ORIGINAL POST:  9:20 AM

Yesterday, we got the back test of the white channel line as expected, putting in a low of 1348.51 before rebounding 5 points to close at 1353.64.

Pebblewriter.com is dedicated to forecasting markets.  Since I’ve been fixated on the same upside targets for almost a month [see: Fed Up Yet? and OPEX Games], I thought it would be interesting to see what evidence still supports these targets.

continued…The rising wedge we charted last week (below, light blue) has an apex of around 1450 on about Sept 13.  Recall that we often see rising wedges break down at their .618 from a time standpoint and a price standpoint.

In this case, the Fibonacci .618 time line is July 31.  The .618 price line has already been met, so we look instead at the two most likely Fibonacci price retracements: the .786 at 1389 and the .886 at 1404.  I’ve highlighted all three in the chart below (the bold purple dashed lines) and drawn a target area (rectangle) that encompasses them.

Recall that we also have an Inverse H&S target around 1404.  Though the back test got a little out of hand, the right shoulder was never exceeded.  Thus, the pattern is still perfectly valid.

Pulling back, we can see the market’s current position relative to the major channel lines and trend lines we’re following:

This is shown on a weekly chart to make it slightly less busy.  The same chart, shown with harmonic grids only, yields the following:

Note our target area doesn’t fulfill any harmonic targets other than the small purple pattern’s.  The pink grid features a Butterfly Point B (.786) at 1296, meaning it has potential to 1433 (the 1.272.)  The red grid came close to a .786 Point B for a Butterfly pattern, indicating an upside of 1451.

The yellow grid, which dates back to the October 2007 1576 high, featured a .618 Point B which can yield either a Gartley that completes at the .786 (1381.50, already exceeded) or the .886 (1472.43, up ahead.)

Achieving any of these new highs would mean breaking through the two trend lines we studied yesterday [see: Channels to Watch.]  Each is complimented by a number of parallel trend lines, meaning they are part of a system of important channels.

We have to wonder whether the channels or the Harmonic patterns will win out.   It’s analogous to holding a full house, wondering whether someone has 4 of a kind.   Or, out on a date with Mary Ann, wondering if Ginger might show up.

It’s just very difficult to know; but, suffice it to say I spend many, many hours each day pondering it.  One of today’s CNBS articles mentioned a bearish death cross on the monthly moving averages (the SMA50 is about to cross the SMA200.)

But, on the daily chart, the 10, 20 and 50-day moving averages are bullishly aligned, and the impending 50/200 cross would be delayed by an upturn in the SMA50 if prices even hold in a sideways pattern.

I’m going to sign off for a while to watch BB’s testimony and the more important Q&A.  The market is hanging on his every word, and in the end, QE_n will probably have as much to say about the upside question as anything else.

 

UPDATE:  10:35 AM

We broke through the white channel line — probably the third leg of a corrective wave.  I’m playing the downside (from 1350) as long as prices stay in the little channel.  Will post some charts in a few.

I don’t think this will go far, but I’d like to be on the right side just in case we go down and re-test the wedge at 1342.  More in a few.

UPDATE:  11:00 AM

That didn’t take long.  Just broke out of the channel at 1347, closing those shorts and resuming the long position.

As we charted yesterday, the next upside targets are the Fibonacci .786 at 1364.24 and the lower TL off the 1422 high, currently at 1368.  The .886 Fibonacci is a tad higher at 1369.18 — so we’ll consider 1368-1370 as one target.

1368 should provide at least a pause; 1368-1370 will probably take a bit more of a push.  I intend to watch the channels and TLs to the upside much as we recently did to the downside.  With any luck, we’ll pick up some intra-day trading points in addition to the general move.

UPDATE:  12:15 PM

The break out is holding for now.  In the meantime, we have an important development in VIX that supports the upside case for equities.

One of the most helpful tools in forecasting VIX have been the channels on its RSI.

 

Today, VIX’s RSI broke down below the red channel line that’s supported it since June 20.  If it can close below this channel line and continue in the purple channel to the downside , it will greatly support our 13.66 target for VIX.

Remember, we have two completed H&S patterns now, both of which indicate much lower prices.  The yellow pattern targets 11.46 and the the white pattern an improbable 5.50.  VIX hasn’t been down to single digits since Feb 2007.

The dashed yellow TL is our nominal target and currently reads about 13.70.  It’s actually a long-term channel line with impeccable credentials.

 

UPDATE:  1:10 PM

We’ve also been keeping an eye on the dollar, which as a safe haven, continues to move inversely to equities.  I remember reading Aftershock a couple of years ago.  It made the very convincing argument that the US dollar would be destroyed by disastrous fiscal policy and runaway debt.

The advice was to dump everything into euros and ride out the coming storm.  Needless to say, that book demonstrated the risk of putting any investment advice into writing — a fear I battle on a daily basis.

DX has been in a huge falling channel for years — a fact many dollar bears have duly noted.

Since 2005, however, the major direction within the channel has been a slightly downward sloping sideways movement (the white channel lines.)  We’re currently working on our third thrust up within that system — shown by the small purple channel over the past 2 years.

This might continue on, but for the big purple channel.  I’ve already adjusted it slightly to reflect the dollar’s recent strength (it was strong enough to nullify a couple of pretty well-formed H&S patterns.)  Any further adjustment and I’m afraid it starts to lose its validity.  Here’s a couple close-ups:

So, not only is DX butting up against the big purple channel bound, it’s hit the upper bound on the white dashed channel and the mid-line on the smaller purple channel.

On top of all that, it just completed a rising wedge, visible here on the daily chart.  It should get back down to the white-dashed line without too much trouble.

From a harmonic standpoint, DX recently tagged the 1.618 of the red pattern, and the 1.272 of the larger purple pattern.  We’re pretty much in no-man’s land with respect to the large yellow pattern — so I’m inclined to think there’s more upside and that the Point B was the October 2011 80.43 high for a Bat pattern — targeting 87.07.

Such a move would obviously rise beyond the big purple channel, but it needn’t arrive for quite some time (ideally mid-October, but in any case further away than right now.)

Throw all this together, and I think DX is likely to move down sharply from its current levels in the next two weeks, probably to the lower bound of the smaller solid purple channel.  The lower alternative is the white, dashed channel line at 79.30; a less drastic decline would be the bottom of the rising wedge (and channel mid-line) around 81.63.

 

UPDATE:  1:55 PM

We’re getting very close to the Fib .786 line of 1364.24 mentioned earlier this morning.  We will likely see at least a pause here, since this is a potential Gartley target set up by a .618 Point B at 1357 last Friday.  As long as we stay in the little channel up, I’m long.  Otherwise, I’ll likely make some intra-day trades – try to capture a few extra points.

For anyone who’s more actively investing today, just hit your refresh button on a regular basis.  This post is getting rather unwieldy and I won’t be sending out emails with every little update.