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.
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First, a quick overview…
The dollar got clobbered overnight, knocking it temporarily out of the white channel that’s guided it since Jan 11.
But, interestingly, its RSI channel is doing just fine, thank you.
The EURUSD continues to levitate, but still hasn’t broken the last important interim top put in on Feb 24. It is also bumping up against two 25% channel lines, so could very well stall out here at the .886.
There is still ample negative divergence regardless of which channel ultimately wins out.
With the market exceeding the recent 1474 highs, the analog that did so well for us since last April is officially dead. This begs the question: “now what?” I see three big issues hanging over the market right now:
Earnings
GOOG and IBM both gapped up this morning, but the earnings that can really move the market — AAPL — comes after the close. We’ll take a fresh look at the AAPL chart later today.
Budget/Debt-Ceiling
In a few hours, the House will probably pass a measure to postpone the debt ceiling debate until May. Reid and Obama have both said they’re on board, so this appears to be a done deal. If House Republicans don’t fall in line, as occurred with “Plan B,” the market will sell off precipitously.
New Highs
The market’s strength has caught many off guard, including yours truly. Many are calling for new all-time highs for SPX. The 2007 high of 1576 is now only 84 points away, so a few good sessions could do it.
We’ll take a fresh look, focusing on the harmonic and chart pattern picture as well as the establishment agenda. “What’s that?” you say. Say all you want about random walks, CAPM, dividend discount models and Dow Theory. Like any government-managed enterprise, the market is subject to the policy goals and needs of those who attempt to control it.
Even to my cynical ears, this sounds a bit like rants from the tin-foil hat crowd. But, consider the news on Egan-Jones yesterday. This is one of the biggest stories of the month, yet predictably earned only this from WSJ/Marketwatch:
CNBC was slightly more generous, yet still presented only the SEC’s side of the story. It’s a story that deserves to be told because it speaks volumes about the degree to which the market is presently being controlled. And, I’m not just talking about quantitative easing, though I suppose we’d have to consider QE exhibit #1.
Last summer the market crashed 22%. It was an analog (replay) of the 2007 top, so we saw it coming in plenty of time to profit quite handsomely. But, it was a huge wake-up call for The Powers That Be (TPTB) or Plunge Protection Team, Wall Street Cabal — whatever you want to call it.
With virtually unlimited power and unlimited resources, why couldn’t they prevent something like that from happening? More importantly, if the top was a replay of the 2007 top, might the rest of 2011 play out like 2008-2009?
It didn’t, because they learned from the crash of July-August. First, they tweaked the markets just enough to bust important chart patterns that were playing out. Second, they tweaked the rules to provide for more time to contain any damage which might otherwise occur (circuit breakers, etc.) Third, they attacked those who had “caused” the crash.
S&P CEO Deven Sharma was one of the first victims. In the wake of the 2007 financial crisis, S&P was rightly pilloried for having pulled its punches — particularly on mortgage and banking related debt. This was no surprise to anyone who’s ever worked on Wall Street — which pays for these supposedly unbiased views.
An infamous exchange between two S&P analysts in April 2007 aptly illustrates:
“BTW, that deal is ridiculous.”
“I know, right . . . model def(initely) does not capture half the risk.”
“We should not be rating it.”
“We rate every deal. It could be structured by cows and we would rate it.”
Imagine if Hollywood studios funded the reviews of their movies. Would you care if they received thumbs up or down? So, in August 2011 S&P found religion and bravely downgraded US debt. Seventeen days later, Sharma was fired and replaced with the COO of Citibank, the bank whose existence relies on the absence of any future downgrades.
Egan-Jones beat S&P to the punch, downgrading US debt on July 16. Two days later, the SEC’s Office of Compliance Inspections and Examinations called looking for information on the downgrade.
On October 12, Egan Jones was formally notified of a Wells Notice — they were being investigated. On April 24, the SEC filed a cease and desist order against Egan-Jones — the only rating firm not on the take — stating the action was “necessary for the protection of investors and in the public interest.”
