As we expected, yesterday’s pre-opening rally failed and new lows were reached by the end of the day — though we didn’t quite reach the upper end of our target range on SPX.   Here we are, 24 hours later, looking at pretty much the same set up.

The eminis are up 9 points, the dollar sold off nicely during the night, and the EURUSD is back below the support it tried to regain overnight.  Could this be a case of same tune/different day?

As we discussed yesterday, the dollar was due for a sell-off.  We got it — in fact nailing our proposed Point C (in yellow, below.)

The euro also complied, by putting in a wave C in its back test of the broken red channel.

SPX reached within a couple of points of the high end of our target range.  But, by my count it hasn’t completed the full extent of this sell-off.  Look for this rally to fail at around 1422.

The eminis, despite a great bounce off the .886 of the April – June correction, appears to have stalled at the bottom of the white channel.  And it did so without having reached its own harmonic target and without any positive divergence whatsoever.

continued for members…

This rally looks to only reach the white channel bottom on SPX — probably around 1422.50.  I see it as another opportunity to short at an attractive price.  I would consider pulling the plug if it’s still gathering strength past 1423.

Recall that this was our bounce target from the past couple of days.  It looks like the completion of a corrective wave 4, setting up a little wave 5 to our targets range of 1401.74 – 1405.45.

Obviously it widens our falling channel somewhat, but it looks like a very good fit for the past week’s price movement.   And, note that it reaches the top of the (broken) little red channel that was in play the last couple of days.

There is one signal out there I haven’t discussed much yet — the misshapen H&S pattern at the top of this pattern.

It’s not exactly a thing of beauty, and as such is a little suspect.  But, I can’t ignore the fact that it targets 1360 — which is within a few points of:

• the .618 of the move from 1266 to 1474 (1346.11, purple pattern)
• the 1.618 retracement of the move from 1396-1474 (1348.39, red pattern)
• the 2.618 retracement of the current pattern from 1425 to 1464 (1363.25)
• the .618 of the move from 1266 to1422 (1362.93)
• a yellow channel mid-line

Here’s a wider angle on it…

What I’m not so sure about is the timing.

IMPORTANT UPDATE:  11:20

SPX is selling off nicely, but I’m keeping an eye on a possible threat to the downside case.  With this morning’s push to 1421.12, the bulls might be trying to engineer an Inverse Head & Shoulders pattern that would target 1435.  Set your stops accordingly.

There is now positive divergence from 15-50 minutes, but not on the daily.  And, it’s unusual to put in an important top or bottom without divergence (we had no negative divergence on the 1474 top, either.)

This pattern would complete at around 1421.50 – 1422, depending on when it happened.  And, again, it would target 1435.  There is no harmonic support for this pattern to play out, but yesterday SPX tagged the bottom of the purple channel.

I expected an intra-day tag of the above-mentioned 1401-1405 Fib targets, but a channel tag is just about as important.  A move below 1407.10 negates the threat.

If this does start to develop, it would be hard to play.  I assumed that this morning’s 1421 would be the end of wave C of corrective wave 4, there wasn’t much form to it.  It’s possible it was just an initial subwave of C, in which case we could get a deep retrace that comes very close to completing the IH&S — but not quite.

It would suck in a lot of bulls who are playing the completion and resultant run up to 1435, only to result in a drop to 1405 instead.  It would also wash out a lot of bears who are trying to protect their gains from shorting.

I don’t think the odds favor this pattern playing out.  The EURUSD appears ready to make one last move down to either the red .786 or, less likely, the .886.

And, the dollar is likely just back tracking a little before heading higher to complete a Crab Pattern up at the yellow 1.618 (after hitting the .786 of the smaller purple pattern.)

The only safe bet is to either (1) take profits here and look to re-short again higher or at the pattern bust of 1407; or (2) set your stops way up around 1422 in case it does play out.

Again, I don’t think it will, but I would be remiss in not mentioning it.  Okay, back to the longer-term picture…

UPDATE:  12:25 PM

We reached the upper end of our target range — the .886 of the 1396 to 1474 rally at 1405.45.  So, we should get a reaction here.  The wave form is craptastic at best, so I’m not convinced this is the bottom.  I’d like to see at least a channel break and back test on positive divergence before declaring it done. I’m closing my shorts anyway and trying a small long position — but am fully prepared to reverse course if the bounce should fail.  Charts in a few.

UPDATE:  12:40 PM

IMPORTANT UPDATE:  3:30 PM

It’s nice that the market has done absolutely nothing the past three hours.  It gave me time to construct a very interesting chart.  Those who have been with us since earlier this Spring know that we had great luck with a analog I discovered..

It took us from 1422 to 1286 and back up to 1474 very successfully — though the chop during June – July became so severe and the timing so “off” that I pretty much gave up on it — aside from noting that the Sep 14, 1474 high was within a couple of points of our target (from March.)

Well…I think it’s back on again.  I’ll post more details later, but I think it’s simply running at a current rate of about 2.4 days for every day in May – June 2011.  And, of course, there are plenty of divergences — mostly minor except for the above-mentioned chop.

The figures above represent the number of days from the patterns’ start (0); the numbers in the parentheses are the ratio of 2012 days since inception to their 2011 equivalent.

If the analog holds, we should get a bump up in the next day or so (1430-1440, still working on the target) followed by a decline to 1350-1360, a return to the low 1400’s and then a significant sell-off to around 1290 (sometime around the end of the year.)

If the analog is still working, we could see a rebound to 1400 or more before stocks get crushed in February.  I have a lot of details to work out, but that’s where things stand right now.

One big question is whether the PPT would allow any significant declines between now and Nov 6.  My intuition tells me they wouldn’t, which would contribute to a lag of the next leg down.  More as it becomes available…