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Friday marks one-year anniversary of the new pebblewriter.com (I can finally stop calling it that.)  Despite all the twists and turns, it’s been a pretty successful year [see: RESULTS.]

But, I’m always on the lookout for ways to make it better.  So, please take a moment to share your thoughts when the survey hits your inbox.  Thanks.

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It’s hard to believe the folks running the big show in the euro zone could be so stark-raving mad.  Raising taxes on countries with 25% unemployment seems positively brilliant compared to the idea of confiscating 10% of bank deposits — especially those that are supposedly insured.

Get ready for the media interpreters who assure us “it’s only Cyprus” —  which reminds me an awful lot of “it’s only Bear Stearns” or “it’s only Lehman.”

The issue, of course, isn’t the size of the depositor base in Cyprus banks.  It’s the effect this action will have on depositors in Portugal, Spain and Italy.

By now, even the most clueless depositors have to be wondering just how safe their deposits are.  The smart ones already know.  And, the brilliant ones moved their money a long time ago.

This bone-headed action also calls into question the ECB’s willingness and/or ability to support troubled nations/banks.  If they can’t float a lousy $13 billion to bail out Cyprus, how will they react when other, larger systemic risks pop back up?

And, last but certainly not least, what effect will this action have on the $700+ trillion derivatives market?  It’s a spiders nest of complicated agreements whereby one party guarantees another that credit quality/interest rates/etc. won’t slip past a certain level.

These private contracts are bought and sold countless times, to the point where no one usually knows the true exposure of any given player until it’s too late.  When a bank fails, it’s very difficult to discern how many counterparties will be affected.  It quite rightly shakes confidence in the entire system.

Cyprus is a reminder that the euro zone is not “fixed.”  It’s a reminder that much more is needed to fulfill the promise of “whatever it takes.”  And, it’s a reminder that the Fed and the ECB either don’t have as much control as they’d like us to think, or are losing interest in preventing every little hiccup along the way.

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The dollar may have just completed the transformation we discussed at length Friday — reverting back to the risk-off safe haven to which we’re accustomed.

The smallest rising wedge on SPX has clearly broken down and should now try to establish a channel something like the one drawn below. Look for a playable bounce here around the midline between 1543.43 and 1546.

UPDATE:  10:10 AM

We got the bounce at 1545.13.  If the bears can keep the trend going, it should fail before the next higher channel line — currently around 1558 — or the yellow TL up at 1560.  But, of course, there’s no reason it has to be more than 1553.39 (the 1.618 extension of the 1370-1074 correction in 2011) or 1552.19 (the .382 retracement of the move down from 1563.32.)

As legitimate as the little white channel above appears, it’s merely a conjecture.  A pitch.  If Cramer & Co. can convince the average small investor to ignore the implications of Cyprus and embrace a market selling near all-time highs, the channel is proof of the absence of risk in the markets.

It coincides nicely with the midline of the larger purple channel that’s guided SPX’s upside since November.  This morning’s dip looks like nothing more than a successful test of the midline.

Here’s a close-up, showing the tag of the .236 Fib (red) and slight push below the purple midline.  Important for the bullish case: (1)  the white 1.272 is even still intact, and (2) prices are re-testing the 1.618 Fib at 1553.39.

If SPX pushes higher than 1553.39, it reinforces the idea that the Crab Pattern set up by 2011’s plunge from 1370 to 1074 is going to fail (8 points would be a failure.)  If it drops below, then the push up to 1563 can be characterized as a momentary blip of irrational exuberance.

The technical elephant in the room, of course, is whether or not SPX will continue to take a run at the previous high of 1576.  It’s not as though bulls will throw in the towel over Cyprus.  Take the move down from 1563, for instance.

If this bounce from 1545 retraces all the way to the .786 at 1559.66, it will have set up a potential Butterfly Pattern that targets 1575.   Look for the little white channel to turn by the .500 (1554.38)  in order to construct another leg up.

UPDATE:  1:25 PM

Where does this morning’s dump fit in with yesterday’s LT charts from the last post [see: Do or Die]?

continued for members…

It’s now been a week since SPX first reached our 1553-1555 target range.  I’ve been generally short ever since, though we’ve played several bounces while waiting for things to shake out.

The Fib levels generated by the drop from 1576 to 666 provided great guidance for the rebound since March 2009 — with significant downturns coming specifically at the .618, .786 and .886 retracements.

Now that we’ve exceeded the .886, the next Fib level is 1.000 — a double-top.  Like every other major Fib level, there is always the possibility that a turn will occur just short of the expected price (as in Apr 2010 – 9 points shy of the .618 and May 2011 – 11 points shy of the .786.)

There’s also the possibility that a Fib level will offer no resistance at all, as occurred with the .236 and .382 — which provided corrective wave support after they’d been exceeded.

[This margin of error is what makes using harmonics for options trading tricky.  If I take a short position at 1561 and the market slips up past it by a couple of points, I might be out 0.2%.  If I have out-of the-money puts that expire soon, my losses could be substantial.]

In 2007, investors faced the dilemma of a double-top.  SPX had a big reaction at the .236, then smaller ones at the .500, .618, .707 and .886.  As it approached the former top at 1552, the expectation was that it would continue on up and complete a Crab Pattern at the 1.618 of 2037 (not much reaction at the .786, so a Butterfly was less likely.)

But, a minor incident known as the financial crisis intervened, and the run ended after retracing 102.96% of the 2000-2007 crash — 1.495% over the previous high — for a double-top.

You don’t know you’re looking at a double-top until a retracement fails to produce higher highs.  Otherwise, that first wave down might be just a normal pullback on the way to higher highs.  So, we’re often left wondering whether a 2nd wave is corrective or is taking prices up to a 1.272 or 1.618 extension.

This means that the price range between .886 and 1.000 and back down from 1.000 to the .886 is full of potential traps.  As a result, it’s best to stay nimble and keep a close eye on other chart patterns for confirmation.

As the chart above shows, channels are a great tool — but, they still require close monitoring and correct interpretation.

The Jul 2007 high of 1555.9 at the purple channel midline was confirmed by a drop through the purple channel bottom to 1370 in August.   But the bounce went back into the channel and added 206 (15%) points in the next two months.  Clearly, using the purple channel alone wouldn’t have been enough.

CONCLUSION

I don’t know whether SPX will reach 1576 in the near future or not.  It came within 12.47 points — less than 1% — on the 15th.  That was close enough for me to be short, with the expectation that we’ll get a decent reaction from the Crab Pattern completions from last week.

SPX had a large correction at the .786.  So, if SPX were to push up much beyond 1576, a Butterfly Pattern at the 1.272 of 1823.42 would clearly be in the cards.

But, the top of the current channel doesn’t even reach 1823 until June 2015.   And, looking around the world, a lot could happen in the next two years: Portugal, Spain or Italy going south; China’s economy hits the wall, an armed conflict with Iran, inflation jumps, etc.

In other words, if SPX should reach 1823 any time soon, don’t expect it to come in a continuation of the impossibly narrow channel that’s already stretching credulity.

more later…