UPDATE:  1:00 PM

While I’m searching for the Oreo’s, I want to make a small point regarding the timing of the moves over the past two days.  If the 56-pt decline had all taken place yesterday and a 45-pt rally today, most of us would view this as an obvious retracement of an impulse move down.

Also, watch the rising wedge on the 5-minute chart.  It also argues for a reversal here.

UPDATE:  12:35 PM

Having trouble getting past the 20-day moving average at 1180.93.

Look for a possible turn here.  We have a Butterfly pattern turning point at 1176 (the 1.272 extension) and 1187 (at the 1.618.)  Also, check out the RSI channel on the 15-minute chart.

Note today is a scheduled POMO settlement date.  They purchased $439 million in TIPS yesterday, but probably had billions more available to the Plunge Protection Team given how important it was that the market not crack on the no QE news.

You can find the NY Fed schedule here.

UPDATE:  11:25 AM

Little bat or crab setting up on DX.  If a bat, my top choice, it should reverse around 74.05.  A crab at the 1.618 XA extension would target 73.64.

UPDATE:  10:55 AM

Will the right shoulder hold?  This is about as close as you can get…

Meanwhile, the dollar backtested its falling wedge and is attempting to break higher.

UPDATE:  10:30 AM

The market’s not thrilled with no new quantitative easing, falling 25 points before snapping back for a backtest of the H&S; neckline.  If the neckline (or even the right shoulder) holds, the next stop should be 1121.

Excerpts from Bernanke’s speech (full text here) courtesy of CNBC.

ORIGINAL POST:  8:50 AM

Just a reminder, today is a POMO day.

Bottom line on the 2nd GDP revisions — a mixed bag, in line with expectations, evidence of an economy still stumbling along.  I doubt it gives the Fed enough ammunition for QE.

GDP was revised downward from an annual rate of 1.3% to 1.0%,  in line with expectations and confirming the slowdown underway.  The first quarter real increase in GDP was 0.4%.

The biggest revisions were to exports (lowered from 6% to 3.1% increase) and inventories (lowered from $49.6 billion to $40.6 billion.)  Corporate profits rose 4.1%, increasing $57.3B in Q2 versus $19B in Q1.  Yet, corporate income taxes fell $3B versus a Q1 increase of $17.6 in Q1.

Consumer spending was revised upward from 0.1% to a still marginal 0.4% — the lowest increase since 4Q/2009.   Inflation, as measured by the personal consumption expenditure index, rose 2.2%.  Real disposable personal income was revised upward from 0.7% in both the 1st and 2nd quarters to 1.2% in the 1st and 1.0% in the 2nd.

From Briefing.com:

And, from the DOC:

I’ll admit, after watching more than a few patterns fail over the past day or two, I was feeling a little snakebit. 

On Tuesday, we completed a nice little bearish butterfly pattern at the 1.272 extension.

But, the next morning, we were up 20-points in spite of horrid economic news — nailing, instead, the 1.618 extension.  Thankfully, a quick reversal followed, confirming the butterfly.  Miller time, right?

Of course, the reversal was a headfake.  I watched dejectedly as SPX soared and my ego slumped.  Fifteen points later, I was on my third Excedrin of the day, wondering where my wife hid the Oreos.

My only hope was a little H&S; pattern that looked suspiciously like the one a few days before, and a shabby little rising wedge.

I snapped a picture, but didn’t have the heart to show it to you, my faithful partners on this bear hunt.  My fears were realized when the market rode BofA to the moon this morning.   I was clearly no match for Warren.

My only hope was to criticize the deal, get a few million people to read the critique, sell their BofA (and everything else, while they were at it) and bring stocks back to the neckline of my pathetic little H&S; pattern.  Not too much to ask, right?

Apparently not.

 The completion of the pattern should send SPX down to 1120.  But, the really cool part is that it completes a bigger, not-so-pathetic H&S; pattern that could send SPX to 1040.

Recall that 1040 is one of those key targets we’ve been talking about, as it corresponds with the last major low of last summer’s swoon.  That particular low is, itself, the origin of gobs and gobs of important fan lines, so I think it’s pretty über-important, itself.

Will it all unfold as planned?  We’ll see what GDP and BB have to say about it tomorrow.  Irene might even slip in a word or two.

