It seems longer than seven weeks since we led with this chart on Sep 14 [see: The World According to Ben.] QE3, the ECB’s latest stick save and the German Constitutional Court’s pro-ESM decision had all just been announced. According to just about everyone, stocks were about to explode higher.
To me, it was a long-awaited shorting opportunity.
Meanwhile, SPX is nearing our 1472 target. I will ease some stops into the equation as we approach it, as I’d like to remain long for as long as possible. This is a 35 point gain since we went long yesterday at 1437 with the Fed’s announcement.
And, less than an hour later…
Going ahead and pull the plug on my longs here at 1474. The 5-min, 15-min and 60-min charts are all showing negative divergence. I’ll place stops at 1475 or so, trailing lower as need be, just in case it makes another run higher.
It wasn’t rocket science — just a big Bat Pattern that had finally completed. Those who simply hung on to that short position scored 86 points for a nice 5.8% gain. For buy and hold types, it’s been a great trade that is nearing an end.
For us swing traders, it’s been a wild ride with (much) higher returns [Results] from anticipating the swings that had most analysts scratching their heads. Yet, most of the swings were signaled by Harmonic Patterns and/or chart patterns that usually agreed.
We were able, for instance, to short again just ahead of yesterday’s plunge — earning me some sympathetic private messages from well-meaning friends [“Are you sure, man? This one seems kinda out there, especially without any election results yet.” B.B.]
This is essentially the same chart as above — seven weeks later. We’re coming up on the next Fib level lower — the .786 retracement of the 1576 to 666 crash. And, it just so happens that we’re nearing the SMA 200 at 1380.80.
Not shown on this chart, there’s also a Crab Pattern completion at 1384.13, not to mention the .786 of the 1354 to 1474 run at 1380.30. So, as the rest of the investing world is jumping on the bearish bandwagon, harmonics are signaling another important and unexpected turn.
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continued for members…
UPDATE: 11:30 AM
Not a lot of fireworks compared to yesterday. It appears the back-test is over, and SPX should be making its way to our 1380-1384 target pretty soon. Once there, I plan on going long for the trip back up to 1430ish.
With things fairly quiet, I have a chance to post some “background info” on the big picture. First, here are the major channels I think are at play.
I think it’s also interesting to see this little plunge in stocks has come without a spike in the dollar. It’s risen, but still hasn’t tagged the 1.618 target we’ve been watching. I imagine the tag will come at the same time as the bottom of this equity sell-off around 1380-1384.
In May of 2011, a spike in the dollar marked the end of the sell-off, but actually arrived just prior to the interim bottom for stocks.
More in a little while…
UPDATE: 1:30 PM
We just reached the 1381.50 Fib — the .786 of the 1576-666 crash. I’m closing my shorts here and switching to the long side for an expected ride back up to 1430ish. Trade safe and use stops!
UPDATE: 2:45 PM
Our long entry is looking good so far, with a back-test taking place now. Note the yellow channel I’ve drawn — a very good fit which features a mid-line around the neckline of the latest H&S pattern (in purple, currently about 1403.) Have to study it more, but this could end up being the target area of the first wave up.
To the casual observer, it would seem like a back-test. Thus, longs would sold and shorts loaded up on — just in time for a 30-pt rally. Remember Pebblewriter’s Corollary to Hanlon’s Razor (never attribute to malice that which can be adequately explained by stupidity):
When it comes to market makers, never attribute to randomness that which can easily be explained by malice.
In other words, it has the potential to screw over the greatest number of investors — which gives it extra credibility in my book.
UPDATE: 3:40 PM
Looks like we’ll probably poke a little lower — maybe 1380ish. In the meantime, I took a quick look at AAPL for anyone interested. It’s had quite a tumble today, hitting down around 538. I think it’s about to bottom out, though.
Note, it’s trading around the .886 of its last run up.
It just dipped below the bottom of the big white channel. This is the same one that is nestled in between the midline and 2nd rung on the channel that dates back to the year 2000.
While I think the next big move will be to flesh out the biggest channel — potentially down to as low as 409 — AAPL should get a brief bump higher as SPX does — perhaps to 600 or 620. Of course, if it stalls there, it will have formed 5/6 of a huge H&S pattern that could target 370 or lower. Not saying that’s in the offing, but this is a very scary looking pattern.
If it’s able to break the yellow channel mid-line, however, it could easily make it up to 670 or so. The next few weeks should be quite dramatic.
UPDATE: 5:00 PM
Will post more later, but in the meantime here are a few charts to chew on…
Comments
18 responses to “Harmonics Are Your Friend”
My guess is still long since no one is talking.
I always post a change of position within minutes of it being decided. Look for the blue boxes. If you don’t see a new one since the prior long/short position announcement, you should assume the prior one is still valid.
I would request that you consider simplifying all the great information you post.
ie. For any charts, just show the support/resistance lines and target prices and timelines. Remove all the extra lines.
Perhaps have a standing current position section that shows what you are in, when you entered it, what are your target and timelines for those without time or interest to learn from your details.
Just a thought on how to continue to improve this service.
