Short, my friends.

Though ES climbed back into the purple channel by the end of the day Friday, it has since stayed in line with the falling white channel.

UPDATE:  9:34 AM

We’re getting a bounce here at the former 1687.18 high, so I’ll play the long side with tight stops (1686.75ish.)   I don’t necessarily expect a breakout, but it’s the logical play.

The USDJPY has reached the purple channel midline as we discussed and should get a bounce here at 97.62.  Though a drop through it would also drop the pair from the white channel, which would target the yellow midline and H&S neckline at below 95.

EURUSD reversed at the white .786 almost where it intersects with a falling channel top. The .886 at 1.3339 looks to be next up unless the purple channel line and narrow acceleration channel fails.

UPDATE:  10:15 AM

SPX just stopped out at 1686.75, back to short with target of 1680-1683 and stops at 1688ish.

Bears are chomping at the bit, and bulls are likely thinking IH&S — the theme behind the bullish scenario on the above chart (last Thursday’s forecast shown in purple.)

UPDATE:  11:20 AM

SPX has reached our initial target area (1680-1683.).  The bottom of the red channel is just below at 1678-1679, but an IH&S from here would be well formed.  Watch your stops.

UPDATE:  11:30 AM

Should get a bounce here at 1682 — the .618 of 1676 to 1691.  Normal bounce should be to the last channel line at 1685ish.  But, keep your eyes open for any higher.

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June worked out very nicely for our strategy: +26% versus -1.7% for SPX.  This brings Q2 2013 to 53.56% and ytd 2013 to 76.99%.

We continued to play things rather close to the vest with tight stops and very few overnight positions.  June continued the market’s practice of adding more than all of its net gains via ramp jobs.  Without the gains made in the first hour of trading following overnight ramp jobs, June would have dropped over 8% instead of posting a more modest loss.

June far outperformed our average month returns of 10-11%.  I attribute this to a rather predictable correction to the bottom of a well-defined channel where, as expected, SPX bounced and continued its march higher.

How predictable?  The first bottom made at 1598 on June 6 at 1598 was pretty much what we forecast on May 21.  An on-the-fly adjustment made on Jun 20 to accommodate the lower lows came in handy, too.

While I welcome these kinds of months any time, we should consider them outliers and not become accustomed to them.  Here in July, for instance, we again face the question of whether the markets might make new highs.

That same issue throttled performance in January and March of this year when we posted returns of only 4.5% and 8.3% respectively.

As we’ve discussed before, the flip side of not holding positions overnight is more trading.  Beginning each day in cash, we are likely to take a position on the opening bell, play a reversal or two intra-day, and go to cash again at the end of the day — which translates into 4-6 trades per day.

This isn’t a lot for day traders, but it’s hardly ideal for swing traders.  I will continue to try and find the right balance between the two.

Thankfully, our results continue to come in without undue volatility.  Our largest single losing trade during the month was -0.93%, which was almost completely offset by concurrent offsetting trades.  And, we have yet to experience a negative month or even week.

Again, there are trade offs.  We were able to limit losses by using tight stops and not holding positions overnight, but it meant a greater volume of trades.  In my estimation, it’s a reasonable price to pay.  But, I recognize that this won’t necessarily be the case for everyone.

As we approach the startup date for the hedge fund, I have to make certain choices regarding risk and return, volatility and activity, etc.  My intent is to make choices that will be compatible with the average investor’s needs and competitive with other hedge funds.

In HedgeCo.net’s universe of approximately 1300 funds, for instance, only 13 funds have never had a negative month.  And, of those 13, none comes remotely close to our performance figures.  Our 77% YTD through June would land us in 4th place overall; and, our 15 months of returns (approximately 175%) would land us in 12th place compared to the top funds ranked by their 36-months returns.

None of this is to say we’ll be able to continue on such a streak.  As you will no doubt read many times in the documentation, past performance is no guarantee of future results.  But, enough of you have indicated interest in the fund that I feel we must be on the right track.

I have been rather deliberate in preparing for its launch.  This past week was fruitful, as I finally found great office space that should be very convenient.  I have made similarly exciting finds regarding service providers, technology, and business partners.  I appreciate your patience as I work to ensure a smooth transition.

A quick note about the fund:  I will offer only 100 slots initially.  If most of you who have expressed interest in the fund actually subscribe, then the majority of those slots will be spoken for.  Those current annual pebblewriter.com members who subscribe in the initial period (probably Sep 15-Oct 15) will be given first priority, as well as a 10% discount on their fees.

