The May 8 forecast for NYA was for the index to plunge from 7815 to 7340.  The forecast worked out well, as Friday’s low was 7286 (a quick 7% return, yay!)  As noted in that update, 7340 doesn’t really match up with any particular Fibonacci levels.  And, it doesn’t intersect with the rising wedge until early August (the highlighted oval.)

I didn’t really see it taking that long to play out, and the market obliged for a change.  It also obliged by precisely tagging the fan line I had drawn off the Oct 2007 top (yellow, dashed) and one of the parallel horizontal channel lines (redrawn as red, dashed line E for emphasis.)

We still haven’t landed exactly on a Fib level, so we either just overshot the .500 or haven’t yet reached the .618 target of  7145.  Deciding which it is presents some interesting questions.

continued…

I apologize in advance for the length and complexity of this post.  There’s a lot going on, and I think it’s worth slogging through it.

First, the .618 Fib level looks to intersect the big red rising wedge at 7145 tomorrow, Monday June 4.  Would it surprise anyone for NYA to continue last week’s bloodbath by tacking on another 147 points tomorrow?  Those who’ve already read the VIX update might recall a slightly higher VIX on Monday would fulfill all our original targets (though we’re already close enough.)

It also appears from the RSI and channel charts I’ve drawn over the weekend that a slightly lower value would be the perfect fit.  It’s tough drawing TLs and channels all that precisely over a period of years, but just eyeballing it, I’d say an intra-day drop would make for a nice fit all around — though the daily RSI tags on that dotted white TL, combined with the positive divergence, argue that we’ve bottomed already.

Like so many charts I’m looking at this weekend, the big question is the euro zone.  How worried are Germany, the ECB, the IMF and the Fed about the possibility of this plunge getting away from them?  I really thought we’d see more rumors and leaks over the weekend, but it’s entirely possible they’re waiting until just before the European or US markets open in order to get maximum effect (less time to debunk.)

You tell me how gutless the politicians will be over the next 24 hours, and I’ll tell you when/where the market is going to bottom.  Luckily, there are some good guides.

The channel line and fan line cited above, like most, are not absolute.  In other words, they are often violated slightly in either direction, particularly in times of transition — which I believe this to be.  Consider the channels on the chart below.

The red, labeled channels are all parallel to A — a significant trend line if I ever saw one (the line we just tagged is E.)   The slightly steeper yellow channels are slightly more contrived, but I think they’re a pretty good fit for much of the price movement we’ve seen.  The highest one connects the three recent tops very nicely.

The ascending red trend lines are all parallel to the channel that produced the 1992-2000 and 2002-2007 bull runs.  The current ones form another channel, the midline (dashed) of which intersected with the ran line off 2007 to stop the most recent advance.

The ascending purple channels are all parallel to the bold line that intersects with A back in 1992.  Note the dotted white TL parallel to these which intersects with the .618 and big rising wedge in the next few days — highlighted in the circle below.

So, if they can’t pull a stick save by tomorrow morning, 7145 looks like a good possibility.  It’s a 2% drop, pretty much in keeping with what’s going on around the world tonight.  More importantly, it would keep NYA from plunging through the fan line off the 2009 bottom (aka the lower boundary of the red channel.)  Surely TPTB know what a break of that fan line means (think SHTF.)

Whether we’ve bottomed, or are about to, the question is whether we’ll get merely a bounce or a new high out of it.  The fan line off the 2009 bottom is significant, but so is the one off the 2007 high.  Together, they form a triangle; but, combined with the prices of the past few years, they form a diamond.

The fan line we just discussed, if broken, would lead to the bottom of that diamond — as we would complete a small H&S pattern.  It’s the small pattern in the right shoulder of the larger pattern below and is highlighted in the oval.

Looking at the close-up, I see a potential target for the next few weeks.  A bounce off the fan/channel mentioned above (the bold, red line in the graph) would likely retrace to the .886 Fib of the 8327-7145 drop.

Such a move would mean a parallel shoulder line as well as a good fit with the oval. Importantly, it also connects with the fan line off the 2007 top — the (only) fan line that’s also parallel to all the yellow channel lines.

From there, who knows?  A break out of a continuation diamond pattern happens 30-40% of the time, while a breakdown from a diamond top occurs 60-70% of the time.  Let’s cross that bridge if/when we come to it.

Keep an eye on the euro, the euro zone markets and the rumor mill.  There’s a lot riding on this, so I think we’ll get the bump we’re looking for.