The financial establishment’s interests, sure. But, to frame this obvious smack down as “in the public interest” is laughable alarming. Egan-Jones was the one rating firm with the balls to point out the country’s crumbling financial condition and stick to their guns. Now they’ve been branded as deceitful, dangerous. George Orwell spoke the truth in 1984:
“In a time of universal deceit, telling the truth is a revolutionary act.”
That other deep thinker, Jim Morrison, provided a similarly profound observation:
“Whoever controls the media controls the mind.”
The extent to which the market has been manipulated is deserving of its own post. But, this Zerohedge article, forwarded by a member, is a great preview.
Okay, so I know what you’re thinking: if the market is so heavily manipulated (and, presumably, insulated from downturns) why bother trying to beat it? Simple.
Over the very long-term, stocks return 8-10% — depending on the time frame examined. But, sadly, most of us are limited to 40-60 years of investing. And, a 60% crash right before starting a business, buying a home or beginning retirement could be devastating.
So, we’ll keep plugging away, letting the markets tell us where they want to go…while trying to get there first.
So, the question is “Now What?” We’ll start by looking at the harmonic picture. As detailed in our last review of all the previous tops, harmonic patterns are very likely to come into play. So, we’ll start with the charts, then move on to the agenda question and, last take a look at AAPL.
Since we’ve exceeded the range at which this rally could be considered a double top, we’re probably going higher still. So, we’ll examine the 1.272 and 1.618 extensions.
In terms of a trading strategy, I’d be comfortable going long here at 1491. But, disappointing AAPL earnings could knock the stuffing out of the market. So, those with weak hearts should probably stay on the sidelines until tomorrow morning.
The most recent patterns show a few possibilities, some of which are clumped together in fairly narrow ranges. The largest of the patterns — the yellow grid — shows a 1.272 Butterfly Pattern extension at 1510.19 that intersects with the 2.24 extension of the decline (purple grid) from 1448 – 1343.
A Butterfly Pattern is a good bet, as the Dec 18 reversal at 1448 pretty much nailed the .786 Fib level Point B (1446.44) which Butterfly Patterns require.
1510.19 also falls within the confines of the thin red line — the TL connecting the Apr 2 and Sep 14 highs that would probably satisfy the EW requirements of an ending diagonal. I know you’re out there, my Waver friends. Please weigh in, as I know only enough EW theory to be dangerous.
The white pattern is appealing enough, but I would have to consider it secondary in importance to the yellow since it began at a less momentous point X. Ditto for the grey pattern.
Although it should be noted that we faced a similar dilemma when choosing between the Point X’s for the Butterfly patterns beginning in 2011 [see: All the Pretty Butterflies.] In the end, it was a point similar to the white pattern 1.0 Fib at 1464.02 that determined the April 2 turn. It featured a Point B closest to the .786 Fib.
Zooming out, we can see that the 2011 highs could very well still influence the outcome of the current top. The chart that includes everything is a little busy…
…so I’ll clean it up by eliminating the interior retracement levels and switching to weekly.
The target areas can be more easily seen in this close up.
Note that the large red pattern, the one whose 1.272 extension helped me accurately forecast the April top, comes into play at its 1.618 extension of 1515 – only a few points away from the 1509-1510 level discussed above.
This is promising, as patterns that influence markets once (that was an 11% correction, after all!) are more likely to do so again. And, patterns that the market completely ignores — such as the yellow and white patterns from May and July 2011 — are less likely to suddenly leap into a position of authority.
And, there’s also a purple 1.618 extension (set up by the 1422 – 1266 decline) at 1518.57. Again, this is close enough to be considered significant.
If 1520 is exceeded, then we’ll look at the next higher grouping: 1553-1555. This “group” is basically the two yellow 1.618’s. Again, the larger pattern’s 1.272 had no influence on the market. The smaller pattern’s 1.272 is the one coming up at 1519.
