Last week, the S&P 500 successfully completed a carefully controlled trip to the bottom of a price channel dating back to November 16, 2013.  The move was tailor made to alleviate the overbought condition widely recognized by participants, and delivered almost exactly the results the MFM (mainstream financial media) prognosticators said was needed: a 5% correction.

By letting a little air out of the markets in a carefully controlled fashion, TPTB have reduced the odds of a blowout.  The transformation from “brink of disaster” to “humming along nicely” is nearing completion.  But, there are still substantial risks, despite S&P’s revision back to hunkey dorey status for the US.

The markets are pointed higher this morning, so we’ll play along on the upside on the opening bell.  But, beware the risks.

RISK #1

SPX has tagged the purple .786 retracement and is only a few points from tagging the purple channel midline and the .618 retracement from the 1687 top at 1653.  Either would normally be effective at stopping a rally.  Together, they could really do a number on the rally that began Friday.

And, the 60-min RSI channel looks vulnerable.

RISK #2

The USDJPY, which clearly fell out of its own channel last week to retrace 78.6% of its meteoric rise from Apr 1 to May 22, is almost back to the channel’s lower bound.  If the backtest holds and the pair is unable to retake the channel, this doesn’t bode well for a sustained equity bounce.

The US dollar index (DX) is threatening to break out of a price channel best seen on the 60-min chart:

But, if it doesn’t, there is a very good chance it’ll drop just a little further to the channel line we discussed Friday — around 80.88.

GLTA.

continuing…