New all-time highs, yes, but no follow-through just yet…

My working theory is we’re due for a typical double-top pullback. As detailed in yesterday’s post, characteristics of big (95+ points) double-tops since Oct 2007 include:

• average 0.32% overshoot
• peak 5.91 sessions after the .886 tag
• drop 4.5% from the double top high
• almost always retrace to the .886 Fib level

Yesterday’s 1693.12 high, which came 5 days after the recent .886 tag (of the 1687 to 1560 decline), amounted to a 0.35% overshoot.

We remain short from 1692 yesterday, but will be ready to pull the plug should the market decide otherwise.  Today is OPEX Friday, when bullish levitation sometimes materializes out of thin air.

The dollar is taking the new highs in stride.  Recall it was whalloped last week in a well-orchestrated after-hours take-down following the startling revelation (not) that the Fed didn’t intend to raise interest rates anytime soon — all to get SPX past the .786 Fib at 1660.

Since then, however, it has more than held its own — even as SPX has been ramped up another 33 points.  The bullish longer-term channels and harmonic patterns are still in place — though the falling red channel midline could limit any push higher to the .786 (85.47) in the near-term.

UPDATE:  3:10 PM

Pretty quiet day, with the usual ramp into the final hour going on now…

There’s a good chance the small Bat Pattern (red) will complete at the .886 (1692.09) before the EOD.

No change from yesterday’s forecast. We’ll be watching to see whether SPX can break 1687.18 and ES can break 1685.75.  All in all, the market response to Bernanke’s testimony was quite muted — the first non-event in recent memory.

The e-minis are up a few points, but are still lurking in the harmonic waffle zone of .886-1.000.

This morning’s initial claims number was much better than expected — 334K versus consensus of 348K and prior of 358K — leading some to speculate that tapering might come sooner than expected.

This one of those times when the usual seasonal adjustment nonsense (unadjusted was 409K, up 25K) might work against TPTB.  I guess someone didn’t get the memo…

The important Philly Fed survey and the Conference Board LEI are due out at 10AM EDT.  As we discussed yesterday, a big miss on either or both could be especially damaging to the markets in light of the positive initial claims print.

A scenario where the economy continued to show weakness but unemployment remained stable might tie [Bernanke’s] hands in terms of tapering the tapering.

Briefing.com is forecasting a big miss on the Fed survey.   Stay tuned.

UPDATE:  10:03 AM

Philly Fed survey general business conditions printed a big beat: 19.8 versus prior of 12.5 and consensus of 5.3.

I’ll go long on the push through 1687.  Tight stops are warranted, as SPX has only now completed a double top.

 

Given the lack of a meaningful response at the .886 Fib on the 11th and the relatively small reaction at 1684 on Monday, there is still an elevated risk of a larger pullback here — especially since tomorrow is OPEX, which tends to prop up markets that are otherwise ready to fall.

Yesterday, we looked at both bullish and (short-term) bearish scenarios.  Though the push above 1687.18 is indicative of a continued bull market rally, a 5-pt rally isn’t exactly “proof.”

Last week, we examined the 14 large apparent Bat Patterns since the Oct 2007 high of 1576 [see: Time’s Up.]

• 14 previous large Bat Patterns — or at least what looked like one — since Oct 2007
• 4 met the precise definition: most significant reversal at B < .618
• of the 14, avg .886 overshoot was 0.13% (range:  -0.6 to 0.5%)
• of the 4, avg .886 overshoot was .38% (range: 0 to 0.9%)
• of the 14, avg reaction at .886 was -2.1% (range: -0.4 to -5.1%)
• of the 4, avg reaction was -2.5% (range: -0.8 to -3.6%)
• 13 of 14 provided a “2nd chance,” reacting at the double top to below the .886
• 3 of the 4 did the same, average retrace at double top = -4.5%

It’s this last data point that catches my eye, as 4.5% of 1687 is 76 points, or about SPX 1611 — which is almost exactly a .618 retrace of the 1560–1687 rally.

Going back to the data I put together for the Bat study, 12 of the (now) 15 Bat Patterns studied went on to make a double top reasonably soon after hitting their .886 (average = 5.92 sessions, range: 1-11.)