Summary
My leading harmonic forecast is for 1509-1515. I can’t imagine getting this close to 1500 and not snagging it for the trophy case. And, I like the idea of dancing with the harmonic patterns that brung us.
My secondary goal is slightly higher at 1553-1555, so there should be opportunities to jump back in and capture most of any upside above 1520 if/when appropriate. Such a move would likely follow a reversal from 1509-1515 back down to 1474ish and would constitute a fifth wave rather than the ending diagonal suggested above.
If AAPL’s earnings stink up the joint after the closing bell, going long won’t have looked very smart. But, judging from the steadily appreciating share values, I’m guessing that a relatively positive result is already being leaked.
Chart Patterns
I won’t rehash the stuff already posted in the past couple of weeks. Just take a look at the rising wedge that would be confirmed by a reversal at 1510 as early as tomorrow. The target would come at the .886 of the base to apex price range and .618 of the time range (almost too good to be true.)
We’re currently very close to the .786 of 1498, which tells me there’s a decent chance of a run up to 1500ish into the close.
UPDATE: 3:45 PM
AAPL is up almost 9 points at the moment. A rally past 1426 would take it up out of the falling white channel it’s been in since last August.
Anything over 515 would take RSI above the white and purple RSI channel midlines. So, as expected, much is riding on the earnings report and how it’s perceived.
We’ll watch these RSI channels, though. A return to the top of the yellow (and, especially the white) channel would surely spell a reversal.
The Agenda
I think it’s pretty straight-forward — bag an important new high, but without setting the bar so high that expectations can’t be managed. At 1510, SPX clears 1500 but buys some time before the pressure of “will it exceed 1576?” comes to bear (no pun intended.)
Then, get through the budget mess (or, more kicking of the can) and see where we are. If we get a sequester, so be it. The establishment will be well positioned ahead of time and the correction will be managed.
After the shock of it wears off and prices have firmed in the 1200-1300’s, time to establish the next leg higher.
Now, the big question is whether TPTB can engineer such a move without it getting out of hand — as it often does.
Stay tuned.
The last time I posted about FB was October 24 [see: CIW Oct 24, 2012], when I happened to hear Donald Trump repeatedly mention the stock as he was being interviewed about something else all together.
BTW, interesting chart on Facebook. I knew something was up when I heard Donald Trump touting the stock on the radio.
He…still managed to mention the large position he’d been buying about 5-6 times. More likely he was going for the ol’ pump and dump.
It’s hard to escape the power of channels.
The channel in question had been stretched to the limit by the gap up from 19.5 to that day’s 24.5 high and looked like this:
The channel de-friended FB, smacking it back down to below 19 within the next two weeks. But, since then, the amazingly positive stock market to the moon has taken hold, trumping that falling channel. The stock has retraced about half the losses since its 45 high (the white Fib levels below.)
Unfortunately, it’s also traced out a Rising Wedge — not to mention a Bat Pattern from its June highs (the purple Fibs above.) As such, it is likely to weaken considerably here — with a drop to at least the bottom of the rising wedge — currently at 27.75 or so.
Judging from the charts, though, I’d say FB is a good candidate for a breakdown of its Rising Wedge. Often, this results in a new channel that features a lower bound parallel to the upper bound of the wedge.
The mid-line of the proposed channel is at 27 (a 10% drop from current prices), and the bottom is way down at 22.75. The good news is that the channel is obviously rising, so these potential targets are also on the rise.
The bad news, however, is that the charts indicate the trend may well have changed and the downturn could be more significant than just 10%. 4-hr MACD just crossed over yesterday (60-min is already negative.)
And, the rising daily RSI channel is probably yielding to a falling channel — signalling a trend change to go with the obvious negative divergence. Though, we won’t know for sure until RSI reaches the bottom of the white channel.
