nearly 10% in a few months.

I expect prices to snap back into the purple channel and resume their climb; although a dip corresponding to a politically related equity surge is to be expected somewhere along the way.  If/when stocks sell off, we’ll get the greatest move in the dollar.

If the stock market correction is serious enough, look for the long-awaited threatened QE3 to knock the dollar for a loop.  I wrote extensively about DX yesterday.  For more detail, see Managing Expectations.

 

UPDATE:  3:00 PM

The S&P 500 is hanging in there after a pretty wild ride.  SPX closed yesterday at 1399.80, soared to 1410.72 on the opening, fell back to 1398.96, soared again to 1413.09, and has since settled back around the the 1404.64 Fib level — where it’s inching higher.

The markets were clearly not thrilled with Bernanke’s remarks this morning.  But, I suspect there was a sizable short position at yesterday’s close given Lockhart’s “QE3 is a close call” remarks.  It seems like everyone was thinking the same thing: no QE announcement tomorrow (today.)  In retrospect, it was a great opportunity for a short squeeze.

In the end, Jackson Hole was a non-event.  Bernanke left the door open for QE3.  Depending on how you parse his words, it might even be slightly more likely.  VIX has settled back down, the dollar didn’t fall off a cliff, and the market is trading roughly where it has been for the past three weeks.

Count today as the 18th session in a row to trade within 5 points of the fan line from 2007, the 15th to touch it, and the 7th to straddle it.  Clearly, the market is trying to make up its mind whether this is the end of the ride or the beginning of the next leg up.  I’ll spend this weekend trying to sort that out, but in the meantime, some charts are in order.

 

SPX has formed the early stages of another leg down.  The red channel to the right is the same slope as the larger channel to the left.  If we are heading down, we can expect this channel to broaden; so, the top isn’t necessarily in.   The first peak in the former red channel was exceeded twice before the channel was done forming just the left side of its eventual full width.  We’ll come back to those red channel lines in a moment.

The dashed yellow line that formed the neckline for the small H&S pattern (indicating 1370) over the past couple of weeks is parallel to a number of other important channel lines — shown above in red.  For the sake of illustration, I’ve changed them all to yellow in the chart below — and added a few more parallel lines.

It’s easy to see how influential they’ve been over the past several months.  But, in reality, they and their cousins have been influential for years.

The latest H&S neckline mentioned above stopped a rally in Feb of 1996, touching off three back-to-back Butterfly Patterns in a row that governed the market’s movements for a full seven months.

The red channels mentioned above guided many of the corrections over the past 20 years.  Most of them were relatively minor, but one stands out from the rest — the crash from 2007.

There are three more systems of channels I want to chart — along with updating the harmonic picture. But, I’m running out of time before the close.

I’m going to go ahead and close out my short from this morning before the close here at 1404.50 and reevaluate the next move forward.

I’ll have lots more charts either later this evening or tomorrow morning — along with a forecast.