The average price at which the double top completed was 0.32% higher than the previous top (range -0.18% to +1.31%.)  The reactions that occurred after the double top ranged from nil to -19.7%, with an average drop of -4.3%.

Now, again, all this is not to say it will happen this time.  But, an average response after reaching the 1687.18 top would be a 0.32% overshoot (or 1692.57) about 6 sessions after the .886 (it’s been 5 so far) that is followed by a 4.5% decline (1611, the .618 of the 1560 to 1687 rally.) 

Just saying…

SPX is about to complete a small Crab Pattern at 1692.34, so keep your stops where you’re comfortable.

UPDATE:  11:23 AM

We’re getting a small reaction here at 1692.  I’ll take a short position and see if we get merely a backtest of 1687 or something more.  Stops at 1694ish.

UPDATE:  1:24 PM

SPX just tagged 1687.18, so I’ll take profits on the short position and revert to long — with tight stops in case there’s more to come.

There’s no evidence yet of lower prices to come. This has been a very orderly backtest.  But, you never know (OPEX and all.)  Bulls will need a break back above 1689.25 to break the little falling channel from 1693.12.

Bears will want the bounce to fail there and drop through 1687 — which is where I’ll entertain a short again.  Note that the .886 of the drop from 1693.12 to 1687.1 is 1692.44 — which is also the 1.618 that triggered the short position earlier.  It makes a nice target for a bounce, no?  Just need to get through the red .786 channel line at 1691ish.

UPDATE:  2:50 PM

Shorting SPX here at 1691.

It probably seems a little wishy-washy, but we just completed a backtest of the red .786 channel line discussed above — and a backtest of the .75 of the little channel I hadn’t shown before (above in purple.)

It’s not that I’m worried about bagging the whopping 4-pt gain on our last long position; but, consider today’s move in the context of the data presented earlier:

• today’s high = 1693.12, a 0.35% overshoot versus 0.32% average
• today’s high came 5 sessions after the .886 versus average of 5.91
• almost every double top has retraced back to the .886 (1672) or more, especially if — as is the case here — there was very little response there in the first place
• the red channel midline is currently crossing the .886 at 1672
• the 50-period SMA on the 60-min chart is at 1672
• the average drop for big double tops is 4.5% or 1611
• the .618 retrace of 1560-1693 is 1611
• the SMA 100 should reach 1611 around next Tuesday
• the broken falling white channel intersects with the purple channel .236 on Tuesday
• someone please explain to me why we should make new highs after tapering — the single biggest threat to the bull market — has been confirmed multiple times

There’s more, but you get the picture.  I’ll gladly suffer the told-you-so’s next week if SPX is trading at 1772 rather than 1672 or 1811 instead of 1611.  I’ll close my short on any thrust through 1695, no harm done.

UPDATE:  3:45 PM

Chances are nothing will happen until after OPEX this Friday.  But, of course, a drop back through 1687 would be short-term bearish.

While I’m thinking about it, I will be out of commission after the close today and again Monday after about 11am EDT, back in the saddle on Tuesday.  Here’s a peek at the current 60-min chart.

Though I might regret it, I’m riding my shorts into the close — not recommended for those who can’t trade and/or hedge after-hours.  Stops around 1695 probably make sense.

GLTA.

 

 

 

 

 

 

 

 

No surprises in Bernanke’s prepared remarks…  The housing recovery…isn’t.  A very predictable earnings report from BofA…  Naturally, the eminis are up 6.75.

Might as well play the upside, but be prepared to duck out at 1682-1683.

UPDATE:  9:35 AM

Just tagged 1683 – the .886 of yesterday’s mini-decline from 1684.51.  I’ll take a short position here, with stops at 1685.76.

We’ve analyzed the channel from 1538 to 1687 in April-May many times.  There are two basic ways to draw it: (1) connecting the tops – shown below in red; and, (2) connecting the bottoms – in purple.

As we’ve discussed, the latest channel rising from 1560 on Jun 24 features roughly the same slope as the channel from Apr-May.

It matches the purple channel slope best, but does so by virtue of its tops rather than its bottoms.

To me, this implies that the current purple channel is likely an acceleration channel within the primary channel: the red one.  In other words, look for the current purple channel to break down at some point and the red one to take over.

