I normally construct charts in log scale. In general, I regard it as a more legitimate way of viewing time and price relationships. But, I try to remember to check in on the arithmetic picture from time to time.
Here are a few arithmetic charts to consider…
That should be it. Remember yesterday [see: Dueling Bancos] we talked about the little channel being established while the market searched for a Point C. The lower bound of the channel was 1304…
I think the exact price is going to be hard to pinpoint, and will likely depend on the nature and timing of news from across the pond. But, leading candidates are the afore-mentioned channel bottom around 1304 and the .707 Fib/red fan line (from Oct 2007) that intersect around 1309-1310. A push any lower should find strong support at 1300.
We’ve likely just bottomed out just below 1300 (1298.90) and should head back up now. The RSI hit the channel midline, which should be its low point, too.
Our charts have grown fairly “busy” lately, what with harmonic patterns, chart patterns, fan lines, channels, etc. I find it helpful every now and then to take a step back and examine those elements that have had the biggest impact in recent years — and are likely to continue doing so.
In my opinion, the two patterns that have influenced prices more than any other are Fibonacci levels (primarily related to the 1576-666 decline) and fan lines.
Note how strongly prices reacted to each of the Fib lines off the Mar 09 lows. Every Fib level played an important role in providing support and/or resistance at pivotal points. The .236 didn’t slow the advance much, but it provided much needed support after a 9% decline. A tag of the .618 touched off a 17% correction (caught by the .382) and set the stage for the Gartley pattern completion at the .786 a year later.
Looking at the markets these past few days, I’m reminded of the prize that comes in a box of Cracker Jacks. Not a real prize, mind you — but one of those cheap little pictures where the image changes as you shift the angle from which you’re viewing it. It’s called a lenticular image.
Despite the uncanny accuracy of our forecasts these past couple of months, the road ahead seems to shift a little with every fresh look. I can’t remember the last time I agonized over a forecast for an entire three-day weekend.
I’ve taken advantage of a relatively quiet morning in the markets to finish mapping the road ahead. There are quite a few harmonic patterns in play right now. My practice is to map all the apparent possibilities and look for confirmation (or lack thereof) between patterns — and then look for ways in which they agree or not with all the chart patterns, channels and analogs I’m watching.
It’s fairly exhaustive, so takes a fair amount of time. I hope to post the results in the next hour or two. In the meantime, the short-term forecast is still for increasing prices. This morning’s chop does nothing to change that, but does illustrate the importance of using stops.
Like yesterday, l will occasionally post short-term trading opportunities. For traders so inclined, the idea of shorting at 1328 and buying back at 1298 is a great trade. But, it requires a certain degree of vigilance. For the buy and hold crowd who aren’t interested in 30 point blips, feel free to ignore such forecasts.
Whichever camp you fall into, please remember to use stops at all times. These are very precarious times, where unforeseeable events capable of moving markets are unfolding daily. Please don’t get caught with a significant portion of your net worth hinging on any particular forecast — mine or anyone else’s — without protection.
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Stay tuned.
Update: 2:30 PM
The 5-min RSI just broke out from a falling wedge on positive divergence. If it can stay above the upper bound this morning’s decline should be erased, and then some. Watch for a back test of the wedge, which would correspond with a back test of the little red trend line at around 1311.
Still working on the longer term picture. I’ll send a message as soon as it’s posted. At this point, all members should be receiving an email within minutes of when a significant post or update is posted. Please let me know if you’re not receiving these messages.
I’ve put the texting option back in the sidebar to the right. Just enter your cell phone and service provider and you’ll be notified of new posts. Note: it doesn’t notify you of post updates, just the initial publishing of a new post.
UPDATE: 4:05
That worked out pretty well. The falling wedge paid off as advertised, turning an 8-pt decline into a 2-pt gain at 1310.50 — just a smidge below our 1311 target. I hope readers were able to take advantage of it.
Since I didn’t complete the longer-term picture before the close, I’ll work late this evening and try to get it up before turning in.
BTW, I get a number of emails during the day from readers, and I’m good with that. But, I much prefer that anything market related — questions about strategy, investment options, etc. — go into “comments” on the post. I’m likely to see them more quickly, and more importantly, your fellow readers might benefit from the discussion. Thanks!
I wasn’t sure what to write about today until I got a great question from a reader, who hopefully won’t mind my reposting it here:
Pebble, I enjoy your analysis, but are you really saying you bought at the low on Friday and you sold at the exact high yesterday?
“After scalping a quick 36 points (going long Friday at 1292, selling at yesterday’s high of 1328.49) I got a little cocky and went long again at yesterday’s low of 1310 — even though it didn’t quite reach my 1309 target. I got stopped out on the opening and am looking for a good re-entry point — probably just above 1300 from the looks of the 15-min chart.”
DeMark 15 min is saying we will have a bottom shortly in the SPX.
Lately I’ve been very, very fortunate in my forecasts and trading. As readers know, I’ve been calling for a decline to 1288-1323 since April 9 [see: New Analog I’m Watching]. On May 6 [see: So Far, So Good], I refined it to 1295 and wrote:
Remember, our target is 1288-1323, although 1288 has been fudged to 1295 simply because a dip below 1292 would be problematic for the bulls from a wave count perspective; i.e., I think they’ll pull out all the stops to avoid it.
