SPX overshot our initial target by just a couple of points yesterday, reaching the channel 25% line at 1497.29 before getting the bounce I expected at 1499/1500. Note that SPX completed a Bat Pattern down to the .886 in the process (larger white pattern.)
The .618 Fib of the decline from 1530 is up ahead at 1518.09 — also the 1.618 of the 1422-1266 decline last summer (1518.57.) It intersects with the channel midline either later today or early Monday.
Daily RSI reached the white midline as we expected, and is currently backtesting the purple midline. It’s still too early to say whether the new falling channel I sketched in yesterday is legit or not.
The dollar is backtesting the channel line it broke through Wednesday after completing a Butterfly Pattern (the small white grid) to the 1.272, but the 1.618 awaits at the confluence of the purple 1.272 and red .618 up around 82.1-82.2 after the backtest is complete (not yet, I think.)
The big question: what happens after the backtests are complete?
SPX is off another 10 points so far, for a total of almost 30 since we went full short at 1530.50 on Feb 19. Look for a bounce at 1499/1500 – a psychologically important line in the sand, and also the .886 of the rise from 1495 to 1530.
It also satisfies pebblewriter’s corollary, which is that the market seeks levels at which the greatest ambiguity can be maintained. At 1499, the market could be setting up a bearish Crab Pattern down to the 1.618 at 1472.82 (shown below in purple) which would find support around the Sep 2012 high of 1474.
OTOH, SPX could be setting up a bullish Crab Pattern (in yellow) to the 1.618 up at 1555, which also happens to be the 1.618 extension of 2012’s 1474 to 1343 decline (1555) and the 1.618 of 2011’s 1370 to 1074 decline.
As expected, equities have sold off since tagging the 1.618 Fib of the July 7 – Oct 4, 2011 sell off — dropping as low as 1522.19 this morning. While it’s gratifying to see a reversal at a major Fib like this, it won’t mean much until SPX can make some new lows. I’d be thrilled just to see the purple channel midline broken. I remain full short from 1530.50.
There’s great interest in the Fed minutes due out at 2 EST. Will the new FOMC composition affect the language re QE? How did they take last quarter’s GDP decline?
Housing starts and permits were released this morning. Overall, starts fell 8.5% since December. But, it was multifamily residential that was really responsible — declining 27% from Dec 2012 nationwide, an alarming 41% in the Northeast and 62% in the Midwest (versus 16% and 30% in last year’s Dec/Jan comparison.) The South and West regions rose modestly, as did permits.
The EURUSD has found support at the .886 (yellow pattern) of the Feb – July 2012 selloff. The rally fizzled several weeks ago at 1.3710 — just above the Feb highs — after initially reversing at the .786, hinting at a Butterfly Pattern objective of 1.3877. This is also the 2.618 of the white pattern and the .618 (1.3832) of the purple pattern (May 2011 to July 2012 decline.)
If the pair manages to hold the .886, it augers well for a move up to that target level. The next white channel level to intersect 1.3832 is the midline around March 18-20. The bottom of the white channel is currently around 1.3250.
The dollar, in the meantime, has retraced the losses sustained the past two days. In the process, it reached the midline of the white channel since Feb – so, we’ll be on the lookout for resistance.
Remember, DX RSI broke out of a daily channel (red, below) on Monday and back-tested it yesterday. It also successfully back-tested the midline of the rising purple channel and is poking up above the yellow 75% line — so, the upside case is clear.
What, then, would a dollar break-out mean for stocks?
Quick aside: just read the FOMC minutes from stem to stern (available here) and there’s nothing of any importance that I can tell. This is really no surprise, given that the last statement was virtually identical to the previous one. Here’s the discussion of the statement:
The media is reporting “increased concern” about the level of QE and inflation, but there is very little change in the outlook and the hawks are still vastly outnumbered by the doves. I suspect that as long as inflation stays under control, and the dollar remains in a trading range — meaning no new pressures or relief for importers/exporters — the FOMC will leave things pretty much as they are.
Getting back to the dollar and equities… It’s always interesting to compare the DX and SPX.
Stocks are a mirror image of the dollar through from 2010 through October 2011. At that point, however, they generally move in tandem — except that, as DX forms a pretty docile channel, SPX leaps out and forms a rather extended rising wedge.
DX has been locked in a trading range between the .382 and .618 of its decline into May 2011, while SPX has obviously blown through its May 2011 highs.
