The toughest moments for those of us who chart publicly are those right after calling a significant top or bottom.  There are some instances when pretty much everyone and their mother can see a turn coming.  Other times, it feels like you’re sailing through the air, frantically searching for the catcher and hoping he hasn’t chosen this moment to take an unannounced coffee break.

The first wave down after any significant top is just plain fun.  It worked!  Sit back, bask in the glory, etc.  Then comes the corrective wave.  Heart-in-throat time.  You know it’s going to retrace some of that first wave down, but how much?  Most chartists develop sweaty palms around 61.8%.  Your stomach starts churning at 78.6%.  At 88.6%, time for your favorite vice.  And, God help us if it’s a double top.

Following an analog is generally the worst.  Virtually no one else sees it coming, and there is a long list of reasons you’re probably wrong.  Taking a tour around the net last night, that certainly seems to be the case now.  The euro is soaring, the dollar is tanking, and the market has spurted 80 points in two weeks — only 50 points from a five-year high.

It’s made even worse if the first wave down didn’t break out/down of whatever chart pattern it was in.  Yesterday’s reversal was impressive — going from up almost 8 points to down 8.But, we never quite reached my 1424.41 target — coming up .68 short — not to mention the Inverted H&S target.

And, we haven’t yet broken down from the rising wedge. A re-test of the high is officially on the table until that happens — hence the importance of using stops.

Once the wedge is broken, the next support is usually either an important Fib level or a morphing of the wedge into a channel.  In this case, we have strong horizontal and Fib support at 1400.  If we convert the wedge to a channel, it has a mid-line currently around 1402 and a channel bottom around 1390.

A rising channel would be bullish, of course.  And, I haven’t a bullish bone in my body right now.  We draw it, though, because we have to try to get inside the head of all the bulls out there and figure out where they’re likely to jump in and buy.  Channel mid-lines and bottoms, as well as important Fib levels, definitely qualify.

UPDATE:  11:35 AM

Nice reversal off this morning’s highs again, turning a 4-pt gain into a 4.5-pt loss where SPX bounced off the 10-day SMA (in red below, currently 1405.37.)  The SMA 20 (white) is down around 1392 and, like the 50 (blue, 1419), is due to continue falling. Fifty sessions ago was Sep 20, two sessions post the Sep 14 high of 1474.  So, all else being equal, the SMA 50 should start coming down as those higher components to the moving average roll off.

The 200-day moving average (thicker red) is down at 1385, so it’ll be a while before the 50/200 cross.  And, we are officially back below the 100-day (thicker yellow) at 1410.59.  Look for the 50/100 cross in the next few days.

The next battles involving moving averages will likely come at 1380, involving the SMA 200 and the SMA 20 at the intersection of the bottom of the rising white channel and the top of the falling red channel.  The 50% retracement of the 1343 to 1423 rally is at 1383.54, which intersects with both channels on Thursday.

So, we’ll keep an eye out for a significant bounce Thursday at 1383ish.  Remember, the .786 of the 1576 – 666 crash is right there at 1381.50.  And, bulls will want to limit this “correction’s” downside to the next Fib level lower — on the way to new highs, of course.

The EURUSD, in the meantime, has reached Sunday’s upside target of the .886 at 1.3084 and has completed a fairly decent looking rising wedge of its own.

UPDATE:  12:10 PM

The dollar has reached the bottom of the white channel we charted Sunday [see: DX Update], just beyond a .618 retrace of the move up from 78.725.  It appears to be basing for a move higher.

I’m expecting a 5% move by around the end of the year.   What does that mean for stocks?

continued for members…

First, I should point out that the slide from SPX 1474 to 1343 was only a 3.5% move for the dollar.  That’s 8.9% to 3.5% — about 2.5X.  Extrapolating, that’s a 12.7% move off the recent high (about SPX 1044.)

During SPX’s 10.5% slide from 1415 to 1266 this Spring, the dollar rallied 6.3% for a 1.66X ratio.  This would imply a downside of 8.3% (118 points) to 1306.  This is pretty darned close to my 1290 target, so I view it as supportive.

UPDATE:  1:55 PM

Getting a nice bounce out of the channel here.  This could be the corrective wave we’ve been waiting for.

Watching the 60-min RSI for signs of anything more than a back-test.

UPDATE:  2:45 PM

So far, not much of a bounce.  The RSI is even behaving itself.

The falling white channel remains intact.

If we did break out of the little white channel from here, the .786 retrace is up at 1419.43 — very close to the SMA 50 at 1419.53.  For traders only, SPX could get back to this level on a mini break-out from the channel if/when.

I suspect most of the market’s hesitation to nose-dive has been the strength in the EURUSD.  It just retested yesterday’s highs (1.31076 v 1.31065) and is now backing off.  Any visible weakness will help accelerate stocks’ downside.

And, it’s worth noting that AAPL has established that right shoulder we talked about last week [see: Update on AAPL], reversing at the intersection of channel lines just below 600.  Our leading forecast remains a drop towards completing the H&S pattern around the end of the year.  It would take 504 to actually complete it.

AAPL will soon have to decide between the rising little red channel and the larger falling white one.