UPDATE:  12:20 PM

Updated Bat pattern, assuming new Sep 20 entry point of 1220.  The .886 is at 1203.79 — just above our fan line (see below) shown here as the highlighted yellow dashed line.

Big Picture

Medium CU

Close Up

And, a quick look at the tech picture…

1 Year

Close Up

A wedge that looks like it wants to break, negative divergence out the wazoo and an RSI TL that refuses to yield.  Shouldn’t be long…  (pun intended.)

MICROSOFT READY TO POP?

Just noticed an interesting chart: a rising wedge along with a completed Gartley.  If that old college chum in Redmond or your hair stylist hasn’t sold her MSFT yet, might be a good time to give her a call and suggest she sell it and put the proceeds into TZA.  As in right now.

ORIGINAL POST:  10:20 AM

I’m looking at channels, trend lines and fan lines, trying to make better sense of yesterday’s rise.  I remembered that I was ahead of the crowd in calling the break of the trend line from the Mar 09 lows — only to discover that some others used arithmetic rather than logarithmic scales in their charting. In that instance, it was only after we broke the arithmetic scale TL that others saw what I had been seeing.

I prefer log because it’s the method that takes into account the obvious compounding of advances and declines.   The effect can be significant over a longer period of time.  It also might be the cause for my frequently being a tad early.  That might be what’s happening here.

The past five years, charted in the logarithmic scale that I normally use.

Here’s the same period, logged in arithmetic scale.

See the difference?  Here’s a close up, w/ log:

And, without:

In the log scale chart, there’s not really an appropriate fan line through yesterday’s top.  In arithmetic scale, it’s clear as day.

Also, note the 30-point difference in the target of the bottom-most fan line — the one I have been using to triangulate our 1040 target.  It passes through the very significant 4/26/10 high.  In arithmetic scale, the same fan line indicates a 1010 target.

The intersections with the 2010 horizontal trend lines take an interesting turn, too.  The log chart:

And, arithmetic:

There are clearly implications for the speed and distance of our next move down.

In the meantime, we’re left to ponder yesterday’s huge move up on pathetic volume.  On the arithmetic chart, the fan line from 2007 through the Mar 16 low provided yesterday’s high and might well cap any further advance.

On the log chart, that fan line is several points higher, say 1201 — which is very close to today’s intra-day high.  I can see it putting the kabosh on any further upside, too.  Both cases are good for the bears, and both provide cover for yesterday’s higher than expected run-up. 

So… to log or not to log?  Which is correct?  I’ll revisit this question after the next move is resolved. In the meantime, there’s a rising wedge with negative divergence with my name on it.

More later.

UPDATE:  EOD

Hate to be posting this so late in the day, but I’m traveling on business and am just getting back to my room.

Today certainly put my bearish conviction to the test.  I haven’t felt so steamrolled since July 1st.  Under the 2011 = 2007 analog, that’s the day the market was supposed to run smack dab into the trend line from the May 2 top and, failing that, the .886 Fib on the Bat pattern that had set up since Jun 1.

After having been so accurate in calling a rapid rise to 1320-1330 from the 1258 lows (remember the choruses of “flash crash!”) I watched in horror as the market surged past my target.  It finally (mercifully) came to rest at 1356 — exceeding the TL and the .886. 

Of course, a couple of weeks later, my ego and my portolio were salvaged as the market finally topped (at a fan line) and dropped a bunch of points.  But, there were some lesssons there which, had I learned them, might have saved me some serious stress today.

First, consider all the possible entry points on harmonic patterns.  Had I chosen the May 2 high of 1370 for my Point X, I would have accurately chosen 1357.75 as my Bat Pattern .886 instead of 1327.

Second, I would have been less wedded to the TL off the May 2 high.  I was so positive we’d have an exact repeat of 2007 that I assumed the TL off the May 2 high had to be repeated.  If I had been more open-minded re the Harmonics pattern…

The lessons here?  I’m going to let the channel line float, telling me where it needs to be drawn instead of me telling it.  Second, I’m taking another look at the entry point.  If, instead of the Sep 27 1195 high, we’d used Sep 20’s 1220 as Point X, then our reversal would come in around 1203.  The Aug 31 high of 1230 would have indicated 1212.

I’m going to take a fresh look in the morning.  In the meantime, though, I’m looking closely at July 1 as a worthwhile guidepost to the next few days.

UPDATE:  3:20 PM

VIX looking like it’s ready to pop.

UPDATE:  1:05 PM

Just saw a chart of the EMA 50 that caught my eye.

Also, note that the internal trend line I mentioned this morning seems to be holding pretty well.  It’s a fan line from the 2007 top that connects with the Aug 15 & 16, Sep 7, 8 and 27th highs.  It’s marked in bold yellow in the above chart.

