pebblewriter

Tag: SPX

  • Charts I’m Watching: Jan 28, 2013

    A positive durable goods report, mixed CAT earnings and the usual meaningless NAR drivel (this time negative, but being spun as a lack of inventory) have combined to drive SPX down 5 points.As we discussed Friday, the bottom of the purple channel (1498) and/or midline of the white (1496.50) are good trigger points for those who play intra-day moves.  Look for a bounce there.

    The bottom of the white channel is currently 1485, the level at which a move lower would seriously undermine our current position.  Otherwise, our core position remains long.

    The dollar, which broke back down below a channel line on Friday, had a 2nd nice bounce off the next lower channel line, but as yet hasn’t broken out.  The short-term harmonic picture continues to be ambivalent.

    Keep an eye on the RSI channels, which still point lower in the short run amidst a general move higher.

    The EURUSD continues to linger in double-top territory — also the completion of a Crab Pattern (small, purple.)

    Note that this is also a .500 and .382 Fib of much larger patterns, so we should get a sizable reaction here.

    I’m adding two pages to the website this morning.  The first is a general discussion of harmonics trading techniques — something I’ve been wanting to do for months.  Part 1 has already been posted under the harmonics section of the “learn” tab.

    The second, which will be posted shortly, is a brief summary of my current core position and will be available under the “markets” tab.  Many of you have asked for such a page, but I’ve hesitated because of the risk of misinterpretation.

    Someone taking a quick look might see a long position, for example, without noting the commensurate high risk of a sharp downturn that was discussed in the daily post the day before.  There’s also the risk that a short-term trade is misinterpreted as long-term, or vice versa.  At tops and bottoms, when we’re waiting for the market’s stripes to emerge, core and short-term trades aren’t always easily distinguishable from one another.

    Last, such a page will out of necessity be a snapshot — a peek at where things stood at the time of its posting.  The outlook might have changed two minutes ago but not have been posted yet.  Someone who reads the full daily post would realize a change is in the works, but this page wouldn’t yet reflect it.

    But, with those caveats out of the way, I’ll post it later today for members only.

    UPDATE:  11:30 AM

    SPX bounced at the white channel midline as suggested earlier (1496.33 v 1496.50 target) and is back above 1500.

    I believe our short-term forecast is right on track.

    continued for members… (more…)

  • Trading with Harmonics

    The first of a two-part article on harmonics trading strategies.

    Part 1.  January 28, 2013

    Harmonics are a great source of information about the market, but they don’t tell you how or when to trade any more than do MACD crosses or breadth indicators.  So, how do you use them?  This discussion of the basic process might serve as a good starting place for beginners.

    I consider harmonics like trade alerts.  That is, every time we approach an important Fib level, I stop and consider whether the market is likely to react or not, then make a trade decision accordingly.

    There are pages for each specific pattern under the Learn>Harmonics tag on the Home Page.  But, they all relate to one another.  Let’s walk through a real world example.

    SPX has fallen from 1576 to 666 and seems to have bottomed (how to know it’s bottomed is the real trick.)  I draw a Fibonacci Retracement grid on the price range (100% for 1576, 0% for 666) and make sure every important level is showing as on the chart below.  For a discussion of Fibonacci levels, click here.

     

    ThinkorSwim makes this very easy with a built-in drawing tool, as do many other platforms.  If your platform doesn’t provide it, you might want to think about changing, or at least opening up a TOS account to facilitate your charting (and, no, they don’t pay me to say that.)  You can read about harmonics and study the charts I post, but there’s no substitute for doing your own charting.

    Back to our example: because we went long at the very bottom, we set our sights on the higher Fib levels.   All harmonic patterns are marked using the letters X, A, B, C and D.The inception point (high) is X, the low is A.  B is the first reversal, C is the next, and D is the completion. The location of the reversals relative to specific Fib levels tells us what kind of pattern we probably have.

    Suppose we’ve watched SPX climb all the way up to 956, where there’s a 9% correction down to 869.  Because this reversal occurred below the .618 Fib level, we might have a Bat Pattern on our hands.  Bat Patterns complete at the .886 (1472) so we’ll make a note of that for future purposes and consider 956 a potential Point B.

