pebblewriter

Tag: analog

  • Analog Update: May 14, 2012

    Today’s action plays out well with the analog I first posted back on April 9 [see: Analog Watch] and charted on the 10th and 11th [Analog Details.]

    At the time, SPX had peaked at 1422, one point above a Butterfly target we identified on March 29 [see: All the Pretty Butterflies] and was on its way to our 1357 downside target (tagged later that day.)

    The subsequent completion of the right shoulder at the .886 Bat pattern target of 1415 [see: A Swing and a Hit] got the downside started on May 1, and it’s been all gravy since then — including the completion and back test (more…)

  • So Far, So Good

    Over the past 5 weeks, our forecasts have been remarkably accurate.

    The Butterfly pattern identified back on Mar 29 [All the Pretty Butterflies] correctly called the 1422 interim top.  As anticipated on Apr 10, we got a bounce at 1357 (the .786 of the 1340-1422 rise) and began tracing out a head & shoulders pattern that fit with an analog of the Feb-May 2011 topping pattern [Analog Details].

    The analog been very accurate thus far, although the initial right shoulder bounce had us wondering whether the alternate path to 1462 was playing out.  Our RSI indicators kept us on the right path.  Instead, we got a complex H&S pattern, with a second test of the neckline and subsequent round trip to the shoulder line, accurately forecast in both time and price.

    Friday’s bounce at 1367 was within 2 points of our 1365 target [2d Time a Charm], with a nice little back test — as forecast — to the neckline, where we closed out the week.  The only reason I mention all the above is that, while this degree of accuracy is always desirable, it’s not typical and should not be expected.

    Regardless of how well your investments have performed the past five weeks, don’t forget that they are out to get you.  Even now, as it appears that the analog is playing out nicely, the financial establishment is working overtime to separate you from your money.  There will be more times, such as in January, when perfectly good harmonic and chart patterns don’t play out as they should.

    Always use stops!

    Now, with that out of my system, it looks like the results of the Greek and French election, on top of Friday’s dismal non-farm payroll numbers, is going to provide the push we need to get on with the downside.

    Remember, our target is 1288-1323, although 1288 has been fudged to 1295 simply because a dip below 1292 would be problematic for the bulls from a wave count perspective;  i.e., I think they’ll pull out all the stops to avoid it.

    Potential bounces along the way include:

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

    But, I divide the downside into three basic scenarios:

    (1)  stick save: Fed freaks over Europe, QEish leak limits downside to 1349.
    (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.

    I expected to be able to update all of the charts today, but my youngest daughter has been home with stomach flu while my wife and daughter #2 were at an all-day volleyball tournament.  Needless to say, it wasn’t as productive a day as I expected.  Look for updated charts Monday.

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    Over the next couple of days, I’ll finish converting the new website to a premium site.  Many thanks to those of you who have joined up.  I hope you’ve been able to act on my forecasts; if so, you’ve more than earned back your subscription costs in the first week.

    To anyone still thinking about it, the end is near.  The old site will still display articles of general interest and delayed market updates.  But, members of the new site will enjoy the first and best of what I can put out.  To join now, click here.

    Good luck to all.

  • Going Out on a Limb

    In spite of the indecision demonstrated in this morning’s post, I’m seeing a channel set up on the RSI that’s tilting me slightly more bearish.  It’s the dashed, red channel on the chart below.

    Remember, everything that’s happened since April 4 is technically a back test of a broken rising wedge — unless we break above 1422.  It’s possibly a replay of the events of Feb-May 2011 [see: Analog Details.]   This back test correlates with a back test of the dashed, yellow TL on RSI (redrawn this morning.)

    Viewed through this prism, the channel makes a lot of sense.  In 2011, a similar channel sent SPX down 45 points or so — but that was after the H&S pattern had played out.  In the current time frame, we had a bounce at the neckline and no follow through since.

    One more thing: the purple trend line intersecting with that RSI channel.  Previous failures to push through it have proven disastrous to SPX.   All things considered, I’m going to layer on more bearish positions — with tight stops.

    The same channel is setting up on NYA and COMP, too.

