ORIGINAL POST 7:45 AM PDT

Sorry for the delay in posting this.  I’ve had my MacBook Pro hooked up to an external monitor, and every once in a while the video card does a swan dive.  Going back to the trusty G4 for now.

Anyway, 1344 was my target and here we are.  My instruments of choice for now are SPY and BAC puts and VIX calls — keeping it simple.

I’d have preferred to get here via bogus debt ceiling news, but will gladly settle for bogus housing data,  Morgan Stanley earnings that don’t suck as much as expected, Philly factory activity and the 50th miraculous Euro stick-save of the year.

This leaves open the possibility that we’ll have one more bump when the debt ceiling news breaks, depending on whether we’re down significantly between now and then.  My best guess at this point is we give up most or all of these gains in the next day or two unless Congress gets its act together — in which case it’ll be an interruption of the decline.

Just finished the FHFA housing report, and I can tell you flat out that this is not great news.  As usual, the press is focusing on the puppy that was saved and not the burning apartment building.  The Philly Fed survey report was similarly underwhelming.  I’ll do a separate post about this later if I have time.

UPDATE:  9:00 AM PDT

DX just completed a perfect little bullish butterfly that started on the 13th.  Initial target is the .618 of DA, which is 75.42.  Subsequent targets are the 1.272 and 1.618 extensions at 76.6 and 77.2 respectively.

UPDATE:  10:30 AM PDT

SPX is giving it the old college try, but there are divergences everywhere.  DX is doing the same, in the other direction.  1347 might be the last best chance at an excellent short.  I expect it to start down in earnest around 10:45 AM Pacific time.

GLTA!

UPDATE:  10:37 AM PDT

Sorry, couldn’t resist this addition that just popped up on my screen:

Buying a few more BAC puts just for grins.  It looks very overbought on every chart I’ve got.

It has come to my attention that last night’s post was too obtuse.  Apparently, the sarcasm was a little too thick for the message to get through.  In an effort to be as clear as possible…

Tomorrow is Christmas Eve 2007.  If you’ve been following this blog, you know what that means and what to do.

We have maybe 20 points at the most to the upside, with 1340-1344 a reasonable target.

My initial target on the downside is 1280 or so by the first week of August (our channel bottom).  Prices should bounce there, then resume a descent to 1160 by the end of August.

I’m 99% sure about the price moves, only 75% sure about the timing.  The debt ceiling deal timing remains a wild card and could throw the timing off, much like the petroleum reserve release did to our big move up.  I think, after all this, the relief rally will be muted.

The fundamental case is compelling:  poor earnings, Euro Zone more problematic than ever, unemployment getting worse, housing still dead, etc.  I expect either this or next Friday’s WLI from ECRI to go negative for the first time since last summer.

The only thing that can save this market is another round of QE, which will likely be announced somewhere around SPX 1200.  But, we’ll deal with that when the time comes.

Good luck, everyone.

Anyone who’s read this blog over the past couple of months knows I’m confident we’re following in the footsteps of the 2007 top (and most of the other significant tops since the 1930s.)  If you’re new here, take 30 minutes and read through the posts listed here.

Lots of euphoria in the markets today.  Great news all around, as long as you don’t look too closely.  I’m reminded of the morning of December 21, 2007 (no, I don’t really remember; but I looked it up.)

Even though it was the week before Christmas, not everyone was full of good cheer.  Unemployment had ticked up from 4.7 to 5.0%.  Bear Stearns had reported its first ever loss, shuttered two hedge funds and had its credit rating lowered from AA to A.  And, housing starts had dipped to a dismal 1.2 million.

Fortunately, TPTB came to the rescue.  The Fed lowered the discount rate from 4.5% to 4.25%.  And, in an unprecedented show of cooperation, it was announced that the Fed, Bank of England, Bank of Canada, ECB, Swiss National Bank would coordinate to make available up to $64 billion to ease credit conditions.  That’s billion with a “B.”