As for me, I’ll be glued to my monitor — Excedrin and Oreos nearby.   Okay, maybe some champagne on ice…just in case.

UPDATE:  9:00 PM

UPDATE:  2:25 PM

Another way of viewing today’s H&S; pattern…  If it completes at 1156, this one potentially takes us all the way to 1121, also completing the larger pattern with the 1032 target.

UPDATE:  2:00 PM

This morning’s spike has been successfully beaten back.  The reversal leaves a head & shoulders pattern on the 15-minute chart. 

Potential is to 1130, just 9 points away from completion of the larger H&S; pattern with potential to 1032.

For all the excitement around the Buffet/BAC deal, the after-effect is a perfectly-formed bearish Crab pattern that should quickly erase this morning’s bump and then some.

UPDATE:  9:25 AM

BUFFET’S BILLIONS BAIL OUT BOFA

BofA has 10.09 billion shares outstanding, with a market cap of $63.85 billion.  For his $5 billion, Buffet gets cumulative preferred stock with a 6% dividend and redeemable with a 5% premium.

The real plum?  He also gets warrants on 700 million shares at an exercise price of $7.142857 each, good for 10 years.  He paid zilch for the warrants, so at the indicated opening price of 8.83 (vs yesterday’s close of 6.99) BH has already recouped $1.2 billion of his $5 billion (on paper, anyway.)

Looking at it another way, if BAC recovers to 14.28 or more, he’s essentially got his preferreds for free. He can reap the $300 million in annual dividends on essentially a zero investment going forward. Pretty healthy IRR, wouldn’t you say?

Why would BAC offer Warren & Co such a sweet deal?  It had no choice.  Warren, who from all accounts is a sweetheart of a guy, knows a desperate borrower when he sees one.  And, this settles that pesky question as to how desperate BAC really is.

Terrible news for the shorts —  131 million shares worth.

INITIAL POST:  9:20 AM

Initial claims of 417K versus expectations of 400K.  The futures promptly dropped 5 points, but are now spiking on news of Berkshire Hathaway’s $5 billion capital infusion into BofA.

UPDATE:  EOD

Not much time to write tonight, so I ‘ll make this short and sweet.

Pretty impressive run by the bulls today, but still on low volume and marginal breadth.  At the very least, I have to expand the channel I drew yesterday.  I’m still confident that this is a 4th wave up, with the 5th to come very soon.  But, sheesh, I’m feeling a bit lonely in this point of view.

Many of the indicators I watch are on the brink of turning bullish.  But, they’re on the brink, not beyond.  This tells me we’re at an inflection point, as today’s close at the .618 Feb retrace level would indicate.

Besides all the obvious, I’m watching the dollar these past couple of days.  It’s been in a gigantic falling wedge for almost 1 1/2 years.  In May, it began traversing from one side to the other of this wedge, hugging a TL that offered great support until July 21, at which point it found support at a lower line.

Shortly afterwards, DX started tracing out a falling wedge that just completed.  We broke out today, and are currently in backtest mode.  If the breakout holds, the next resistance isn’t until at least 75.25. 

The next day or two should be very interesting.

UPDATE:  1:15 PM

The folks in our Conspiracy Department just floated an interesting idea past me.  If you’re a big investment bank or advisory firm and are angling for Ben to break open his piggy bank Friday, do you really want a big, fat rally on the books in the days leading up to decision time?

If this thing gets going to the downside, don’t look for them to stand in the way.

UPDATE:  1:00 PM

Little H&S; pattern backtesting on the 5-min chart (redrawn on 1-minute.) It’s even completing its own little butterfly pattern.  Should reverse at 1169.

UPDATE:  12:15 AM

Additional potential targets for the Butterfly pattern, based on retracements/extensions of the DA leg:

0.618 = 1142
0.786 = 1133
0.886 = 1128
1.272 = 1107
1.618 = 1089
2.000 = 1069
2.240 = 1056
2.618 = 1036
3.000 = 1016
3.618 =   983

Just a reminder, the H&S; pattern we’re tracking has potential to 1032.

UPDATE:  12:00 AM

Another great way of looking at the harmonic picture from the past few days is the Butterfly pattern started at Friday’s high.

The pattern requires a .786 retracement of the XA leg (the first one down) and ends with a 1.272 or 1.618 extension of that same leg.  This one is almost perfectly formed.