    Stay tuned.

     

     

  • Go Away in May?

    Maybe it should read “be put away in May?”

    It occurred to me over the weekend that Friday’s posts probably sounded a little schizophrenic.   “Next Stop 1462?” does seem a little out of step with “VIX Ready to Rumble.”  Is it me, or is the market perhaps a little schizophrenic?

    This morning’s drop does little to clarify things.  Again, we reversed right at the H&S pattern shoulder line — dropping as low as 1395 on the Chicago PMI survey (off 6 points to 56.2 for the third monthly drop in a row — see details below.)

    Furthermore, the RSI TL we were watching so closely last week appears to be holding.  It broke on Friday, but has snapped back to the point where we can probably ignore Friday’s action.

    As anticipated, VIX did do a little rumbling this morning, up almost 7% to 17.41, currently loitering at 17.30.  These RSI channels have done an amazing job at forecasting VIX over the past couple of months.

    Unfortunately, we’re no closer to resolution of last week’s “analog vs alternative” quandary.  For a long, tedious discussion please re-read the past few posts from last week.  The cliff notes version is: “50:50.”  That is, both options are on the table, and will be until we see some sort of break out. I’m keeping my powder mostly dry until the path forward is more clear.

    I’ll continue to watch the red-dashed RSI TL on SPX above.  I’m also watching the McClellan Oscillator, which is often a good indicator.  Like many other indicators, it’s on the verge of a breakout or breakdown.  Now, if we can only figure out which one…

    The economic data continues to forecast slowing.  But, at what point will the market care?  As we’ve discussed many times — good news is good, and bad news is good (if it stimulates another round of QE.)  It seems the only thing that might quash the QE hopes is an announcement from the Fed that it’s off the table (don’t hold your breath.)

    Stay tuned.

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    The April PMI survey isn’t pretty.  The production component dropped a huge 11 points — the largest drop in 11 months.  But, the Buying Policy component is particularly telling.  It asks respondents to report how far in advance they must order what they need for their businesses.  It’s a good handle on the tightness in the supply chain.  This month, it fell dramatically — from 45 to 28.  In other words, there’s plenty of capacity — not a good sign for those expecting the economy to heat up.

     

  • Next Stop 1462? April 27, 2012

    Yesterday we explored the alternate path in detail, noting that one of the two RSI trend lines we’ve been watching had broken, and the second was coming into play.

    There is the possibility that the downward sloping red, dashed TL will catch it on the way up, but the yellow TL just broken was a major feat.  A close above the TL would imply a definite momentum shift.

    This morning, the second (red, dashed) trend line just gave way, lending more credence to the alternate path higher if — and this is key — we can manage to close above it.

    As can be seen on the chart above, there’s very little in the way of resistance between here and 1462.  We’re at the H&S shoulder line now, and it’s possible that the pattern will still play out.  But, as discussed in Bulls Fight Back, the pattern will start looking lopsided with much higher prices or passage of a few more days before it resolves.  It fails definitively at 1422.

    Harmonics give us some ideas as to the path forward and potential turning points.

    Here’s the bullish case — a Crab (the larger purple pattern) with the 1.618 At 1462.55.  There’s a good possibility that we’d see a reaction at 1414, which is the .886 of a Bat pattern and the 1.618 extension of the smaller Bat (in red, labeled in white) that’s nestled in the last two legs of the larger purple pattern.

    But the ultimate target is Point D at the 1.618 extension of 1462.  This is the apex of the rising wedge pattern (yellow) we’ve been in since 1074 and intersects with the SPX channel mid line (red, dashed.)

    Yet, there are plenty of reasons for the market to turn down and complete the H&S pattern, including the very faint possibility that reality sets in.  Here’s the bearish case — a Butterfly (in red) — that points to a low of 1305-1317.  BTW,  red Point C can go as high as Point A, but no higher, in order for the pattern to hold.

