We’re getting dangerously close to our downside target range of 1295-1323, first discussed back in April.

• 1349.42 — .886 of the purple Butterfly (tagged)
  
• 1343.41 — 1.272 of the yellow Crab pattern (tagged)
  
• 1340.03 — horizontal support, prev. Point X  (tagged)
• 1323.85 — 1.618 of yellow Crab (next)
• 1317.63 — 1.272 of purple Butterfly
• 1289.14 — 1.618 of purple Butterfly (and 2.24 of Crab)

I have been viewing the downside as consisting of three basic scenarios:

(1)  stick save: Fed freaks over Europe, QEish leak limits downside to 1349 (fail)
(2)  top case: normal Butterfly completion to 1.272 (1317) or 1.618 (1289)
(3)  panic sets in: crash and test bottom or large red rising wedge around 1200

The daily RSI has reached an important trend line of support (solid, purple) and, unlike FTSE, has yet to exhibit positive divergence — meaning it could go lower and tag the dashed purple line.

I suspect the solid line represents 1323 and the lower, dashed line 1289-1295, but that’s pure speculation on my part.  As we approach 100-pts off the 1422 top, look for lots of investors to throw in the towel.  It’s this capitulation that we need if we’re to see a meaningful rebound.

As I wrote back on April 12 [see: Analog Details]:

To me, a drop to 1305-1317 seems fairly plausible.  The tricky part comes in calling for a reversal after SPX has fallen 120 points from its recent high.  The timing looks to be early May.

Will the Fed and ECB come to the market’s rescue yet again?  I think so.  I think they understand as well as the rest of us how close to the precipice we are. It’s stupid economic policy that will make things worse in the long run, but since when did that matter?

On the other hand, I have no doubt that the looming derivatives disaster [see: There is Nothing Wrong] I’ve been writing about — handily verified by JPM — could be beyond their ability to control (hint: 2008 all over again.)

Stay tuned.

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And, for fellow Simon & Garfunkel fans…