Butterflies are among the more precise patterns, and frequently lead to a sharp reversal that consumes the entire upward move.  I use the .618 Fib as my initial target, with 1.272 and 1.618 extensions as the ultimate goals.  In this case, that would correspond to targets of 1142, 1107 and 1089 respectively.

The big H&S; pattern we’ve been tracking, the Big Ugly, is starting to look quite lovely.  It completes at around 1121.  Obviously, if the Butterfly pattern plays out in any meaningful way, it will complete and give us plenty of ammunition for a downdraft I’ve been expecting.

One way to play this would be to initiate shorts or puts here, with stops at the 1175 level.  It also makes sense to keep an eye on the RSI trendlines.  The 60-minute still hasn’t broken yet, but the 5 and 15-minute charts have broken their trend lines and are in backtest mode.

I think the market will pick up on this and start heading down very soon.

UPDATE:  11:00 AM

We just had a nice reversal off the .618 Fib line and the channel I posted about earlier (TOS does a poor job of keeping TL’s where they belong when you switch from daily to 60 min, so the upper line is redrawn here as the faint red line. )

The bears won’t be out of the woods, however, until the RSI trend line (red, dashed) is broken.  Until then, this pullback could be just a correction of the temporarily overbought condition.  Stay tuned.

UPDATE:  3:40 AM

The dollar is showing some strength overnight. 

I’ve been watching DX, wondering if it was ready to break out of the falling wedge it’s been in since…forever.  Now it’s in a falling wedge within that falling wedge, and seems to have found good support in the white dotted line.

Note that the crab pattern that played out so perfectly at the 1.272 extension has, with a retracement to the .50 level, morphed into a potential bat or even crab pattern.  The .886 (minimum) level would be all the way up at 80.635.  Such a rally would no doubt be deadly for stocks.

ORIGINAL POST:  3:00 AM

Today’s push to 1162 was the perfect follow-through to a pattern in which I hadn’t put a lot of stock — the inverse head and shoulder pattern I posted about at 11:45.  It called for a rise to 1161.

The rally also completed a bearish Butterfly pattern (one of a few), the 127.2 extension of which was at 1163.38, and established a better looking right shoulder than we had before for a larger bearish H&S; pattern.

The big question now is follow through.  Volume and breadth were light today.  For all the excitement, SPX was stopped cold at the 10-day moving average and the gap from Aug 10 on the daily chart.  And, the histogram is still in negative territory.

Further,  I don’t see five waves down yet.  And, this bear market isn’t a great candidate for a truncated 5th wave.   I would like to see more evidence of capitulation before believing the upturn is here.

Last, I think there’s a good chance the H&S; pattern we’ve nearly completed plays out.  It has potential to 1032. 

We’re in a steep and narrow channel (white lines) down from the July highs.  The top trend line of that channel will be the key as to whether we continue down or break higher.  There is also a corresponding trend line on the RSI that I’ll be watching like a hawk.

There’s also a good possibility that the trend line (red, dashed) from the May 2 high, together with the channel top TL, will combine to form a falling wedge for the eventual bounce back up to test the previous 1258 lows.

Unless we get strong follow-through tomorrow, I’m operating under the assumption that the bears are still in control and we’ll establish a new low around 1067, with 1040 and 1010 being subsequent targets. 

UPDATE:  12:25 AM

Fan Line C to the bears’ rescue!

I count that as five rallies stopped in their tracks (Aug 9, 10, 19, 22 and 23.)

Not bad, Line C, not bad at all.

UPDATE:  11:45 AM

And a counterpoint, an IH&S; pattern on SPX completing at 1143.  It has potential to 1161.  If it plays out, it would certainly gussy up the Big Ugly pattern, evening up the shoulders very nicely.

If this rally extends as a result, it might end up looking something like this:

Note the 1161 target coincides pretty well with a 1.272 extension of a larger potential Butterfly pattern.

UPDATE:  11:15 AM

An update on Big Ugly — the larger H&S; pattern we’ve been watching.  It has bearish potential to 1032. 

UPDATE:  10:40 AM

Little Gartley setting up on the 5-minute chart.  Should reverse at the .786 retrace at 1140ish.

UPDATE:  10:00 AM

US new housing sales continue to tumble, coming in at 298,000 versus expectations of 310,000.  June was revised down from 312K to 300K, so don’t be surprised if July’s aren’t similarly adjusted.

