We started yesterday with a warning about SPX closing below a TL connecting the two previous lows on the channel that’s guided it higher since November 2012. Apparently, someone got the memo. Because, the rebound was quite strong.
In rummaging around various investment blogs yesterday, I came across expressions of disbelief, dismay and bewilderment. How could this be, especially in light of the continuing meltdown on the Nikkei? Here’s how:
Yes, the channel got tilted just a bit. And, the SMA 50 was tested a second time in a matter of days. But, we shouldn’t be bewildered over a market’s willingness to simply continue doing what it’s been doing for seven months straight.
What should concern investors is the fact that the channel bottom was tested just three days after the previous test. There’s no rule that says this spells disaster. But, it’s a change from the pattern. And, it’s always smart to be alert to changes.
Combined with the other warning signals we’ve been watching, it means we should maintain heightened awareness — especially as we approach natural turning points such as key fib levels and chart patterns (channel lines, IH&S patterns, etc.)
I also keep an eye on currencies, which haven’t signaled a reversal yet. We would normally expect to see the dollar break out or the EURUSD break down in the event of a big decline in US equity prices.
And, as we discussed at length yesterday, USDJPY closed back above the H&S Pattern neckline that might have spelled a continuing decline. Disaster averted…for now.
But there’s a key Fib level and IHS target at 1640 — just above yesterday’s high of 1639.25. So, we could see a pullback this morning, but perhaps not until after the 1640 tag.
UPDATE: 9:45 AM
SPX just backtested the little red midline. I’ll dip my toes in the water here at 1635 for what should be a 5-6 point bump up to 1640.
SPX clearly got ahead of itself in yesterday’s final 30 minutes or so. So, I’ll set stops around 1635. I show the bottom of the red channel around the light blue .618 at 1632.21.
We have to either break out of the red channel again, or wait for 1640 to come back into range. Shouldn’t take long.
UPDATE: 10:04 AM
Just tagged our target, so will revert to the short side here at 1640.80. Target: 1620-1627.
From the PPI data released earlier… We can see that finished goods prices increased substantially in May, especially for the essentials of food and energy.
But, take a look at the increases for food and energy on the intermediate report (+1.1% and +0.5%) and especially the crude report (+2.1% and +5.0%.) And, these are the seasonally adjusted massaged numbers. We can only imagine how bad the real data is.
Those whopping increases are either going to squeeze corporate profits or be passed along to consumers who, judging from the decline in Univ of Michigan Consumer Sentiment (84.5 to 82.7), are probably already feeling the squeeze.
Higher prices — aka inflation — should mean additional pressure for the Fed to taper or end QE. Just the expectation that it will should be enough to send the market down here as expected.
UPDATE: 10:55 AM
SPX is down about 10 points since we shorted. Technically, it’s enough of a shoulder to set up the IH&S we expected (in red, yesterday’s 1:45 update.) So, keep your stops where you’re comfortable. Personally, I’d like to see SPX reach the .500 retracement of yesterday’s rise (1624.35) or backtest the yellow IH&S neckline or red channel top (currently around 1627.)
UPDATE: 11:15 AM
Getting a nice bounce here, which could mean the dip is over. But, it’s been pretty much a straight shot from 1640.80 — meaning there’s probably a third wave down to come. Could take a protective long here at 1631, but would probably have to ditch it in a few points.
While we’re waiting for that to play out, let’s look at the longer-term picture.
continued for members…While we did, indeed, bounce nicely off the bottom of the purple channel yesterday, the dollar and euro are approaching levels at which we might expect a significant turn.
UPDATE: 11:54 AM
Quick interruption here…I’m going to close the short here at 1628.30 — the .382 of the rise from yesterday’s lows. There’s a little H&S Pattern setting up that could target 1617, and I think the bulls will probably defend it.
If I’m wrong, SPX will head up and tag the top of the falling purple channel and reverse strongly off it for a 3rd wave down of the corrective wave C. Otherwise, we’ll look for a break out and resumption of the rally.
Stops for the long position around 1629 would make sense.
Now, back to the big picture…
The EURUSD is near or even at a potential turning point. It’s approaching the light blue channel midline and purple .786 intersection at 1.3503 in late June (25th?)
Note that it’s also already pushed run into the solid yellow channel line running through the chart, and very soon will run into the falling green channel top.
The blue channel is easier to see on this chart, as is the competing yellow pattern that suggests the purple D could be the last hurrah before a downturn to the yellow D.
There are other larger potential patterns such as the white one below. But, focus on the channels.
Pardon the interruption again. SPX just poked through support TL. I’m pulling the plug on the long position and reverting to full short here at 1630.
I realize the IH&S neckline is just below at 1627.50, but there could easily be another 7-8 points in the downside here. The .500 retracement of yesterday’s rally is at 1624.35 which would create a right shoulder equal to the left (on the larger red IH&S pattern.) So, I’m going to stay with that as my primary target.
But, I’ll leave pretty tight stops on this position — 1630ish. There’s an alternative bullish channel (below, white) that argues for a reversal at 1627 — which is also the big purple channel .125 line.
UPDATE: 1:30 PM
Very close to the .500 (1624.45 v 1624.35.) which is close enough for me. Tagged the top of the red channel, too.
I’m closing the short position here at 1624.45 and will revert to full long.
If this low doesn’t hold, the .618 is at 1620.51 and the .786 is at 1615.04. I show the purple channel bottom at around 1616.
UPDATE: 3:23 PM
We’ve seen a nice bounce so far — up about 7 points since going long again. We’re reached a point of increased risk, however: the midline of a rising purple channel (nestled roughly between the bottom and .25 of its bigger brother) and the top of the falling channel from this morning.
Look for either a breakout or a reversal to the purple channel bottom in the next few minutes (3:34?)
Odds are it’ll break out, but as always watch your stops. If it does pop up through, we should get a swift rise to complete the IH&S (about 1641.10.) If it breaks down, the bottom of the purple channel is currently down around 1616.
UPDATE: 3:46 PM
So, breakdown it is. We’ll see if the bulls can hold the .886 or the previous low of 1623.96. If they do, there’s a nice little IH&S targeting 1640 (in green below.)
If not, the target is 1619, the apex of the little falling wedge and bottom of the purple channel.
In either case, I intend to go to cash over the weekend.
continuing…