Bottom line, the road ahead should be very bumpy.
Stay tuned.
EURUSD is approaching the critical bottom of a large rising wedge, after having maxed out at the .618 time Fib and .886 price Fib.
Daily RSI indicates a break down of the wedge. But, watch out for the mid-line of the forming white price channel. It could put a floor under the pair’s decline around the .886 of the red grid.
The chief elements of the AUDUSD long-term chart are its channels.
Over the past several years, AUDUSD has been a pretty good reflection of equity market performance.
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The market continues to walk a tightrope between another leg up and a very significant tumble. We’ve been here many times before in the past year, and it isn’t getting any more fun. To recap…
We remain short from 1423 on Dec 3 [see: Without a Net]. This was target A established in our Oct 26 forecast [see: A New Old Analog] and can be seen in the original chart below.
Note that 1423 was very close to the .618 retracement (1424.41 on the white grid below) of the 1474 – 1343 decline. Prices reversed there as we expected, shedding 25 points to 1398 in its first wave down (in line with our forecast of 1400.)
That .618 retracement of the 1474-1343 wave down portends one of three outcomes:
The first case is pretty clear cut, and has been detailed in prior posts.
The third is also pretty clear, as the .618 retracement to 1423 could be merely a Point B in a Gartley Pattern to the .786 (1446) or Bat Pattern to the .886 (1459.)
If SPX blows through 1425, I’m fully prepared to switch sides and take a stab at re-shorting at those higher levels.
The big imponderable is case #2. The top question I’ve received over the past week is whether a fiscal cliff deal would result in such a move. It’s pretty easy to imagine that sort of a market reaction, even though — like last year’s debt ceiling compromise — it would hardly be justified.
One thing is indisputable: deal or no deal, we’ll get higher taxes and lower government spending. Any combination of the two will negatively impact GDP. By the same token, though, any deal would almost certainly mean a bump in prices.
UPDATE: 11:50 AM
Last Friday, SPX came within 48 cents of retracing .886 (1420.82) of its 1423.73-1398.23 decline. This morning, it sealed the deal, reaching 1421.64 and completing the Bat Pattern.
In the process, though, it tagged the neckline of the potential Inverted Head & Shoulder pattern we discussed Friday. The pattern, if it plays out, targets 1507ish. For the pattern to play out, we’d (at least) want to see a close above the shoulder line at 1420.80.
But, it’s important to point out that not every IH&S pattern plays out. Sometimes, it’s just market makers trying to shake things up a little bit. Here’s one that didn’t play out last year, for example.
Suppose we went up and tagged the actual .618 at 1424.41 for instance. It’d be easy to see it as the bullish case playing out, what with a higher high and all.
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The last time I devoted an entire post to financials [June 5: So Crazy, it Just Might Work] XLF was down nearly 19% from its March highs. I held my breath and made some ridiculously bullish predictions.
But, all good things must come to an end, and I think the tide is turning for financials. Don’t get me wrong…I still think they’re dead meat in the longer term. I just think we’re looking at a sizable bounce here and now if — and let me be clear, it’s a very important IF — the rumors are true and Kumbaya Banking and Quantitative Whatever are back.
If not, this entire exercise isn’t worth the bytes it’s written with. The financials, along with just about everything else Bloomberg quotes, will roll over and die. OK, with that huge caveat out of the way — and before you laugh me out of cyberspace — here are my targets:
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%)
Turns out that was the low for both JPM and C. JPM reached our target on Sep 6 and tagged on an additional 5 points by October 17. Citi reached its target on Sep 14 (same day SPX peaked) promptly dropped 10%, then rallied another 3.5 points to form a nifty little double-top on October 18.