    We sail right through the .382 and .500 levels, then experience another 9% correction at just above the .500 (1150 to 1044.)  Again, it’s below .618, so it could be signalling a Bat Pattern.  But, it’s a relatively minor reaction, so we treat it as only a potential Point B.

    Now we’re approaching the .618 at 1228.74 — the most important of the Fib levels.  Because the two prior reversals were pretty tame, we might suspect more from this one. We begin to contemplate a short position, and look for other signs of a reversal.

    Because we’ve been watching closely, we notice a smaller Crab Pattern setting up as we approach the .618 (the purple pattern below.)  It features a Point D at 1215.93 — slightly below our .618 at 1228.74.  So, we feel pretty confident about this being a good trade entry.

    Are there other chart patterns such as a rising wedge, channel, fan line, etc. that also hint at a reversal?  In fact, there’s a nice channel that’s formed over the past 9 months, not to mention a broken RSI channel (in red) just shy of the Crab completion.  And, we’re nearing the 1240 target of the Inverted Head & Shoulders pattern completed at the 2009 bottom.

    These would all be good reasons to consider a short.  Taken together, they make for a pretty compelling argument.  Where, though?  Other traders are watching the same charts we are, so there’s a chance the reversal will come a little early.  We don’t wait to wait too long and miss the top.  But, of course, every point too early is a point of lost profit.

    In the end, timing is a judgement call based on many factors, including liquidity, risk tolerance, the type of instruments we’re trading, other positions in the portfolio, etc. and is worthy of its own article.

    Let’s assume we make the decision to open a short position around 1213 on the April 15 — in case SPX doesn’t make it all the way to 1215 or 1228.  We feel pretty good about our decision when SPX is down to 1186 the following day and 1183 the next.  That’s a 2.5% move in two days — not bad.

    On the third day, however, our plan is looking iffy.  SPX gaps up on the open and hits 1208.  Three days later, it pops above the Crab target of 1215.93 and tags 1217, seemingly in search of the .618 at 1228.74.

    Suddenly, we’re underwater by 15 points or 1.25%.  Is it time to bail?  Again, it depends on the type of investor you are.  Options traders might have closed their puts for large profits already, while swing traders might be happy as long as SPX doesn’t exceed 1230-1235.  Buy and hold types might have used the Fib level as a warning of a potential downturn and hedged or lightened up on their long positions.

    Checking our charts, we can see that neither the price nor the RSI channels have been broken to the upside.  In fact, the little red RSI channel which helped convince us of the downside potential shows the latest push higher came with a lower RSI score (negative divergence) and a pretty pathetic back test.  So, we’re inclined to hang in there.

    It turns out to be a great decision.  The following day, RSI plunges through the midline of the purple channel.  SPX plunges 38 points from its high, stabilizes for four days, then really starts falling apart.  On May 4, SPX reaches the white channel midline, a possible bounce spot.  We’ve already made 4.5% since shorting at 1213 less than 3 weeks ago.  Time to bolt?

    To be continued…

  • Now What?

    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:

      1. earnings season —  AAPL in particular
      2. the US budget/debt ceiling imbroglio
      3. new highs justified?

    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.

    1. Chaos theory tells us they won’t have enough fingers to plug every hole in the dike (TPTB have similar “never again” strategy sessions after every crash.)
    2. Even when things do run as programmed, we can still effectively capture enough significant swings in the markets enough of the time to boost returns and, more importantly, try to avoid huge downdrafts.

    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.

  • Ay, There’s the Rube

    Oil is often viewed as a proxy for economic health.  In a growing economy, energy consumption increases.  This increased demand generally pressures prices higher.  Likewise, a decline in oil prices often accompanies declining demand.

    That’s a greatly oversimplified view, of course.  It ignores such important issues such as Middle East tensions, weather and refinery anomalies, etc.

    But, the most important of these external factors is the US dollar — the currency by which oil is traded globally (for now.)

    A weakening dollar is great for the many US companies that export overseas.  In general, it makes dollar denominated assets — such as stocks, real estate, etc — more attractive to overseas investors which helps the US attract and retain capital.

    But, it makes foreign-sourced oil much more expensive.  This isn’t an issue if you travel everywhere via America’s world-class public transportation system.  But, it really sucks for the guy with a 3-ton SUV — or anyone who consumes anything made overseas, for that matter.  Imports are about 18% of GDP.