At present, the bottom of the red channel is around the white .618 at 1638.72 (very close to the SMA 50 at 1637.) I suppose Bernanke could say something shocking enough to produce a 44-pt plunge — but, I think he’s a little more savvy than that.

Other potential targets includes the white .786 at 1660, which intersects with the red channel bottom next Wednesday, and Jun 18 high of 1654 (next Tuesday.)  This second target looks to me like the best bet, as it’s also the intersection of the rising white channel .382 line.

While we’re waiting for Bernanke’s testimony, I’ll post some charts explaining how this fits with my potential scenarios for the remainder of the year.

continued for members… (more…)

It’s so odd to wake up and not see the eminis up 5-10 points overnight.  Most markets continue to be rather subdued as we all wait to hear what Bernanke has planned.

SPX hasn’t yet broken its 1687.18 high.  Although I suspect it will eventually, it will have to show us its intentions.  For now, it’s showing us that it’s content to wait for whatever incredibly bullish comments the Bearded One will deliver tomorrow.  Look for a back test of the .886 Fib at 1672.72 or the channel bottom at 1663 if things get really out of hand.

Last week, markets spiked on Bernanke’s incredibly bullish remark that the Fed was unlikely to tighten interest rates anytime soon.  As we discussed, this was not only not news, it was cover for an after-hours ramp job that shoe-horned the SPX past combined .786/.886 Fib resistance.

Instead of an occasional boost based on important events occurring outside the US, ramp jobs have become the tail that wags the market’s dog.  Like QE itself, they have become necessary to the market’s continued “health.”   As the table above shows, without the points delivered in the first hour of trading following after-hour ramp jobs during Mar-Jun, SPX itself would be sitting at around 1430.

The 120-pt rally from 1560 over the past 15 sessions has featured 9 ramp jobs totaling 126 points.  They are rarely inspired by actual news, earnings reports or economic developments. And, they rarely last longer than is necessary to clear whatever technical hurdle lies in the way.

In the chart below, Fibonacci levels are cleared by ramp jobs 2, 3, 4, 7 and 9.  Channel lines are cleared/saved by numbers 1 and 7.  Downward momentum was arrested by numbers 1, 4, 5 and 6.

Once the cash markets open, they play catch-up (allowing the sale of the previous night’s emini accumulation), and then generally drift about — waiting for the next one.  It has become remarkably cheap and easy to push the market higher… and no one is pushing back.

Not so many months ago, ramp jobs were the exception rather than the rule.  A trader could leave a position open overnight and have have a reasonable expectation that whatever pattern had completed would play out the following day (e.g. H&S patterns, harmonics, broken channels, etc.)

Now, these normally reliable patterns (especially the bearish ones) are routinely busted by the overnight action — driving more traders either into futures or away from the market all together.  It’s yet one more way in which individual investors face increasing risks at a time when many of them — enticed by scintillating reports of the market’s new highs — are considering jumping back in.

I had lunch yesterday with a friend who, as a very successful broker, has recently turned away 15 new accounts from retail investors who have bought into the bullish story line and were ready to roll the dice.

Of course, there’s nothing wrong with making money in equity markets.  Some exposure to equities is a good idea for most investors — particularly those with a long enough time horizon and adequate risk tolerance.  It’s entirely possible the market will continue rising over the coming year.

But, when new highs are built on artifice rather than an improving economy and quality earnings growth, investors should know that the risks of a sudden and severe downdraft are also rising.  Wall Street doesn’t want you worrying about this, of course. Neither do banks, brokerage firms, mutual funds, the Fed, ECB, politicians or the MSM — whose bonuses or continued employment will be determined by their ability to keep advancing the story line.

As a technical analyst, this sort of market makes my job easier.  Patterns that look bullish will probably play out.  Those that suggest a drop beyond the occasional back test or channel expansion probably won’t.

As a trader, this sort of market boosts my returns (preliminary June performance appears to be about double our 10% monthly average.)   My strategy is essentially to take positions suggested by the charts and let the market tell me whether I’m right or wrong.  Any time TPTB’s game plan becomes more easily discernible, it becomes easier (unfortunately, not easy) to make the right calls.

