The market continues to melt up, enjoying the lack of any meaningful overhead resistance — for now.  As discussed yesterday, that should change around SPX 1635-1643.  Until then, at least, I remain long.

Meantime, the dollar continues to bounce around the channel lines, refusing to commit one way or the other.  We’ve been watching for any breakout that would signal an equity sell-off.

In the past, thrusts towards the channel midlines has been trouble for equities: the dips to 1042, 1173, 1074, 1266 and 1343.)

The recent completion of the purple Bat Pattern at the midline of the rising red channel also thrust past the white midline — but, produced only a 46-pt (3%) correction in SPX.

So, we’re left to wonder whether something bigger is coming: perhaps a run to the white .786 (85.47) to complete a big Gartley Pattern and tag the purple midline.

Note that the purple 1.272 is at about the same level, but there’s no argument for a Butterfly Pattern on the purple grid, only a Crab Pattern up at the 1.618 extension (also the white .886) around 87.

I’ll be watching to see whether or not the small rising purple channel holds.  If it does, the potential white harmonic pattern won’t play out and DX will remain above the .25 red channel line.  If not, there’s potential to the bottom of the red channel at 79.93.

The daily SPX RSI channels offer a bullish scenario if SPX can push through resistance at 1635-1641.

The past two days saw it break the TL connecting the last three spikes higher, and today’s value has topped the previous peak — so, a potential break in negative divergence.

But, the daily chart can be deceiving on an intra-day basis. The current push above the yellow TL and red channel midline could be erased with a reversal later in the day.  If RSI is repelled at the red midline, the white midline or lower would be back in play.

Will SPX push through?

continued for members…

I suspect not, at least initially.  The 60-min RSI is already in nosebleed territory.   Focusing on the white channel lines, we can see strong potential resistance here.

But, longer-term, the picture isn’t as negative.  Sure, the market is at all-time highs on razor thin volume, flagging corporate revenues (top-line) and QE-inflated multiples.  But, that was also the case when it pushed through technically much heavier resistance at 1474, 1555 and 1603.

A correction starting in the next few days that takes SPX down to 1603, 1576 or 1555 such as we examined yesterday (chart below) would reset RSI, but leave the purple channel dating back to 1343 in November intact.

My leading scenario is a reversal at 1635-1641 all the way to the bottom of the purple channel by May 24 or so.  Depending on the timing, SPX might hit 1555 — the .786 of a reversal at 1541.

 

Other indicators support this scenario.  Consider the USDJPY, which has continued to slide since our Apr 8 call for a top.   It just back-tested the broken purple channel midline.

The next move will likely tag the bottom of the purple channel.  But, if the most obvious harmonic patterns play out, we could easily see the purple channel break down and the white midline come into play at the intersection of the .886/1.618 at 93.40/93.26.

The intersection occurs around the end of the month.

UPDATE:  2:44 PM

We’re getting another pullback, about as hesitant and unconvincing as the last several.  But, you never know…

It’s a good reminder to have stops in place where you’re comfortable with them.  Personally, I set them at that point beyond which my working thesis is in jeopardy.  Currently, for instance, we’re bumping up along the top of the midline of the little red channel.

I set an alarm to go off at 1626 because it’s where the midline currently is.  If I happen to wander away or get stuck on a phone call and the alarm goes off, I know to turn my attention to the markets and see what’s happening.

If I had to be on the road or away in a meeting, I’d want an actual stop that would automatically generate a sell order at the market if SPX fell below a certain price.

Just be careful regarding round numbers and obvious chart patterns.  Market makers can see where all the stops are, and love nothing more than to push SPX slightly past a logical turning point just to stop out a bunch of investors prior to a significant move. It happens all the time.

So, if we shorted at 1637, for instance, I might put an alarm in at 1640, but not a stop.  There would be many others there, and it would represent too tempting a target for the average MM.  Better to go with a few points higher, 1642-1643, and ride out any overshoot.

 

UPDATE:  3:30 PM

SPX survived the dip to the red channel midline (1626.46) and is back above 1631.  Don’ t be surprised if we finish the session at a tough decision point such as the 1.618 Fib line at 1635.25 or the 2.24 at 1637.15.

FWIW, I show some of the important potential targets as follows:

• .786 of yellow rising wedge: 1631.80
• 161.8 at 1635.25
• 2.24 at 1637.15
• top of purple channel at 1633
• TL off highs since Nov 2012 at 1636.28
• .886 of rising wedge: 1638.21
• IH&S 1641

I also show the top of the rising wedge intersecting with the purple TL from 1994 and 2003 at about 1646 on Friday or Monday the 13th.

Remember, rising wedges can break down, only to quickly recover and precisely tag their apexes.

I don’t know if we’ll tag any of our targets prior to the close, but we’re close enough that anyone with a weak stomach could consider taking profits on their long positions.  I’ll likely stay in overnight for the last few points — though I’ll hedge my bets with a little protection.

GLTA