Since last September, the comparison is especially interesting. DX spent about 6 months bouncing between the .382 and .500 Fibs, while SPX retraced 127.2% of its 1474 to 1343 losses (actually more, but it looks like it’ll probably back test to the 1.272 today.)
Now, if DX starts to make a move, how will SPX react? Will it react? The dollar will need a serious push to get through current levels, since today’s equities weakness/dollar strength produced a Bat Pattern completion at the .886 — just as DX RSI also reached the next higher channel line.
While, SPX has broken channel support…
…even though prices reached a potentially important channel midline.
In the end, I suspect it all spells a breather for SPX’s downturn and DX’s strength – at least until the RSI’s are reset and each can take yet another stab at a real breakout/breakdown.
I’m holding with yesterday’s short-term forecast/scenario [the 2:45 update], but am open to revision if SPX can push strongly through the channel midline. I should get a chance to post again tomorrow morning.
Financials have had a great run ever since we called the June 4, 2012 bottom [see: So Crazy, It Just Might Work]. But, all good things must come to an end. I’d give them another few days/points at most.
I had jumped on the short side Mar 27, 2012 [see: End of the Line and Lots More], riding GS, MS and JPM down around 30%.
On June 5, we loaded up on the long side. Our targets, as posted that day:
JPM: today’s close = 31.99, price target = 38.69 (+21%)
C: today’s close = 25.75; price target = 34.79 (+35%)
BAC: today’s close = 7.10; price target = 11.34 (+60%)
Obviously, those targets proved to be a little conservative. JPM reached its target by Aug 21, consolidated for 2 weeks, then zoomed even higher – reaching 49.31 today and finally (after 4 near misses) reaching the .886 retracement of its 53 to 14 plunge.
C reached its 34.79 target on QE3 day (Sep 14 — lovely being able to dump all those crappy MBS on the Fed) backed off a few points, then proceeded to rally up to today’s high of 44.50.
It only ever recovered 7.95% of its 2007-2009 plunge from 570 to 9.70 (adjusted for reverse splits) and is struggling to reach the .786 of its swan dive from Jan to Oct 2011: 51.50 to 21.4. If the .786 at 45.06 doesn’t do the trick, the .886 at 48.07 should.
And, just today BAC came within a nickel of the 50% retracement (12.39) of its post-2009 high. It reached our 11.34 target in mid-December.
If it gets past 12.67, it could still take a run at 14.13. But, it won’t be easy.
Most of the financials are in a similar situation — at or near major resistance either from Harmonic or Chart Pattern targets. But, it’s XLF itself that looks shakiest.
Today, XLF reached an important channel line as it tagged the 1.618 of the Mar-June 2012 decline.
If it sneaks up past current levels, the .382 retracement of the fall from 38.15 in 2007 is waiting at 18.21.
AAPL has bounced nearly 50 points since its Jan 25 low, leading many to wonder whether the worst is over. When I started this post about a week ago, all the talking heads were talking “breakout.” We’ll give the old crystal ball a polish and see whether that’s likely.
When I posted that AAPL seemed to finding support back on the 24th, it was because of the long-term channel (in purple, below) that’s guided its upside since the year 2000 [see: That All You Got?] The top of it, by the way, is up around 1775.
AAPL bottomed the next day at 435 (one point from our Nov 27 forecast), and obviously still hasn’t broken that channel. The channel top, by the way, is currently up around 1880. [note: these long term charts are as of Feb 6.]
As we’ve noted before, there are other long-term channels at play, too. Note the white channel casts a rather bearish pall, while the yellow channel promises at least a bounce here. So, which to believe?
GETTING HERE
We’ve been very fortunate in forecasting AAPL over the past several months, calling several significant tops and bottoms with decent accuracy.
It looked like AAPL was about to bottom out, followed by a sizable bounce.
“AAPL should get a brief bump higher as SPX does — perhaps to 600 or 620. Of course, if it stalls there, it will have formed 5/6 of a huge H&S pattern… “
It bottomed 6 sessions later when the S&P 500 dropped down to tag our 1344 target [see: Charts I’m Watching Nov 15.] From there, we were looking for a bounce to 600.
As AAPL approached our 600 target, I anticipated a reversal and completion of a Head & Shoulder Pattern that would bounce first at the neckline before plunging below.
