Quick update before the open…

VIX call per the bearish Gartley was dead on.  VIX fell another 8% since the call, closing at 16.23  — down from 19.09.  The hourly charts confirm a continued fall over the near term.  My original target of 15.10 looking safe for the moment.  Very bullish for a continued rally in stocks.

SPX performed even better than expected per the falling wedge and the bullish Gartley, up strongly yesterday with scant pauses.  We should get one this morning after a few points on the open.

If we continue to trade at the fib levels, we should open at 1345, run up to 1348-1350, then pull back to around 1338-1340.  Good level to buy in, IMO.  If there’s enough time left in the day, we should resume climbing past 1350, backtest that trendline for a few, then onward and upward.

My original target remains 1381.50.  But, a note of caution is in order.  Anytime you’re dancing on a razor’s edge, as is this market, the slightest slip could be disastrous.  We’ve had many unforeseen disasters over the past few months, each of which sent the bulls scurrying.  And, Gartley patterns don’t always reach their targets.

We could see a major top within the next 10 days.  My inclination is that the 3% pullback we got last week wasn’t THE 87-day cycle low; a larger one awaits.  If we can reach 1381 (or the vicinity) before the end of May, we still have time within the 105 day window to start a  10% or more correction.

Tight stops are essential as we continue on.  Raincoat and umbrella time.

While it would be easy to jump on the P[3] bandwagon right about now (and it wouldn’t take much convincing) a note of caution is in order.

A pullback that stalls in the low 1320’s on SPX would leave a pretty well-formed bullish Gartley Pattern (Point B should be 4 points lower, allowing a fuller CD extension to .786, but these things are rarely perfectly formed.)

Why should we care?  A bearish Gartley Pattern accurately forecast the 80 point drop starting March 4 — after the market had nearly recovered from the action of the previous 8 days.  It’s estimated to ‘work’ about 70% of the time — house odds, if you will.

A bullish Gartley Pattern that plays out successfully from 1321 could be expected to boost the SPX by a quick 24 points to 1345, with an ultimate target of 1391.  I don’t believe in coincidences (unless CNBC tells me to), but 1391 also marks the upper bound of the rising wedge from Mar ’09.

It’s also only 10 points north of the .786 Fibonacci (off the Mar ’09 lows) levels at 1381.50.   If we don’t turn down from here, I expect P[2] to finally die between 1380 – 1390 sometime in the next 10 trading days.  It coincides perfectly with my 87-day cycle of downturns, but these cycles have taken up to 105 days, so it could be as late as June 3.

Could a decline stall at 1321?   1321 is the level of the trendline beginning on 8/27/10 at 1039.70.  Haven’t talked much about it, but this is a big, bad trendline of support that stopped single-day freefalls of 30 points (3/16) and 20 points (4/18) cold in their tracks.

But, for now, it appears that the “trendline that just won’t quit” from the Oct ’07 1576 level will continue to support the market.  Today, it stands at 1333 and seems to have rebuffed today’s running of the bears. 

If the decline resumes, however, keep an eye on the low 1320’s.  Any stall there is likely to begin a very strong rebound and will catch many off guard.

Next post: the Gartley Pattern that REALLY matters.

Happy Trading!

…  “everything looks like a nail” is the old saying.

Harmonic patterns aren’t too hard to spot.  Look for a big W, right side up or upside down, where each leg is a partial retracement of the previous one except for the last, which extends the previous leg but ends as a retracement of the first.  The retracements should be in accordance with harmonic numbers (usually .382, .5, .618, .786.)  http://www.investopedia.com/terms/g/gartley.asp

The good news is, they work pretty darned well — indicating a significant reversal with 70% certainty.  The bad news (besides the 30% wrong calls) is that once you start looking, they’re everywhere. And, because they’re harmonic they often nest inside one another in different degree, even morphing into one another where a CD leg feeds into a XA leg, etc.

As a (slightly autistic) guy who sees patterns everywhere, I get excited when they confirm other harmonic patterns and technical analysis.  I believe that’s the situation we’re now facing.

Among Elliott Wavers, there is some disagreement as to whether we’ve finished P[2] or not.  There are “problems” with various counts.  My favorite analyst and blogger, Daneric, remains open to alternative counts.  He’s been doing this forever, so that’s good enough for me.  One road leads to SPX 1380, the other to 1200.