In between, the market hit my upside target of 1415 on the nose, and just about every interim target on the way down. We arrived at 1295 only two days later than my forecast from six weeks earlier (the purple line below.) So, trust me when I say I was fairly confident going into last Friday’s session.
We were completing a Butterfly pattern at 1289.14, a Crab pattern at 1288.69 and were approaching a Head & Shoulders target of 1289. And, a number of other indicators I watch were all screaming “here comes a bottom.” I really, really expected a bounce.
I had orders ready to go when we hit 1295. I drew a little trend line coming down the face of the RSI on the 5-min chart (purple dotted line, arrow A on chart below) and waited for it to be broken. When it did, I started selling short positions (at around 1295.) When RSI back-tested and showed positive divergence, SPX was around 1292; so I took a deep breath and started loading up longs (albeit with fairly tight stops, in case I was massively wrong!)
Was I nervous? Enormously. In my nervousness, I devoted practically an entire post [see: Message in a Bottle] to the fact that I’d written myself a note in an April 12 post [see: Analog Details] to bolster my confidence in what I knew would be a very nervous moment a month later. But, yes, after catching the very top, I caught the very bottom.
As to 1328, that was much easier. As I wrote yesterday morning [see: On Track] my 1330 target was based on the previous H&S neckline. But, I was also watching the Fib levels (red Fib lines above) and RSI activity — which was flashing overbought from the word go.
The rise started slowing as we approached the .500 at 1328.82. I felt we would probably build a Bat or Crab pattern to the upside, so a turn anywhere between .382 – .618 made sense. Here we were, slowing at the .5000. Hmmm…
I went to the shorter term charts (5-60 minutes) to see what they were doing and noticed a trend line was in danger of being broken on the 5-minute RSI (note the red dotted line that runs roughly from A to B.)
Within the next 15 minutes or so, that trend line was broken, and back-tested (the yellow arrow.) That was all I needed to confirm a good entry point; so, I went short — with stops a little over 1330 just in case.
And, it worked out pretty well — except that I got cocky and traded at the end of the day yesterday when SPX very nearly hit my 1309 target (it was my birthday, I was loopy on pineapple upside-down cake.) Had I looked at the 5-min chart again, I would have waited.
So, I got stopped out this morning at around 1305 and sat out until 1296-1298 (discussed at 10:40AM, occurred at 12:25PM) which so far is looking like the right move. Note the back test of the channel — setting up more positive divergence. I have stops in just below 1292 just in case, and still believe we’re in for lots of chop.
With respect to DeMark, I know a lot of folks who follow him, and it seems we’re often of the same opinion. But, I’ve never studied his methodology and don’t really keep track of his forecasts. I do take some comfort — especially when taking a contrarian view — when smart people express concurring opinions.
I sat watching my daughter play volleyball all weekend and ran into another dad who’s very smart and also in the investment management biz. He asked how I’d done in the markets lately, and I started to tell him about catching the rise to 1422, the decline to 1357, the rise to 1415, and the decline to 1292.
As I went on, I could see the word “bull****” forming on his lips. I stopped talking and went back to watching volleyball.
Good luck to all.
ORIGINAL POST: 10:00
These are the toughest times in investing — calling a top or bottom, then watching an opening that threatens to undo it. I mentioned in yesterday’s first post I was expecting a choppy next few days. Talk about understatements…
After scalping a quick 36 points (going long Friday at 1292, selling at yesterday’s high of 1328.49) I got a little cocky and went long again at yesterday’s low of 1310 — even though it didn’t quite reach my 1309 target.
A quick glance at the 15-min chart would have convinced me to wait. I got stopped out on the opening and am looking for a good re-entry point — probably just above 1300 from the looks of this chart.
UPDATE: 10:40 AM
This kind of choppy price action is the price the market pays for getting off to such a strong start Monday. We just tagged the .786 retracement of the rise from the past couple of sessions — the 1300 target from above — but there’s plenty of momentum on this decline so I’ll take another look as we approach the .886 at 1296.14.
There is a potential Bat pattern under construction, though I much prefer a better-defined Point B than yesterday’s low. From that low to the subsequent high was contained in one 15-minute bar. Ideally, there’s more separation than that.
UPDATE: 10:55 AM
Going to take another swipe at it here at 1298 with a 1292 stop.
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This one’s for any Quarrymen fans out there…
Our forecast remains on track. Since calling the 1422 top, we’re up a little over 20% on a cash basis (versus -6.5% for SPX) in a little over seven weeks. We’re likely to pause around 1330, as this represents a key TL on RSI as well as the neckline of one of our recent H&S patterns. The chart below shows several key price levels coming up.
Today’s rise continues our successful run — now up 18.5% in the 5-6 weeks since the new pebblewriter.com came online (knocking on wood…) As expected, we got a sizable reversal off the Crab, Butterfly and H&S patterns.
As discussed in today’s earlier post, the 60-min channel is again being tested – – to the upside, now. A study of the RSI picture indicates that SPX will likely (more…)
Back on April 12 [see: Analog Details] I wrote:
To me, a drop to 1305-1317 seems fairly plausible. The tricky part comes in calling for a reversal after SPX has fallen 120 points from its recent high.
Truth be told, I was really writing this note to myself — a time capsule that would hopefully provide a little backbone. I had a feeling I would begin to doubt the analog in the face of news bleak enough to produce that large a decline.
Now, as we approach the 120-point drop (patience, grasshoppers) within two days of the original target, am I still as confident?