    So, what’s a central banker to do?  Boost stocks and investment in US assets, and there’s a pretty good chance you blow the budget of every American consumer.  (Of course, it only really affects those who eat and drive — hey, buy a Chevy Volt already!)

    Boost the dollar to make gas and food more affordable for the 50 million Americans living in poverty (1 in 5 children, 2 in 5 African American children), and you risk a true disaster — a stock market decline.

    Never fear… Bernanke and his fellow Guardians of the American Dream know whose bread to butter.

    The chart below shows how crude light, the US dollar and the S&P 500 correlated over the past seven years.  In 2006 and 2007, oil and the stock market soared pretty much in sync while the dollar took it on the chin.  When SPX topped in late 2007, oil kept right on soaring — because the dollar was still plunging.  Nationwide, gas hit $4.12/gallon in the summer of 2008.

    We’re all conditioned to think of dollar strength as a function of risk off.  But, as the financial crisis worsened, the dollar couldn’t catch a bid.  Money fled to the euro, the swiss franc, the sterling — anywhere but the dollar. There were several best-sellers on bookstore (remember those? shelves that advised putting every last cent into the euro.

    From October 2007, when SPX peaked, until July 2008, stocks and the dollar moved pretty much in tandem.  But, as euro zone problems became more apparent, the dollar finally bottomed.  In August, as stocks began sliding again, the dollar finally took off.  Now deemed a safe haven, DX soared 27% by March of 2009, while stocks shed another 54% in value (58% in all.)

    Of course, this did a number on oil — already reeling from declining global demand.  CL plunged an astounding 78% in only six months — from 147 to 33.  Fortunately for the stock market — and especially the oil industry — Ben Bernanke came to the rescue.  The first round of QE was a resounding success and both promptly reversed.

    In the first three months alone, CL more than doubled to 73.  SPX added on a respectable 44%.  And the dollar took one for the team, shedding an initial 13% on its way to an 18% loss.

    So, why the history lesson?  By now most of you have noticed a slight discrepancy over the past 3 1/2 years.  Oil and the dollar have formed triangles.  They’ve had their ups and downs, but in general the highs have been getting lower and the lows getting higher.  I use the term “coiling” because eventually prices won’t be able to compress anymore.

    This pent-up energy will eventually be released in the form of sharply higher or lower prices, though it won’t necessarily happen tomorrow.   Both have drawn close to one side of the pattern, but there’s still plenty of room for a reversal.

    Oil, if it doesn’t suddenly shoot higher, will probably bounce back down.  Likewise, the dollar is poised to bounce higher.

    Stocks, on the other hand, have made a series of higher highs and higher lows in what’s known as a rising wedge.  These patterns also can’t last forever, and they almost always resolve to the downside.

    Prices are much closer to the upper bound than the lower, which also suggests the next major move will be lower.  In fact, when rising wedges break down, they typically target their origin. Needless to say, a return to 2009 or even 2010 prices would be a huge blow to the rosy scenario TPTB are crafting.

    Does oil offer any hints as to which way prices are likely to go?   I’m drawn to a few periods in particular.  From June 2009 to May 2010, oil gained 19% compared to SPX’s 27%.  Yet, they both shed roughly 20% in the May – June 2010 correction.

    We had another round of QE, which collapsed the dollar and sent stocks up 36% and oil up 70% through May 2011.  This time, SPX corrected 22% and oil 35% (through Oct 2011.)

    At that point, CL sold off strongly — dropping 23% through the end of June.  SPX, however, lagged.  It lost 8%, then promptly regained 90% of it in the next three weeks (compared to CL’s 40% retracement.)  When the slide continued, however, SPX caught up — in spades.

    It lost 80% of its gains from June 2010, while CL only lost about half that.  SPX then went on to make three new highs in a row, adding 38% through today’s close.

    CL managed an 88% retracement of its May-October losses for a 47% gain through Feb 2012, and has made two lower highs (each a 61.8% retracement of the previous high) since then.  Total gain from Oct 2011: 27%.  And, it’s been a fairly neutral currency market.

    I can’t help wondering what the oil and currency markets know that the stock market doesn’t.  A look at the CL charts indicates more downside.  Will SPX again play catch-up?

