Bulls had quite the party last week.  SPX broke through fan lines, Fib levels and resistance galore on decent volume and breadth, reaching our 1472 target in a big blowout party hosted by the ECB/GCC/FOMC.

We discussed this target as far back as March 18 [see: Big Picture].  It was refined further a few weeks later in my posts re an analog I developed [see: New Analog I’m Watching].

The timing ended up being off, as we made essentially two right shoulders in that H&S pattern, and thus reached the bottom in early June instead of early May.  It also took longer to get up to 1472 than I expected – 3 1/2 months of gut-wrenching chop instead of the nice 3-wave move higher I charted.

SPX also fell further than the 1305-1317 target I originally anticipated.  I amended it along the way to as low as 1295, never imagining we’d break the 1292 support level.  But, in general, the analog played out pretty darned well — establishing new highs and turning many bears into bulls.

The great thing about reaching targets, of course, is the profits.  Our theoretical long/short SPX portfolio is up about 55% in the 5 months since that analog was posted [see: results.]  The scary thing is figuring out where things are going next — as it’s absolutely no fun giving any of it back.

Are we really on a sustainable path to SPX 2000 now that Bernanke has practically guaranteed the market will never go down?  Or, are we due for a killer hangover — those 208 points vanishing faster than a Vegas bachelor party security deposit?  The answer, as usual, is somewhere in between.  Though, since I shorted at 1474 Friday, you can probably guess how I expect this to play out.

continued…

As we discussed Friday, completing the Bat Pattern at 1472 sets us up for a pullback.  I remain short from 1474.   Buy and hold types can leave stops fairly loose on this one, as we could easily get a substantial retracement of Friday’s losses.  Traders might  even wish to play the retracement, which would be signaled by a push above the 1464.71 Fib.

First, a brief review of where we are.  The close-up view shows the potential for a bounce or a swift drop.  This morning’s stasis is evidence of the market’s indecision in the short run.

The daily charts show plenty of downside potential.  SPX has gained 120 points since the RSI was last this high (75.38 at 1354 on Feb 9 versus Friday’s 74.74 at SPX 1474.)

Complicating things, Friday is OPEX.  And, the market is acting like it’s already Thursday, moving in breathtaking 1 cent increments.  Something’s gotta give.

UPDATE:  2:30 PM

I’m working on a longer-term analog that shows promise. I probably won’t be able to post it until later tonight.  In the meantime, I’ll expand on the targets discussed Friday afternoon.

The logjam has broken, and we’re getting some nice downside for our short position.   If we can maintain the momentum, we have some logical targets starting at 1450-1455.

 Each of the targets corresponds with a red channel line except A.  A represents a simple tag of the fan line from the early September lows and represents the most bullish case — a 25 point retracement or so.  If preserves an acceleration channel higher.  I believe it’ll provide a bounce, but likely nothing bigger.  Good place to reconsider stops.

B, at 1438-1442, represents the red channel midline as well as a .786 retrace of the last leg up from 1428.  It also marks the broken red and green long-term channel lines and would thus make for a good back test.

C (1422-1426) back tests the former high of 1422 and the white dashed fan line off the July 1329 lows.  It’s also the second lowest red channel line.  And, depending on when it occurs, it could also coincide with the .618 of the run up from 1396 to 1474.

And, D, at around 1400-1404, represents the intersection of a number of channel lines — not to mention the bottom of the red channel prices have been in since 1266 on June 4.

I posted this chart Friday, which shows the various channel lines connecting with the 2007 high.  The point I call D above (B below) remains my favored target.

More after the close.

UPDATE:  4:00 PM

SPX remained safely within the channel we’ve drawn on the 30-min chart.  I’ll post more later tonight, but I believe we remain in a corrective wave to the downside in what is most likely a move higher into the elections.