On the other side of that, I for one are quite interested in the workings of harmonics and your approach to the markets. Obviously I understand that it doesn’t much work in your interest to give away the farm, but I would like to know how to approach some of these charts that have a considerable number of fibs and channels- to know what should be working now, or when a pattern has broken down.
Again, love the service- it’s the perfect complement to the EW work I do.
Thanks for the kind words.
In general, larger patterns take precedence over smaller. When there’s a conflict between patterns, say a Bat Pattern and a channel, I look for tie-breakers such as RSI channels, McClellan Oscillator, cycles, analogs, etc. It’s a complicated mosaic, so it’s very difficult to put into “if A then B” format.
When a harmonic pattern is blown, some of them can morph into others. And, even when they play out, they might extend — such as a Gartley that becomes a Bat which becomes a Butterfly that becomes a Crab. You could end up seeing reversals at the .786, .886, 1.272 and 1.618.
Those who study the harmonic pattern pages will greatly improve their understanding of how this works and what to expect.
If a target is missed, I try not to waste time by posting “huh, it missed our frickin’ target; stand by while I try to figure out why.” Rest assured I am studying the situation and trying to figure out if it’s an overthrow, etc. — and will post as soon as I have something to say.
I’m working very hard to simplify for those who don’t want to learn, hence the blue boxes. They contain the info you mention — long/short at a specific price and typically a chart to show why and what I expect going forward. As far as “what I’m in,” you will find that I post only SPX long/short trades. Everything else has to be extrapolated — though, when things aren’t so crazed, I update charts on the other indices as well.
My style of analysis used harmonics, chart patterns and traditional TA to forecast. So, there usually aren’t simple support/resistance lines like you might see, for instance, on sites that use just chart patterns or Elliott Wave.
For those who prefer pictures, the forecast is currently shown with a solid red line. BTW, clearing a chart of everything except the forecast line is actually very time consuming, and of course as soon as I do someone else will wonder where all the supporting info is.
In the interest of devoting my time to the most productive and difficult endeavor — forecasting the market — I started posting the key Fib levels and forecast in a weekly chart available under the “Markets” tab on the front page.
The SPX page is up, and I’ll be updating the rest this weekend [ https://pebblewriter.com/markets/spx/ ]. You’ll find that my Nov 2 forecast was fairly accurate, calling for either 1389 (A) or 1370 (B) by today or Monday.
What I do is enormously difficult. It involves hundreds of calculations — many in real time as circumstances change and present new possibilities that have to be evaluated and either embraced or discarded.
I’m not whining. But, you should understand that I spend around 12-18 hours every day researching and charting. I’m up before 5 every day and usually fall asleep at my desk around midnight poring over various charts.
Most of the other guys whose sites I used to frequent have thrown up their hands trying to figure out where we’re going. I know of several forecasters — some of whom charge 3-4X what I do — who have literally stopped providing forecasts. I haven’t hit everything on the nose, but I’m not aware of any other analyst who has been as consistently close as this site — including guys making seven figures on Wall Street.
I would gladly add staff who could tend to admin stuff, web development, reset locked access, pretty up the charts, add computing power and redundancy — but it’s simply not in the budget at the current level of membership. If these things are important to members, I encourage them to spread the word about the site.
I do virtually no marketing. But, if every current member went out and recruited a new member, posted some comments on Zerohedge, etc. we’d have the overhead to justify some of these enhancements (and, I’d have a great comeback when my wife complains that I devote too much time to this silly blog.)
still long SPX or did you get stopped out? Pondering selling AH…..as I believe closing below 1380 created a pretty significant EW overlap violation…..
I’ll leave EW to the experts, but I’d worry more about 1370. I’m still long, though I agree that was an ugly close. Will post more later.
longs slammed into the close…
how much wiggle room do you rec on the stops… SPX 1380?
getting close to 1384…think this will reverse overnight so to catch most people by surprise?
I do indeed.
That is, if we close in the 1380s today, I wouldn’t be surprised if much of the initial rebound happens in a gap opening tomorrow.
Good stuff PW, appreciate the great work. When you go long at 1380-1384, what option date will you be using? Would you ever consider the Dec option instead of the Nov. 16? I’ve been using the leveraged ETFs, but it feels like I’m leaving money on the table so I’m starting to add some small option positions as well. Also, you usually buy at-the-money options, correct? Thanks man.
I can’t really advise what’s best for anyone else, but in a situation like this where my target date is between expirations, I tend to use a barbell strategy — with higher strikes (vs 143) on the longer date (Dec) and lower strikes calls on the shorter ones (Nov.) I’ll also usually throw a few bucks at true orphans — those trading for only .05-.06 because of the big sell off — and 8 days till expiration. They’ll usually at least double if the forecast is anywhere close; but, if I’m wrong no great loss.
Some advice form someone who learned the hard way (and is still learning) – before you start using options I recommend tracking how their value changes based on expiration and market moves. I would start by buying longer dated options at or near the money (ie Dec / Jan) at first so you have some room for error and learning. They still move plenty each way!
Thanks guys, great advice. I do have some decent option experience, I usually use LEAP puts for structural shorts (NFLX, GMCR, etc), but not a ton of experience with short dated ones like this. I’ll be sure to keep the positions small and the strike dates a little longer for a while.
Although, my options advice usually goes something like: “don’t.”