BAC was my one disappointment. It had achieved a nice 38% return when it peaked at 9.79 on Sep 14, but had fallen short of my price target — a Fibonacci 61.8% retrace of its 68% 2011 plunge. Apparently I had been too optimistic. Or, so I thought…
Don’t look now, but in the past couple of days BAC has shaken off its laggard status and is once again spiking higher — trading within 66 cents of my June forecast. As has been widely reported, call option buying is going through the roof.
Sadly for those speculators, though, it’s going to take lots of unicorns farting rainbows for those calls to pay off very big. Why?
Reason #1: Yep. Two Crab Patterns pointing to the same conclusion — a reversal near current prices.
Reason #2: Uh-huh. Rising wedge, plain as the note on your place.
Reason #3: Bad channel karma everywhere. Maybe those call buyers don’t look at charts much? Yikes!
Reason #4: How about a Fib .382 reversal? It’s not usually the end of the world, but it is a Fib. And, it’s surrounded by a bunch of little channels that are about as cute as a pack of Dilophosaurus.
I’m not going go all negative and start talking about the massive fundamental problems BAC faces — as do most other banks. But if BAC hasn’t done its thing by the time the market does its mama bear crash here over the next few weeks, it’ll be a couple of months before it gets another shot.
If it’s lucky, the sell-off will only be to 9.12. But, it the white channel mid-line doesn’t hold, you could through another point or so on the fire.
What does this mean for the rest of the financials? Think in terms of a downdraft on Monday. XLF needs 8 cents to reach its .786 (or .21 for the .886), which ought to get the party started to the downside.
JPM needs .47-.61 to reach a prime target for reversal — either 43 or 43.14.
And, C has about 44 cents of life left in it; 38.19 oughta do it.
When it comes to significant moves, financials often lead the broader markets. Fortunately for our forecast, they are only one good pop away from being ready for a slide. Having them on board in the next session or two should get us where we want.
The US dollar remains in a rising channel within long-term channels that point to very different outcomes.
The rising white channel intersects just ahead with the larger falling white channel upper bound, the rising red channel mid-line and the 75% bound of the falling purple channel.
Whether the red or purple channel carries the day will depend largely on whether the ECB or the Fed can deflate its currency the fastest.
But, the intermediate-term picture is clear: if DX can hold the white channel, the next move should be much higher.
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Bat Patterns are one of the more common harmonic patterns. They are similar to Gartley Patterns, except that the AB retracement can be anywhere less than the Fibonacci .618 of the XA leg and the AD leg completes at the .886.
Because the AB leg can be anything < .618, we have to be a little careful as we approach the .618. A reversal at .600, for instance, could be a Bat or a Gartley that came up a little short. So for those that are close enough to go either way, we’re cautious around the .786 (the Gartley completion) too.
Likewise, a presumed Bat pattern that is approaching the .786 on its CD leg can throw us a curve and put in a bigger reversal there than at the .618. If this happens, there’s a pretty good chance we need to move the Point B to the .786 and prepare for a Butterfly Pattern extension to the .1.272 or 1.618.
Likewise, a Bat Pattern that completes at the .886 could evolve into a Crab Pattern — which features a Point B anywhere up to the .886. The pattern above, for instance, could be just the XA and AB legs, with an ultimate completion at the 1.618 of 892.12. Bottom line, either play a minor reversal at the .886 or have a pretty clear idea of the medium and longer-term potential.
In the chart above, for instance, there’s a trend line that should provide support near the last session’s low. So, there’s a decent chance that the existing reversal is all we’ll see. As always, stops are recommended just beyond the expected target just in case the pattern fails — as it does about 30% of the time.
ORIGINAL POST: 11:15 AM
In something akin to a recess appointment, the market is making a run for our target area (the rectangle in the chart below) during a holiday-shortened trading session. We’ll look at the chances it has of getting there and the most likely impediments.
First, the little pullback we had to the midline yesterday was the 10-15 points I’d been discussing. I wondered whether we’d get something bigger, but this morning’s action lays that option to rest. It does, however, open the door to a bigger pullback at the 1.272 coming up.
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