ORIGINAL POST:  11:30 AM

SPX might be tracing out either a flag or pennant pattern on the 15-min chart.  While either could portend higher prices (2/3 of the time), a flag would mean lower prices first — probably down into the mid 1370s.

 

At first blush, the market seems to be respecting the last high of 1380.39 on July 19.  I suppose it makes for a more positive wave structure.

But, I suspect the bigger worry for bulls is the Fib .786 at 1381.50 (in yellow).  This retracement from the 1576 to 666 plunge (Oct 2007 – Mar 2009) was only recently exceeded again, and a real, live bull market shouldn’t have any difficulty retaking and defending it.  Here’s the big picture, again:

continued…

 

This is the big Gartley which aspires to be a Bat Pattern.  Remember, Gartleys involve a Point B at the .618 and complete at the .786.  We certainly got a reversal very close to the .786 — putting in a top last year at 1370 vs 1381.

Bats, on the other hand, involve a  Point B at anywhere up to the .618 (check) and complete at the .886.  In this case, that means 1472.43.  If SPX is to gain another 90 points (6%) or so, it shouldn’t have any further difficulty with the .786 Fib line.

The red channels get there by late December, while the more steeply sloping purple channels would easily accommodate a push to 1472 right away.

 

The biggest obstacle is the purple dashed line just overhead. This fan line off the 2007 high could put the kabosh on any further rally.  It’s currently overhead at about 1412.

In the meantime, the yellow dashed line has been able to keep a lid on things all by itself.  This is a trend line connecting the 1422 and 1415 highs, but its also a channel line — as can be seen by all the parallel red TLs.  And, it shouldn’t be trifled with.

 

A close up shows just how critical the next few points in either direction is to the overall picture.  If we’re able to hold above 1381.50 and push only a few points higher, we’ll break the yellow TL and take on the purple one.  And, a break of the purple line opens the door to 1472.

If, on the other hand, we react negatively off the yellow TL, there’s 50 points of downside available without even breaking the red or purple channel lines.  It doesn’t mean all is lost for the bull case, but at the very least, it would significantly delay any higher highs.

This is where the central bankers come in.  In my opinion (and, you know what they say about opinions) there’s nothing they can do to fix the problem of too much debt in the world.  Debt is the elephant in the room that everyone seems to be ignoring lately.  Sooner or later, the feces will impact the fan.

But, bankers can flood the system with liquidity.  If they were to announce a massive printing campaign tomorrow, there’s little doubt that the resistance immediately overhead would melt away.

Will they or won’t they?  They’ve done a very good job of effecting the “benefits” of QE by merely hinting at it.  Even Draghi is getting into the act.  But, in the next few days they’ll have to either confirm QE is happening, or tell us it’s merely still on the table.

Given the relatively positive economic headlines of these past few days — not to mention a 120-point rally for SPX — I expect the latter.  I think they’ll jawbone as long as they can and put off printing until we’re facing another stock market meltdown.   As the 5 year chart above amply demonstrates, there’s plenty of downside ahead if the purple channel line should be broken.

My best guess is they’ll roll out a means by which the Fed and/or IMF can help prop up European credit instruments — perhaps something as simple as revving up Fed swap lines.  In the meantime, we’ll stay zeroed in on the critical Fib levels and trend lines just above and below current prices.  It shouldn’t be long.

I still have a small short position from yesterday morning at 1387, but will likely switch to long if SPX exceeds 1390.

 

UPDATE:  3:55 PM

Would have been a good day to go fishing, take a nap… anything but trade.  There’s no change to my stance — still maintaining shorts, waiting for tomorrow as noted above.

The flag/pennant is looking more like a pennant, and there’s a falling wedge look to it and its RSI.  There appears to be potential to 1376ish without too much trouble.

 

I’ll continue watching this little pattern.  A breakout means going long, while a breakdown signals more shorts.