Nothing lasts forever, of course.  Whether by tapering, higher interest rates or HFT, the rally will falter.  If Wall Street thinks it’s tough to get mom and pop investors into the market now, wait until it sells off by 20%.  I was trading options in risk arbitrage names back in October 1987 and can well remember how individual investors fled the markets after the meltdown.

Those who were decimated by the crashes in 2000-2003, 2007-2009 or even the summer of 2011 are understandably nervous about a repeat.  Until the market can stand on its own two feet and string together even a few months of positive returns without games or outright manipulation, they should be.

*  *  *  *  *

UPDATE:  1:30 PM

Who knows whether it’ll be permitted to play out, but there’s a completed H&S Pattern visible on the 15 minute chart below.

It targets 1661.76, which is also a .618 retracement of the last leg up from 1647.66 on Jun 10 and a stone’s throw from the .786 Fib of the 1687–1560 decline.

I’ll take a long position on any bounce back up through the neckline.

UPDATE:  1:39 PM

SPX just moved back through the neckline at 1673.30.  I’ll take a long position here, but keep a tight rein on it in the event that it’s just a back test.

Ordinarily, I’d put the odds of the H&S playing out at 60-70%.  But, the market completely yawned when the pattern completed. And, SPX did just bounce on a channel fib line (the red .146.)  There’s a better looking neckline available based on the 1671.84 low that suggests a shoulder of 1676.68 later today.

continued for members… (more…)

Earnings haven’t impressed.  Economic data has been mixed.   The Fed even talks openly about withdrawing the mainstay of the rally since 2009: QE_n.  So, why does the market march ahead as though everything is just great?

We’ve looked at “how.”  A handful of ramp jobs* over the past four months has transformed what would otherwise have been a 15% loss into a 2% gain.

 

There are two fundamental explanations as to “why,” depending on your level of cynicism: (1) the beneficial wealth effect of higher stock prices; or, (2) TPTB wants/needs the money.  Either way, there is no longer much attempt being made to disguise the blatant manipulation.

Fortunately for us, these same conditions have existed throughout the past couple of decades.  Therefore, we have tools that have been fairly effective at pointing out the obvious and not so obvious paths ahead.  We’ll start with the charts for RUT and COMP.

continued for members… (more…)

The dollar caught a bid at the .236 Fib line of the rising red channel last night.  This also represented the .500 Fib retracement (green) of the drop from 84.595 to 80.615 and, more importantly, the .618 (white) of the drop from 88.90 to 72.86 that began in Jun 2010.

The dollar intrigues me in the way it acts as the canary in the coal mine for all the fear and greed associated with so many markets.

DX spiked as SPX was tumbling towards 1266 in Jun 2012, then again as it initially failed to retake the .786 of the 1422-1266 plunge.

When SPX recovered and went on to new highs, DX plunged — especially when the Fed announced another round of QE in Sep 2012.  It made our top call at 1474 nerve-wracking.  Clearly the markets thought QE would trump the biggest Bat Pattern completion ever!

It spiked modestly when SPX tumbled to 1343 — obviously thinking the drop was manageable.

TRADE UPDATE: 10:44 AM

I’ll take an interim long position if we break 1678 (for protective purposes.)  This is probably just a stop-clearing exercise to weed out weak shorts.  Remember, our target date is Monday.  Core short position still in place.

THE DOLLAR, CONTINUED…

It settled back down as SPX recovered from 1343, but got increasingly nervous as SPX approached 1553/1555 — the completion of the Crab Patterns set up by the 1370–1074 plunge in 2011 and the 1474–1343 correction in the fall of 2012.  DX hit its peak about the same time SPX was testing the previous all-time high at 1576.

I was quite bearish at this point, and can well remember the fear present in the marketplace (for those of us who shorted then, it was more on the greed spectrum.)

DX bottomed in early May as the euro and the yen both slid at the same time and SPX tagged the trend line connecting the 2000 and 2007 highs, reaching an interim high as SPX topped out at 1687.  And, this is where it got weird.

I had shorted at 1687. From an equity fear/greed standpoint, I was looking for a rise in the dollar as the market sold off.  The dollar had just topped July’s 84.25 high.  Having just completed a Bat Pattern in April (purple grid), it was well on its way to completing a Crab Pattern up at 87.66.  Why, as stocks were melting down, was the dollar following along?