And, a reminder, these figures were for the calendar month, meaning the full impact of the stock market slide won’t be felt until next month.

And, from the Eurozone, an update on German economic conditions/expectations from the Center for European Economic Research.  Pretty dismal readings.

The view from there is that the German economy is sliding.  Those who ranked the German economic situation as “good” fell from from 90% to 57%.  The Eurozone “good” rating fell from 13% to 6%, while “bad” leaped from 10% to 25%.

And, what do they think of the good ol’ USA?  “Bad” grew from 40% to 58%, with “good” sliding to an absolutely horrid 1.1%.  According to news reports, the McGraw-Hill board is preparing pink slips for the survey participants.

ORIGINAL POST:  2:00 AM

Perhaps it’s the S&P; news, but the futures are making another bull run tonight — currently up 11 to 1134.  A note of caution:  at 1140 there’s a potential inverse head & shoulder pattern that would complete.  If it plays out,  it’s got upside potential to 1180 or so.

Why do I always preface these predictions with “if it plays out?”  Because none of these indicators are foolproof.  They’re all subject to being overtaken by important events, politics, fed action.   Think Fukushima, QEn, etc.

Here’s a H&S; pattern on the eminis that didn‘t play out, just this morning.

It was just as well-formed, and had nice downside potential to 1092.  This evening’s runup to 1134 might negate it, since the right shoulder has been exceeded.  Or, has it?

Reprinted in its entirety from Zerohedge.  I have nothing to add.

Just a quick check on how the fan lines from the Oct 07 top and Mar 09 bottom have done so far.  First, the big picture…

And, a close up of how well they’ve done lately in guiding price moves…

Their performance has been nothing short of stunning.  The Mar 09 fan lines (numbered) did an amazing job of guiding the Jul 10 through July 11 action.   Breaking Line #1, for instance, was the beginning of the end for the bull market.  Line #2 stopped the July 11 dive and, when we finally broke it, gave us a 200-point plunge.  Line #4 provided important support and resistance over the past 1 1/2 weeks.  Line #5 gave us an important bottom last week.  And, so forth.

The Oct 07 lines (lettered) have, thus far, defined every major move since the Feb 11 top — often supplying key support at a critical time.  Consider Lines A and B, both of which stopped serious declines.  Line D stepped in to stop the Aug 10 decline.  And, just this morning, Line C stopped the rally attempt cold.

The points that interest me the most are where fan lines intersect.  They often take on outrageous importance.  The bottom we made on Aug 10, for instance, was the intersection of Line D and Line #5.  Other important intersections were the Mar 16 and Jun 16 bottoms and the recent Aug 17 high.

As always, the important question is “what’s next?”  I’ve mentioned more than a few times that I think we should get to at least 1067 in the next few days.  This is the intersection of the midline of last summer’s W pattern ((Line #6) and a fan line crossing through the top of it (Line E.)

Another logical target is line #7, which is actually a fan line between the Feb 9. 2009 low and several key lows in last summer’s pattern.  It’s at around 1040.

Next up is 1010, which is obvious horizontal support from the low on Jul 1, 2010.  Beyond that, well…  let’s just say there lots of possibilities.  But, don’t be surprised if most of these lines continue to play major roles over the next couple of months.

UPDATE:  7:20 PM

Here’s the latest 2007 v 2011 comparison.  As we discussed last week, the current pattern is slowing relative to 2007/8.  But, for the bears, it’s worth the wait.

New home sales are due out in the morning.  Consensus for July is 310K versus June’s 312K and 315K in May.  Keep in mind that July’s figures will reflect only the early few days of the current market swoon, so we may not see as great an impact on sales as we will in subsequent months.

UPDATE:  4:05 PM

This one worked out pretty nicely so far.  Note the role that the RSI trend line played, as well as a TL off the three pattern tops (the head, the right shoulder and the backtest.)  We’ll see tomorrow if it plays out all the way, reaching its target of 1117.

Not all of these work out perfectly.  They can be overwhelmed by greater forces, especially these little ones.  But, they’re very effective for day trading and giving guidance on the bigger forces at work.  And, as I mentioned earlier today, they often kickstart larger patterns.

