In my opinion, the next eleven sessions should shape up as a battle between the status quo and those who want a new direction.  The bull market, getting very long in the tooth, is overdue for a correction.  But, the administration, the Fed, and some on Wall Street need to keep it afloat for eleven more sessions — as a tumble in the weeks before an election wouldn’t be good for business.

The New Order thinks a tumble would be just fine.  It would expose the soft underbelly of the status quo’s approach and encourage the electorate to reconsider the current path.

Wall Street, which has benefited enormously from the Fed’s largesse, has reportedly thrown their support behind Romney.  Are they really ready to bite the hand that feeds them, or are the Romney donations simply a way of hedging the downside in case the current guys are thrown out?

In any case, I think the next two weeks will be largely range-bound — but, possibly very volatile — as the two forces duke it out for control.  The euro-zone obviously is working very hard to keep things together a little longer.  The following chart shows the negative overall trend (the big red channel) for the EURUSD, which should have seen the pair back to the channel bottom by now.

But, the jawboning and monetizing that boosted prices out of the falling yellow channel in January has kept the pair vacillating about the midline ever since.  I believe the pair will fall hard sometime in the next three weeks.  Whether it happens before or after November 6 is the only question.

Prices can remain in the red channel through then quite easily.  Even a loss of the red channel and support by the purple mid-line would be “positive enough.”

Likewise, the dollar is due for a breakout, but has been kept in check both by additional rounds of QE in order to prop up the current markets.  Whether it will break out before or after November 6 is the only question.

Stocks have reached important support from a channel perspective, so remain at risk for a significant break down if they don’t bounce very soon.

continued for members…

The big picture: (1) SPX recently completed a Bat Pattern at 88.6% of the 1576 to 666 decline and reacted with a relatively minor 50-pt decline; and, (2) SPX is back to where it was when QE3 was announced — a fail, any way you look at it.

We’ve had a series of 40-pt swings since the 1474 high — a series of lower highs and lower lows.  So, the trend is negative.

But, my thesis is that The Powers That Be will limit any immediate further downside to the bottom of the white channel (1423ish), and engineer a rally heading into the election that brings prices either back to the .886 of the 1474-1425 decline (around 1469) or, if the 1474 high is taken out, to the next higher fib at 1489.

The chart above shows the downside harmonic case.  The 1425.53 low on the 12th was a .618 retracement of the pattern rise from the 1396-1474 run.  It’s possible that Point C is already in — the 1464 high from the 18th.  But, that level was midway between the .786 (1461.24) and .886 (1465.78) of the previous drop, which casts doubts — even though it was a solid tag of the upper white channel line.

A more interesting case would be a Point C around 1469 — a .886 retrace of the 1474 to 1425 decline.  It would energize the bulls, frustrate the bears, and help TPTB stay in office for another four years (“the market is near all-time highs!”)

Just to extrapolate, if we did see a return to and reversal at 1469, the resulting Point C would open the door to the downside harmonic case playing out to at least the .786 (1413) or the .886 (1405) of the 1396-1474 rise (note the Points D in the above chart.)

I find it very interesting that each of the red harmonic patterns in the above chart features a 1.618 extension down around 1405 — three sign posts pointing in the same direction?

As we’ve discussed before, a trip to 1405 would set up a potentially higher harmonic path, too.  The 1.618 extension of the 1474 to 1405 decline would place a Point D right in between the 1.618 of the 1347–1074 drop between Jul – Oct 2011 and the 1.618 of the 1422–1266 drop between Apr – June 2012.

A little closer view…

Okay, so much for the big picture.  What about today?  Since we’ve broken below Friday’s low at the .886 of 1429.92, the next support is the pattern low of 1425.53.  A break below virtually guarantees a trip to the white channel bottom — probably around 1422-1423.

But, at 1422, the support should be very strong.  It’s not only the white channel bottom, but the previous high from April 2 and a channel line from a much bigger channel since Oct 2011, which is a subset of the channel since 2009.

It’s easier to appreciate if we strip away some of the latest patterns.

Remember, it’s not just the white channel we care about.  From Jan 09 through Jun 11, another channel (shown below in purple) was actually the better price guide.  It was only the break down from that channel and subsequent low made in Oct 2011 that even established the white channel.

And, as we’ve discussed many times, the purple channel is being echoed in the rise from 1074 in Oct 2011 to the present.  The current purple channel offers significant support.  If broken, the next channel support isn’t until 1405.