“A reversal here could quite likely spell a return to the channel bottom — which will be around 434…
…it’s easy to imagine a scenario where prices drop to [the neckline at] 500 into the end of the year, but can’t quite seal the deal on the H&S pattern…
If, on the other hand, AAPL breaks down below [the neckline], look for a back test followed by a more serious plunge.”
AAPL topped out two sessions later at 594 and plunged to the neckline at 501 where it failed to “seal the deal,” bouncing for two weeks before finally falling below the neckline on Jan 15.
It back-tested the neckline for a week before taking a “more serious plunge” down to 435, onepoint from our original Nov 27 target.
GOING FORWARD
The purple channel has done its job so far. The big question is whether it can continue to stave off the damage of the completed Head & Shoulder Pattern. H&S Patterns commonly back test their necklines. Back tests can even exceed the neckline, as has AAPL’s in several cases.
As we’ve discussed many times, AAPL has been in a fairly tight price channel all the way down from 705 (below, in white.)
The upper bound of this channel intersects with the H&S neckline at about 498-500 around Feb 19 (there is some wiggle room, depending on exactly how the channel is drawn.) This likely represents the extent of any short-term upside.
As for the downside, the white channel midline intersects with the purple channel at about 450-452 around Feb 20. The white upper bound intersects with the purple channel bottom 465 on Mar 18.
But, note the large red falling channel. It’s dicey to consider it well-established, since the “top” consists of only one tag. But, it looks to me like it has potential over the medium-term. Today, AAPL is testing its 25% line; and, a close above 473 or so would be positive — arguing for the more bullish of the two scenarios above.
The daily RSI recently poked up through the white midline and the yellow 75% line, but appears to be backtesting both. This would be consistent with a dip to 450, where AAPL could back-test the white price channel midline and the purple channel bottom (the purple circle).
From there, the top of the yellow RSI channel beckons — which probably corresponds with a return to test the neckline around 500. As noted above, this could occur as soon as Feb 19 if prices are to remain in the white channel.
And, what if prices break out of the white channel? Keep an eye on the RSI. A break above the neckline would probably require a break out from the yellow RSI channel. While, remaining in the yellow channel probably means a period of consolidation until early May, when the purple channel and neckline intersect at about 490.
One other issue often discussed is the expiration of the 30-day wash sale period. The biggest volume spikes in the past few months were the plunges of Nov 16, Dec 6, Dec 14 and Jan 24-25. So, the only remaining relevant buyers who might rush back in are those who sold in the 435-465 range on Jan 24-25.
Since the stock has gained a few points since then, these sellers might be expected to believe the worst is over and that it’s safe to re-enter at these levels — especially since the rest of the market is setting new highs.
SUMMARY
My best guess at this point is a test of the purple channel bottom around 450-455. If it bounces, it has potential to the white channel top around 495.
But, it’s important to note that AAPL just closed a huge gap.
60-min RSI shows support coming up from a channel midline (white) as well as a rising channel bottom (purple.)
If the channel bottom breaks down, the H&S target is way down around 304 — only a short hop from the yellow .618 at 317 and the white .786 at 307.
ECRI’s Weekly Leading Indicator (WLI) came out Friday at 130.2 — up from 129.6 the week before. Further, they reported that the index’s annualized growth rate increased from 8.2 the previous week to 8.9% — the highest since May 2010. I wondered: are they retracting their Sep 2011 recession forecast? Are things really getting better?
CAN’T WE ALL JUST GET ALONG?
There’s currently an argument raging between various economists and analysts as to whether the US is still in/dipping back into a recession or is on the mend. ECRI is pretty sure we’re in one, while folks like Doug Short and, of course, the mainstream media think not.
There’s no question that we’ve seen an uptick in several economic measures. My own thesis is that most of these have been not secular, but cyclical swings. In other words, I don’t yet see evidence of a sustainable trend change, only natural swings from one side of a channel or wedge to the other.
Here’s an example I posted last week. Total Confidence has traced out a pretty solid-looking channel, while the Present and Expectations indices have formed expanding wedges (and are nowhere near their upper bounds, especially given the recent downturns.)
underlying chart from briefing.com
Hardly a day goes by when I don’t second guess myself. Is all the “good news” just one big, well-coordinated head fake or am I missing something? I spent much of the weekend studying ECRI’s historical WLI (who says technical analysts don’t live exciting lives!?) and found a lot to think about. First, a brief primer on Harmonics.