There was a Santa after all!  The Dow soared 205 points, the S&P; 500 over 21.  The next two days tacked on 13 more points.  At that point, SPX was just 10 lousy points from completing an inverse head & shoulders pattern that might have sent it up 125 points to 1635.  That’s a bunch of Beemers!

We all know the rest of the story.  Suffice it to say there were a lot of hangovers those next few weeks that had nothing to do with New Year celebrations.  SPX dropped 120 points in 2 weeks, 230 points in 4 weeks and 750 points by the following Christmas.

Ten lousy points…that’s all we needed.  TEN.  LOUSY.  POINTS.

So, here we are 3 1/2 years later.  We don’t have the exact same set of problems.   Bear, Lehman, WAMU, etc. are gone, but we do have BofA — only, it’s down 50% from its 2010 high.  It just reported an $8 billion loss.  Goldman’s doing great; it’s only shed 30% of its recovery high.  Even Europe is fixed; they’ve announced it over and over.

And, the Fed– the Fed has pumped hundreds of billions into stimulating the economy.  Okay,  there were 3.8 million families foreclosed on in 2010 — up 2% from 2009 and 23% from 2008.  But, at least unemployment is dropping — only 9.2% (16% if you count the millions who have given up.)

“And, look at the market!” you say. “It’s more than doubled since 2009.”   If fact, we had one of those crazy strong days only yesterday — just like December 21, 2007.  The Dow wasn’t up 205 points, but 202.  That’s pretty good, right?  And, the SPX, while not up 21 points, was still up a respectable 19.  That’s something!

Now that you mention it, I’m getting pretty darned excited.  Didn’t we just complete an inverse head & shoulders pattern earlier today that should send SPX up to 1344?

And, if we hit 1344, we’ll be spitting distance from completing an even bigger inverse head & shoulders pattern that should send SPX up 90 points to 1444!

Let’s see, zip up to 1344, then tack on just a little bit more and we’re virtually guaranteed to go through the roof!

Hmmm, the tacking on part…  If I do the math right, we’ll only need 10 lousy points!

I’m getting my 750Li in black.

As we embark on the very last upleg of this topping pattern, it’s worth a reminder that we trade in a heavily-leveraged environment.  Furthermore, it’s leverage that already doesn’t work at interest rates of 1.5%.  What happens if markets decide 5% or 8% is the more appropriate risk-adjusted return?

We have a multitude of negative indicators staring us in the face including an obvious economic double dip, moribund employment, unsustainable debt and the abject lack of political will to do anything other than further enrich the greedy bastards who led us to this place.  The key factor in the market’s rally since the summer of 2010, quantitative easing, will be increasingly difficult to institute — not to mention increasingly ineffective.  But, that won’t stop the Fed from trying.

While gold and silver would normally rally in a QE environment, they are subject to huge declines if massive stock selling ensues.   We can argue all day about whether owning gold coins will make sense in the post crash world.  But, in the meantime, don’t count on your GLD and SLV shares to protect you from the turmoil.

USD futures (DX) are tracing out a return to the lower end of the channel they’ve been in for the past three months.  We broke out of the falling wedge, but the rally failed on last Wednesday’s stock market action and we’re back below the upper trend line.  The same thing happened to the downside last October.

As the above chart clearly shows, DX is about to be forced out of the channel or the falling wedge.   I expect stocks to start down in earnest in the next week or so, and DX to break strongly out of the wedge at that point.  A reminder as to what that looked like in 2007:

The harmonics picture is a bit muddled.  While we’ve completed A, B and C and D of an obvious pattern, it’s neither fish nor fowl.  The B retracement of .786 is typical of a Butterfly pattern, but the current D point at .886 of the XA leg is typical of a Crab.  The typical Butterfly D leg would be at least a 1.27 extension of the BC leg, or about 69.8.