After those slots are spoken for, I will open the fund up to others.  I don’t know how long the second period will be, but I intend to stop accepting new subscriptions once the total fund size reaches $100 million.  The fund may continue to grow, but it will be through existing investors and performance rather than through new sales.  I will probably do one last membership promotion for pebblewriter.com in the next day or two, so pass the word if you know other folks who might be interested.

For those of you who are not accredited investors, I am exploring alternative structures — possibly registered — that will accommodate you, too.  I will pass along details as soon as I am able, but my plan is to get going on it as soon as the fund is well enough along.

If you’re not yet on the mailing list for fund information, click here.

 

 

 

 

SPX didn’t quite reach the .786 target I had picked out for it yesterday because the emini got to its first.  ES then bounce exactly to the .707 at the top of the channel we had been tracking and reversed, putting in a perfectly placed right shoulder for a H&S Pattern that, if it completes (1673ish), targets 1647.

ES is now backtesting the intersection of the midline of the falling white channel and an important long-term channel line at 1678.  If it holds, the H&S should complete.

Good time to be short — especially if 1673 falls.

The other drama is with the USDJPY, which completed the little H&S we looked at yesterday morning and is threatening to lose support at 98.26 (hint: it will.)

This would be a very bearish development as 98.26 is the pair’s best shot at maintaining the Crab Pattern (white) that would break it out of the falling white channel.  It’s already broken below key yellow and purple channel lines but is approaching potential support at the purple midline at 97.63.

If the purple midline falls, it’s all the way back to the yellow midline — probably at the .786 (95.45) where the white midline and yellow midline intersect around Aug 25.  Of course, that would complete another H&S Pattern, wouldn’t it?

Surely, the Japanese know this and are furiously buying dollars to keep the magic alive.  If they fail, a trip to 85-87 might be in cards.

And, given the pair’s very high correlation with SPX (below in purple), this would hardly be good for US equities…

…which, so far, are pretending not to notice that they’ve fallen out of step with the pair.

As I wrote that last sentence, the pair broke through 98.26.  Next up, 97.65, then watch out below.

As for the dollar itself, it is likely to reach the .786 at the falling red channel (81.546) or the .886 at the rising red channel bottom (81.111.)

I have to get on the road shortly, but it’s appearing more and more likely that we’ll likely reach our downside target after all.  SPX completed a H&S yesterday (in red, below), but bounced hard and didn’t come close to closing below the neckline, which is required for confirmation.

I suspect it will do the same thing again today.

It’s working on a new one (in purple) that would target 1662ish.  All we’d need is a close below 1678 on the day.

I think it’s likely we’ll reach not only the .786 at 1677.61, but probably 1674.91 too.  I’d take profits on my short position at either one if the market is firming up, but anyone taking a long position should be careful around that 1671.84 support.

And, if 1680 holds, I’d have stops on the short position around 1683 — the purple channel line.

I’ll check back in later if I get the chance — probably around 2-3PM.  GLTA.

 

 

 

The futures are pointing toward a 7-pt drop on the opening, which would take SPX to the .786 Fib (1677.61) we identified as our initial downside target yesterday.  We remain short from 1698 on Tuesday, but will look for a bounce there.

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The eminis are up 5 pts overnight, but so far have produced only a completed Bat Pattern rather than a new high.

The dollar is possibly breaking out of its falling wedge — though it’s too early to say for sure.

The EURUSD has formed an interesting looking rising wedge and is coming up on a Gartley at the white .786 (not to mention a channel intersection.)

And, USDJPY continues to stave off multiple H&S Patterns…

…with the bounce on its latest neckline Monday setting up a fractal of the Jul 5-18 Gartley Pattern.

H&S Patterns aren’t always that reliable in currency trading, but it’s interesting that the target of the latest pattern (in the right shoulder of a much larger pattern) is the yellow channel midline back around 96 — which would spell the end of the rising white channel and complete the much larger pattern that targets the white 1.618 at 85.66.

Indications are that SPX should reach its own .886 (1697.91) on the open.  But, no signs of follow through just yet.

I’ll hold short unless we get a push through 1700.

UPDATE:  9:32 AM

SPX just tagged its own .886, so should be done here at 1698.38.

Bears now need a drop below 1691 to officially break the rising pink channel (and purple midline.)