So, what’s an investor to believe?  For me, that’s where Harmonics come in.  I’m following three patterns:

(1) a bullish pattern on SPX indicating a short-term upside of 1380 (the next week or so.)  The alternative is that the decline has already started (see below.)

(2)  a bearish pattern on VIX, also indicating a short-term rise in stocks  (VIX collapsed 8% after this chart was printed at 9am this morning.)

(3) a long-term bearish Gartley pattern on SPX indicating 1281 is the end of our road after rebounding from the Mar ’09 lows.  This chart shows the 87-day cycle lines as well.

The SPX daily chart ties everything together pretty well.  Note the rising wedge, overhead resistance with the Supercycle line and the .786 Fib, and the 87-day cycle date of May 16 (past cycles have varied by up to 15 days, or June 3.)

I’m clueless about the wave count.  But, I wouldn’t be surprised if we bounce off the RISING WEDGE (chart 3) to complete the ST BULLISH GARTLEY (chart 1), thereby completing the LT BEARISH GARTLEY (chart 2) at around SPX 1380 sometime before June 3 (105 days on the 87-day cycle.)   The falling VIX is icing on the cake.

Once caveat: it may have already started.  At 1318 earlier today, the SPX was off 3.8% from its highs.  It’s not much, but it could easily be the 87-day cycle decline in progress — or even the whole enchilada.  But, the Gartley patterns on VIX and SPX tell me we have one last bump up before it’s time to stick a fork in this thing.

Bottom line, I’m not going to heap on the puts if we drop a little in the morning.  I’ll see if we bounce off the rising wedge and start back up.  If we break decisively through 1310…forget I said anything.

VIX just completed a very well-formed bearish Gartley Pattern [see last post – Are We There Yet?], indicating it MIGHT have topped at 19.09.   In addition, VIX just bounced off its upper bollinger band, and there’s a shooting star on the 30 minute candle. 

SPX is also a few points from completing a bullish Bat Pattern (this chart is from last week — will update when I get the chance).

Lastly, we’re clearly in a falling wedge since May 12 (easiest to see in eminis.)  The apex is tomorrow at 1313.   Importantly, 1313 is also the .786 retrace of the 1370 high — a logical spot to arrest the decline IF that’s going to happen.  It’s also marks the bottom of the rising wedge since Mar ’09.

At 1318.51, SPX was off 52 — 3.8% from its high.  If we do reach 1313 on SPX tomorrow, that would be a 4.3 decline from the top, on the lower end but within the range of declines recorded by the 87-day cycle over the past 4 years.

I remain open to the possibility that 1370 was the P[2], and that the bounce up ahead (if it happens) is a corrective wave on the way down.  If so, we should see SPX contained below 1370.

All to say — the market’s ST direction is very much a toss up at this juncture.  But, for those bearishly inclined, keep one eye on the VIX.

It was supposed to be a great turnaround story, a good cause and a profitable investment, too.  After going public again post taxpayer bailout, GM dropped like a rock

despite research report puffery that would have Shakespeare drooling with envy

http://in.mobile.reuters.com/article/rbssConsumerGoodsAndRetailNews/idINN1824469820110419?irpc=984

While it would be easy to get caught up in P[3] fever, here’s a note of caution.  A pullback in the SPX to 1321, if it isn’t

Saying today’s PPI numbers were great — except for food and gas prices — is like saying your flight was great — except for the highjacking.

UPDATE  — 2:00 AM EDT

SPX closed down 8.30 at 1329.47, down 3% from the high of 1370.   The Asian markets are mostly flat or mixed, with the e-minis indicating a slight rebound.

The weekly charts look abysmal, but there’s still the possibility that we’ll bounce off these levels for one last push.  In addition to the below-mentioned trendlines, the 50 day EMA and .618 fib lines would offer support at 1323.  And, am I the only one underwhelmed by the volume accompanying today’s decline?

Other considerations include TICK, DVOL TRIN and the A/D  — all of which have thus far failed to confirm the downturn.  Also, the USD is probably due for a bit of a breather. And, at this late hour, the hourly e-mini charts leave open the possibility of a near-term bottom.

The VIX is breaking out, as would be expected if the decline is real.  But, at these prices it has nearly completed a bearish Gartley Pattern that started on May 6.  Of course, bearish for VIX means bullish for stocks.  It would complement the bullish Bat Pattern detailed below.

Lastly, don’t discount the Fed’s determination to avert a crash.  We have some oft-manipulated economic indicators coming out in the morning (housing starts and building permits.) And, any positive news on the debt ceiling (or even QE3?) might turn things in a flash.