While there’s no reason we must complete a valid pattern, it’s puzzling that we’d come this far — tracing out perfect Fibonacci retracements all along the way — just to abandon the pattern at this juncture.  The coming crash will be a pretty impressive wrench in the works, so maybe we should leave it at that.  On the other hand, I wonder if greater weakness awaits the USD after the initial runup.

With EUR in the same — if not worse — mess as we are, it’s hard to imagine that there’s a better currency alternative out there.  But, with depression and constructive default just around the corner for the US, who would question the need to hit the big, red reset button and bring asset values and underlying debt back into sync?

UPDATE:  9:35 AM

Thanks, Albertarocks, for the great comment.  Always appreciated.

I guess my bias is showing.  I believe that equities are due for a strong downdraft soon (the 2007 comparison, underlying fundamentals, etc.) So, that colors my thinking, to be sure.   I view SPX’s move from the 7th as [i] of 3 of (1) down, meaning this bump up today is a corrective wave [ii] that’ll be blown out of the water with the [iii] of 3 move down.

I added modest longs last week (Thursday or Friday?) in anticipation of the bump up, but closed most of them around 1316 this morning.  I might add a bit more if we backtest at 1310 or so, but the downside is likely not worth it, as we’re talking the c wave of [ii].   I’m currently as close to cash as I’ve been in a while, and am more focused on determining the best way to play the next leg down.

Irrespective, I believe DX’s channel would prevent it from making new lows until early August.  I think that in times of great uncertainty, markets keep their options open as long as possible.  For DX, that means staying in both the falling wedge and the rising channel until it must choose — by Aug 11 at the latest.  In fact, might just zig-zag all the way to 75.2 on the 11th, unless other markets go haywire first.

If stocks do crash, of course, that’s fuel to the upside fire.  But, what if they don’t?  You’ve got a very good case for 771-73, as the falling wedge has a long, long ways to go if it’s allowed to.  And, the fundamental problems are numerous. 

Please share your thoughts anytime.  Yours are among the most reasoned opinions I read on Daneric’s blog.

UPDATE:  11:35 AM PDT

Just completed a little inverse H&S; pattern that targets 1341 on the upside. Close enough to 1346 for my liking. 

UPDATE:  8:50 AM PDT

SPX at 1316.  The backtest may be done here at the .50 Fib line.   There’s a 50-50 chance that we go all the way back to 1310.  I sort of favor that scenario, as it would give us the room we need to do a half-hearted rally on the debt deal news.  If it’s the “hand the hot potato to Obama” version that’s being suggested, it won’t be much of a rally at all — as it would probably entail little to no spending cuts.

UPDATE:  7:00 AM PDT

Should get a little backtest of the falling wedge we just broke out of.  Might present some day-trading opportunities, as completing the backtest usually results in a trend resumption.  For the uninitiated, though, I’ll throw out a reminder that I am extremely bearish at this point.  This, in my opinion, should be the last rally we get before the next big move down.  And, given that we overshot on the 1356 rally, this one could be much smaller to compensate.  Since 1327 is only 10 points away, there is a lot of risk in participating at all. Closing out the bulk of my calls at a nice 2-day profit.

ORIGINAL POST:  6:25 AM PDT

The bump up we’ve discussed at length looks to get started in earnest this morning on the strength of the housing numbers.   I would hesitate to call this the move, preferring instead a rally based on a debt deal.  But, it appears the debt deal will be a watered-down version that might, in fact, be a disappointment rather than cause for celebration.  So, a market in need of a rebound will take what it can get.

Our lower target area remains1327 — the channel midline and the .618 Fib off the 1370 highs.  If we break through there, the next stop is 1346.50.  At this point, I am doubtful we’ll get there.  But, a better than expected bipartisan debt deal that involves real cuts and tax reform would certainly help.

UPDATE:  1:30 PM PDT

We got the bounce I was looking for, but it came later and after more damage then I expected.

The ramp job that occurred at Friday’s close was undone in the futures by the time the cash market opened.  I expected 1298.60 to hold, as it was key to the most bullish wave count out there — that we’re completing a minor 4 and beginning minor 5 up.