This one, for instance, gave us a good push below the neckline of the big, ugly H&S; with potential to 1032 (see 1:35 update below).  It also confirms the target of a small H&S; pattern from Friday that targets 1114.

UPDATE:  3:10 PM

Got a more substantial wave down and are coming back for a larger backtest.  Might fail here, or with another touch of the original RSI trend line (dashed purple.)

UPDATE:  2:40 PM

So far, so good on the little H&S.;  Broke the neckline, and are backtesting it now.  Never even came close to the RSI TL, so I’ve drawn a new one to reflect the next trend.

From the looks of things, we should turn down from here.

UPDATE:  2:15 PM

To better answer dm’s question….  Here’s another little H&S; setting up within the shoulder of the 5-minute chart.  If the right shoulder of this pattern exceeds the head, obviously it’s busted.  Such a move will likely play into a harmonic pattern and reverse at the .786 or .886 retrace.

But, if it confirms by moving decisively (“closing” if on a daily chart) below the neckline around 1128, it’s good for an 11-point decline to around 1117.  I know it’s not a huge move, but it’s very tradeable if you’re so inclined.  More importantly, it takes us below the neckline of the larger H&S;, which would help nudge that larger pattern into action.  Like ripples in a pond.

Let’s see how it plays out.  I’m also keeping an eye on the RSI, in particular the shaded oval.  The right shoulder should complete somewhere before the RSI passes through the TL drawn through that oval.

UPDATE:  1:35 PM

Here’s yet another way of looking at the big, ugly H&S.;  This drawing has bearish potential to 1032.

Tom Bulkowski has a fantastic website (and great books, too), and discusses H&S; patterns extensively.

UPDATE:  1:15 PM

I watch for harmonics all day long on the 5-minute chart.  And, I try to take a frequent peek at the 60 minute and daily charts, too, just in case I’m missing something that’s bigger than my screen.

Here are several possibilities shaping up right now, as we bounce off the just completed H&S; neckline — a bounce that’s almost always to be expected, by the way, just like trend lines.

This is a bearish bat pattern that would reverse around 1138.50.

This one has an alternate entry (X) point, but the B retracement is not quite to the .382 level.   I slightly favor this pattern, because the .886 retrace (1142.83) takes us almost to the right shoulder and traps a lot of bulls who think the H&S; won’t play out, before plunging back down.

Here’s another possibility — a bearish butterfly that’s already completed at the 127.2 extension.  But, because it’s smaller, it might be good for only a smaller reversal on the way to completing one of the larger patterns shown above.   These things very often nest inside one another.

By the way, the white dashed line you can see just above (and stopping) the last advance at 1135.83 is the neckline from the other H&S; pattern I just posted at 1:10.  So, if we’re able to hold below these levels, it makes me like that H&S; pattern that much more.

UPDATE:  1:10 PM

Here’s another H&S; pattern with bearish potential to 1053.  It’s not very well formed, but sometimes the ones with ugly right shoulders perform the best.  We could look at this morning’s rally as backtesting the neckline.

UPDATE:  11:30 AM

We’re 7 points away (1121) from completing a H&S; pattern that, in a normal market, would take SPX down to 1095 or so.

Since it would represent such a massive reversal of this morning’s action, I would expect it to have a lot of momentum as it falls, especially once we crack 1100.

UPDATE:  10:50 AM

The rally this morning can be characterized as a backtest of the fan line we broke through several sessions ago.  It’s the red dashed line, drawn off the Oct 2007 high through the high of the Nov 2010 “W” pattern.

Seen here, closer up.

Once the backtest is completed, we should be able to get on with wave 5 to 1067 or below.

UPDATE:  9:50 AM

We got the reversal at 1146.50, a little shy of the target price.  It’s possible we’ll go back up and tag the target price before the decline progresses any further.  But, this is looking like a pretty good reversal so far.

Interesting, in that the cash market is following the futures’ lead on this one.  Often, the cash market takes over on the opening and can negate a pattern established in the futures.

These harmonics patterns can obviously be very effective.  Like Elliott Waves, they don’t care much about earnings per share or Fed comments or CNBC breaking news.  Although, those triggers are often credited for the move that the harmonics pattern correctly forecast days in advance.