    Even ignoring what I suspect about the dollar and equity markets, CL presents a bearish picture.

    Whether it breaks down or out, CL is obviously at a turning point.  We’ll keep an eye on it…


     

     

     

  • Charts I’m Watching: Jan 14, 2013

    ORIGINAL POST:

    The dollar is making a stand at the upper end of the target range I charted Friday, but hasn’t yet broken out of the steep falling channel.  While there was a turn at the .618 Fib that would justify a .786 completion (a Gartley), the more obvious Point B was at the .382.

    In a perfect world, this would signal DX has further downside potential to the .886 for a Bat Pattern completion — though, obviously, not every corrective wave has to be a harmonic pattern.

    The EURUSD similarly reached a common turning point at the 1.272 extension of the latest move down from Dec 19 (or Jan 2, take your pick.)

    But, as can be seen, the rally from last week features no potential Point B whatsoever.   It’s hard to call this a Butterfly Pattern in the absence of an actual pattern.

    Furthermore, the tails on the daily candles offer an even more aggressive upper bound for the rising wedge we’ve been charting for the past several weeks.

    Equities are pointing to a soft opening, but nowhere near what one would normally expect with horrid AAPL news on the tape — much less the approaching budget showdown.

    Regular readers are well aware of the importance of the 500 price level for AAPL.  As we’ve discussed many times, the completion of the H&S pattern could have dire consequences for AAPL and the entire market.

    continued for members… (more…)

  • Update on Everything: Jan 11, 2013

     

    Around the horn with major indices and currencies…  Like SPX, most are at a threshold where they must either break down or break out (I think “break down,” but we’ll know soon enough.)

    Coming up: VIX, RUT, COMP, NYA, NDX, DJIA, FTSE, SPX, DX, EURUSD, USDJPY, AUDUSD, CL, GC, SI.  And, yes, I’m happy to take requests — first come, first served after the above are done.

    *  *  *  *  *  *  *  *

    VIX

    continued for members… (more…)

  • Charts I’m Watching: Jan 8, 2012

    We’re getting a little more momentum going on the downside today.  SPX completed the small H&S pattern I posted yesterday.  It targets 1445 — approximately the .146 Fib of the 1266.74 – 1474.51 rally.

    DX completed its back test of the falling red channel and continues to show strong positive divergence.  The RSI chart shows substantial upside.

    And, despite the Japanese vote of confidence, the euro is showing continued weakness — with another test of the rising wedge and a white channel line coming up.  The channel line intersects with a .382 Fib at 1.3060, so look for a bounce there.

    We remain short from SPX 1462, but we can expect to see some bounces along the way.  As discussed in the last performance posting, I will likely maintain a core short position until we reach our ultimate target.  But, I’ll also provide thoughts on any foreseeable interim moves.

    Longer term investors who wish to ignore the intra-day swings should feel free to disregard that info.  While, those who hope to capture the many 10-20 point swings along the way will have some useful (and hopefully helpful) information.

    As of last week, the primary directional moves accounted for about 40% returns since inception on Mar 22.  The interim swings were good for an additional 55%.  So, pick your poison.

    UPDATE:  11:15 AM

    AAPL just broke through an interim channel line on the primary channel we’ve been following since early November.  This should set up another test of the channel midline and, more importantly, the H&S pattern neckline.

    Since AAPL is an important bell cow, it’s important to know what’s at stake here.

    continued for members…

    (more…)

  • Channeling a Top

    We got the reversal we were looking for last Friday, but as detailed in the last forecast there is still some uncertainty as to the ultimate outcome of this latest rally.

    We remain short from 1462, but a stop in the 1466-1468 range would be prudent.  A rally through 1474 changes our forecast, as discussed yesterday.

    The euro bounced off the bottom of the rising wedge we’ve been tracking as expected.  There is negative divergence relative to the Dec 7 low; so, in all likelihood, the larger wedge should break.

    The daily RSI shows the two options quite well — a bounce off the yellow channel line or just a back test of the broken purple channel line.

    The dollar continues to move in tandem with equities.  It rose last week as SPX rallied, and is off today.  But, like EURUSD, there is marked divergence on the daily chart since it broke up through the top of the red price channel and retested the bottom of the white price channel.