We did get several bounces off 1298.60, coming with 7 cents at 7:57 and 2 cents at 8:38AM.  At that point, we were within spitting distance of the falling wedge bottom TL and the .382 Fib line.  But, here, the selling pressure intensified and we bottomed at 1295.92 before retracing back to 1305.44 at the close.

The minor 4 count isn’t the only bullish count.  For great charts and discussion, check out the excellent Daneric’s Elliott Waves blog.   And, to be clear, I don’t expect the bullish case to play out.  But, I am surprised that those with a bullish agenda let this important line in the sand fall so easily.  My hindsight is that it was in their best interests to throw a scare at the Congress and Administration in order to get a deal done on the debt ceiling.

The Goldman’s, Merrill’s and JP Morgan’s of the world have huge stakes in seeing that the market remains “healthy.”  Underwriting, M&A;, trading, investment management, etc. all depend on a continuation of markets that are worth investing in.

A default by the US would destroy these revenue streams in a heartbeat.  I believe, therefore, that the powers that be orchestrated today’s little sampling of bear meat for the benefit of those Congressional dimwits (redundant, I know) still clinging to the idea that we could survive a default.

For that reason, the comeback at the EOD wasn’t allowed to accelerate the way it normally does — remaining, instead, firmly in the danger zone and keeping everyone more than a little on edge.

UPDATE:  8:35 AM PDT

VIX completed the backtest of the rising wedge it fell out of Friday, should head down from here.

UPDATE:  7:15 AM PDT

SPX down 14.62 to 1301.52.  For all the fear raging through the market, we’re still only at the bottom of the falling wedge and the -1 std dev line (also the .382 Fib) is holding just fine.  Don’t think we’ll broach the 1258.60 mark.  Took some short profits and added some on the long side here.

Going back and forth on the upside target.  Leading candidates right now are 1327-1330 (channel midline and .618 Fib) and 1346.50 (.786 Fib.)  TL off the May 2 high currently at 1350, but if we include shadows it changes to 1354.

I don’t think we’ll break the Jul 7 high of 1356.48.  The downside should be limited to the -1 standard deviation regression channel line, currently around 1300.  All subject to the debt ceiling talks, of course.

ORIGINAL POST:  6:45 AM PDT

Still looking for a countertrend rally up to the 1345 area beginning this morning, all totally subject to the debt ceiling news, of course.

Geithner trying to calm the markets with assurances that the ceiling will be raised — kind of like Hannibal Lechter assuring a dinner guest that there’s plenty of food to go around.

Friday’s action brought us closer to the apex on the SPX bullish falling wedge (60 minute chart).  In addition, there is divergence in the histogram, the stochastic and the RSI vis-a-vis the index.

VIX broke out of its bearish falling wedge at the end of the day.  The technical indicators are flashing negative — positive for stocks.

There is a bearish harmonic pattern forming on SPX — probably a crab — since Thursday of last week.  If it completes and plays out, it could knock the index back as low as 1300.  Such action would still leave the index in the falling wedge and would increase the odds of a stronger breakout to the upside.

If this were any other week, I would say we’re going up Monday, probably towards the 1345 area to set up a lower high.   This would be consistent with the 2007 pattern I’ve been tracking.  (I realize this is a long shot, with the E-minis down 10 at this hour.)

But, of course,  it’s not just any other week.  The entire financial world is waiting to see whether our fearless leaders can come to an agreement on the debt ceiling.  Any moves the market might otherwise have will likely be muted by the overhang of that pending news, much like the effect OPEX has.

I expect the news to be “positive,” meaning that they come to an agreement that will allow us to go another couple of trillion dollars into debt.  There should be a relief rally (as mentioned above), followed by a downturn as it dawns on people what this means for the economy long-term.

If some of the hard-core have their way, however, and an agreement either can’t be reached or is too modest in its spending cuts, all bets are off.  The sell-off will be swift and immediate.  It’s all about perception, and that’s the one thing the pols have proven themselves good at.

