Needless to say, yesterday’s decision to go short is working out pretty well.  While we missed the top by a couple of hours and nine points, we were well positioned for the 23-point plunge on the opening.

The analog we’re following continues to shine.  Having passed its first important test, another one lies just ahead.

continued for members…

Note that we completed the latest H&S pattern we’ve been discussing.  The right shoulder is much larger than the left, but it’s still a legitimate pattern.  So, odds are it will play out.

By my calculations, it targets about 1382.70.  The pattern has already back-tested its shoulder line, so it’s clear sailing to the downside, except…

Note that we’ve also completed a much bigger H&S pattern that’s been on our radar for awhile.  I’ve highlighted it in purple.

This bad boy targets 1329, so it’s significant.  Expect more of a neckline back-test, possibly around 1400 (the .618 retracement of the 1354-1474 rally) or 1395-6 (horizontal support from Sep 4 as well as the .382 retracement of the 1266-1474 rally and the 1.272 extension of the small red pattern.)

The falling white channel in the chart above is based on daily candles.  If I adjust it to better fit 60-min moves, we get something like this:

Whether the top line is right or not, the bottom fits a succession of lower lows quite nicely.  A tag of the lower line around 1395-1396 would fit with the bounce/back-test scenario detailed just above.

Traders might wish to take a shot at playing it.  But, the medium-term picture is still quite negative — particularly once the back-test completes.

UPDATE:  12:45 PM

I’ll have more info in a few.  I need to chart the next week in order to determine if this is the extent of the move down.  As of this moment, I’m looking for 1380-1384 on Friday or Monday.  But, I have some more work to do before making that official.

UPDATE:  2:45 PM

Please pardon the delay.  Sometimes “a few” is optimistic, as there are literally hundreds of harmonic patterns, channels, trend lines, moving averages, RSI patterns, etc. to consider — not to mention the analog itself.  You end up with something like this, which takes time to sort out, and even more time to turn into something presentable.

Here’s my best guess as of right now — and, it’s a real ball-buster.   As I posted a bit ago, this move down is probably not quite done.  The analog has been challenging to nail down perfectly because the exact ratio isn’t yet established.

Key match-ups between the current and former patterns have ranged from 2.34 to 2.62 X.  That is, one day in the 2011 pattern is averaging 2.34-2.62 days to play out in the current pattern.

Without boring you with the details, my best guess is that we’re at the equivalent of May 23 (day 64.)  The market had fallen about 21 points from the previous close to a low of 1312 before bouncing back 11 points (to test a very lopsided H&S pattern).

It then shimmied down to 1311.80 two days later.  If the analog holds, those 2 extra days are the equivalent of 3-5 days in 2012.  So, there’s your timing calculation.

From a price standpoint, we came close to but didn’t quite reach the 1.618 extension (the purple grid) at 1384.13.  Note that this is adjacent to two .786 Fib lines at 1380.30 and 1381.50.

In other words, I think we bounced prematurely, leaving open a very good possibility that there’s one more wave down to the 1380-1384 level.  But, the bounce looks only half-baked to me, with only one wave up of the likely three (A-B-C.)  We might need to move higher first.

A full back-test would reach around 1405, so look for a period of consolidation over the next few days, wherein we reach 1405ish and then drop to 1380-1384.  The only hitch?  The election likely threw the timing off a little.  So, don’t be surprised if the time involved to complete the corrective wave and subsequent drop is way off.

The ball-buster part comes after — with a run back up to test the last high, perhaps around 1433, before taking a dive into the end of the year.

More after the close.