The answer came courtesy of the yen, which caught a bid when the USDJPY tagged both the .786 of the 110–75 decline that began in Aug 08 and the midline of a price channel going back forever (yellow, dashed line below.)

As a result, USDJPY broke down from a wicked-steep acceleration channel it had been in since August 2012, spurring an avalanche of short-covering by yen bears.  As USDJPY found channel and Fib support in mid-June, SPX’s rebound from the initial 1687–1598 plunge ran out of steam.  The combination of the two sent the dollar soaring again.

But, when SPX found another bottom at 1560, the dollar kept rising.  From 1560 all the way to 1654, the two rose in lock-step.  I considered this quite normal, as SPX was closing in on the .786 retracement of the 1687–1560 decline at 1560.

Then along came Wednesday and Bernanke’s little chat.  Within a few seconds of the dollar index closing on the ICE, someone started buying up eminis like crazy.  Later, the talking heads would explain that Bernanke had allayed fears of tightening — i.e. raising interest rates.

This was insane, as no one in their right mind ever equated tapering or even ending QE with a Fed directed increase in interest rates.  And, there was no change in the previously discussed plans for QE other than the wording that was, if anything, stronger regarding its end (by the year’s end.)

The emini buying was enough to break through resistance and initiate a marvelous ramp job that boosted SPX to the .886 the following day.

By the time the poor dollar re-opened several hours later, the damage had been done.  It gapped down and has been holding on for dear life.  It found support where it should have, and is waiting to see whether stocks are really going to ignore the obvious Bat Pattern reversal opportunity.

As our study pointed out yesterday, this has not occurred in the past six years of trading.  No other well-formed Bat Pattern of this size has utterly failed to register even a blip at or near the .886.  And, even those that made a very modest retracement reversed from a double top back to the .886.

So, I think it’s worth taking the chance that this is a slight overshoot of a Bat Pattern .886 that will reverse on Monday.  If I’m wrong, and it hits 1687 first, odds are we’ll be even or ahead of the game after a pullback from the double top.

I’ll be updating the forecast Saturday afternoon.

GLTA.

 

It’s here a little early, but this morning should see the end of the rally from 1560 on Jun 24.  Look for the market to top out at the .886 Fib retracement of the 1687 to 1560 decline to complete a Bat Pattern.  This is the higher of the two targets we’ve had in our sights since May 21 [see: If It’s Tuesday] — which was the last time we saw a sharp rally 17-point ramp job on Fed comments that were decidedly not bullish.

The original forecast, shown below, called for a much quicker return to this level from a low of 1600, followed by a decline to 1560.  Instead, we are reaching the interim high after the 1560 decline.  Time will tell how this translates in terms of waves.  But, we should get a sharp pullback regardless.

For anyone short from yesterday, expecting a pullback before this final thrust like I was, the options are to hold and wait it out or play the upside and re-short.  I’ll do the latter.

UPDATE:  9:44 AM

SPX has come to a screeching halt at 1670-1671.  We could still see another point or two, but no doubt there are others who are wondering the same thing and won’t wait to short.

I’m pulling the plug, will revert to a full short position here at 1670.57 w/ tight stops.

Note the dashed line SPX tagged just now at Point D.  This is one of the three trend lines from 1994/2002 we’ve been tracking (445.45 on 12/8/94 and 776.76 on 10/9/02.)  Its yellow cousin is just above at 1685, and the red version is down at 1619.

Note the consolidation that has occurred around each — validating their importance.  A sustained move above the yellow one or below the red one will tell us much about future prices.

Also, an update to yesterday’s ramp job tally: this morning marks the 11th ramp job for 10 or more points since the 1687 high on May 22.  The S&P 500 might be down 16 points since then, but without those ramp jobs it would have been far, far worse.

My back of the envelope calculations:

UPDATE: 2:36 PM

The eminis just completed its own Bat Pattern, so SPX should be free to reverse now.

Obviously, Bat Patterns don’t always produce meaningful reversals.  That’s why we use stops.

But, the nice thing about them is that they occur at the .886 Fib.  So, if they bust, a double top — another shot at a reversal — is only 11.4% (of the decline) away.  In this case, if 1672.72 doesn’t produce a reversal, the previous top of 1687.18 is only 15 points away.