If there were ever a time to be neutral and/or sit on the sidelines, this is it.   I have very modest short-term bullish positions in place now, to go with my longer-term bearish positions.  If we break out to the upside on news, I will be looking to take profits, likely within 2-3 days, and position for a much larger downturn.

I’ll try to update this post before tomorrow’s opening.

One other note… Tom asked about gold the other day on another post.  I’m not a gold expert, but I do keep an eye on it from time to time.  I hadn’t in a while, so I though it would be worth checking the technical picture.  Here’s how I answered him:

I guess I’d separate the discussion into two parts: the fundamentals (what gold’s going to do thanks to the USD, EUR, hyperinflation, etc.) and the technical picture (ignoring all the possible external influences.)

From a technical standpoint, GC has been in a rising wedge since 2008, starting at a baseline of 680 with a 300 point spread — now down to about 70 points. The apex looks to be around Oct 31 at about 1640.

Interesting, because it’s also completed the bulk of a bearish crab pattern. The 1.618 ext of the XA leg would be at 1648. The BC extensions would be 2.0 at 1643, 2.24 at 1663 and 2.618 at 1694.

It’s currently a little overbought, but has shown the ability to get real overbought, so I wouldn’t give that much credence.

Having said all that, the fundamental picture is, IMO, extremely complex — irrespective of timing. FWIW, I think the dollar’s in for a wild ride, but short-medium term should be up. If the SHTF, which I think it will, maybe GC benefits from that and all bets are off.

Lastly, if you believe – as I do – that assets largely move together these days, you have to wonder if GC could hold up in a major equity bear market.

My best guess is that the next big move down happens by the end of July, initially to low 1200’s, bouncing back to around 1250 in September before a much bigger downdraft in October. When that happens, I think it takes most other assets with it — including gold.

A friend just tipped me to the fact that a certain Elliott Wave outfit (we’ll call them Elliott Wavers Incorporated, or EWI) pronounced yesterday that 2011 and 2007 exhibit a “similar topping pattern.”

OMG!

I only wish I had had this very valuable information a couple of months ago.  Oh, wait, I did.  When I made the exact same observation in May.  But wait, there’s more.

Now, only 36 points away from completing an obvious H&S; pattern, EWI says this market has a head and shoulders look about it.  To me, this is like predicting the Giants might win the World Series — as Nelson Cruz started to swing at Brian Wilson’s 3-2 pitch in the bottom of the 9th in game 5.

In reality, the pattern was visible well before my June 21 post and we had just completed the “head.”

EWI goes on to describe the similarities, including the internal trend lines, broken support line and backtest that I describe in detail in early June [here and here].  They’ve also been noticed and written about by folks like Max Cherry and Austin Mitchum — long before EWI’s breakthrough discovery.

Last, EWI questions if there’s any “forecasting benefit in analyzing this chart?”  Aside from the limited benefit in showing a similar psychological progression, they “haven’t found any price and time relationships between the two moves that would allow a more specific forecast.”

WTF!?!

Please indulge me as I set the record straight.

**********************************************************************************************************************

On May 31 [Why P[3] is My Top Bear Count] I noted “significant similarities between the past few months and the tops in 2000 and 2007.” 

On June 3 [Here We Go] compared the market action between the patterns as related to breaking and backtesting the long term support trendline.

On June 8 [Deja Vu?] detailed the pattern that the 2000, 2007 and 2011 tops had in common, noting how the market, “once it drops below its long-term support, looks like it’s in for a free fall.  But, it eventually finds new support in a parallel channel as I theorized a few days ago.  The bottom of the channel is drawn off a recent major high and the top is drawn off the two most recent peaks.  It pencils in nicely for 2000 and 2007…”

On June 10 with SPX below 1270 and amidst warnings of “flash crash!”, [Channel Surfing] showed how the pattern (accurately) promised one last return to the midline of the regression channel at around 1330.  I showed how the channel I’d drawn corresponded well with a 2-standard deviation regression channel.