HARMONICS
Regular readers of pebblewriter.com (heck, even the irregular ones) know all about Harmonics and that the corrections experienced in April 2010, May 2011 and Sep 2012 correspond to the important Fib levels of 61.8%, 78.6% and 88.6%.
For the uninitiated, measure the drop from SPX 1576 (Oct 2007) to 666 (Mar 2009) and multiply it by a Fibonacci 61.8% and you get 1228.74. SPX reached 1219.80 in April 2010 (within 10 points) and promptly sold off by 17% over the next three months.
In May 2011, SPX peaked about 10 points away from the 78.6% Fib level (completing a Gartley Pattern) and plunged 21.6%. And, in September 2012, SPX reached the 88.6% Fib level (completing a Bat Pattern) and corrected by almost 9%.
Those of us who follow Harmonics were well aware of each of these downturns well in advance [see: HERE, HERE and HERE] and profited nicely from the market’s plunges. Those who rely solely on fundamentals or [involuntary shudder] the mainstream media…not so much.
THINGS THAT MAKE YOU GO “COOL!”
While I had noticed the WLI’s channel-like general decline before, I never noticed that it also complied with the rules of Harmonics. From its all-time high of 143.73 in Jun 2007, the WLI plunged to a low of 105.40 in Mar 2009.
Like SPX, it found its footing (thanks to QE1) and started higher. Its first big pause was in Oct 2009 at the 61.8% Fib level. It paused again in Jan 2010 near the 70.7% Fib, and eventually reached the 78.6% level in April — completing a Gartley Pattern as SPX had finally retraced 61.8% of its drop.
One could infer from the mismatched Fib levels that the economy — as measured by ECRI’s leading indicators — was ahead of the market at this point. The WLI had retraced 78.6% of its drop, while SPX had only retraced 61.8%. In any case, they both suffered from the removal of the QE drip – SPX shedding 17% and WLI 11%.
When the Fed realized their patient would flatline without more QE, they were back with QE2. The market took off, reaching the 78.6% Fib in May 2011. This also completed a Crab Pattern, a 161.8% extension of the amount of the Apr-Jul 2010 slide.
The WLI, however, retraced only 78.6% of its slide since its 2010 high. In other words, the market was now officially ahead of the economy.
Following the expiration of QE2, SPX plunged 21.6% to 1074 through October 2011, while WLI gave up 8.9%. From there, SPX climbed to 1474 primarily on Fed jawboning and promise of more QE — which it finally delivered the day before the 1474 high.
The timing was no doubt an effort to send the SPX soaring right through the 88.6% Fib retracement of the 1576 – 666 crash. I seriously doubt that “two points over” was what they had in mind (the market sold off anyway, correcting a respectable 8.8% to 1343.)
The WLI, in the meantime, topped out at 127.77 — only an 88.6% retracement of its decline from its previous high in 2011. Again, the market was outpacing the economy.
IS IT OR ISN’T IT?
The world of market prognosticators is, as always, divided. There are those who believe the economy is improving, and the market – as a leading indicator itself – is all the proof we need. Then, there are those who believe the market is priced well in excess of levels justified by the underlying economy — which remains in or is dipping back into a recession.
Whether QE has “saved” the economy or not, I don’t know of any respected economist or technician who doubts that it has significantly goosed (i.e. “manipulated”) the markets. And, we should pay attention to the disconnect between the markets and the economy as evidenced by the SPX/WLI comparison.
The WLI just hit an important Fib level (88.6%) after demonstrating that it does, indeed, pay attention to such things. This occurred at the same time that the S&P 500 hit several important Fib levels and is thus, by my reckoning at least, poised to correct [see: Satisfaction.]
We all know the old truism “the market isn’t the economy.” However, another quarter of negative GDP following the tax hikes recently enacted and spending cuts in the works would certainly remind investors that the market and economy are, indeed, joined at the hip.
I care about the economy because I have children. The Fed’s unprecedented experiment in QE will quite possibly end very badly for the country, for my children and for yours. But, there ain’t much We the People can do to influence Fed policy. They don’t answer to us or our political “leaders.” So, we play the cards we’re dealt.
As an investor, my goal is to capitalize on whatever the market throws at us — regardless of how manipulated it might be, and regardless of what economists call the current business cycle. If depression or hyper-inflation come along, we’ll hopefully see it coming and be well-positioned.
