While much of my trading is driven by swings lasting only days or hours, occasionally we arrive at one of those critical junctions that’s been years in the making.  For the S&P 500, 1823 is one of those levels.

This is the culmination of a huge Butterfly Pattern, the 1.272 extension of the drop from 1576 in Oct 2007 to 666 in March 2009.  I’ve been watching it for months, as has anyone who takes Harmonics seriously.

The previous significant reversals on the harmonic scale charted above ranged from mild to severe.  And, note that 2 of the 3 came up 10-11 points shy of their projected turning point.

• 17% drop from the .618 Fib level in April 2010
• 22% drop from the .786 Fib level in May 2011
• 9% drop from the .886 Fib level in September 2012

Butterfly Patterns require a significant reversal at the .786 Fib level, and the 22% drop from May – Oct 2011 certainly qualifies.  However, they can extend to either the 1.272 or the 1.618 Fib level.  In other words, the real damage might await us at SPX 2138.

In a heavily manipulated market such as we now have, this turn of events would surprise no one.  Take a nominal breakthrough in the budget deal, pour a little more QE on it, sprinkle in an overnight ramp job or two and we could slice right through 1823 as we did 1576 (the potential double-top.)

If the market does react, however, the implications range from minor (off 5-6% to 1700 or so) to huge.  How huge?

Many investors have seen the comparisons between the current market and 1929.  But, the last major sell-off after completing a Butterfly Pattern was in 1973.  The S&P 500 dropped 48% between January 1973 and October 1974.

While we wait for 1823 to show its colors, I’ll look more closely at the strengths and weakness of this potential analog (see more on analogs and their effectiveness HERE.)

Stay tuned.

ES and SPX are completing a Bat Pattern this morning.  Look for a reaction at SPX 1809.62 — the red .886 Fib level.  Charts in a few…

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Today should be all about establishing a Point B for the final Butterfly Pattern.  The magic number?  SPX 1806.16 (1805.50 on ES.)

How else to explain the market’s euphoria over a taper-quickening jobs report?  This morning’s made to order market “response” sent ES scampering up to nail Wednesday’s target.  And, it’s hanging in there — at least until the pop and drop.

UPDATE:  9:50 AM

We’re seeing a Gartley unfold first, which will lead us to the .786 later in the day.  Look for the IH&S we’ve been expecting to set up after the pullback from 1801.58.

UPDATE:  11:15 AM

Making a slight adjustment to the IHS.  The pullback shouldn’t be all that great, as we’ll probably reach SPX 1806 at the close, leaving latecomer bulls who hold long over the weekend with a disappointing opening on Monday — one last shake down before the climax next week — probably Wednesday.

The eminis are a little trickier.  If they’re to reach their 1.272 at 1837.26, it’ll have to happen overnight or over a weekend.  With an extra 15 minutes at their disposal, they could easily tack on an extra few points to reach the white .886 at 1808.53 today — even if SPX only reaches the .786 at 1806.  If not, Sunday would do nicely.

SPX could also push past to its own .886 at 1809.61, which would be a great head fake as it would signal the 1.618 extension at 1834.  Bottom line, be careful.  If you intend to hold long over the weekend, keep in mind that this whole move is an precision exercise in manipulation.  It has been very carefully crafted to separate you from your money.

UPDATE:  1:50 PM

SPX just reached the .786.  Well…almost reached it.  By coming up just a few pips short (1806.4 versus 1806.16) they can justify a last-minute rally to close at a high point.

UPDATE: 4:25 PM

The day’s high for SPX: 1806.04 versus our 1806.16 target.  For the e-minis: 1806 versus our target of 1805.05.  Close enough for government work.

I have some very interesting charts to post regarding the implications of completing the big Butterfly Pattern.   As mentioned before, there are two versions: mildly upsetting, and leaping- from-windows ugly.   I’ll try to get them posted later this afternoon.

The market’s hanging in there, finding support at the purple midline and a red channel line  after retracing completing a bullish Bat Pattern yesterday. The bulls need ES 1786/SPX 1785 to hold.

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INITIAL POST:  9:20 AM

Between bank downgrades, the ADP report and a raft of bearish analogs floating around out there, it’s a tough day to buy the dip.  But, that’s exactly what the charts, particularly a rather bullish analog, are telling us to do.

Look for the eminis to potentially tag the white .786 at 1782.63 and for SPX to bottom out at current levels (1785.91.)

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The rising wedge is broken and ES is nearing our first target from yesterday.  Have we already topped out?

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The chart of the day:

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I hope everyone is enjoying a relaxing holiday weekend.   Equity markets close at 1PM EST today.

Most of the indices and currencies we watch have been coiling — tracing out triangle or flag patterns this past week.  A break out is now imminent, but it will be a trap.

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Do you love this rally?  Are you ready to throw caution to the wind and plow every last cent into stocks?  If your answer is “no”, you’re in good company.

Triangles are all about indecision.  And, we’ve got plenty of that.  Jumping in at all-time highs feels just plain insane — despite the cheerleading from the boob tube crew.

Yet, there’s a little more upside left — or, so say the harmonics.  We just need to break up through this triangle…and then navigate the mine field of harmonic and channel resistance that awaits.

The important patterns at the moment are:

• breaking 1807 and putting the purple pattern out of business
• breaking through the purple channel midline
• getting past the light blue .886 at 1808
• topping 1809.25.

Since the .886 and purple midline are both around 1808, we’ll keep a close eye on things there.

The dollar’s harmonics suggest a sizable drop to 80.06 or so.  But, there’s the possibility that this counter wave will extend a little further to the channel top before selling commences.

UPDATE:  11:40 AM

ES broke up through the triangle top, reached 1807.50, and is currently back-testing. One word of caution: what happened yesterday with the break above the IH&S neckline could happen again.

The 1798 level has attracted a tag twice now.  A third tag at the white channel bottom later today (the purple circle) would make for a well-formed flag pattern… and, flush out all the weak bulls sitting in traffic or on a tarmac on the way to Grandma’s, secure in the knowledge that their stops will protect them.

UPDATE:  12:00 PM

DX just tagged a TL connecting the last two tops and the purple channel midline. And, the red .618 is just above at 80.819.  A reversal should be close at hand.

UPDATE:  12:25 PM

Interim target?

Another day, another case of whiplash.  The dollar is indicative of the volatility — a downtrend to the white .886 that reversed back up to the .382 before heading lower, right?  After retracing about 101% of Sunday’s low, it reversed and regained the white channel — only to abandon it again this morning.

The EURUSD has been almost as schizophrenic, reversing after completing a Bat Pattern — but failing to break out after the catch at the white .500.

The USDJPY broke out of a very well-formed channel (in white below) a few days ago with an even better-looking channel (in purple), only to put in a backtest that’s a full-on nail biter.

The close-up:

Then, there’s the equities markets…we’ve got dueling H&S Patterns (both bullish and bearish), violated Harmonic Patterns and violated channels coming at us right and left.

This morning’s post-consumer confidence plunge (completing an H&S Pattern) probably had more than a few bulls reaching for the sell button.  But, it stopped .25 shy of yesterday’s low and recovered the neckline in a matter of minutes.

What does it all mean? (continued for members)

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