ORIGINAL POST:  10:15 AM

Friday’s action wasn’t terribly reassuring for bulls or bears.  SPX’s dip to 1373 on the opening was largely a carry-over from Thursday’s decline.  And, from a technical standpoint, remaining above the May 2011 high of 1370.58 was net positive.

The subsequent surge to 1391.39 seemed to ease traders’ fears, but they quickly returned when SPX erased most of the day’s gains by the close.  A break out of the falling wedge would be more convincing if SPX first completed a bullish Bat Pattern down at 1375.12, but it’s not necessary.

As SPX is poised for a bounce, so is the dollar poised for a dip — having already reached our Point D target, but still lingering.  While the larger trend remains positive, we should see a pullback to at least 80.30-80.40, with greater potential down to 79.55.

And, the EURUSD is likewise almost due for a breather.  It has completed a small Butterfly Pattern to the 1.272 at 1.2711 (the red pattern), though a dip to the 1.618/.500 combination at 1.26 — in the proximity of the red channel bottom would make for a much stronger case for a reversal.

Our forecast remains on track, with a high probability of some consolidation in this price range before the next big move — which will likely catch many off guard.   But, it’s the move after that one which will pack a wallop.

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continued for members…

However the short-term picture resolves, I still expect a solid move higher into the 1430 area, then a strong plunge into the year-end.  As mentioned above, a dip to 1375 would complete a Bat Pattern.  It would also provide the C-wave for a more traditional A-B-C corrective wave following the strong move from 1373 to 1391.

But, there’s a 50:50 chance we’ll put in a slightly lower low before reversing.  Note that on the small purple pattern, 1370.63 marks the .500 Fib of the 1266 to 1474 move.   Right there with it is the .886 (red pattern) of the 1354 to 1474 rally — at 1368.31.

We got close the other day, at 1373.03, but a reversal at these key Fib levels (especially if we stayed north of 1370.58) would definitely appear more bullish.

UPDATE:  1:30 PM

SPX continues to oscillate about the SMA 200 (1381.29), showing signs of firming up.  Our target date range for the next leg up, remember, is Nov 21 – 28.  But, some of the analog match-ups have stretched as long as 2.6, so that leaves the door open to as late as Dec 7.

I don’t think it likely, however, since the time Fib ratios and channels point to Nov 21 as the highest probability.  The daily RSI chart shows a likely 3-wave rebound, with 1403 as my top choice for an interim step on the way up.  It’s the current SMA 100, as well as the neckline of the latest H&S pattern to complete.

I had an excellent question from a member this morning.  Vincent asks:

According to the analog you are following, we should swing up to about 1430, take a small dip and try to retest the high, and then fail before the next waterfall.  My concern at this time is the QE3 money is starting to come in this month – 40B of MBS on a monthly basis.  The first settlement is due this Wednesday.  With this new QE3, the high for the market may still be ahead in January time frame.  Are you taking into account this new QE3 liquidity?

With respect to the analog, I’m looking for a decline from 1430 to below 1300 (current range: 1274-1290) between Nov 21 and Dec 31.  That’s about 10%, so it’ll qualify as a correction and will feel, to most investors, like more than a “small dip.”

Regarding the effect of QE3, I do believe the market will — as a result of the actual liquidity infusion or the perception of its impact — react bullishly.  In fact, a rally on Wednesday would fit nicely within the analog time frame.  I see this little rally most likely topping out around Nov 21-28.

I don’t have all the statistics at my fingertips, but I believe daily dollar volume is about $200-250 billion between NYSE and NASDAQ.  So, $40 billion, if it all worked its way into the markets, should leave a mark.

The question is whether it will be enough of an offset to the other drags on the market (fiscal cliff, global recession, euro zone issues, etc.)   That’s an issue I’m not sure is really quantifiable.  I do believe, however, the fiscal cliff isn’t fully priced in yet.  My best guess is it will be blamed for the decline from 1430 to 1274.

After that, my leading forecast is for a very significant rebound around Feb/March — possibly to 1450 or so.  This will equate to the July 2011 rally, and will precede the next big crash which I currently show taking SPX below 1000.

IMO, the fiscal cliff isn’t “solveable” in a way that will be net positive for the markets in the short/medium-term.  While potentially positive in the longer-term, the best possible solutions will require either higher revenues or lower expenses or both.  Economic growth will suffer.

Growth doesn’t always perfectly correlate with stock prices.  But, at the end of the day, corporations whose stock we might consider buying must sell stuff to people who have money.  Many corporations have done a great job so far of obfuscating the declining quality of their earnings (through mergers, off-balance sheet transactions, etc.)  But, I question whether this can go on forever.

The real wild card is how the Fed and other central banks react.  They can clearly turn on the printing presses and continue to balance the budget and pay off debt with increasingly worthless dollars.  But, as we all know, that’s a desperation move that exacerbates other problems such as inflation.  And, there’s a good chance that China and the EZ will be doing the same.

Such a strategy, if embraced, could very well result in nominally higher stock prices — even though real values would be very hard pressed to keep up with inflation.  I suspect the Fed keeps a copy of this plan under glass, marked “break in case of SPX 1000.”