    That red, dashed channel mid line at which either alternative ends is a biggie.  Here’s the view of the past 20 years…

    And, the even more stunning view since 1935…

    There’s the possibility of a slight miscalculation when graphing anything over 77 years.  So, when I say it comes in at 1462, that’s an educated guess based on my best interpretation of what I can see.  But, it’s helpful to know that it corresponds with the Crab patttern 1.618 –and is darned close to the Fibonacci .886 retracement level of the 2007-2009 drop at 1472.

    I believe we’re destined to tag that line again before the next big downturn.  But, whether we get there directly from here or after a more extended wave 4 is not clear to me at the moment.  For now, the momentum is clearly with the bulls, especially when we can rally off of horrid economic numbers.

    Personally, I’m reigned in quite a bit right now — at least until the picture is a little clearer.

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    The EURUSD has also defied logic, gaining slightly on the day to the point where it’s exceeding the channel that’s guided it for over a year.  But, the last month has traced out a Gartley that could see prices reverse around the .786 retracement of 1.3297.  Our high for the day so far is 1.3269.

    Stay tuned.

  • Spain Downgraded: April 26, 2012

    S&P cuts Spain two notches, from A to BBB+, based on contracting economy…cites declining disposable income, private sector deleveraging, front-loaded fiscal consolidation and an uncertain outlook for external demand in many of Spain’s key trading partners.

    This could be the catalyst for the turn we’ve been wondering about.  It could be the difference between the H&S and analog playing out versus our top alternative.  Notice that we did break the RSI trend line identified the other day (yellow, dashed) but were stopped by the 2nd one we discussed earlier today.  Today’s high was right at the shoulder line of the H&S pattern, and retraced a Fibonacci .707 of the recent 1422-1357 decline.

    Keep an eye on the CDS and bond rates for Spain/Portugal/Italy and key regional banks.  Remember, all these rates are available right here, just go to the economics menu and select market data.

  • On the Verge: April 26, 2012

    UPDATE:  5:35 PM

    S&P cuts Spain two notches, from A to BBB+, based on contracting economy…cites declining disposable income, private sector deleveraging, front-loaded fiscal consolidation and an uncertain outlook for external demand in many of Spain’s key trading partners.

     

    UPDATE:  3:25 PM

    Here’s a close up of the alternative path, which looks stronger with every uptick.  I haven’t altered its course since first charting it a couple of weeks ago.  Remember, it remains only an alternative until the H&S pattern busts.

    As we originally discussed, the thick, red dashed line is our target.  It’s the center line of a channel that goes back to 1935.  Really.  The rising wedge apex intersects with it at around 1462, which is the 1.618 extension of the purple Crab pattern detialed below (Point X at 1422.38).

    FWIW, it’s also the 3.000 extension of the small Crab pattern (yellow) nestled in the B-C-D legs of the larger Crab.

    UPDATE:  3:15 PM

    Interesting that today’s ramp has come without any help from the euro zone.  EURUSD continues to stall at the channel line discussed in this morning’s update on the euro.

    ORIGINAL POST:  1:45 PM

    Yesterday we examined the fact that SPX had broken a 26-session channel and was in danger of following our alternative forecast higher — the purple dashed line marked “alt.” in the chart below.  Remember, that alternative calls for a strong move to 1462-1472 in short order, while the analog calls for a breakdown first.

    We took a close look at the RSI trend line that, broken back on the 5th when the rising wedge was broken, was being back tested big time.  I mentioned I’d be watching it like a hawk, as I felt it would hold the key to which way this confusion resolves.

    As of right now, that RSI trend line is being broken.  While it’s possible this is an intra-day head fake, I’m not so sure that I’m willing to bet cold, hard cash.  Note the highlighted circle on the RSI portion of the chart below.

    And, expanded here…

    There is the possibility that the downward sloping red, dashed TL will catch it on the way up, but the yellow TL just broken was a major feat.  A close above the TL would imply a definite momentum shift.

    From a bearish perspective, one small Bat pattern that indicated more downside busted when we moved above 1392.  The larger Butterfly (labeled in red) will need its Point C moved over to today’s high, but won’t bust until/unless we exceed 1422 (where C > A.)

