This is News?

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.

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