Aside from creating great trading opportunities, they can mentally prepare an investor for a coming turn.  This comes in handy when, like this morning, you wake up to a 20-point rise in the futures market that threatens your short positions.  A quick look at the bat pattern, and I knew there was a good chance the bulls run was about over.

My gut tells me that when the rebels take full control of Tripoli, oil will resume its near-term decline (light sweet crude hit 84.43 this morning.)  This is good for our economy in the long run, but I expect it would hurt stocks in the short run.  Oil companies have used high crude prices to generate record profits; they compose 12.5% of the S&P; 500.

Another angle is that falling oil prices might give the Fed the inflationary headroom it needs to bring on another round of QE.   It’s still an awful idea, but lower prices at the pump might justify their contention that stagnation and deflation are the greater risks to the economy.

After the Fed pumps another $500 billion into the system, oil companies can go back to raising prices and making billions in earnings and the Fed can go back to inflation whack-a-mole.  Just a thought.

UPDATE:  1:00 pm … a WSJ reporter’s take on the situation:

ORIGINAL POST:   9:25 AM

The futures, at 1144.75, are completing a bearish bat pattern, with the .886 retrace at 1148.46.  This rally should reverse very soon.

This rally is the follow through to the bullish butterfly pattern I discussed in Friday’s 2:40 post.   We were looking for a turn at 1124, and got it at 1122.05 instead.

Here’s the chart I posted at that time.

And, here’s the completed pattern.  Note we also completed a falling wedge, that also forecast a bounce.

The little H&S; pattern that indicated a downside to 1114 has likely played out, as this morning’s rise exceeds the right shoulder high.

UPDATE:  4:15 PM

SPX ended at the lows of the day, a good sign for the bears.  However, there’s a little divergence set up on the short term charts, so we might see a little bounce in the immediate future.  I would imagine we at least fulfill the H&S; pattern (to 1114) first.

UPDATE:  3:08 PM

The H&S; pattern is battling a potential falling wedge and OPEX for control of the close.  Should be interesting.

UPDATE:  2:40 PM

SPX is working its way toward completing a small bullish butterfly.  While I wouldn’t expect much of a reversal here, it might be good for identifying the next intra-day bounce.  The 1.27 Fib is at 1124 and the 1.618 is at 1115.93 — very close to the H&S; target mentioned below.

UPDATE:  12:50 PM

SPX just completed a little H&S; pattern on the 5 minute chart.  Potential is to 1114.

ORIGINAL POST:  10:05 AM

Good morning, all.  Gold just extended to the 3.618 Fib level on the bearish Butterfly pattern we’ve been watching.  At the risk of crying wolf, maybe this is the magic number.

Just a reminder… the butterfly pattern is normally very powerful, producing strong reversals at the D point.  But, as we’ve seen, identifying that D point can be frustrating.  The rules state that it must be at an extreme Fibonacci number, but this has taken “extreme” to a whole new level.

While we’re waiting for the market to reach its target, I thought I’d do a little exploration on gold margin increases.  There were six increases in 2009 – 2011.   They’re marked on the chart below with yellow asterisks; the four decreases are marked in purple.  The equivalent SPX dates are also marked.  

I’m looking for patterns in how and when margin requirements are changed, and whether such changes are related to activities in the stock market.  Several of the increases follow run-ups in price, but there are several rapid price increases with no corresponding margin increase, the most notable being in early 2009.  There have also been several cuts at a time when prices seemed on the rise. 

One interesting observation is the way stock market declines seem to follow gold margin decreases.  It happened three out of four times since January 2009.  I suppose it’s possible that CME anticipated stock market weakness, and lowered margin requirements to permit accumulation of positions in advance; but, no one’s that good at predicting the stock market.

CME states that initial and maintenance margin rates are based primarily on volatility — the goal being to prevent member firms from collapsing and endangering the exchange.  Margin decreases would therefore be instituted during periods of perceived and expected low volatility (not the same as price decreases.)

Expectations of low gold volatility would likely exist during times of expected stock market and USD stability and/or low inflation.    Let’s take a look at the dollar versus gold.

It seems that gold margin increases often follow major bottoms in the dollar.  Given that the dollar and stocks are increasingly negatively correlated, this could be pretty useful information for stock investors.

Since gold’s rise has been both parabolic and volatile of late, it’s not hard to imagine another margin increase is on the way.  Might this mean both the dollar bottom and stock market top are in?