    From a bullish perspective, the Bat/Crab pattern marked below in purple correlates very well with the smaller yellow Crab — which, until this morning, was just a Bat.  Remember, Bats terminate at the .886 retracement, and Crabs at the 1.618 extension (or more).

    The small yellow Crab’s 1.618 is 1413.74, while the larger purple Bat’s .886 is 1414.97.  When two targets are in such close proximity, it lends additional credence — all else being equal.    Technically, we could get a move to 1414ish and still have a valid H&S pattern, but as we discussed yesterday, it puts additional strain on the pattern — and the analog — playing out, unless we see a very quick reversal.

    As we approach 1400, the market should at least pause.  It’s the original H&S “idealized” shoulder line, the 1.272 of the small Crab pattern, and a nice round number.  But, unless we reverse in the next hour and see that RSI dip back below the TL, I’m increasingly positive about a move to at least 1414-1415 to fulfill the Crab and Bat.

    Remember, this is still a back test of the rising wedge.  But, I’ve been studying rising wedges a lot lately; and, as we discussed many times [see: In a Fix], it’s not uncommon for a back test to go on up and tag the original apex — faking out all who were playing the broken wedge.

    More later.

  • The Bulls Fight Back

    The market is parading around in yesterday’s Apple earnings report like a glamor queen in a mink stole.  An economy that can pump out eleventy zillion iPhones is very pretty, indeed.  Then, along comes the stink of a very disappointing durable goods report.  And, that mink stole is suddenly, jarringly out of place in this economic favela.

    It was a nice overnight ramp.  It’s taken us past the channel line we identified as key for the bears in yesterday’s analog update.   But, is this the hard bounce at the neckline we’ve been discussing?  Is our alternative playing out (the purple, dashed line) or is this yet another in an endless series of head fakes?

    Looking at the daily RSI, we’re back testing a trend line (yellow, dashed) going all the way back to last August’s lows.  We broke it on the 9th — remember that 16-pt tumble out of the rising wedge?  I’m going to watch that TL like a hawk, as I believe it holds the key to which way this latest confusion resolves.

    Bottom line, you can’t break down from an eight-month, 400-point rising wedge and not expect the bulls to put up a little fight.  That’s what back tests are all about.  It’s a case of the bulls not being ready to give up, and the bears not having enough conviction.

    Just like confirmation of a H&S pattern has its levels of certainty, so does the bust of a H&S pattern.  One key indicator to watch is whether we exceed the previous shoulder — 1392.76 on the 17th.  So far we haven’t, reaching only 1390.81 this morning.

    Another is whether this ramp causes the overall pattern to start looking malformed.  In this case, the left shoulder was very lumpy and drawn out to begin with — a complex H&S left shoulder with two touches of the neckline.  So, a complex right shoulder with two touches would actually be in keeping with the existing pattern.

    Remember, we had originally been looking for 1400 in order for the right shoulder to be proportional to the left.   We never did reach the parallel shoulder line, and so an A-B-C move to 1400-1408 would leave the pattern looking slightly better.

    The only issue with that scerario, though, is that the analog doesn’t fit as well if the right shoulder extends more than a few additional sessions.  In 2011, the H&S pattern took 41 sessions, with the left shoulder lasting 13 sessions (32%), the head lasting 18 (44%) and the right shoulder lasting 10 (24%).  Thus far, this pattern has taken 57 sessions, with the left shoulder lasting 22 (38%), the head lasting 24 (44%) and the right shoulder (so far) at 11 (19%).

    While no particular proportionality is required of H&S patterns, it is for analogs.  I’d be a little leery of the analog playing out if the right shoulder lasts too much longer.  By Tuesday of next week, the right shoulder — and the entire H&S pattern — will be roughly proportional to the 2011’s.  That means whatever bump this pattern has in store should run its course pretty quickly if the analog is going to hold.

    Bernanke speaks at 2:15 EST.  I suspect most of the fireworks is done till at least then.

    Stay tuned.

  • Analog Update: April 24, 2012

    The analog we’ve been watching since April 9 is playing out nicely so far.  We got the original bounce at 1357 as forecast, followed by a rise to the middle of our 1380-1400 target range.  The H&S pattern we expected did, in fact, set up and complete yesterday.

