As we close precisely on the trend line between the Oct 27 high (which kicked off a 112-pt Inverse Head & Shoulders pattern) and the just completed (for the 2nd time) Head & Shoulders pattern, I’m reminded of how little fundamentals have come to matter.
Oh, and for any Fibonacci haters out there, check out the time and price relationships between the two patterns.
Nothing to do with markets per se, but this kind of story really makes you stop and think… Anyone who thinks the same couldn’t be done just as easily with a FAB-250 from a Skyhawk is deluding themselves.
UPDATE: 3:40 PM
The H&S neckline back test we discussed in the 2:20 post below is likely complete.
Note that the head of this little H&S pattern came at the 1.618 extension of last week’s 1392-1358 decline — in other words, a Crab pattern (drawn in yellow.) And, it’s nestled in the C and D legs of the Bat pattern that completed at 1415 (the purple pattern.)
After weeks/months of normally reliable patterns busting left and right, it’s so nice (not to mention profitable) to see patterns play out the way they should.
UPDATE: 2:20 PM
SPX traded through the small neckline and seems quite content to pause at the small fan line I posted about this morning. It’s line k-4 on the chart below, and just so happens to correspond to the SMA 10 on the daily chart (1390.81.)
In H&S patterns, neckline breaks are often followed by a back tests. If the NFP print in the morning is lousy, we should head down to 1372 pretty quickly. If the numbers are great (or the market perceives them as guaranteeing another round of QE), the pattern will bust.
UPDATE: 1:15 PM
Be cautious with this smaller pattern, though. The 60-min chart shows a distinct possibility of a bounce at the neckline (as happened with the larger pattern.) Focus on the bold, yellow TL on the RSI below. I would suggest anyone considering piling on shorts protect themselves, as always, with tight stops.
UPDATE: 12:30 PM
Over on the right shoulder of the Head & Shoulders pattern we’ve been watching is a… H&S pattern. It would complete somewhere just below 1394 and targets 1372 — the (wait for it…) neckline of the larger pattern.
Ever get the feeling the market is just toying with you? Seriously, though, this fits rather well with the RSI indicators, which as I posted earlier, support the idea of another test of the neckline.
If we get crazy positive non-farm payroll numbers in the morning, all bets are off. Barrons is reporting consensus estimates of 165,000 (below), while Briefing.com estimates 140K.
We didn’t have to wait long for the Bat pattern I posted at 11am to play out.
The .886 target was 1414.97, and we reversed at 1415.32 at 11:50am — closing just a fraction above the subsequent low for the day of 1405.25.
I was disappointed to be stopped out of my short position early this morning, but more than made up for it by establishing new shorts at 1415. I enjoy 60% intra-day profits as much as the next guy, but what’s really cool about the way the day closed is the effect on the RSI channel.
I posted yesterday about the RSI channel that was setting up on SPX. I added another post late last night (early this morning?) showing essentially the same pattern on all the other indices I watch. It strongly suggests that the rise since 1357 is nothing more than a back test. Here’s the view at yesterday’s close.
This morning’s elevator ride sent RSI right through that dashed, red line — making the channel look about as valid as a $3 bill. In fact, RSI spent most of the session ignoring my channel line. But thanks to the Bat pattern reversal, at the end of the day (literally) the channel held.
And — wouldn’t you know it — SPX closed right at the shoulder line (white, dashed line) where it can torment us with uncertainty for another day.
For a peek at the other indices and their channels, check out New Charts! posted last night. Also, each index has its own page under the MARKETS menu, and will be updated at least weekly. SPX, DX and VIX are typically updated intra-day on the main page, depending on market conditions.
While you’re poking around, consider signing up. Current pebblewriter followers who join by midnight tomorrow are entitled to $100 off an annual membership. Also, the first 100 annual members who sign up by tomorrow will have their membership rate grandfathered for the life of the site. No increases, ever — which will be pretty cool when it costs $500 just to fill up your Suburban.
Over the next day or two, this website will be password protected, so those of you who have already subscribed (thanks!) will enjoy first dibs on the latest and greatest. If you haven’t subscribed yet, might as well do it now and save yourself $100. If you bought a dozen at-the-money puts at 1415 today, you’re already up more than the cost of an annual membership.
Good luck to all.
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.
Back on the 18th [see: VIX at a Crossroads] we charted VIX’s future, observing that it had fashioned a perfectly good falling wedge into a downward sloping channel. We talked about how a drop to 16 would be the ideal level for an Inverse H&S pattern to develop.
Guess what?
It’s interesting that VIX is reaching its ideal shoulder line just as SPX is reaching its. To make things even more interesting, the RSI channels support the idea of a reversal here.
Stay tuned.
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.
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.
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.
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.
I’d be impressed if the bears were able to deck OPEX — the perennial champ — and let the H&S pattern play out just yet. But, here we are, at the bottom of the nice little channel that’s guided the upside since 1357 on April 10. I suspect the sell-off will be limited to 61.8% of the rise, or 1370.
The nice thing about the .618 is that it leaves open the possibilities of a Gartley, with a reversal at the .786 at 1365, or extension to a Crab’s 1.618 at 1335 — which would be a nice level at which to start a back test of the neckline.
If there’s one thing you can count on these days, it’s the market’s insistence on maintaining maximum ambiguity for as long as possible.
More later.