I’ve spent the last several hours looking at the 12 significant Bat Pattern over the past six years. I limited the study to those of 95 points or more which involved a reversal off a decline rather than a rally.  Both are legit; I just wanted to see what recent history said about situations like the current one.

To review, a Bat Pattern involves a drop from one significant point to another.  They should be at least meaningful interim highs/lows, though this is obviously subject to interpretation. They are shaped like a big “W,” with the height of the right side only 88.6% of the height of the left (from the very bottom.)

The trick with Bat Patterns is the Point B.  It must come in at less than 61.8% of the initial drop from X to A.  If it’s greater than or equal to .618, you’re probably looking at a Crab Pattern which finishes at the 1.618 extension (or more.)

One common problem is deciding which reversal to label as Point B.  Here, there are no absolutes; but, my practice is to choose the greatest reversal to date.  In the current case, that came at 1626 on Jul 1 at roughly the .500 Fib.  It was only 22 points, but there are no other candidates as large since the 1560 bottom.

BTW, we could have chosen the Jun 18 high of 1654 as the origin.  The 1626 reversal would be at its .707 Fib, which means it could not be a Bat Pattern.  The pattern from 1687 to 1560 qualifies perfectly.

I’ll publish the actual data after the close. But, the bottom line is that of the 4 patterns that actually qualified (B<.618), every one of them posted a reversal within a few points of the .886.  The extent of the reversals:  44 points (2/11/11), 61 points (5/2/11), 106 points (8/31/11), and 130 points (10/11/07.)

The last one is the biggest pattern on the chart that represents the 88.6% retracement of the drop from 1576 to 666 that began on 10/11/07 and finished on 9/14/12.

The Bat Patterns that “busted” weren’t really Bat Patterns.  They featured either a Point B that exceeded (even slightly) the .618 Fib or a much bigger reversal at, say, the .786 Fib (indicating a probable Butterfly Pattern.)

But, of those that did “bust,” a reversal at the double top occurred in almost every case — typically down to the .886 or more.  The result of this, of course, was another chance to break even.  So, even someone completely asleep at the switch, who shorted at the .886 but did nothing as it climbed up to the 1.000 typically saw a reversal back to their entry point.

As I wrote back in December 2012, as SPX was leaking up past its .886 retracement of 1474-1343, the gap between the .886 and a double top is the most challenging area for harmonics traders.

SPX tagged 1676.60 a moment ago.  Is it a slight overshoot (not uncommon) of the .886?  Or, is it a double top, instead?  If it tops 1687, will it stop at a double top, or is there more upside to come?

Given the acceptable form of the price movement up from 1560 and the channels at play, I’ll stick by the Bat Pattern call.  If it closes at 1677 and they ramp it up again tomorrow, my downside is probably another 10 points, which I should be able to recoup in the likely event it reverses at 1687.

I’ll take a quick break after the close, and be back within the hour to post the study data as well as a revised forecast for the next few months.

continued for members… (more…)

FOMC minutes will be released at 2PM ET today.  Some see the minutes as an opportunity to get a behind-the-scenes look at the real Fed agenda.  I see them more as a tool the Fed uses to communicate what it wants the market to hear.

Bernanke has already stated, and reiterated, that some tapering will likely begin “later this year.”  From June 20:

“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year…

…we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”

SPX traded at 1654.19 on the 18th, and subsequently fell more than 100 points on fears of tapering.  Yesterday, it traded as high as 1654.18.

It is possible that the “random walk” of 500 stocks — reflecting the collective wisdom of both bullish and bearish investors, discounting the present value of future cash flows, etc. — just happened to come up one penny short of the previous high.

But, I think it’s more likely that TPTB have a very specific game plan in mind.  The trick, as always, is to figure out what it is and trade accordingly.  I’ve tried decrying the lack of orderly trading and transparency — it doesn’t help at all and is not very profitable.

Some of you might have noticed the following chart in our May results post.  It shows the effects of the gaps up and first hour of trading following ramp jobs in the overnight markets.

In May, for instance, the S&P 500’s net gain of 35 points (+2.2%) was dwarfed by the 100 points gained via ramp jobs.  Without them, the month would have shown a 65-pt, 4% loss.