In terms of timing on the downside….  My original forecast from 2 weeks ago identified 1040 17th or so.   That would be roughly 150 points in 5 trading days from right here.  Normally, that would be a tall order.  In this market — very doable.  The trick will be getting things going on the downside.

Obviously, we’re at a critical juncture.  Any time a market seems poised to break out from a long established pattern — in this case, the channel it’s been in since July — one of two things will happen.  If it fails, like it did on Sep 16, we get things like 150-point declines.  If it does break out,  which I’m certainly not ruling out, the momentum could be substantial.

For me to believe that’s happening, I’d want to see a close above the channel at the very least.

UPDATE:  10:50 AM

Just completed a nice looking back test of the rising wedge.  The advance seems to have stalled out, with volume dying off and breadth easing.

While it could have a little more juice in it, this advance seems to be sputtering.  The inverse H&S; pattern would be very lopsided, with a tiny shoulder on the right side.  Stranger things have happened, but I wouldn’t put much stock in it without a more symmetrical shape.

ORIGINAL POST:  10:00 AM

We’ve reached last week’s .886 target of 1182.06, the logical place to reverse and complete wave 5 down of Minor 1 if this is, indeed, a Bat pattern playing out.

The alternative, of course, is that we’ve already started into Minor 2 and that this pattern will extend, closing beyond the channel.   Many EW experts, including some very good ones, are operating under this theory — having called 1074 the Minor 1 bottom.

But, my money is on this being an intraday push — like many we’ve seen before.  I’m going out on a limb and will start loading shorts.  My respect for the alternative viewpoint means I’ll keep a close rein on things — tight stops, etc.

There is an internal trend line that runs through about 1192.  If we overshoot on the Bat, it should provide a good line in the sand.

PATH TO 350: Day 8

Almost done with this counter-move.  My forecast is <1040 by October 17, so we'd better do a hard bounce off the channel line and get started on wave 5 sehr schnell.

Note that today our shadow hit the channel line, but we closed well within the channel itself.  A move to 1182 would leave a shadow above the channel line, but should close below it.

Postings will be spotty next week.  I’m traveling on business, and… I did promise myself I’d cut back on the old pebblewriter treadmill.   Haven’t done very well in keeping that promise yet…

BTW, daily page views have nearly doubled these past couple of days.  Anyone know why? 
 

UPDATE:  4:10 PM

Looks like we’re working on completing the 2d wave of the final five to 1182.  Whatever the wave count, we’ve completed four legs of a possible Crab Pattern that began at this morning’s 1171 high.

Crabs’ Point B is at the .886 of the XA leg.  As the chart shows, we came within 47 cents of that level before the last minute dip to the close (aka Point C.)

Crabs complete at the 1.618 XA extension.  In this case, that works out to 1184.87, just 2.81 away from our .886 fib target.  The move up to 1182-1184 should come quickly next week, followed by an even swifter reversal.

UPDATE:  3:00 PM

DX looking ripe.

UPDATE:  1:30 PM

I expect it’ll look something like this.

Here’s the corresponding dollar chart, also showing a corrective wave within the counter-trend decline.  Near-term correction should continue to the .886 at 78.131, followed by a resumption of the climb to at least 80.635.   Note, that’s the .886 Fib of DX’s Bat pattern.  If we blow through (accompanying a more serious market crash) then the upside is to the 1.618 at 87.058.

ORIGINAL POST:  12:20 PM

Should catch at 1155 and reverse to 1180 if this is a Bat playing out.  If it evolves into a Butterfly, it might extend to the 1.272 at 1148.

1148, BTW, is close to the .618 (1149.60) of the larger Bat pattern we’re following — the one that indicated 1182 as our upside.  So, I’m inclined to believe this morning’s decline is a Butterfly.  The only difference, of course, is we should expect a stronger snap-back.

Also, note that at 1148, this corrective wave 4 is equal to wave 2 from Oct 4.

updated chart 1:07 pm

We’ve completed another H&S; pattern on the 5-minute charts, that could push us further down.  But, the last one didn’t play out, and we do have good horizontal support as well as the .886 here.  If the Bat morphs into a Butterfly, the downside is 1148 – only 3 pts away from the H&S; target of 1145.

UPDATE:  3:00 AM

THE PATH TO 350:  Day 7
 

The strong counter-trend rally is developing a rising wedge with an apex of around 1180.   This coincides well with the Bat pattern .886 (mentioned below) of 1182.

SPX has held pretty religiously to the B-6/B-7 channel thus far, the only excursions being intra-day shadows.  So, it’s likely we’ll tag the 1182 level and retreat to the .786 at 1170, back within the channel line.

If we push decisively through 1195, I’m prepared to reevaluate. 