If the decline is arrested here, the market’s vulnerable to a short squeeze.  Given that Friday is OPEX, it’s easy to imagine one last turn of the screw for this past week’s put buyers.

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ORIGINAL POST — 3:15 PM EDT

Feels a bit like a bear fake-out to me.  Unfortunately, as a frequent victim, I have more than a passing acquaintance with how they feel.

We’ve bounced three times today (5th in 3 days!) off the 2nd Biggest Baddest trendline on my charts — the one that started at the Oct ’07 highs at 1576 [see The Trendline That Just Won’t’ Quit on May 5].  Today, it sits at about 1332.

We have additional support at that same price from the .50 fib retrace (of the 1294 to 1370 move.)  One way or the other, this descending triangle is just about done.  Below here, out next major support is the trendline from August ’10, with touches on 3/16 and 4/18 — currently around 1326.

If this support holds, we’ve either started or are about to start [v] of P[2] up for the final push to:

(a) 1381 — the .786 fib line off the Apr ’09 lows);

(b) 1393 — the upper bound of the rising wedge since Mar ’09; or,

(c) 1410 —  the Supercycle line from the early 1990’s (The Biggest Baddest Trendline, also in the vicinity of the inverse H&S; target.)

I suspect we’ll be there within the next 7-10 days, in time to stay within the 105 upper limit (June 3) of the 87-day cycle [see Sure It Works Fine in Practice, May 10.]  After that, we should officially start P[3] down with a 10-12% or more decline.

An alternative view is that this cycle decline will be on the lower end of the scale.  The smallest over the past 4 years was 3.88%, which would indicate 1315 or so.  That would also mark the lower bound of the Mar ’09 rising wedge.  If we stalled here at 1331, we’d be down only 2.9%.  Not bad, but not in keeping with the cycle pattern over the past 4 years.

The interesting thing about 1315 is that a decline that stalled there would result in a very well-formed Bullish Bat Pattern.  Such a pattern, if it played out, would take us back to 1370+  muy pronto.  I drew the following chart last Thursday, when Blogger was on the fritz.  (I incorrectly labeled it as a Gartley, kissin’ cousin of the Bat; a Gartley would have had a bigger retracement at point B.)

Which way do we go?  I see three possibilities:

(1) we’re entering [v] up to 1381-1390 before starting a big P[3] down.  If we close above 1344 today or tomorrow, I’ll favor this route.

(2) we’re going to fall to 1310-1315, bounce off the lower bound of the rising wedge up to 1381-1390 before starting P[3].  This will be easy to spot, because we’ll fall decisively below the above-mentioned trendline at 1332.

(3) if we don’t stop at 1310, the next levels of support aren’t until 1295 and 1249. 

Weekly MACD, RSI and STO are all trending down and show plenty of room on the downside before we’re oversold.  Make no mistake, this market is one sick puppy.  The only question is whether he limps over to the side of the road and croaks right here, or whether he’s got a little fight left in him.

We should know in the next day or so.

Reposted from Thursday, May 12, 2011

While it would be easy to jump on the P[3] bandwagon right about now (and it wouldn’t take much convincing) a note of caution is in order.

A pullback that stalls in the low 1320’s on SPX would leave a fairly well-formed bullish Bat Pattern. Point B should be a few points lower, allowing a fuller CD extension to .886, but these things are rarely perfectly formed.

Why should we care?  Bat Patterns work well in forecasting market moves.  It’s estimated they’re successful about 70% of the time — house odds, if you will.  The most recent notable example was on March 4.  After the market had nearly recovered from the previous 8 days’ mini-crash, many were expecting further gains.  A Gartley Pattern — close cousin to the Bat — correctly forecast an 80 point drop.

A bullish Gartley Pattern that plays out successfully from 1321 could be expected to boost the SPX by a quick 24 points to 1345, with an ultimate target of 1391.  I don’t believe in coincidences (unless CNBC tells me to) but 1391 also marks the upper bound of the rising wedge from Mar ’09.
It’s also only 10 points north of the .786 Fibonacci (off the Mar ’09 lows) levels at 1381.50.

If we don’t turn down from here, and that’s a BIG IF, I expect P[2] to finally die between 1380-1390 sometime in the next 10 trading days.  It coincides perfectly with my 87-day cycle of downturns, but these cycles have taken up to 105 days, so it could be as late as June 3.