I’ve been quite bearish since going short on April 11 at 1597 [Big Picture: 11:30 update.] Yesterday, though, SPX reached our initial downside target of 1540 and, as expected, paused.
As we’ve discussed, this was an important points for bulls to take a stand. It was also the ideal spot from which to launch the right shoulder of a Head & Shoulders Pattern as I posted on the 16th.
So, we closed our short position late yesterday [Dollar Daze: 3:45 update in members section] and played “catch the falling knife” with a long position at 1541. This morning, we’re being rewarded with a nice bounce that should have legs.
Whether it will form the right shoulder we’ve been expecting, or resume its QE-fueled race to the moon is open to debate. But, for now, the trend is higher.
Note that SPX formed a nice little falling wedge (in yellow above) that, if it plays out, supports the idea of a return to the idealized right shoulder height represented by the dashed yellow TL.
The falling white channel I’ve slapped on the chart, as regular readers know, probably won’t last. It’s rare for the initial slope of a decline to be maintained through the series of rallies and sell-offs that comprise a major move. But, it’s a good initial fit, so it will do for now.
UPDATE: 10:30 AM
The ideal right shoulder in a H&S Pattern is the same height as the left. But, it needn’t be in order for the pattern to play out. The high so far for the day is 1549.63, which represents a 14 point bounce off the neckline — compared to the left shoulder’s 33 points.
UPDATE: 12:15 PM
SPX has reached the important Fib levels of 1553 and 1555 (the Crab Patterns from 1370-1074 and 1474-1343.) This would be a natural place for prices to reverse, so I’ll close my long position here at 1554 and go short.
This constitutes a 20-pt rise off the neckline, so it’s technically enough of a right shoulder for the pattern to play out. And, the bears could really use a H&S Pattern completion to keep the downward momentum going.
A good reversal here – or, at least by 1574 – and we can write off the 1576-1597 rally as a prank, a juvenile burst of irrational exuberance.
Bulls, on the other hand, would greatly benefit from a push through the Fib lines that they completely dissed the first time around. And, they should have mattered. Take a look at yesterday’s Dollar Daze for a discussion of how the dollar confirmed the sell signal that a few good overnight ramp jobs were able to beat.
There are other logical turning points as well. This could quite likely be a short term trade to score a quick 10 points or so — unless 1535 is taken out and the H&S completes.
Choices, choices. We’ll take a look at different scenarios below.
continued for members…
As we discussed yesterday, the medium-term picture is still negative. But, a back-test to the broken purple channel (currently around 1560) would be reasonable and provide for a very respectable 25-pt right shoulder. It would also represent a .618 retrace (red grid) of the decline from the 16th (1575) and a .382 retrace of the decline from 1597.35.
If the market is going into serious correction mode, here, that might be as high a bounce as we’re likely to see (of course, if we’re going into crash mode, 1554 might have been it.)
UPDATE: 1:20 PM
We’ve shed only 5 points since shorting at 1554, but SPX is getting potential RSI support as seen in the chart below (midline of the rising white channel pattern.) I think we’re going to make more of a B-wave here — at least backtest the broken red channel — before starting on the C-wave.
But, I’m prepared to go long again and will use stops around 1554-1555.
By the way, I realize the first chart below is almost unreadable. I use RSI charts in multiple time frames, leaving the daily and 60-min patterns in place from one day to the next and then superimposing shorter term patterns during the day to help guide the smaller moves.
These shorter term patterns are usually in white and are typically the ones that seem to fit anything at all, while the longer term patterns look like a bunch of lines running horizontally through the chart and can be ignored.
There’s a little price channel rising up from this morning’s lows. But, I doubt it will hang together very long. Way too straightforward…
UPDATE: 3:15 PM
If 1554.87 wasn’t the high for the right shoulder, my next higher choices would be the 1560, and then 1573ish. A push beyond 1576 would almost certainly open the door to a retest of the TL’s that stopped SPX at 1597.
If 1554.87 was the high, then it will complete the H&S which happens to target …drumroll please…1474. Some of you will remember 1474 from Sep 2012 — a couple days after the latest round of QE was announced. We shorted there and rode SPX down to 1266.
Look way up in the upper-right hand corner of this chart and you’ll see the massive sell-off that’s occurred so far since 1597. Right. It barely registers. Now check out 1474 – also not much of a fall from grace.
The solid yellow trend line connecting the 2009 bottom to the other important lows intersects with the TL from 1994 and the yellow channel it inspired in Feb 2014 (subject to error since we don’t really know which tails and shadows to use.)
If we peg the intersection at 2/3/14, we get a pretty solid fit on the time Fibs — the .886 of which is in mid-July where it intersects with the light blue channel line at 1474. This would mean, of course, a break of the rising wedge formed by that big yellow TL.
If we run the TL up through the 1074 bottom on 10/4/11 instead, we get a slightly different result: an intersection of 4/8/14 and a .886 time Fib of Sep 8. Interestingly, that’s very very close to where that yellow TL crosses 1474.
This isn’t much more than a gut feeling, but I’m going to go with that as my target. We’ll have a better sense of the timing, etc. if we can get more downside from current levels. And, I’m not discounting the possibility that the rising wedge will be broken to the upside. I think it’s less than 50:50, but as long as the FOMC is in business, who knows?
Someone recently made the comment that we seem to be lost in the reeds lately. I agree. We pushed 44 points higher than is justified by normally very reliable harmonic patterns, but found some stiff resistance there at an incredibly important trend line from the 2000 and 2007 peaks (red, dashed.)
We almost immediately reversed, but have only lost 57 points so far. We did, however, see the breakdown of the five month-old purple channel from 1343 — only to be right back up at those key Fib levels of 1553/1555 — where we’ll probably close.
IMO, it’s perfectly normal to back test them. At this price, we’re also back testing the broken channel. And, the H&S pattern argues for even higher. But, the preponderance of the evidence points to the downside — at least on a medium-term basis.
For those who haven’t noticed, I added a substantial preamble to yesterday’s post: Dollar Daze. It’s worth a read. Note that DX is back above the yellow TL I mention in that post.
Unless something really crazy happens in the next 20 minutes and we spike higher than 1555, I’m going to hold my breath and go into the weekend short. There’s a good possibility we’ll gap up to 1573 Monday morning. But, I think there’s more downside risk here and am willing to take that chance.
For those who couldn’t stomach the idea of a gap up Monday, why chance it? We had a great week. Take the money and run.
I have a very busy weekend ahead, so I’m not sure how much charting I’ll be able to do. But, I’ll give it a shot.