Employment numbers are due out at 8:30.  It’ll be interesting to see if September’s numbers are revised to below the 0% increase that was reported.  Moody’s just downgraded a boatload of British and Portuguese banks.  So far, the futures haven’t noticed. 

ORIGINAL POST:  1:50 AM

I mentioned yesterday that I wasn’t thrilled with the presumed Bat pattern because the entry point looked wonky.  Ideally, Point X should be at a clear and distinctive reversal.

I was operating on what I thought was a pretty good EW count.  It has since been proven at least suspect, and probably wrong by today’s rise above 1140.  So, I’m going to keep my nose out of the EW tent and refocus instead on the harmonic picture.

Given where we closed today, I’d say there’s a great chance we’re working on completing a Bat pattern with the Sep 27 1195.86 as an entry, or Point X.  The Point B retrace was .236, a perfect fibonacci retrace for Bats.  The target is the .886 at 1182.06.

Another possibility arises, though, based on the fact that we came very close to the .618 at 1149.60 today.  1149 could be a Point B, with a reversal to Point C before climbing again.

If we get any kind of reversal tomorrow, look for a rebound to the .786 at 1170 instead of the .886.  This would be a Gartley instead of a Bat, and it would fit just fine with the channel line (B-7 in red) that’s bounded the decline since July.

In any case, we should top out Thursday or Friday and begin a sharp 130+ point decline that wraps up in a week or so.

Keep an eye on the channel line.  While we could easily exceed it intraday, we shouldn’t close above it (about 1173 Thursday, 1169 Friday.) Any such close would be a sign that a lower low is probably not in the cards.

Also keep an eye on the SMA 50.  Currently at 1183, it should help keep a lid on any upside.

Back in July, I blogged about the 2011 v 2007 pattern being off by a few days.  It struck me then that as the 2011 market approached the edge of the cliff, it slowed relative to 2008.

Perhaps some of the forces propping up the market were aware of the analog and threw more ammunition into preventing a repeat [see: Happy New Year and All Aboard.]  They only delayed the inevitable, as the market fell 57 days after the top versus 2007’s 52 days.

Interestingly, the market caught up to where it “should have been.”  The 2007/8 market bottomed 70 trading days after its 10/11/07 top.  After its plunge, this market found a new bottom at 69 trading days after its May 2 top.

The chart below details day-by-day comparisons between the two markets.

updated to EOD

Yesterday’s low of 1074 could be interpreted as the equivalent of 3/17/08.  It is the 108th day since the top and 23rd since the 8/31/1 midpoint; that would correlate nicely with the counts of 107/22 for 3/17/08.

But, I think it’s more likely that we’re simply seeing the same pre-plunge analog fart that we saw back in July, and before that in June.  If so, we’re at the equivalent of 3/12/08 and Minor 1 isn’t quite over.

I’m looking for a decline to 1040 sometime around next Friday, which is at the confluence of a number of harmonic patterns, head & shoulder patterns, trend lines and fan lines [see: The Path to 350.]

Also, a word to the wise: I’m usually early, and I often underestimate the degree of the declines I forecast.

I had a wonderful lunch with some very close friends the other day.  They’re both off-the-charts smart.  He’s a CFA, former actuary, institutional asset management whiz.  She’s an artist turned entrepreneur turned asset management whiz.

Yet, their jaws dropped when I ran my forecast of the S&P; 500 dropping to 350 past them.  When I mentioned that 350 would be the first wave down of five in P[3], I caught them checking their watches, LOL.  I know it sounds preposterous.  Such a decline no doubt means a Depression.

When I first started talking about another Depression many months ago, most people thought I was ready for an I-love-myself jacket.  Now, I’m hearing it talked about daily in the mainstream press (another reason we’re going to bounce up very soon.)

As my friend reminded me, many US stocks derive plenty of earnings from overseas, and are well-positioned to take advantage of still-strong BRIC economies.  That’s the key question, isn’t it?  It’s pretty clear the US consumer isn’t going to buy as many Cokes and iPhones as in the past.  But, maybe the Chinese and Brazilians will.

Will that be enough to prop up multinational earnings?  And, what about interest rates?   Can we count on 0% bills and 2% notes, or will we see higher interest rates competing for equity investment dollars?  What would that do for PE ratios?  And, what would it do for global liquidity and wealth?

Lots to think about.

More later.

THE PATH TO 350:  Day 6

Charts updated for end of day prices.  So far, so good.

Going to have to think about the EW count a little more, but I take great comfort in the fact that the midline of the channel effectively capped today’s rally.

And, an updated chart on the 2011 v 2008 analog…

For an important discussion about the comparison, see Tell Tale Fart. 

EUR/USD should get one more push down to 1.31 if only the Bat plays out — 1.16 if it’s the crab instead.