UPDATE:  1:50 PM

The former low of 1425.53 broke.  As discussed above:

A break below [1425.53] virtually guarantees a trip to the white channel bottom — probably around 1422-1423.

SPX just tagged 1422.06 and got a pretty good bounce at the white channel line.

60-min RSI dipped to 22, a very low value that hasn’t been seen often in the past six months.  Previous dips below 25 have been met with bounces of 20-50 points; but some were followed by lower lows — notably around May 17.

When RSI bottomed at 20.4, SPX stood at 1305.  It subsequently fell to 1295 even though RSI was recovering, and fell as low as 1266 (with RSI higher at 23.)

Since the formation of the white RSI channel (from mid-June), the tags of the channel bottom have split evenly between those which were soon followed by a lower low and those which were no.   So, in this case, RSI isn’t much help in predicting which of our scenarios discussed above will play out.

Those interested in playing the bounce here at 1422 might consider waiting until SPX breaks out of either the 15-min price or the RSI channel.

For those still short, it would make sense to check your stops to make sure a bounce higher doesn’t swallow up your profits.  It looks like the channel bound is around 1427.

Personally, I’m comfortable taking profits here on my shorts and opening a small long position to play the bounce with a stop around 1420. This is based solely on the channel bottoms being hit and some positive divergence on the shorter time frames.

More in a few.

UPDATE:  3:30 PM

We got a little breakout up to 1428; looks like it could go higher.  For those of you watching AAPL, here are the charts I promised.  I find the weekly RSI interesting — looks like it’s going higher on a back-test, which isn’t terribly positive for more than the next few days.

The daily RSI shows that today’s rally is running into resistance within the little red channel.  If it breaks out, there’s still the bottom of the purple channel to contend with.  Again, it has the look and feel of a back test.

The daily price chart, however, shows that a back test isn’t necessarily a bad thing here.  The purple channel (dates back to June 2011) is rising at such a steep clip that AAPL could easily ride the back test up to the 1.618 at 719.28.

The purple channel is an acceleration channel within the white channel, which is a subset of a much larger white channel.

There are well-defined channel lines going back to the 1990’s, but the potential for a slight error in charting to throw them off track is large after such a huge run up over the past 20 years.  Besides, at current prices there’s not really anything they’re connecting to; they’re merely echoes of previous connections.

I do, however, think it’s worthwhile keeping an eye out for more recent channels that follow the same slope.  Here’s one, shown in yellow below, that certainly looks like it has some bearing.

Placed like this, it reinforces the notion of a channel back test — actually, three of them:  the purple channel, the yellow channel mid-line and the white channel mid-line.  There’s also a potential back test of the little H&S pattern that hasn’t quite reached its 598 target.

The above chart shows the upside potential — a Crab Pattern completing at 719.  But, getting there means reversing and overcoming the white channel mid-line, two yellow channel lines (including the mid-line) and the H&S neckline — not to mention the previous high.

It would take some effort, but AAPL has overcome such odds many times before.  And, it would be a bitter pill for AAPL bulls if, after all that effort, the 1.618 extension at 719 was the extent of the reward for making a new high (though there’s no reason it would have to reverse there.)

But, what if there’s a general market meltdown?  The downside case is equally compelling.  If AAPL fails to clear the previous high, it could form a potential Gartley or Bat Pattern like the one below.

I know, 561 isn’t the end of the world.  But, if it played out as charted below [spitball alert!] it could feel like it for AAPL shareholders.  Suppose prices stay in the small, falling purple channel through November 6 (completing a back test of all those channels, etc. as described above.)

A reversal anywhere near Point C might easily send prices back to test the bottom of the white channel and yellow channels where they intersect with the  purple — Point D above.  But, in so doing, it would complete yet another H&S and Butterfly Patterns targeting 461 and 472 respectively — the bottom of this portion of the big white channel.

If a second H&S Pattern completed at the bottom of the yellow channel, the target would be closer to the 1.618 at 409 — the very bottom of the big white channel.

Do I think it’ll happen?  No idea what kind of reception the upcoming products will receive.  I have been a Mac user since 2000 (Titanium Powerbook — the envy of all my co-workers) and happen to like the company.  But, it’s obvious to me that quality has slipped some over the past couple of years.

Guess we’ll find out shortly.