Are we still in or dipping back into a recession? Will the current QE4-ever result in another 2009-2011 run, or does the market’s yawn last September signal the end of QE’s effectiveness? We’ll find out in time. In the meantime, we have some very good tools at our disposal that have provided excellent returns in a very difficult market. I’ll continue to call it as I see it, and appreciate having you all along for the journey.
Will the sixth try be the charm? SPX has futzed around in our target area for six sessions in a row. Today, we should finally get some satisfaction.
The dollar has broken out of and is back-testing the yellow triangle. Lots of juicy Fib levels ahead, starting with the cluster at 80.758-80.883.
RSI appears poised to break out of the red channel and explore the upper half of the white.
While the EURUSD looks like it’s ready to tumble. The test I’ll be watching closest is the intersection of channels around 1.3253. But, merely popping back down below those falling white channel lines would be a great start.
If I’m right, the falling white and/or yellow channels will take it from here. Note the negative divergence represented by the last two spikes up to the top of the yellow channel. The flatish red channel dates back to the fall of 2008, and every sustained push below its midline — currently around 50.51 — has been accompanied by a nice sell-off in EURUSD.
Japanese finance minister Taro Aso is frantically searching for the “off switch” on the yen-cinerator. In a chat with a legislative budget committee, he admitted: “it seems that the government’s policies have fueled expectations and the yen weakened more than we intended in the move to around 90 from 78.”
The 7 sessions in (and slightly above) our target area are looking tenuous. A dip to the bottom of the white channel could take the pair back to 90.82.
And a fall from the white channel could easily see a back-test of the midline from the purple channel dating back to 2000.
Nice little intra-day sell-off again yesterday, culminating in a last minute positive close — another shake-and-bake by your friendly neighborhood market makers to separate you from your hard-earned money. Look for more of the same today.
Today’s news is all about currencies. Draghi’s comments are successfully taking some of the bloom off euro’s today. The euro is up 11% since Draghi’s “whatever it takes” speech last July 26. What has it gained them?
Oil got a little cheaper — at least through the end of the year. Germany might not care, but Spain, Italy and France exporters are feeling the pinch at a time when they can ill afford it.
IMHO, this will set up a battle of political wills between the haves and have nots in the EZ. Bucking the global trend and trying to achieve nominal growth without more accommodative monetary policy is doomed from the get-go.
The EURUSD chart shows how the market feels this will ultimately be resolved.
Though the pair will likely find support right about here — an important Fib line (red .618) and the intersection of two prominent channel lines.
The top of the big falling white channel is still out there as an upside target. Timing would determine price, of course, since the channel features a fairly steep slope. But, the range currently includes the red .886 at 1.3995 (the top of the purple channel), the white .500 at 1.3956 and the purple .618 at 1.3832 (the purple midline.)
SPX isn’t enjoying the plunge in the EURUSD. I’m taking an intra-day short position with the channel line cross at 1508 with a target of 1497.29 – 1499.29 — the .886/.786 of the latest run up. Charts in a few.
60-min RSI shows likely downside to at least the red midline and white channel bottom. This likely translates into the .886 at 1497.29, but the purple midline is way down at 1492, so I’ll give it some rope (and reconsider our upside target) if SPX dips below 1495.
The dollar is taking a breather after a strong reversal off the latest .886 and channel bottom, but appears ready to break out.
The EURUSD back-tested the broken channel line and rising wedge lower bound, and is likely about done.
SPX fell 19-pts after we shorted last Friday. We positioned for an intra-day bounce, but SPX added only 4 points before falling back to complete a little H&S pattern at the close.
The pair continues on a tear, putting in a miniscule consolidation at the 87.5 – 89 range where I expected more of a correction and reaching our secondary target a full 10 weeks ahead of schedule.
UPDATE: 09:30 AM
Daily RSI reached the white midline as we expected, and is currently backtesting the purple midline. It’s still too early to say whether the new falling channel I sketched in yesterday is legit or not.
The dollar is backtesting the channel line it broke through Wednesday after completing a Butterfly Pattern (the small white grid) to the 1.272, but the 1.618 awaits at the confluence of the purple 1.272 and red .618 up around 82.1-82.2 after the backtest is complete (not yet, I think.)
The big question: what happens after the backtests are complete?
