ORIGINAL POST:  6:00 AM

SPX ended yesterday just below our 1497 trigger point at the neckline.  I know the bulls would love to blow through this level and negate the H&S, but I think they’ve really got their work cut out for them, especially given the political mess in Italy and the looming US sequester.

Bernanke isn’t likely to say anything new today.  And, judging from AAPL’s price action, the market isn’t looking to Cupertino for salvation.  The durable goods data?  Ho hum…  Saying it was a good number if you ignore defense and aircraft is like saying a shark attack was fine except for those pointy things in their mouths.

Defense is due to get a lot worse starting next Monday.

I’d put slightly greater odds on a breakdown of the purple channel.  As for targets, I’ve mentioned the 1474.51 level a lot – the Sep 2012 high and roughly where the SMA 50 was at the EOD (hat tip to Mike for the question.)

I still think this area has potential, as a retracement to the .886 of the 1576-666 decline would set up a move to 1576 itself.  Why?  Think of stair-steps, where each major Fib tag or break is followed by a back test to a significant lower Fibonacci level.

continued for members…

Looking at this massive harmonic chart, a new high seems almost certain.  After all, the .786 reversal at 1370 practically screams “Butterfly Pattern!”  Such a pattern would target the 1.272 at 1823 or the 1.618 at 2138.

But, even if the market were to make new highs, there’s a whole lot of ground to cover first.

For starters, what about the bottom of the yellow rising wedge?  We can’t very well bounce off the upper and lower bounds religiously for nearly three years, only to abandon the pattern now.  It currently sits at about 1421.

And, how about the H&S pattern we just completed at 1497?  It targets 1463, below the bottom of the purple channel.

Then, there’s the measured move to consider.  From (2) to (3) was 207.77 points.  Adding that same total to Point (4) yields 1551.12 — right there in the vicinity of the white Crab Pattern 1.618 at 1553.39.

UPDATE:  9:30 AM

Futures are pointing higher, but the dollar argues otherwise.  There’s support at the price midline and RSI channel bottom on the 4-hr charts.  And, we still haven’t reached the 82.136-82.281 level.

Remember the drill?  A push above 1497 = intra-day longs.  Otherwise, short.

Almost a year ago, a very smart friend of mine told me that his money manager was anticipating 1500 by year end.  I knew all about this manager from having been in the biz — not a serious contender.

I knew even more about them from their marketing campaigns.  Every few weeks I received a big, glossy full color mailer touting something or another – never any mention of a track record, which was widely known to be inferior.  Their CEO was a widely read author and magazine contributor.

Well, as it turned out, they were right.  The presidential cycle, QE, etc – whatever their logic was, it worked out okay for them. They earned a whopping 12-13% (vs 16 for S&P 500) which was much closer to the index than they usually got.  And, they collected 2% on their $20 billion of “separate accounts” for wealthy individuals.

My point is, you can be right about the finish line, but still underperform based on any number of factors (stock selection, sector weightings, cash, etc.)  Suppose we knew for a fact we were going to 1555 (+3.5%) or 1576 (+4.7%.)  Would that change our approach to playing the H&S Pattern?  Would we ignore the purple channel?  The major Fib lines?

These patterns, while offering no guarantees whatsoever, give us something concrete against which to measure our position.  If I go short based on a harmonic pattern that indicates a turn at the .886 Fib, and prices rise through that Fib level instead of reversing, I know I’m probably wrong in my assessment.  I can reassess and make an adjustment.

If I go long based on support from at the bottom of a well-formed channel, and prices break down below the channel bottom, I know the trend has probably changed and I should be short.

To me, these decisions are much more reliable than trying to guess whether AAPL is going to increase their dividend, or whether NFLX is cooking the books.

So much of that world is driven by the imponderable and the easily manipulated.  Technical analysis, chart patterns, harmonics are concrete, discrete, measurable and, by their very nature, somewhat predictable.

For the record, the calls made on this website crushed the money manager’s 2012 performance (even though he was right about the finish line.)  But, he probably collected $200MM in fees.  So, I guess he has the last laugh.

UPDATE: 10:45 AM

SPX just tagged the 25% purple channel line at 1507.  I’ll close out the intra-day long for a 10-pt gain, but am ready to jump back in on a push higher.

For the trend to turn positive, we’d need a push up through this channel line and take out 1525.84 — meaning a potential pop through the purple midline as well (depending on when.)

The dollar has been flirting with losing midline support all morning, but keeps bouncing back.  I like the look of a channel on the 15-min RSI.   I’m going to assume DX will hold the price midline until that RSI channel says otherwise.

UPDATE:  11:00 AM

SPX just poked through the purple channel line.  Probably heading up to the white channel line at 1509.50, so I’ll play along with trailing stops back at the channel line at 1507.  The .618 is up at 1513.39, which also looks like a measured move vis-a-vis the last leg up.

Charts shortly.