    Now, we’re back testing the little channel (solid yellow) formed by the right shoulder.  It was broken during yesterday’s plunge.

    As we discussed yesterday, if the wheels fall off the analog, it’s going to happen here — at the H&S neckline.  A hard bounce would likely send SPX up to tag the initial rising wedge apex at 1462-1472 (the purple dashed line.)  It can be viewed as a Crab pattern with the 1.618 at 1462 (in purple, points not marked.)

    But, I think we’re more likely to see the analog continue to work.  The key will be a failure of this morning’s rally/back test and a close below 1363.  Note that we’ve also established a channel to the downside (red, dashed) that coincides nicely with the harmonic picture.

    The pale blue Bat/Crab indicates a potential to 1335-1340, which would be a nice spot for a back test of the H&S pattern itself.  From there, the larger red Butterfly pattern takes over, with potential to 1317 (the 1.272) or 1289 (the 1.618.)  Though, a drop below last October’s 1292 would be a challenge.

    The key levels I’m monitoring today are 1378 — at which point the back test starts to intrude into the previous channel, and 1382 — at which point the larger red, dashed channel is jeopardized.

    Good luck to all.

  • VIX at a Crossroads: April 18, 2012

    Where there was once a falling wedge, there is now a channel.  The April 10 breakout that looked so promising completed a Bat pattern and promptly reversed nearly 61.8% of the move from the 13.66 bottom.  Is this the end of the ride, or are there bigger and better things in store for VIX?

    I have tentatively added another channel to the RSI to accommodate the latest spike.  It would likely guide the next leg down, if indeed that’s forthcoming — which I mostly doubt.

    Of course, every time we complete a Bat pattern with a Point D at the .886, we’re also establishing a potential Point B in a larger Crab pattern.  In this case, that would result in a completion Point D at the 1.618, which is 27.12.

    That’s an interesting price, because it equates with the 2.618 of the small Butterfly pattern potentially setting up on the hourly chart.

    Things get real interesting when you back out and look for competing or complimentary patterns.  On the 60-min chart, we can see that the move off the bottom conforms to a upward-sloping channel (in white) so far.  This channel will intersect with the downward sloping main channel (yellow) on Friday — which, of course, is OPEX.

    It’s only fitting that the point at which VIX must commit to one channel or the other arrives on OPEX.  The situation reflects the alternatives we’ve been discussing for SPX.  The analog we’ve been watching indicates a short-term top is at hand, and we should see a brief but scary sell-off in the next few days.  This would correlate with sideways action in VIX, followed by a breakout of the yellow channel to follow the white one — probably topping out at the 27.13 level at the bottom of SPX’s decline to around 1305-1317.

    The alternate SPX view is that we go on up and tag the rising wedge’s apex without the sell-off first.  There’s certainly enough important news in the pipeline over the next few days to bring either course to fruition.  Such a movement in stocks would mean the white channel breaks down and the yellow one holds — knocking VIX back to the 14.5 — 15.8 range.

    Of course, such a move would complete most of an inverse H&S pattern (in yellow) and set up the next upside break out.  Technically, we have enough of a right shoulder as it is, but a drop to around 16 would be ideal.

    In summary, my leading assumption is sideways until OPEX, then a breakout up to the 23-24 range to complete the IH&S that correlates with the SPX’s H&S move down.  We should then see a back test of the yellow neckline and subsequent push to the 27-30ish range to correlate with SPX’s move to 1307-1317.

    It would be a break of the yellow channel (which has a grand total of two anchor points on its upper bound) that would be similar to the Mar 16, 2011 breakout to 31.28 (see below.) But, such a move would bring it back the midline of the long-term channel that’s been such a magnet for breakouts over the past few years.

    That midline, by the way, is in the same neighborhood as the Inverse Head & Shoulders target of 28.20, which would be very doable if SPX were to plunge 70-80 points over the next week.

    But, keep the alternatives in mind.  The market is exceedingly hinky lately; and, as much as I like the analog, it’s certainly not guaranteed to play out.  As always, please use stops.

    Good luck to all.