Note to members: I have received responses from almost everyone regarding the mailing list for the new fund in the works. If you would like to receive an accredited investor questionnaire and future updates on the fund as they come available, please contact me. I will update the list tonight and do my best to respond to everyone by Tuesday, June 18.
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The futures are pointing up. I’ll go long on the opening, but I’m looking for a reversal at the neckline (about 1641) of the IH&S we’ve been tracking.
For seven months, now, SPX has shot up through a steep channel — tacking on over 300 points since its 1343 low last November.
Including the November reversal itself, SPX has bounced off the bottom or the .25 line of the channel 4 times prior to June 2013.
Each time, the bounce was vigorous — jumping up into not just the next higher level of the channel, but two levels higher, and with little hesitation.
This time, SPX didn’t just hesitate. It came right back down and bounced off the bottom of the purple channel a second time. We can characterize that as a successfully passed test. We could also say it’s a testament to the growing influence of the bears. But, it was different.
The reversal off the recent top wasn’t terribly difficult to anticipate. Seemingly every talking head on the boob tube was calling for a 5% correction, and it did have a very “engineered” feeling about it at times.
Before the market opened on May 21 — the day I first called the top [a day early, see: If It’s Tuesday] — I wrote:
…we could be nearing the beginning of the fourth downturn, with a low to come around June 3-4. Could it be more than a whopping 4%, or is that all that’s programmed in?
- -4.4% over six sessions in late December 2012
- -3.1% over four sessions in February
- -3.9% over five sessions in April 2013
When SPX reached our target later in the day, I posted a forecast showing a drop to 1600. In the end, we reached 1598 on Jun 6.
Without getting into a metaphysical discussion about greater forces, etc., is the market really that predictable? Buy and hold types argue that owning a well-diversified portfolio of solid companies with good balance sheets and smart management is a good way to make money in the market.
I can’t argue with that. In a constantly rising market, it makes perfect sense. But, is it necessary to ride out every downturn along the way? Why not profit from them, instead? Why not keep an eye on moving averages, channels, harmonic patterns, analogs, etc. and manage your exposure accordingly? It sure hasn’t hurt our results.
Consider the past 20 years. Wouldn’t it have been nice to reduce exposure or even go short during the crashes of 2000-2002 or 2007-2009? It’s something to think about the next time someone tells you that shorting is too risky.
Our purple channel looks significant even against the backdrop of past 20 years. It levitated SPX right up through the midline of the yellow channel this past New Years Day, when many patterns called for a reversal (holiday week, low volume ramp job on the fiscal cliff “solution” – don’t get me started!)
It broke the pattern of SPX dropping three rungs on the channel and regaining two (the next drop would have been out of the channel.) But, note that every single previous move through any of the channel lines was followed by a backtest of some sort. There were zero clean slices through — up or down — without some sort of reaction.
I can’t imagine that this one will suddenly break the mold. When it happens, it will announce itself by doing something out of the ordinary, something different. It will almost certainly involve the breakdown of a channel…maybe even our purple channel.
Stay tuned.
UPDATE: 9:40 AM
Reached the neckline, taking a short position here at 1641, stops at 1642.
It’s not that I don’t expect it to complete, just that these patterns usually struggle at bit at the neckline itself.
UPDATE: 9:45 AM
Just tagged our stop, so I’ll switch back to the long side. The next serious resistance isn’t until 1650, though we should expect a back test of the neckline at some point.
Our previous resistance — the neckline at 1641 — is now our support. So, 1640ish stops make sense. Don’t be surprised if SPX closes just below or at least near the neckline in advance of the Fed policy statement (due out Wednesday at 2pm ET — at which time the neckline should be about 1641.60.)
Recall that the last time Bernanke had anything to say about QE, the market began the 89 point slide discussed above. See his prepared remarks to the Joint EconomicCommittee here. There had been plenty of talk about QE ending or tapering before, but this time Bernanke seemed a little more serious about the idea.
This one is pretty easy: if Wednesday’s news amps up fears of tapering, look for a sell off. If, instead, Bernanke grins and yells “psych!” then it’s probably off to the races again. Since the market seems intent on doing nothing until then, we’ll examine what either of those eventualities might mean.
continued for members…
Downside Case
The downside case is just a matter of degree. At 1598, SPX recently retraced just shy of .618 of its rise from 1536 (Apr 18 low) to 1687.
It also came within 4 points of the trend line connecting the 2000 top of 1552 and the 2007 top of 1576 — which is more of a bullish argument, really (looks like a backtest of an important TL.)
In any case, a drop to the .618 indicates the potential for either a Gartley, Bat or Crab Pattern — which would complete at 1568, 1553 or 1442 respectively.
If SPX should prove unable to exceed the Jun 1648 high, then there’s a nice potential Crab Pattern that would support the idea of a drop to 1568. It would begin at 1598 (Point A above) and top out at 1648 (Point B above) and its 1.618 extension would be 1567.05.
A drop beyond 1568 would most likely extend to 1555 for starters. This is approximately the .886 of the rise from 1536 to 1687, and also the .382 of the height of the entire purple channel: 1343 to 1687.
Between the two more immediate downside cases, this is the more compelling. It’s a major Fib level of a much bigger pattern. And, it would also represent a bullish backtest of another major Fib level: the 1.618 extension of the plunge from 1370 to 1074 in 2011 (1553.39.)
TRADE NOTE:
SPX just broke through the neckline and our stop at 1640. It reached 1639.18 momentarily, but bounced right back to 1640. Note that it reached the .886 of the drop from 1648 to 1608 this morning, so we should expect to see some sell-off as the result of the Bat Pattern completion.
So, I’ll bite on the short side, but keep stops relatively close — say 1642 — just in case this is a stop-running exercise.
Needless to say, there will probably be a lot of this kind of chop between now and Fed comments on Wednesday. Updated charts in a moment.
UPDATE: 2:30 PM
That might be about it here at 1635 — a .500 retrace of the gains from 1623. Note the tag/backtest of the grey channel line and the reversal off the rising purple channel midline.
I’d rather see a deeper retrace though, perhaps the .786 at 1628.73 or the .886 at 1626.50. I’ll hang with the short trade and see if it has more potential. Watch your stops.
The steep white channel and (more so) the slightly less steep purple channel have potential to define the bottom, here. The bottom of the purple channel intersects with 1626 in the next 30 minutes.
UPDATE: 3:25 PM
A move back above 1635 and I’ll play the bounce back to the neckline.
UPDATE: 3:37 PM
SPX broke through 1635 and appears to be backtesting the broken neckline. Almost back to 1640, which is where I’ll probably close the long position and revert to cash at the close.
UPDATE: 3:39 PM
Closing the long position here at 1640. To cash unless we get another leg down started in the last 20 minutes.
I have to admit I like the purple channel and harmonics better than the white channel alone.
I’m going to take a short position here at 1639 and possibly hold it overnight — but at least into the close.
UPDATE: 3:58 PM
Can’t bring myself to hold overnight. I suspect we’ll tag 1626 in the morning, but there’s not enough evidence either way — so back to cash for the night.
Some of you might have caught the discussion last week about holding overnight and over weekends. I’m a decent enough chartist; but, in looking back over the past few months at my own track record, I was right only 60% of the time, and it benefited my returns only marginally — certainly not enough to compensate for the additional risk and worry.
EOD: I have more to add to the downside case — and still need to lay out the upside. I also have updates on NG, NYA and RUT to post — will try to get them up in the morning.
GLTA.