In the time it took me to adjust the Fibs and print out the chart, SPX reached the next higher white channel (75%.)  The measure move calc puts the top of this rally at 1513.56 — right at the .618 mentioned above.  Hanging long just a little longer, but watching those stops.

This early in the game, it’s a bit risky to call the white channel legit — especially after a solid reversal at the bottom of the purple channel.

UPDATE: 12:30 PM

SPX just reached the .618 and measured move targets at 1513.39 and 1513.56 respectively.   I’m closing my intra-day long here at 1514 for another 7-pt gain from 1507, but will pop back in if we get a push through these levels.

I’ve sketched in a (very) tentative falling channel in white.  We’ll keep an eye on it and see if it plays out with a reversal here.

UPDATE:  12:45 PM

Changing the color of the new channel to yellow just to avoid confusion.  It’s early, but it’s looking good so far.

UPDATE:  1:30 PM

DX looks like it’s broken out on the 15-min RSI chart (yellow channel), though the price chart has yet to look all that exciting.  Remember, we’re just looking for a return to the top of the white price channel to tag those fibs at 82.13-82.28.

The daily RSI chart is much more ambiguous, with the top of the yellow and white channels still untouched in the midst of this 3-day pullback.

While we’re waiting to see if SPX 1514 holds, let’s get back to the big picture (I’ll sort these posts later so the forecast stuff isn’t scattered everywhere through the post.)

The daily RSI chart on SPX fascinates me. Remember, it was the break of the latest rising RSI channel that signaled the latest downturn. This was the same slope as the last one, so I felt pretty good about its validity.

In trying to fit a channel to the move since the breakdown, the obvious choice is the rather steep channel shown below.  But, as the previous two drops indicate, the steep initial channel isn’t usually the right one.

There are countless ways to slap a channel on there, but one technique I like is to determine whether a previously “proven” channel might resonate.  If we modify the current falling channel’s slope to reflect the previous one, we get a decent-looking fit that shows this morning’s rally bumping into resistance at the white midline.

And, if we “stretch” the falling red channel (from Jan – May 2012) over to the current time frame, we get something even more interesting.  Note how the previous turns “obeyed” the red channel at critical junctures — marked with purple circles.

The past three in light blue, however, changed the pattern.  When RSI reached what might might have been the latest top — the first light blue circle — it popped through rather than reverse.

This, IMO, was an aberration.  Note that it occurred on Jan 17, the very day the market shot through the previous 1474 high and .886 of the 1576-666 crash.

On Feb 2, the day after SPX tagged the next most important Fib levels (1515-1518), it fell to 1495, momentarily breaching the red channel line (the 2nd light blue circle.)

But, the market reversed its losses the next day and took RSI above the red channel line where it remained until the big drop on Feb 20.  Since then, it’s mostly remained below the red channel line — until today (the third circle.)

Today’s rally has taken RSI back up to (possibly through, depending on where SPX closes) the red channel line — in addition to the other channel lines mentioned above.  A close at or near 1521 would likely leave it above the red channel line, but at the top of an RSI channel on the 60 min chart.

Because it would be the most ambiguous close possible, I fully expect SPX to close right at 1521.  I will close any longs in anticipation of a reversal there, and then toss and turn all night while wondering whether the 60-min or daily chart will take charge tomorrow morning.

 

UPDATE:  2:10 PM

Quick trade alert.  SPX just popped through 1514, so it’s probably got the .786 (1521.11) or .886 (1525.70) in mind and the yellow channel is likely busted.  Will play along on the upside with tight stops.

“Tight stops” only because we could be looking at a yellow channel as shown below.  If so, the 75% channel line could potentially hold.  But, I’m keeping an eye on the .886 at 1525.7  because (1) it’s right at the top of the new yellow channel, and (2) it would blow up the H&S pattern — which is looking more and more like it was the goal all along.

If it makes it that high, it officially blows up the white channel, too.  The top of the white channel is currently at the .786 (1521.11.)  But, the .786 should prove difficult to break.  It’s also the .886 of the drop from 1525 to 1485 and it’s awful darn close to the purple midline – depending on how it’s drawn.

That always sounds like a cop out: “depending on how it’s drawn.” But, the best fit looks different on a daily versus a 4-hr, 60-min or 15-min chart.  In the end, the daily channels are the ones you look at and say “of course, that was the one.”  But, because you never know which tails and shadows to include and which to exclude, the 60-min or 4 hour end up standing in until that a-ha moment.

UPDATE:  3:40 PM

As discussed earlier, SPX seems determined to tag or even close at the .786 (1521.11)  We should get some selling pressure here at the end of the day, so don’t be surprised if it doesn’t quite make it.  I’ll take profits on my longs at or near the close.

UPDATE:  3:45 PM

1520 is close enough.  Out of here, full short again.  Of course, now SPX is free to go on up and tag 1521 or 1525, LOL.