Inflection Points

The SPX closed below a key channel line yesterday, which is a technical red flag. It’s certainly not a guarantee of further weakness, but it greatly increases the odds.

It wasn’t much of a breach, but it was a breach.

Arguing against that scenario:

  • SPX tagged its SMA 50
  • USDJPY has reached potential Fib and channel support
  • the USD has still not broken out

If the market does find support here, we should get a nice bounce at a deep retracement of the 1598 – 1648 rally. We can call yesterday’s close below 1617 (the purple channel bottom) a momentarily lapse (or market maker fakeout, take your pick) and get on with the bull market.

If not, however, there is much additional weakness to come.  In sum, this is an important inflection point.

We’ll resume our short position on the opening, as we came up a few points short of our targets from yesterday afternoon:  the red .786 at 1609.30 or the .886 at 1603.98.

UPDATE:  9:40 AM

Just tagged the red .786 at 1609, so I’ll switch to the long side with tight stops (@ 1609) in case the .886 comes into focus.

The shape of the downturn from 1648 suggests a Bat Pattern — which would complete at the .886 Fib level.

Of course, at 1603.98 we should assume that the round number of 1600 would be more appealing.

The purple channel with the best fit on the daily chart is shown above.  The solid red TL just below it is drawn off the daily lows of Nov 16 (1343) and Apr 18 (1536.)  And, the dashed red line is the trend line off the 1994 and 2003 lows.

Needless to say, channels get redrawn all the time as markets overshoot by a few points here and there.  This could be one of those times.  But, the first step in a market that’s turning is the establishment of a slightly flatter channel slope.  Stay tuned.

UPDATE:  10:00 AM

SPX has broken through the white channel midline but is coming up on the critical purple channel bottom (previously support, now potential resistance) which is in close proximity to the red .618 Fib level at 1617.51. We’ll watch for any signs of weakness here, as a reversal would likely mean a quick trip to 1600-1604.

UPDATE:  10:06 AM

Running into resistance here just below the intersection mentioned above.  I’ll likely open a short position with any sustained fall through the white channel midline.

It would be a more compelling trade if it came at the top of the white channel or the bottom of the red or purple channels.  But, midlines can make for nice reversals, too.

BTW, here’s the situation with the USDJPY.  We’ve been watching this pair closely for the past couple of weeks as there’s a high positive correlation between it and the US equity markets.

First, the channel picture.  The falling blue channel is a pretty good fit except for the lows in 2010-2012.  Otherwise, its midline accounted for at least a dozen reversals and its top and bottom signaled several highs and lows.  We’ll come back to it in a moment…

We’ve been tracking the purple acceleration channel in the lower right corner of the chart that faithfully guided the pair higher since September 2012.  It failed on Jun 5.

Since then, the pair retraced .886 of the rise from the April low of 92.56 and — just today — bounced off the midline (the dashed line) of that channel from the 90’s.  No guarantee it’ll stay “bounced”, but this is potentially a very big deal and potentially quite bullish for stocks at a time when seemingly the whole world is waiting for a collapse.

UPDATE:  10:46 AM

SPX just reached the bottom of the purple channel where it intersects with the falling white channel.  It will also complete an A-B-C corrective wave where A=C at 1620.77.

I’ll play a short position here at 1618.40 with stops at 1620ish.

This might just be a reaction to the channel bottom, but the red .886 at 1603.98 is still out there.  If we push up through the purple channel, I’ll gladly revert to the long side.

UPDATE:  11:05 AM

Nice reaction so far.  It’s too early to say how far this dip might go — if at all — but even a .786-.886 corrective wave would take SPX back to 1609-1610 and make for a nice 1-1.5% day.  [I like big moves as much as the next guy, but 1% daily, 3-5% weekly is a great return over time.]

The potential Bat Pattern is shown below in red. Note that Point B came at less than a .618 retracement, which is required under the rules for Bat Patterns.  Though, as we’ve pointed out before, a .786 retracement is perfectly normal for corrective waves.

UPDATE:  11:55 AM

We have a nice little rising wedge forming on the 5 min chart.  But, these do break out instead of down about 1/3 of the time.  And SPX is back above the purple channel bottom and white channel top.  So, the odds of a decline are diminishing.

I’ll give the short position a little extra leeway up to 1621, the .886 of the decline from 1622.31, before pulling the plug.  There’s a competing bullish pattern setting up as well: an Inverted Head & Shoulders Pattern (IH&S) targeting 1640 (shown below in yellow.)

UPDATE: 12:35 PM

SPX just exceeded the white .886 and the 100% extension of A-B — not to mention the purple channel bottom and white channel top.

I’m closing my short position and reverting to long here at 1620.

The first hurdle for bulls to overcome is 1622.92 — Tuesday’s low.  And, remember, every reversal at a .786 Fib is a potential Butterfly Pattern.

They complete at the 1.272 or 1.618 extensions, meaning 1584 or 1567.  It’s a possibility that doesn’t go away until SPX clears 1649.

NOTE: I’ll be sending out an update on the Fund after the close to members who have expressed an interest.  If, for whatever reason you don’t receive one, please contact me to be placed on the list.

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