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NYA features some of the best-formed channels of all the indices.

It’s helpful because, when it comes to harmonics, NYA usually dances to SPX’s tune.  One recent notable exception was on May 22, when NYA completed its big Bat Pattern.

NYA reversed at the .886 of its crash from 10,387 to 4,181 (Oct 2007 to Mar 2009) — providing excellent confirmation for our call for a top for SPX at 1687.  It performed the same duty in May 2011, Mar 2012 and Sep 2012.

What should we read into the fact that it has now rebounded to the May 22 high?

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The S&P 500 has one foot in the 1600’s and the other reaching for the 1700’s.  I’ll play along on the long side on the opening, but am still looking for a reversal — probably at or just above 1700.

ES is finally trading above its own double top, but is running into a channel midline that should provide resistance around 1695.

The dollar has found support at the .618 we pointed out yesterday but hasn’t yet broken out of the falling wedge.

And, the EURUSD continues to waffle.

The USDJPY fails to break out again (43 sessions since its May 22 high)…

…and continues to run into trouble on the daily RSI chart: now stuck beneath another channel line (red .75.)  If it loses the white midline, there’s a very good chance of the H&S playing out (price chart) without the purple .886 tag (D, above) first.

Summing it up, all the stars are aligned for a pullback here — if SPX will cooperate.

UPDATE:  9:36 AM

SPX gapped up to the small scale (red) 1.618, which forms a nice little rising wedge tag just shy of 1700.  I’ll drop the long position and go full short here at 1698.

BTW, I have recently updated the RUT, COMP and NYA charts for anyone who’s interested.

UPDATE:  1:15 PM

SPX just broke through the midline of the small falling channel at 1694.  If the downside momentum from this morning’s reversal is to be maintained, this rise should be limited to the top of the channel: 1696-1698ish.

While we’re waiting to find out whether the decline sticks or not, let’s take a look at the current forecast and the interesting next few weeks ahead of us.

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RUT recently completed multiple Crab Patterns in the 1026-1039 range.  We discussed this cluster of Fib levels as an important target range in our May 13 update on RUT.

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COMP recently tagged the .618 retracement of the decline from 5132 to 1108.

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The markets continue in limbo, as Friday’s after-hours ramp didn’t hold up (for a change) and currency markets continue to vacillate.  DX is pushing toward a potential reversal and resumption of its uptrend at one of two .618’s…

…while EURUSD, having bulled its way back into the purple channel, tries to convince us that it’s on the rebound.

USDJPY continues to flirt with a couple of H&S patterns that could accommodate a move up to the .886 if need be.

The eminis pulled the usual nonsense after the cash markets closed Friday, spurting a couple of points after the close and another few on Sunday.  But, by this morning, all of it had been unwound.

SPX tagged along for a nanosecond this morning, but has since settled back to flat on the day — probably waiting for the existing home sales data (10 AM EDT) for some direction.

As of this moment, there’s a nearly completed Butterfly Pattern at the red 1.272.  It fell .53 shy on the opening thrust, which is probably good enough given the larger forces at work such as the double top we’ve discussed extensively.

UPDATE:  10:05 AM

The NAR existing home sales came in at 5.08M versus 5.28M expectations — a big miss considering it’s seasonally adjusted to begin with and that NAR is well known for huge revisions following inaccurate (cheerleading) initial reports.  This data reverses a 3-month trend of increasing activity and, due to the lag, doesn’t even reflect the impact of higher mortgage interest rates.  Distressed sales continue to make up almost 1 of every 5 transactions.

Past Freddie Mac data indicates sales will continue to slow once the real impact of higher rates is felt in the marketplace.

In the past, prices were knocked back by higher rates, but rebounded when rates moderated.

Though, increases in the use of adjustable rate mortgages were largely responsible for maintaining/regaining price momentum.

There’s no denying that average prices have risen in many markets.  The MSM attributes it largely to an inventory shortage.  I continue to suspect it’s largely a function of activity in the lower end of the price range — mostly from institutional buyers of distressed portfolios. CoreLogic reports about 2 million units still in some stage of foreclosure, and foreclosure filings are once again on the rise.

UPDATE:  11:08 AM

SPX just pushed up through this morning’s high.  I suspect the 1.618 at 1698 — call it 1700 — is in focus.  I’ll take an interim long position here at 1695, but leave our core short in place.

Tight stops (1695) though, as the dollar just tagged the lower of the two .618’s discussed above.