Apologies for the late post this morning.  I’ve been working on the mid-range forecast and the market was moving higher as expected.  I wanted to get the next few weeks mapped out, as we should see some huge volatility and — with some help from our friends in D.C. — some juicy returns.

We’re getting the bounce we’ve been expecting after SPX finally caught up with the E-minis after a tag on the yellow .786 Fib line.

We had been aiming for a reversal at ES 1646/SPX 1649, so the markets overshot that just a little — but not so much that it derails any of the patterns we’ve been watching.

Both have reached our initial target area — a back test of the purple channel and tag of the top of their respective falling white channels.  I would short here at ES 1672.50, with the understanding that it could just as easily be a small pullback on the way to 1683 (.500 retrace) or even 1693 (.618.)

I show the actual purple channel bottom at 1675.50 or so, and the yellow .500 is at 1675.75.  So, don’t get nervous if it leaks a little higher.

Recall that when we adjusted our initial downside target to 1646.58 on Oct 3 [CIW: Oct 3] we didn’t specify a price level for the subsequent bounce.

Just dropped through ES 1666.75.  Next stop is the .618 at 1663.71 — though there’s no real good channel support there.  There are lots of other potential turning points, including my favorite from the 30th at 1657 and my new favorite of the yellow .786 at 1646.58.

Having the purple channel break down was obviously key to the the downside of the past several days.  We almost always get a backtest of broken channels, so we’ve satisfied that requirement.  And, the falling white channel was due for another tag on its upper bound.  So, the intersection of the two was the logical spot for this rebound.

But, it isn’t a great spot from a harmonic standpoint.

continued for members…

Note that the .618 retrace of the drop from the Oct 1 1692.25 high is 1672.33, so it’s a likely suspect for an interim stop.  And, it’s reasonably close to the .382 (1673.11) of the drop from the Sep 19 all-time high of 1726.75.

But, what if Congress gets its act together?  What if the White House caves?  What if Janet Yellen is spotted in the showroom of the local Sikorsky dealer?  Surely, there is a bigger retracement coming than a lousy .382 of the 86-pt drop?

Here’s where it gets tricky.  Yesterday, I spoke with a friend (hi Tom) who is a very high-level fixed income guru on Wall Street.  He’s not one of the talking heads you see on CNBC or Bloomberg.  He’s the guy they call as they’re sitting in make-up, preparing to dazzle us.

Tom is not the nervous type.  He’s talked me down from a bearish ledge on many an occasion. Yesterday, however, Tom was more nervous than I can remember him ever sounding.  He thinks — and I happen to agree — that the politicians are so entrenched in their ideological political positions that it’ll take a big market dump to get them moving.

Remember July-Aug 2011?  It was certainly the case then.  And, if anything, the political landscape has become even more toxic.  The whole exercise seems to be about letting the pain occur, and then being able to say to one’s base: “look what those evil [insert name of the other party] did!  I thank God for giving me the courage to do what’s right!”

As citizens, we can and should press for change.  As investors, our task is to recognize the way the world works and position ourselves accordingly.  So, if Tom’s nervous that the pols can’t get their act together, then I’m nervous about the country’s prospects (but, I’m also encouraged about our downside case working out.)

UPDATE:  3:45 PM

At 1687-1693, the .382 Fib of the 1624 to 1726 rise, ES will have completed a fairly deep B-C leg of a Butterfly or Crab Pattern (the recent low was a little closer to the .886, making the Crab a slight favorite.  The equivalent move for SPX is 1690-1692, hence this rally has probably just about run its course.

Crabs extend to the 1.618, implying a move to ES 1561.71 — just slightly lower than the .886 of the rise from 1553 (Jun 24) to 1726.  A SPX drop to the 1.272 (1599) or 1.618 (1564) would also land it around the .786 (1596) or .886 (1579.)

That price level of 1579 is extremely interesting because a stop there would set up a very cool move: a Crab Pattern to 1823.  Set Point X at the recent 1729.86 high and Point A at 1579.66, and you end up with a 1.618 extension at 1822.68 — right on top of the 1.272 Fib of the 1576 – 666 drop between Oct 2007 and Mar 2009.)

The equivalent level for ES is 1547 — slightly lower than the Jun 24 lows, but only 14 points away from the yellow Crab Pattern’s 1.618.

This all presupposes that today was a relief rally, not a breakthrough of the political logjam.

Stay tuned.