ORIGINAL POST:  9:30AM

The dollar and the euro each overshot our short-term targets just a tad, but are resuming the path we mapped out for them last week.

The EURUSD came very close to a key .886 Fib level, prompting many to wonder “was that it?”  I wasn’t so sure, myself.  The resultant sell-off was pretty convincing, taking out the previous low.  It reversed as we expected it would overnight, and appears to be taking a run at 1.2588.  If it can break that level, it would complete a measured move to the .886 at 1.2617.

The dollar, meanwhile, bounced hard off the channel midline as expected, and has resumed its decline towards the 1.272/.5000 at 80.83 – 80.88.

Each of them is at a smaller degree .786 or so, meaning they’re due for a pause here.  And, if they can’t seal the deal with a higher high (euro) or lower low (DX), then the party’s over sooner rather than later.

But, I’m still operating under the assumption that we’ll get one last push in this corrective wave before things come undone at Jackson Hole.  I have yet to see any serious trial balloons regarding an imminent QE announcement.  While not necessary, I would expect the very political Fed to do so, especially given the diatribe coming out of Tampa this week.

If DX and EURUSD are only in a corrective wave, can SPX break out to new highs as we wondered last week?

continued…Given that we reversed at the .618 yesterday, there’s a very good chance that SPX will bag the .786 at 1420 or the .886 at 1423 (below.)

This is the little pattern that sits atop the leg up from 1266 to 1426.  It might well be the last gasp, or it might be the springboard to one last high.

The fact that SPX is still lurking around the fan line from 2007 is indicative of the market’s indecision. The daily RSI is likewise still clinging to a TL of support.  It’s exactly the same slope as the previous TL’s of support that, when violated, resulted in some pretty substantial sell-offs.

Here’s a close up on the 4-hour chart:

The harmonic grid 2 charts above shows the presumed rising wedge from inception to apex.  Note that the .786 in time is on Sept 13 — the day after the German Constitutional Court is supposed to render a decision on the ESM, and the day Bernanke speaks following the next FOMC.  So, it’s not hard to imagine that time frame being incredibly important to the market’s direction.

UPDATE:  2:00 PM

The markets are back to where we started today.  In trying to read the tea leaves, I’m watching a few charts on the shorter end.  In this chart, RSI seems to be catching support at the red TL.

If so, we could expect to see some upward movement in the channel below.  This kind of action begs for a catalyst, though, and I don’t know what that would be — short of a positive preview of Jackson Hole or a horrible economic data point that would aid the QE argument.

The daily chart we’ve been building for months shows the potential for upside if TL #6 holds.  If/when the market tops (if it hasn’t already at 1426), I expect to see some real negative divergence — which is common at important peaks.

For those unfamiliar with the term, it would involve a higher high on the index, concurrent with a lower high on RSI.  Ordinarily, they move somewhat in lockstep.  But, when things get out of balance in either direction, the daily RSI is usually the more reliable gauge of direction.

In this case, a high of say 1433 or 1451 might correlate with an RSI that peaks at TL #3 or #2.  The dashed purple line originates at 78.8 in October 2006.  Since then, it’s been all downhill.  If the other TL’s were to fail, this TL should offer formidable resistance.

UPDATE:  3:00 PM

BTW, this morning’s brief sell-off helped establish a pretty decent looking channel to the upside.  Seen here on the 30-min chart:

At this point, it ranges from 1408 to 1422.  1420.55 is the Fib .786 of the 1426 to 1398 drop.  And, 1423.42 is the .886.  It won’t be in range until tomorrow about 11am EDT.  As discussed earlier, the fact that we reversed at the .618 of 1415.74 leaves both patterns on the table — the .786 as a Gartley Pattern and the .886 as a Bat.

Remember, either of those two patterns can extend.  The Gartley’s .786 can become a Point B in a Butterfly that extends to the 1.272 (1434) or the 1.618 (1444.)  The Bat’s .886 would normally extend to the 1.618 (1444.)

For either of these patterns to play out, though, SPX needs to push through the dashed red trend line descending from the 1426 high.

*  *  *  *  *  *  *  *

As we shuffle along towards Jackson Hole, I can’t quite get lemmings out of my mind.  Is that a field of clover we’re rushing toward, or a cliff?  QE3 is all anyone’s talking about this week, but I still can’t imagine the Fed playing this important card until it has no other choice.

From a technical standpoint, here are clear paths in either direction.  If they do, or even hint strongly enough that it’s coming, my initial targets are 1433 and 1451 (then 1464 and 1472.).  If not, the market will tumble — with targets starting at 1380 (then 1350 and 1300).