    It reversed at the .786 of the B-C (purple) drop.  And, the 1.618 extension of this move is the same level as the .786 of X-A:  83.10ish.  This would set up a tag of the white channel mid-line somewhere around Jan 22-23 (the .886 intersects with the mid-line around Mar 6.)

    I posted quite a bit over the weekend about the SPX forecast, so I won’t rehash it here.  Suffice it to say we need to see some follow-through on the dip this morning in order to get anything going on the downside.

    The 15-min chart shows a potential H&S pattern that targets 1443.  But, SPX will need to reverse before 1468 for it to play out.

    I’ve updated the channels and harmonics for the most recent top.  In general, they confirm the current forecast.  But, there is plenty of wiggle room.

    continued for members…

    (more…)

  • Down the Rabbit Hole: Part 2

    Alice laughed: “There’s no use trying,” she said; “one can’t believe impossible things.”   “I daresay you haven’t had much practice,” said the Queen. “When I was younger, I always did it for half an hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”
                                        ― Lewis Carroll, Alice’s Adventures in Wonderland

     

    The market never ceases to amaze me.  Despite all the ingredients being in place for a sizable correction, it’s sailing along as though everything were copacetic.

    Negative divergence abounds.  The correlated currencies are all selling off.  Gold is down.  Silver is down.  Even AAPL is down. Numerous indices have completed bearish Harmonic or Chart Patterns.

    The Fed let slip yesterday that the adrenaline drip will soon be removed — leaving banks without a buyer for their underwater mortgages and the stock market without any downside protection.  They’ve finally admitted what we’ve all known for some time: QE’s effect is diminishing, and the risk is growing.

    The budget showdown is still ahead (the part of the fiscal cliff that really matters.)   The most fractured Congress in modern history, which utterly failed to resolve the important issues, will now turn the task over to an arguably more partisan Congress.

    The country’s AAA credit rating is hanging by a thread at both Moody’s and Fitch.  A downgrade by either would require massive selling by institutions which require at least two AAA ratings in order to comply with their investment policies (especially insurance companies.)

    Unemployment has reportedly declined, but only because we no longer count the dejected job seekers who are leaving the work force in droves.  Include them, and the actual picture is startlingly bleak. (source: Shadowstats.com)

    The EU is officially back in a recession (though it never really left.)  Its banks are being kept afloat by the ECB/ESM, which is exchanging (somehow AAA) paper backed by shaky sovereigns for junk sovereign debt as fast as it can.  Meanwhile, unemployment continues to soar.

     

    The big 2013 headline that isn’t (yet) is the global derivatives debacle:  $700 trillion — over 10 times the global economy — of unregulated, unpriced, unreported private contracts which have been sliced and diced so many times that no one has the slightest notion what the risk really is — except that it dwarfs the capital of the banks that hold it.

    In my opinion, the only things keeping the economy and the market afloat are the unrelenting screech of MSM fairy-tale “good news” and the Bernanke Put (the Fed’s money printing and plunge protection operations.)

    As long as these two factors can outweigh the negative fundamental picture, the market stands a good chance of rising.  Take one of them away, and the resulting crash will be swift and severe.

    That said, I’ve spent the past two days assessing the current state of our analog and forecast.  I’ve quantified it as best I can in an attempt to eliminate my admittedly negative bias.  I’ll lay it out over the next several hours, a few charts at a time.

    If you’d rather skip to the punchline, I’m still bearish.  In the absence of a push through 1474, I think we’re in for a sizable correction and remain short from 1462.  If 1474 is broken, everything changes.

    For members who enjoy getting their fingers dirty, stay tuned.

    *  *  *  *  *  *  *  *

    About an hour ago, we completed a Bat Pattern which is nestled inside of a Bat Pattern which is nestled inside of a Bat Pattern.

     

    UPDATE:  3:15 PM

    RSI channels show how much is riding on this moment.  A push through the top of the purple channel brings the red channel mid-line into play.  Could it correlate with 1474, or maybe just the next channel line on the intra-day?

    I’m not sure.  The intra-day 1.272 is 1468.17 and the 1.618 is 1471.61.  A double-top would be a real nut-buster.

    All I know is there’s still negative divergence across the board, so I don’t expect the red mid-line to be broken.