On June 12 [Update: Channel Surfing] reported that almost every major top since 1928 exhibited the same pattern.  I suggested that the pattern was not only characteristic of tops, but a requirement.  I formalized the description as:  “…characterized by a multi-month pattern within a rising market that has at least two significant touches (of the index or its Bollinger Band) of at least 1.5 standard deviations on the upper and lower extremes of a regression channel commencing after a post-correction new high.  It’s capped off by a third touch on the lower boundary and subsequent return to at least the midline before a final plunge to new lows. “

On June 16, [You’ve Got a Fan in Me] showed how the regression channel could also be defined in terms of fan lines from significant previous high and low pivot points.  I used examples from 2007, 2000 and 1937 to demonstrate.  The prior day’s post [Playing the Bounce] used the pattern to call the bottom at 1261.90 (it was the next day at 1258.07.)

On June 21 with SPX at 1294, [A Different Perspective] discussed how a return to the pattern midline around 1327 and subsequent fall would create a huge head and shoulders pattern that, by mid-August, would begin a decline to around 1200.

On June 23 [Deja Vu, All Over Again] showed how the 2000 and 2007 patterns corresponded, beat for beat, and charted the various trend lines that would govern the pattern’s completion.  With SPX at 1287, the pattern still indicated a 1320-1330 target.  I reiterated the pattern prediction the following day in the midst of the 25 point intra-day plunge triggered by the strategic petro reserve decision.

On June 26, [Cliff Diving] defined the decline from 1370 to 1258 as 1 of (1) of P[3], and the subsequent rise a corrective wave 2.  I suggested the pattern interim target might also follow fibonacci guidelines.  The midline, at 1322, was virtually the same as the .786 Fibonacci retracement line.  With the market back to 1268 and bearish sentiment through the roof, I suggested the pattern would take us up 54 points in 5 days.  It took 4.  As I suggested on June 29, we would likely even overshoot (we did, hitting instead the .886 Fibonacci retracement.)

In June 29th’s post [Lunatic] I restated that contrary to popular opinion, the rally would not lead to new highs, but would merely complete a corrective wave 2, followed by wave [i] of 3 to around 1300 (it’s reached 1306, so far.)

On July 4, [Final Destination] suggested the next move down would stop north of 1298.61 in order to keep the bullish count alive.  So far, so good, with Friday’s 1300.5 overnight low in the futures market.

On July 7, [Confidence Fairies] and [Then and Now] suggested we had reached the pattern high at 1356.87 right at the .886 Fibonacci level.   The next day began a 5-day, 46-point decline.  In [Friday the Bear Came Early], I suggested the peak was in — earlier than the 87-day cycle would indicate because that’s what happens in market tops.

When a big decline the next morning was quickly reversed and seemingly everyone turned bullish [She’s Come Undone]  explained this was simply a throw-over, and that the pattern 1-standard deviation line had stepped in for 2007’s channel midline in defining the top and preventing any further advances.  SPX declined 27 points the next day and, as mentioned above, seems to have petered out above 1298.61.

***********************************************************************************************************************

Obviously, the pattern hasn’t yet completed, and there’s no guarantee that it will.  Anything can happen between now and then, including an extension of the pattern as occurred in 2000 (EWI didn’t mention that part, did they?)

But, excuse me for thinking that a pattern that accurately predicted 3 tops and 2 bottoms in 60 days has some freakin’ forecasting value!!!!!

Maybe if I charged $59/month… but, then you’d expect other brilliant calls like shorting silver at $20.

A friend just tipped me to the fact that Elliott Wave International pronounced yesterday that 2011 and 2007 exhibit a “similar topping pattern.”

OH!  MY!  GOSH!

I only wish I had had this very valuable information when I posted back on May 31.  Oh, wait, I did.  When I made the exact same observation.  But wait, there’s more.