I focus on the “initial” targets, because much of what happens afterward is also subject to manipulation.  If the news is “bad” and the market sells off, at some point BB will go on the air and explain he was just kidding.  When he does this is anyone’s guess, but I would imagine they’d want to keep the rising wedge intact.

If the news is “good”, how long will it take for the markets to run out of steam?  There are numerous harmonic targets that we’ve identified before [link here.]  And, how long until prices at the pump and the grocery store — already sky high due to the drought and Middle East tensions among other reasons — begin to alarm consumers?

This morning’s consumer confidence report already shows a drop from 65.4 to 50 (versus expectations of 66.)  I guess higher prices is one way to increase spending — albeit with a rather nasty boomerang effect.  And, if inflation should become apparent, how long until higher interest rates — the kiss of death to the entire crap game?

It’s perhaps appropriate that the iconic scene of lemmings throwing themselves off a cliff in a suicidal version of follow-the-leader was also manipulated.  In the 1958 Disney documentary White Wilderness, the filmmakers reportedly flew thousands of lemmings from Hudson Bay to Calgary where they were thrown over the cliff for dramatic effect.

If central bankers do “save” the global economy in the coming weeks by enacting QE3, it will no doubt be heralded by the media as a brave and noble deed.  For anyone with any foresight, however, it’s obvious this is just one step closer to the cliff.

UPDATE: EOD

Re the smallest harmonic patterns we’re watching: DX has retraced .886 of its rise from 81.22; EURUSD has retraced .886 of its decline since 1.2588.  This would be a perfectly natural place for them to reverse and resume their primary trend — which is up for the dollar and down for the euro.

But, if they can keep their harmonic pattern alive, the resulting targets would be the 1.618 extension for a Crab Pattern.  DX should head up a bit now, and top out shy of 81.83 — probably around 81.56.   The resulting Crab Pattern target would be 80.83 — the same as the larger scale 1.272 and .500 levels.

EURUSD should ease to somewhere north of 1.2464, ideally around 1.2518.   The Crab target (the 1.618) would be 1.2655, though the 1.272 at 1.2622 lines up better with a larger scale .886 of 1.2617.

More later.

UPDATE:  9:50 PM

Earlier this afternoon, I ran into a friend (and member here) who was trying to develop a strategy for the rest of the week; we got to talking about various approaches.

I know I wrote this numerous times last week, but it bears repeating: if you’re not a gambler, stay out of this market.  In the short-term, it’s just too dependent on what Bernanke says (or doesn’t) on Friday.

I blog every day about what I see and what I think.  As always, I have an opinion as to what will happen (see above).   But, right now, my confidence in my opinion being right is a lot closer to 50% than the 70% I shoot for.

I have no special insight into what Bernanke is going to do.  So, unless something really weird happens in the next two days, I will have at most a very modest bet in place when Bernanke starts talking.

Ever since 1426, trading SPX has been very high risk.  First, 1426 didn’t really match up with any patterns; 1422 or 1433, sure — but not 1426.  I saw a few Elliott Wave guys get it right, but that’s about it.  So, it wasn’t clear it was the top (still isn’t.)

Second, every one of the past 16 sessions has traded within 10 points of the fan line from 1576 in October 2007.   Thirteen have actually touched it, and 5 have straddled it.  Fan lines are extremely important, and the fact that the market can’t make up its mind is very telling.

Third, the cost of being wrong could be substantial.  I’m working on a forecast that covers a range of outcomes, but SPX could easily move +50 or -50 in a matter of a day or two — depending the what the news is and how well it’s delivered.

Looking back over the years, the worst trades I ever made came from being invested at a time when I wasn’t very sure about the direction, but had enough of a hunch to stay invested.  Sometimes these even work out, which is dangerous (it only encourages more hunch playing.)

I’ve learned the hard way that it’s perfectly all right to be on the sidelines.  Sometimes, it’s the only sensible approach.  Although illogical from a mathematical standpoint, in my  opinion losing money sucks more than missing out on an opportunity to make money.

So, unless there’s a great straddle (currently 5.10 ATM on SPY) or volatility trade that makes sense, this is one of those times.  I’m still long from 1409, with an objective of 1420-1422 and a stop at the fan line around 1405.  I’ll continue to take stabs at the intra-day stuff for those who like to day trade.  But, if nothing substantive happens in the next few days, I’ll be market neutral (and sleeping soundly) Thursday night.

GLTA.