As vicious as yesterday’s reversal seemed, it was only a fraction of size of the three previous downturns.

• -4.4% over six sessions in late December 2012
• -3.1% over four sessions in February
• -3.9% over five sessions in April 2013

SPX should catch up with the futures this morning, reaching the purple midline around 1632-1633.  We should get a bounce there, but we’ll wait for a clear sign of a reversal first.

The bounces on the way down were only about 5 points each.  Be careful about jumping on just any reversal.  Make sure there’s a compelling chart pattern or Fib level.

I shorted yesterday at 1687, which was as nice a setup as you could ever hope for.  We tried shorting the day before at 1674 [see: If It’s Tuesday], which was the 2.618 Fib extension of the 1422-1266 decline from Mar-Jun 2012 — a big, beautiful Crab Pattern.

But, Bernanke’s remarks sent SPX spiking higher and we were stopped out at 1475.  This opened up the other 2.618 extension we’d been watching: the one established by the 1474-1343 decline from Sep-Nov 2012 at 1686.73.  The chart looked like this:

So, we had the other 2.618 right at the top of the red channel — where it intersected with yet another 2.618.  It was a high percentage opportunity that worked out very nicely — about 3% on the day, and probably 5%+ on the week.

The only hard part is watching the news at the end of the day — the talking heads description of the reversal:  “all of a sudden, without warning, etc. etc…”   Not one of them discussed the red channel or the Crab Pattern!

It also helped that DX tagged our downside target, and EURUSD tagged our upside target at the same time.

 

UPDATE:  10:05 AM

I’m going to assume that the channel midline has been restablished a little higher as a result of yesterday’s throwover and is more like 1635.  I’ll update that in a few…

Taking a long position here at 1640 for what should be a decent bounce.

UPDATE:  10:35 AM

Not quite as much as I expected, but good enough.  I’ll close the interim long position and revert to full short.

My only hesitation is the wave structure.  On the 1-min chart, looks like 5 up, 3 down…maybe need another 5 up for wave C?

Might take another interim long at 1638-1639 if we get more support there.  I’d really been expecting a bounce more like 1557-1558 — the next higher purple channel line and a significant Fib level.

UPDATE:  10:53 AM

I’ll try another interim long here at 1643. But, would rather it be 1637.94.  Tight stops on this – 1641ish.

BTW, I’m not going to tweet these intra-day bounces of 5-10 points.  It’s too distracting for me, and anyone playing them should be at their computer all day, not trying to trade while performing an appendectomy, landing a 787 or even teeing off at Cypress.

UPDATE:  11:40 AM

At this rate, SPX is aiming at 1653.16 as the extent of this bounce.  It’s a .886 retrace of the move down from 1655 (red pattern) and almost .382 of the drop from 1687.

It would also set up a nice falling channel from the top.

UPDATE:  12:12 PM

Just tagged 1653.16 and then some.  I’ll close the interim long here at 1653.80 and revert to full short.  Stops at 1656 just in case it’s focused more on the purple channel .75 line or red channel back-test.

The nice thing about chart patterns and harmonics is they give you discreet measures of correctness.  If we change sides because the market has arrived at a point where it should reverse, but it doesn‘t reverse, then we know we should be back on the other side.  In other words, the market usually tells us whether or not we’re on the right path.

Since the little white channel hasn’t broken down, and it’s always dicey to assume a channel is correct so early on, we’ll watch for signs of this latest call being premature.  Like I said before, it’s not much of a retracement.  There are plenty of higher targets that are quite appealing for a bounce.

The move won’t be confirmed without a drop through the channel bottom — currently around 1450.

While we’re waiting to see, we’ll take a look at where SPX goes next.  First likely stop: 1637.63.  But, there’s a hitch that could spell 1663 instead.

continued for members…

UPDATE:  2:00 PM

Sorry for the lag, had to reevaluate that last statement after the bounce at 1645.  SPX rose back through the neckline of the little H&S pattern (yellow) which kinda confirms something I was thinking.

I’m going full long here at 1649.  There’s a path to the bottom of the red channel at 1663-1667 that makes a lot of sense.

UPDATE:  2:30 PM

The original rising white channel and falling purple channel from this morning are kaput. But, the red H&S pattern, if it completes, could send SPX down to 1635.  So, the downside case is still there.

Now, note the rising red channel that connects the two lows in the chart below.  I’ve also expanded the falling channel from the top and colored it purple.  The intersection of the two is at 1646ish in the next few minutes.  Assuming that this level, and more importantly the 1645.13 low hold, then we might have constructed only the A and B of an A-B-C corrective wave.

The falling purple channel isn’t a lock, but it isn’t a bad fit.  But, what I like best about this possibility is the intersection of so many important elements:

• top of the small rising red channel
• the top of the falling purple channel
• the bottom of the big rising red channel just broken (needs a backtest)
• the dashed yellow trend line from 1994-2002

Note also that the intersection, marked as “C” in the A-B-C pattern, comes at the close or very early in tomorrow’s session — which means one of those lovely hold-or-fold decisions at today’s close.

As far as the big picture goes, the initial motive wave down from 1687 looks like five waves to me.  A rebound to about the .500 Fib would make for a decent A-B-C corrective wave; so, the downside could resume — if it’s going to.

There’s very little enthusiasm to this rebound.  It has the same melt up feel to it as the rally  the past couple of weeks.  But, as we all know, those melt ups can be lethal.

If we get another bounce off the bottom of the red channel at 1649.18 or so, I’ll consider this scenario in play.

UPDATE:  3:44 PM

Looking good so far.  But, beware the latest H&S pattern — in white below.

The question came up in comments below about EOD positioning.  I don’t know if we can tag on 14 points in the final 15 minutes.  But, if we were to close at 1665, it would present an interesting dilemma.

The dollar argues for much lower prices, as it bottomed today at an important channel bottom and an even more important channel midline.  Its RSI looks bullish on all time frames — even the daily.  It already completed an .886 retrace of its last leg up, and is backtesting the broken white channel at a larger channel midline.

I really want to be short at the close. But, I’m nervous about the possibility of one last pop up in the morning.  So, I’ll likely close out and see where we open tomorrow.

UPDATE:  3:49 PM

The little white H&S just completed at 1650, but immediately popped back above the neckline.  It didn’t complete the red H&S, though.  Fakeout.

UPDATE:  3:58 PM

Closing out the long position here at 1651.  I’m really agonizing over it, which is usually a sure sign that I should go to cash and sit on the sidelines for the night.

I’ve felt slightly behind the curve today, just a half step behind.  I try (but don’t always succeed) to pay attention to that little voice in the back of my head at such times: “are you really sure about that?”  I don’t always succeed.

In a less manipulated feeling market, I’d be fine going short based on the dollar chart alone.  But, as weak as the market was yesterday, and as horrid as the headlines were from around the world, the market still managed to close down only 4.84.  At one point, it had regained all its losses.  So, to cash I go.

More later.