Now, only 36 points away from completing an obvious H&S; pattern, EWI says this market has a head and shoulders look about it.  To me, this is like predicting the Giants might win the World Series — as Nelson Cruz started to swing at Brian Wilson’s 3-2 pitch in the bottom of the 9th in game 5. 

In reality, the pattern was visible when I posted on June 21 and we had just completed the “head.”

EWI goes on to describe the similarities, including the internal trend lines, broken support line and backtest that I describe in detail in early June [here and here].

Last, EWI questions if there’s any forecasting benefit in analyzing this chart.  Aside from the limited benefit in showing a similar psychological progression, they “haven’t found any price and time relationships between the two moves that would allow a more specific forecast.”

HUH!?!

Pardon me as I set the record straight.

**********************************************************************************

Back on May 31 [Why P[3] is My Top Bear Count] I noted “significant similarities between the past few months and the tops in 2000 and 2007.” 

On June 3 [Here We Go] compared the market action between the patterns as related to breaking and backtesting the long term support trendline.

On June 8 [Deja Vu?] detailed the pattern that the 2000, 2007 and 2011 tops had in common, noting how the market, “once it drops below its long-term support, looks like it’s in for a free fall.  But, it eventually finds new support in a parallel channel as I theorized a few days ago.  The bottom of the channel is drawn off a recent major high and the top is drawn off the two most recent peaks.  It pencils in nicely for 2000 and 2007…”

On June 10 with SPX below 1270 and amidst warnings of “flash crash!”, [Channel Surfing] showed how the pattern (accurately) promised one last return to the midline of the regression channel at around 1330.  I showed how the channel I’d drawn corresponded well with a 2-standard deviation regression channel.

On June 12 [Update: Channel Surfing] reported that almost every major top since 1928 exhibited the same pattern.  I suggested that the pattern was not only characteristic of tops, but a requirement.  I formalized the description as:  “…characterized by a multi-month pattern within a rising market that has at least two significant touches (of the index or its Bollinger Band) of at least 1.5 standard deviations on the upper and lower extremes of a regression channel commencing after a post-correction new high.  It’s capped off by a third touch on the lower boundary and subsequent return to at least the midline before a final plunge to new lows. “


On June 16, [You’ve Got a Fan in Me] showed how the regression channel could also be defined in terms of fan lines from significant previous high and low pivot points.  I used examples from 2007, 2000 and 1937 to demonstrate.  The prior day’s post [Playing the Bounce] used the pattern to call the bottom at 1261.90 (it was the next day at 1258.07.)

On June 21 with SPX at 1294, [A Different Perspective] discussed how a return to the pattern midline around 1327 and subsequent fall would create a huge head and shoulders pattern that, by mid-August, would begin a decline to around 1200.

On June 23 [Deja Vu, All Over Again] showed how the 2000 and 2007 patterns corresponded, beat for beat, and charted the various trend lines that would govern the pattern’s completion.  With SPX at 1287, the pattern still indicated a 1320-1330 target.  I reiterated the pattern prediction the following day in the midst of the 25 point intra-day plunge triggered by the strategic petro reserve decision.

On June 26, [Cliff Diving] defined the decline from 1370 to 1258 as 1 of (1) of P[3], and the subsequent rise a corrective wave 2.  I suggested the pattern interim target might also follow fibonacci guidelines.  The midline, at 1322, was virtually the same as the .786 Fibonacci retracement line.  With the market back to 1268 and bearish sentiment through the roof, I suggested the pattern would take us up 54 points in 5 days.  It took 4.  As I suggested on June 29, we would likely even overshoot (we did, hitting instead the .886 Fibonacci retracement.)

In June 29th’s post [Lunatic] I restated that contrary to popular opinion, the rally would not lead to new highs, but would merely complete a corrective wave 2, followed by wave [i] of 3 to around 1300 (it’s reached 1306, so far.)

On July 4, [Final Destination] suggested the next move down would stop north of 1298.61 in order to keep the bullish count alive.  So far, so good.