    My apologies for the delay in getting the forecast charts up.  They’ll have to wait until after the close.  I’ve been distracted by the melt-up, checking and re-checking my charts to see what I might be missing.

    continued for members… (more…)

  • Down the Rabbit Hole

    “In another moment down went Alice after it, never once considering how in the world she was to get out again.”
    ― Lewis Carroll, Alice’s Adventures in Wonderland

    Not quite four months ago, the Fed guaranteed lower interest rates and higher stock prices forever.  At least that was the mainstream media’s take on QE3.  The market shot up about 40 points in a day, then did something rather curious.  It stopped.

    While the rest of the world took advantage of the pause to shift more money in AAPL, those who study harmonics loaded up on shorts in anticipation of the huge Bat Pattern that was completing [see: The World According to Ben.]

    After having reversed at the Fibonacci 61.8% of the 2007 to 2009 crash, SPX had reached the 88.6% level.  Would it be a huge reversal as occurred when the Gartley Pattern completed at the .786 (- 21.6%) or something more modest?

    The fact is, we don’t know yet.  After shedding 131 points (8.9%) from September to November, SPX has retraced 119 points — roughly 88.6% of them.

    This means that SPX has constructed another Bat Pattern over the past 4 months.

    It’s easier to see if we zoom in.

    Like the larger pattern that took place from 2007 to 2012, will this pattern deliver a big reversal or something more modest?  For help, we can examine how SPX reacted the last time it reached a major Fibonacci level — the Gartley Pattern at the .786 in May 2011.

    SPX lost 112 points to 1258.07 before regaining about 88.6% of them to complete a Bat Pattern (the light blue pattern.)  At that point, it did it all over again (the red pattern.)

    In retrospect, the move from 1370 to 1258 was the 1st wave.  The move back up to 1356 was the 2nd, corrective wave.  It was powerful and quick — taking only 14 sessions compared to the 1st wave’s 33.  This fooled a lot of investors into thinking it was a motive wave and was going to establish a new high.

    Note: For those of us following an analog that compared the 2011 top to the 2007 top, it was a fabulously opportune time to start loading up on shorts [see: Why Do Analogs Work?]  Our gains over the next couple of weeks were nothing short of spectacular.

    The same thing happened a second time (the red pattern.)  The wave from 1356 to 1295 took 7 sessions, while the wave back up to 1347 took only 3.  Again, this suggested higher prices, not the powerful reversal that slashed 246 points in only 13 sessions.

    Are there any parallels between the market’s reversal at 1370 and its reversal at 1474?  As regular readers know, I am tracking a new analog [see: A New Old Analog] that suggests there are.  But, there’s a line in the sand at current price levels.

    We can argue all day about whether the pathetic fiscal cliff deal, combined with the latest QE incarnation, should mean higher prices.   But, if the latest Bat Pattern doesn’t hold, and prices ramp up past 1474, I’ll consider the analog broken and start charting upside targets.

    But, it won’t be because the Transportation Index just made a new high.  It simply completed a Crab Pattern (on negative divergence I might add), imbedded in the tail end of a large Bat Pattern that it’s been trying to complete since February.

    And, it won’t be because the Russell 2000 just made a new high — which can also be viewed as a quadruple top (dashed purple TL) that coincides with: (1) a Butterfly Pattern completion (in purple); (2) a Crab Pattern completion (in red); (3) a back-test of a well-formed rising wedge; and, (4) the .786 time fib of the wedge.  All of this, of course, is on negative divergence.

    It would be in spite of a dollar index that just broke out of a channel that dates back to May (red), after testing the bottom of a channel (in white) that dates back to Feb 2011.

    It broke out of and back-tested the latest channel on the hourly chart, too.

    I’ve always wondered what would happen when The Powers That Be threw everything they had at the market and it yawned.  Might that be a rabbit hole from which there is no easy escape?

    Between QE3, ESM, Congressional Kumbaya singing…the market should be hitting new highs.  So, why is it mired at the same point (metaphorically, at least) that preceded the last big correction?

    The market is currently frozen in headlights, wondering whether to respect the latest Bat Pattern or not.  So, I’m going to take the opportunity to review our analog and general forecast.

    To be continued…