Between Apr 18 and May 22, SPX traded in a very steep, very narrow channel (below, in red) that carried it from 1536 to 1687 in one month.

Looking at it closely, we can see that 120 of the 151 points came in the first hour of trading following ramp jobs.  The total rises to 164 points if we include the first two hours of trading.

Aside from punishing those who don’t trade the futures markets, this obvious bull market engineering should be a reminder to all that there is always an agenda.

*  *  *  *  *

Since SPX closed within the purple channel dating back to November 2012, we should expect some positive follow through.  But, the momentum was turning negative in yesterday’s closing minutes — and SPX likely would have closed back below the channel if someone hadn’t pumped it at the close.  Things aren’t always what they seem.

We laid out the different scenarios and targets in yesterday’s post.  Today will be about reading the tea leaves and following along — whatever the market has up its sleeves.

Since the market is all about fake-outs lately, I assume that the manner of yesterday’s close indicates declines ahead that the MM’s didn’t want the average Joe to see coming.

I’ll short any breakdown of the rising wedge and go long on any breakout — trying to stay nimble enough to change positions when the market changes its mind — especially around 2PM.

UPDATE:  10:18 AM

Getting a little breach here…  I’m tempted to take a short position at 1651, but this is probably the first of many fake out attempts.  We’ll know it’s something more if it back-tests the wedge and breaks through the purple channel bottom — currently at 1647.50.

Note that the bottom of the purple channel intersects with the .75 line of the rising red channel and the .75 of the falling white channel at around 1647.75 in about an hour.  This could be a significant time & price — just as the previous intersections were.

UPDATE:  10:46 AM

I’ve fine tuned the purple channel and like the possibility that this is a back test of the bottom.  I’ll try a long position here at 1649, with stops just below at 1647.50.

The red channel top is up at 1657 and the .786 is at 1660.03 — so decent decent risk:reward.

A break below would likely target 1638.72 — the .618 Fib retracement of the 1687 – 1560 drop.

From the You-Can’t-Make-This-Stuff-Up Department, Jack Lew is lecturing the Chinese on cyber-espionage:

Lew said that for economic relations between the two countries to succeed, U.S. firms had to be “preserved and protected from government-sponsored cyber intrusion.”

In a completely unrelated story, the manhunt continues for Edward Snowden — the former NSA contractor who alerted the world to the enormity of America’s cyber espionage program.

Also this morning, Zerohedge reports that the NSA has embedded its own code — known as Security Enhancements for Android — in the Google Android operating system.  Android shipments totaled 162.1 million units in Q1 2013 — 75% of all smartphones shipped.

Eventually all new phones, tablets, televisions, cars, and other devices that rely on Android will include NSA code, agency spokeswoman Vanee’ Vines said in an e-mailed statement.

Thank God for the NSA.  At least we won’t have to worry about those sneaky Chinese!

UPDATE:  1:55 PM

The market has essentially gone nowhere since this morning’s first posts.  SPX is sitting just below 1651.

My expectations: if 1655 is broken, look for 1660 or 1672.  Downside, a break of 1650 leads to 1638 or 1623.  FOMC minutes should be released in a few minutes.

UPDATE:  2:08 PM

The minutes are available HERE.

UPDATE:  2:15 PM

My initial take is that this represents no dramatic change from the latest statements by various Fed governors or the Bearded One himself. The biggest news is explicit discussion of support for an end to QE by the end of the year.

Half the voting members would support ending QE late this year, while “many” others said it would need to continue into 2014. Participants also described their views regarding the appropriate path of the Federal Reserve’s balance sheet.  Given their respective economic outlooks, all participants but one judged that it would be appropriate to continue purchasing both agency MBS and longer-term Treasury securities. About half of these participants indicated that it likely would be appropriate to end asset purchases late this year. Many other participants anticipated that it likely would be appropriate to continue purchases into 2014.

Several participants emphasized that the asset purchase program was effective in supporting the economic expansion, that the benefits continued to exceed the costs, or that continuing purchases would be necessary to achieve a substantial improvement in the outlook for the labor market. A few participants, however, indicated that the Committee could best foster its dual objectives and limit the potential costs of the program by slowing, or stopping, its purchases at the June meeting.

