End Games

Don’t look now, but the Butterfly Pattern generated by the drop from 1576 in October 2007 to 666 in March 2009 is a handful of points from completing.  We’ve discussed this target for over a year [see: The World According to Ben.] It’s hard to believe it’s finally here.

Will we get a 1973-style response [see: Butterfly Warning] or something more muted?  Will the same knuckleheads who tried to portray throttling back the Fed’s magical money machine as a good thing pull out all the stops…again?

The caveats:

  • SPX probably won’t stop at 1823.42 on the dime; that rarely happens
  • at 1823, it’s already plenty close enough
  • it could overshoot 1823 a bit; 10 points is a common margin of error
  • TPTB could keep things going and bust right through 1823 if they so choose
  • even if this proves to be an important top, it won’t necessarily plummet

I’d be comfortable taking a short position right here at 1817, as the purple channel seems to offer good nice resistance at the white channel intersection. But, it’s a steep channel, and SPX could continue bumping up along the underside of it for the rest of the day, easily tacking on the extra 6 points.  I show the top of the purple channel intersecting with 1823 at around 3:15PM.

The red channel is from a couple of weeks ago based on several similar previous channels.  But, the purple channel has almost as strong a pedigree.

ES is also a few points from a pattern completion — a Crab Pattern on a much smaller scale.  Its Big Butterfly is way up at 1837 and obviously wouldn’t be reached during regular market hours if SPX does reverse at 1823.

Furthermore, the DJIA Big Butterfly is still a few points away: 16,300 versus its current 16,250.

UPDATE:  2:00 PM

SPX just tagged 1823.42.

In fact, the global market targets we posted about a month ago [see: Around the World] have generally been reached:


Index Nov 20 Target Result
Nikkei 225 15,597 15,870
FTSE 100 <6875 <6875
NYSE 10,239 10,229
SPX 1823 1823
DJIA 16,300 16,286


One indicator I look at in various time frames is the RSI.  I don’t care so much about the actual value, but how it moves in relation to past moves.  I discovered a long time ago that, just like prices, its movements often form channels.  It’s a little like reading tea leaves or throwing monkey bones, but it works for me.

Note how, on the 60-min RSI chart for SPX, the swings in RSI followed the rising purple channel to a point, then switched over to the falling white channel.  In the midst of the transition, a new channel has been established – shown below in red.

If SPX reverses at 1823 as I expect, RSI will fall back below the top of the red channel and confirm the downtrend.  We can watch its progression relative to the purple, white and red midlines.

What’s really interesting to me, however, is the daily RSI chart:  The rising white channel is pretty obvious, and has been consistent with the series of higher lows in SPX.  No divergence here.

But, consider the peaks in RSI.  As seen below, they can be connected with a falling channel line.  The prices are rising, but the relative strength is falling.  This, of course, is marked negative divergence — and, it has been known to spoil more than a few bullish parties.

Here’s the same chart with prices.  Note that it’s not the tag of the yellow channel top that’ll kill a bull market.  That just gets the ball rolling.  It’s the subsequent falling channel — usually around the 5th tag or so.  And, if a peak should fail to even reach the trend line, such as July 2011 at 1347 — watch out below.

Here’s a close-up of the past year.  Note that RSI is currently bumping up against the white channel midline, the purple channel top (arguably a little ragged) and the red channel top — all at about 5 tags of the red channel top after the yellow top tag at 1729.

If you’re a bull, this is a good reason to lighten your load.  If you’re a bear, this is a good reason to get very, very short — especially in light of the biggest Butterfly Pattern completion since 1973.

Not that there are any similarities or anything…

Anyone happen to notice the nice bottom in VIX yesterday and today?

I’ll update several more charts over the weekend, but here’s a little taste…a nice juicy Crab Pattern in RUT.

Have a great weekend, everyone.




End Games — 8 Comments

  1. there is a typo though up top, “at 1723, it’s already plenty close enough”. I think you meant 1823.

  2. Thanks PW. Took home an ESM14 future to the short side from 1809.25. Sold one for a little “breathing” room on the stop so I can survive a double top if they want to put one in. It will be interesting to see if the ES or the SPX rules the roost as far as 1825ish vs. 1837 futures. Have a Merry Christmas and a Happy New Year…and keep up the good work. I appreciate it. 🙂

    • Thanks, Newb. Based on the last three minutes of “trading” in ES in the after hours, we’re supposed to believe 1837 is also on the way. Note the jump in volume at 5:13 from around 150 contracts per minute to 2,582 — all to force ES up over the 1817.75 mark rather than close the session off from the highs as occurred with SPX. Don’t know if it’ll work, but watch out for the follow through on Sunday.