Reposted from last night:

Yesterday, I ran into a friend (and member here) who was trying to develop a strategy for the rest of the week; we got to talking about various approaches.

I know I wrote this numerous times last week, but it bears repeating: if you’re not a gambler, stay out of this market.  In the short-term, it’s just too dependent on what Bernanke says (or doesn’t) on Friday.

I blog every day about what I see and what I think.  As always, I have an opinion as to what will happen.   But, right now, my confidence in my opinion being right is a lot closer to 50% than the 70% I shoot for.  Why?

Most of what happens in the next couple of days will be driven by what Bernanke says on Friday.  And, while I have opinions, I have no special insight into what he’s going to do.  So, unless something really weird happens in the next two days, I will have at most a very modest bet in place when Bernanke starts talking.

Ever since 1426, trading SPX has been very high risk.  First, 1426 didn’t really match up with any patterns; 1422 or 1433, sure — but not 1426.  I saw a few Elliott Wave guys get it right, but that’s about it.  So, it wasn’t clear it was the top (still isn’t.)

Second, every one of the past 16 sessions has traded within 10 points of the fan line from 1576 in October 2007.   Thirteen have actually touched it, and 5 have straddled it.  Fan lines are extremely important, and the fact that the market can’t make up its mind is very telling.

Third, the cost of being wrong could be substantial.  I’m working on a forecast that covers a range of outcomes, but SPX could move +50 or -50 in a matter of a day or two — depending the what the news is and how well it’s delivered.

Looking back over the years, the worst trades I ever made came from being invested at a time when I wasn’t very sure about the direction, but had enough of a hunch to stay invested.  Sometimes these even work out, which is dangerous (it only encourages more hunch playing.)

I’ve learned the hard way that it’s perfectly all right to be on the sidelines.  Sometimes, it’s the only sensible approach.  Although illogical from a mathematical standpoint, in my  opinion losing actual money sucks more than does an opportunity loss.

So, unless there’s a great straddle (currently 5.10 ATM on SPY) or volatility trade that makes sense, this is one of those times.  I’m still long from 1409, with an objective of 1420-1422 and a stop at the fan line around 1405.  I’ll continue to take stabs at the intra-day stuff for those who like to day trade.  But, if nothing substantive happens in the next few days, I’ll be market neutral (and sleeping soundly) Thursday night.

I’ll post more after the open.

UPDATE:  9:50 AM

We’re getting that rebound we were expecting off the lower channel bound on the 30-min chart.  So far, the TL (red, dashed) from 1426 is holding, but I expect it to give way in the next hour or two.  If it does, potential targets are the .786 at 1420 and the .886 at 1422.  But, I wouldn’t be surprised if the channel midline (the yellow dashed line) keeps a lid on any break outs.

If the channel should break down for some reason, the immediate downside should be limited to the fan line down around 1405.  The channel bottom and the red TL intersect around 1410 at 1230 EDT, so look for a breakout or breakdown before then.

continued…

Also, be aware that MMs are on the prowl.  Expect sudden 3-4 point swings that are designed to get traders off the sidelines.  These can just as suddenly reverse, leaving option buyers stuck in losing positions (like yesterday at 3:15 EDT.)

Note that there are really two fan lines at present:

1. the higher one runs from the October high through the Apr 2 high of 1422.38.
2. the lower one runs through the Apr 2 real body high (close) of 1419.04.

Obviously, both have influenced prices over the past couple of weeks, so we’ll leave them both on the chart for now.

The white TL that just caught the latest dip is the former neckline of the Feb – Apr Head & Shoulders pattern — still in play after all these months.   The parallel white lines below it just happened to help guide prices — as often happens with major trend lines.  The TL is the pebble tossed into the pond, and the parallel channel lines are the ripples.

Remember, this TL goes back much further than that H&S pattern — which makes this particular system of parallel lines (channels) very significant indeed.

UPDATE:  11:30 AM

That didn’t take long.  The breakout/breakdown question was just resolved to the downside.  Prices seem to have bottomed at a line parallel to the neckline discussed above (ditto for the RSI.)

Don’t be surprised if the rebound takes us back up to test the just-broken yellow channel line.  If it holds, the higher low just put in would make a nifty Point C for a Butterfly (from 1416) completing at 1419 — but only if SPX can push up through that red TL.

 

UPDATE:  1:50 PM

Got the break-through on the red TL.  Hitting some resistance here at a RSI TL which is also the .786 of the smaller harmonic pattern below.

Given that we’ve already reached this level yesterday, I’m rooting for an extension to the 1.272 at 1419.  If that’s going to happen, we shouldn’t have another serious reaction at this level — maybe just a point or two.  But, I’ll likely raise my stop to 1411 or so.

The dollar has floated up to tag the channel midline again.  And, its daily RSI is finding resistance on that falling wedge.  I think we’ll stay within it until Friday, which means the next move is down — supporting my view that stocks will go a little higher.

A trip to the lower bound looks like it could drop DX on down to our 80.83-80.88 target, based on similar RSI moves in the past week or so.

UPDATE:  3:00 PM

Not much movement on anything.  SPX is back to the channel bottom, though that particular feature isn’t as credible after being broken this morning.

I had a question about gold earlier.  Recall from our last gold update that gold broke out of a descending triangle and was working its way toward a Bat/Crab Pattern completion at 1762.  But, we hadn’t had a serious back test of the triangle since breaking out.

This past couple of days, gold’s RSI bumped up against the channel we’ve been watching.  Consequently, gold reversed a little — not enough to complete a back test, but enough to notice.  It also hasn’t been so much that prices fell out of the latest upward sloping purple channel.

Like equities, gold will react to Bernanke’s statement on Friday.  If it’s gold-positive, look for the climb to 1762 to resume.  Obviously, there are degrees of positive, but that’s our medium-term goal.

Otherwise, it depends on how negative it is.   The downside scenarios (depending on how little enthusiasm is expressed for QE) are:

• 1634 — the triangle’s upper bound for a backtest
• 1606 — the white, dashed trend line
• 1567 — the red mid-line
• 1527 — the triangle bottom

More later.