I suspect that using the word “end” rather than “taper” will attract some attention.

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The currencies played out exactly as we expected overnight — but the equities ramped anyway.

The eminis are showing +10 right now and are likely to test the Jun 19 high after a miniscule reaction at the .886 Fib level.

In so doing, ES have pushed up into the purple channel.  With the FOMC June minutes released tomorrow, it appears to be the only play the markets have: ramp as far and as fast as possible before BB reiterates the Fed’s intention to taper if/when.

I am a bit surprised TPTB don’t try to build more of a base for a meaningful rally.  I guess this falls into the category of “get while the getting’s good.”  Far be it from me to stand in the way.

A 10-pt pop on SPX doesn’t run into any resistance other than the Jun 18 high, so I’ll play along on the long side on the opening, but watch for any pullbacks near 1654.19.  The gap from Friday will apparently remain open for now.

A 10-pt pop also leaves SPX in no man’s land: 10 points shy of the .786 at 1660.03, but 5 points over the line separating the purple channel from reality.

UPDATE:  10:05 AM

The 10-pt ramp job has been pared back to a 5-pt rally that’s stuck at the purple channel’s lower bound.

I’ll go short here at 1646 on the off chance that we’ll get a back test of the white channel top and or gap fill down to 1632.  Tight stops on this one, though, as it might just as well be a back test of the broken purple channel bottom.

From a trading standpoint, this is a bit of a quandary.  If you expect the FOMC’s minutes to boost the market, the .786 and .886 of the 1687 to 1560 decline are just overhead to provide resistance at 1660 and 1672 respectively.

If you expect them to disappoint, we’ve already pulled back from the purple channel incursion and, despite what intra-day height we reach, are likely to close at the channel boundary.  What more is there?

I suspect SPX will remain in a trading range for the next 24 hours — with current prices pretty well indicating investors’ current expectations re the Fed.

If this situation seems vaguely familiar, it should.  On May 21, the market rallied on expectations that Bernanke’s testimony the following day would be bullish.  One of the biggest ramp jobs in recent memory followed that night, and SPX shot up 17 points in the opening hour on May 22, only to provide a great shorting opportunity at 1687.

The forecast I posted on the 21st called for a drop to 1600 in early June, followed by a .786 retracement to 1670 and a subsequent drop to 1560 before a rally to 1823 around the end of the year.

Here are the charts from back then [see: If It’s Tuesday]:

We got the drop to 1600 right on schedule.  But, instead of rallying to 1660 next, we got another leg down to our 1560 target two months ahead of schedule.  Now SPX is working on that retrace to 1660.

To me, the wave picture is a mess.  At 1560, we had a nice little A=C corrective move down from 1687.  A push above 1654 would certainly help confirm that 1560 is all the correction we’ll get anytime soon.

But, there are three potential problems that need to be overcome first:

1. SPX dropped out of the purple channel back on Jun 19
2. the currencies are positioned as though a correction is imminent
3. the white channel bottom was never tested

I’ll take the next hour or so to review the big picture.

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NDX lost 83% of its value between 2000 and 2002.  Its 2007 high came close to retracing a Fibonacci 38.2% of the losses before the next crash lopped 56% off the top.  Now, as it tags one important Fib level and approaches another, is there another big correction around the corner?

What does it mean that the latest red channel — parallel to the one formed off the 2002 low — just broke down?

The major channels generated by NDX’s 1994, 2000 and 2008 lows are shown below in white and purple.

NDX just nudged the purple midline, and is closing in on the white .382 channel line.  But, the placement of very long-term channels is subject to interpretation/error, and being “just a little off” can lead to large errors in forecasts.  So, we look to other indicators for confirmation.

A large Crab Pattern (in white) dating back to 2007 recently completed at 2993 — very close to where the purple midline crossed.

The May 22 high of 3053 would be a relatively easy “top” call if not for the fact that the yellow IH&S target is still a few points away at 3100 and the .618 retracement of the drop from 4816 to 795 is 227 points away at 3280.

NDX reacted nicely at 3053, shedding 228 (7.5%) before beginning a rebound that, like SPX, recovered slightly more than .618 of the losses.

So, top or not?

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