Take a look at Apple, which just broke through a rising wedge 5 years in the making.  It could and probably will backtest for a while.  But, this is market leadership showing its hand in a very negative fashion.

It’s developing a bullish Crab pattern that indicates a potential reversal, but not until we get to 340.

That’s a big drop from 422 on Sep 20, when we noted the very bearish, completed Crab and Butterfly patterns.

More later.

THE PATH TO 350:  Day 5

Again… so far so good.

And, a crack at the Minor 1 Elliott Wave count.  Note that (iii) amounts to a 1.618 multiple of both (i) and (v) — assuming we make it down to 1040.

ORIGINAL POST: 11:00 AM

I’m expecting internal trend lines to shape today’s price action.

More later.

THE PATH TO 350: Day 4.  So far, so good.

Still looking for a descent to 1040 by next Friday the 14th.  Although, at this rate, we might well arrive before schedule.

More later.

THIS JUST IN!  Did you see the headline?

Okay, I made up the Pebblewriter part.  But, I did publish my 3-page opus a day earlier than their 15-pager (how did they cut and paste so quickly?)

It’s worth a read, if only because their graphs and charts are prettier.  Enjoy.

PATH TO 350 – DAY 2

I think I’ll post the Path to 350 chart as the last chart each day, just to keep an eye on it.  If you missed the post and have an extra hour on your hands, here it is.

If you read nothing else on this blog, this is the one — the Big Kahuna, Grand Poobah and Big Cheese all rolled into one.

If someone you love is invested in stocks, send them the link.  If someone you despise is invested in stocks, send it to them too (they’ll never take your advice, and will hate you all the more after the crash!)

And, the close up…

Let’s see how many days in a row we can go without it being painfully obvious just how serious my dain bramage is.

UPDATE:  7:55 PM

Seeing a little divergence in the 2011 v 2008 analogy.  Might be OPEX issues, but in 2008, day 34 made a higher high from day 30; in 2011, 30 to 35 made a lower high.  We’ll see how it plays out over the next few days.

Looking at the open interest in SPY puts, I would imagine market makers and dealers are pulling out all the stops to keep the markets at these levels.  Given the way things work these days, that probably means our “tax money at work” in the form of the Plunge Protection Team.  Certainly had that feel, today.

The lines in the last few days of the 2011 chart, BTW, aren’t meant to convey a price objective — just tracking expected time and direction.

UPDATE:  6:20 PM

This is Pimco’s 25-yr zero coupon ETF, (ZROZ.)  I don’t follow it, but came across it today while researching something.  The Crab Pattern jumped out at me.  It reversed just above the 1.618 extension, and seemingly has further to fall — maybe on the order of 20% or so to just the .618.

The portfolio’s duration is 27.79, so a 20% decline in prices would indicate a yield increase of 0.72%.  Anything could happen, but a .72% increase in long bond yields would hardly be beneficial to stocks.

Of course, other factors can drive down prices — credit quality, for instance.  We are talking US treasuries, after all.  And, let’s not forget currency fluctuations.  A crash in the dollar wouldn’t do much for the value of long-duration dollar-denominated assets.

Come to think of it, none of these events would be beneficial to stocks.  In an “all-the-same-market” scenario, bonds will tank right along with stocks and commodities.

Wait, you say, didn’t the Fed just commit to a twist strategy that would boost long term bonds and lower rates?  Surely, that would allow bonds to continue their ascent?  Take a look at a cool SentimenTrader.com chart, which shows bond sentiment at extremes.  Nowhere to go but down.

 

As discussed in yesterday’s The Path to 350, a rising interest rate environment would be the nail in the economy’s coffin.

UPDATE:  11:10 AM

Conjoined Head & Shoulders, anyone?

ORIGINAL POST:  11:00 AM

We all know the dollar needs to soar in order to get a decent stock dump, so how do we reconcile the dollar’s drop with SPX’s coming 5th wave down?

The dollar (DX) has played out a beautiful little Crab Pattern over the past two months.  It reversed right at the 1.618 as expected.   It’s the pattern in yellow, below.

But, note that that Crab Pattern takes place wholly within the C and D legs of a much larger Crab Pattern that began last January (seen in purple.)  Its 1.618 extension is at 87, a whopping 11.3% increase from here.

It doesn’t have to be a Crab, by the way.  Bat Patterns also accommodate a Point B at the 50% retrace.  Instead of extending to 1.618, they reverse at the .886 retrace.  Even that, though, is 80.664 — a still healthy 3.2%.

My guess is that we’ll see 80.6 with this wave 5 down, then a retrace while Minor 2 works itself out, followed by a rocket to 87 to coincide with Minor 3.

EUR is in the same boat, BTW.