On July 7, [Confidence Fairies] and [Then and Now] suggested we had reached the pattern high at 1356.87 right at the .886 Fibonacci level.   The next day began a 5-day, 46-point decline.  In [Friday the Bear Came Early], I suggested the peak was in — earlier than the 87-day cycle would indicate because that’s what happens in market tops.

When a big decline the next morning was quickly reversed and seemingly everyone turned bullish [She’s Come Undone]  explained this was simply a throw-over, and that the pattern 1-standard deviation line had stepped in for 2007’s channel midline in defining the top and preventing any further advances.  SPX declined 27 points the next day.

***********************************************************************************

We haven’t yet completed the pattern, and anything could happen between now and then. 

But, pardon me for observing that a pattern that correctly predicts three bottoms and two tops in less than 60 days has some freakin‘ “forecasting benefit.”

I

UPDATE:  11:45 AM PDT

Just a quick recap of where we are:

Fairly neutral at the moment, other than some longer term bearish bets I established last week.  Took profits yesterday on most of my shorts, and actually bought a few SPY calls this morning, nothing big. We have to get OPEX out of the way first, as prices are caught in that tractor beam.  But, until the debt ceiling issue is resolved, I can’t see a lot of big moves either way.  Looks like we’ll close at 1315 or 1310.

The MM’s make money on volatility, so we keep seeing these little breakouts that go nowhere (just a minute ago, TICK was -982, no follow-through) just to bring suckers into the game.  In the meantime, we just range down into this falling wedge, currently bounded by 1305-1313.  The apex is Monday, but that doesn’t matter as we’ll just redraw it until there’s resolution.

I can’t imagine that we wouldn’t get a good-sized pop when the news breaks, but after the celebration dies down we’re still in a sucky economy with even bigger debt problems, euro problems, political stalemate, etc.  The USD should rally up and keep going, only because it’s (at least temporarily) in better shape than the EUR.  But, I’m expecting the equity rally to die off pretty quickly, probably no higher than 1345.  I think by mid-August at the latest, we’re looking at 1200-1230.

Just want to reiterate, go back and look at 2007.   We don’t have to trade every expected move.  Those that missed the 110 pt runup from 11/27/07, got a 70 pt runup 2 weeks later.  Those that missed the 12/11 top got another shot two weeks later.  Even bulls who clung to their longs got bailed out when the market backtested the channel bottom for FIVE MONTHS before finally rolling over for good. 

Many expect a flash-crash kind of crack, and sure it could happen.  But, history is on the side of gradual declines, 1% day after day over weeks or months before capitulation by the big guys makes huge declines possible.  Remember that the bulk of investment capital is with institutions that have an equity allocation that varies very little from day to day, even year to year.  It takes a lot to get them out of stocks, especially when the alternatives are equally bleak.

Good luck to all.

ORIGINAL POST:  6:30 AM PDT

Today’s dominant themes are the expected debt ceiling breakthrough, lukewarm economic news and options expiration.  It’ll be a battle to see which exerts the most pressure, although any debt ceiling news should trump.

Stocks have formed a narrowing/consolidation pattern typical of OPEX, taking the form here of a falling wedge, while DX has formed a rising wedge.  As discussed yesterday, both should break out on news of a resolution, but only the dollar should be able to sustain the bump.  I’m working on a more precise target for stocks, but I suspect it will be in the 1345 area.  It should test, but not break, the 1356 highs from the 7th.

I used yesterday’s lows to take profits on riskier downside bets, and swap out trades to better position myself for the updraft that could occur any minute.   Today, I expect we’ll follow the pattern of the past two days, where we open higher but drift back towards the bottom of the falling wedge around 1300-1305.  The 1298 high from 6/2 appears safe for the time being.

 There’s a pretty stiff penalty for being wrong on timing as volatility remains high.  There is also still a small, but real risk that Congress blows it, and we don’t get a deal on time.  The safe stance is to scale back on short-term bets and use price swings to establish or add to longer-term positions if opportunities present themselves.

More later.