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Thursday, June 30, 2011

Mission Impossible

UPDATE:  11:00 PM PDT

Not much to add.  Just looking at chart patterns... and see what looks like:

There'a a bearish Bat pattern setting up on XLF in another .10 or so; VIX horizontal support at current prices, a falling wedge and descending broadening wedge on VIX hourly, bumping the -2 bollinger band on VIX, negative divergence between price action and RSI and histogram on SPX, VIX, RUT, COMP and SPX, overhead resistance from 50 SMA all over the place.  Right shoulders developing on SPX, RUT, etc.  They go back to February and are starting to look fairly well formed.   Good luck, everyone!


ORIGINAL POST:

What seemed laughable two weeks ago actually happened today, as SPX reached 1321.97 intraday -- 3 cents shy of our 1322 target drawn back on June 16 by studying trend lines.  In so doing, it is within spitting distance of its IHS target as well as completing bearish Bat and Crab patterns.  It also reached our statistical target and bumped up against the trendline which should limit the rally to these levels.



VIX also dipped below our target of 16, reaching 15.88.  I currently view any dip below 16 to be a good buying opportunity.  But, keep in mind, the decline not only hasn't been confirmed yet, it hasn't even started. 

It is possible (not necessarily likely) that we'll overshoot in the morning -- possibly as high as 1326-1329.  But, from there, the likely direction is down -- either tomorrow or Monday.  I'm expecting 1285-1300 within the next week or so, followed by a strong bounce back up to the 1315 area by July 15th and a subsequent dive to the low 1200s.

My confidence in this pattern unfolding over the next month is about 75% -- less than I've had over the past several weeks.  I hope to spend more time studying the charts later tonight and will try to clarify things.  But, I'm traveling this week, so might not have the time.  The patterns to which I've referred are discussed in detail in various posts over the past several weeks.

Wednesday, June 29, 2011

I Just Might Be the Lunatic You're Looking For

[Reprinted from June 29 Intra-day Post]

We closed up almost 11 today at 1307.41, coming within 3 points of overlapping [i] down, which seemingly everyone believes would invalidate the bearish count.  Other indices such as RUT and COMP did overlap this wave.   Here's the daily chart again, with my original projections from a couple of weeks ago in red.



There's absolutely nothing wrong with that above conclusion -- as long as you're positive that 1258/1262 was the termination of [iii] and not [v].    If it was [v], as I contend, then 1 is done and we're in [c] of a corrective wave 2.  To me, the A-B-C move off the lows is pretty clear.  But, then again, maybe I'm off my bean.

I'm not ranting and raving about this count because I know more about Elliott Wave than anyone else.  Far from it.  But, as I've posted for several weeks now, this top is ridiculously similar to that which we experienced in 2007-2008.  I'm not going to bore everyone a restatement of the premise.  If you have no idea what I'm talking about, go back over the past month and read forward to today.  Deja Vu on June 6 is as good a place to start as any.

So, where do we go from here?  Am I turning bullish?  Absolutely not.  The intersection of all those fan lines and trend lines is still hanging out there at around 1322 or so (my favorite spoiler candidate is the trendline off the May 2 and June 1 highs.)  So is the target of the inverse H&S set up at the recent bottom.  Also at 1322, we'll have completed both a bearish Bat and bearish Crab patterns I talked about in the recent post about Patterns

Could we overshoot?  Absolutely.  Once the bears capitulate and/or the margin calls get to be too much, I can easily imagine a higher move.   As I understand it, the medium-term bearish case is still alive unless we exceed the May 2 1370 high.

And, given that most -- if not all -- of this bull has been attributable to Fed manipulation, who knows what else BB might have up his sleeves?  I'm certain they'll try; not very sure at all that it'll work.  Certainly wouldn't bet the farm on it.

So, no, I don't think we'll establish a new high.  I think we'll stop somewhere shy of 1330 and begin [i] of 3 of (1) of P[3] down.  I expect it to take us down to 1300  (any lower would make it difficult to trap more bulls.)  The bounce back up, the last bullish frenzy, will falter on or around July 15th (the 87th day) at the above-mentioned trend line -- probably around 1310.   If this all plays out as expected, look for the low 1200's from [iii] of 3 down. 

Once caveat:  many are calling this a wave 4 triangle, and I can see the logic in that.  If so, we hit the very same targets above.  Except, after the bounce from 1310 to that trend line, we keep on going.  The one thing that's been consistent about this market is its propensity to leave the greatest number of options on the table as long as possible.    I'll be watching for that possibility.  A study of previous tops tells me it's a slim, but distinct possibility.

I'm reminded of Dennis McCarthy in the original (and best) Invasion of the Body Snatchers


The lesson there?  Just because someone rants and raves like a lunatic, they're not necessarily crazy.

Intra-day: June 29, 2011

UPDATE:  6:45 PM PDT

We closed up almost 11 today at 1307.41, coming within 3 points of overlapping [i] down, which seemingly everyone believes would invalidate the bearish count.  Other indices such as RUT and COMP did overlap this wave.   Here's the daily chart again, with my original projections from a couple of weeks ago in red.



There's absolutely nothing wrong with that conclusion -- as long as you're positive that 1258/1262 was the termination of [iii] and not [v].    If it was [v], as I contend, then 1 is done and we're in [c] of a corrective wave 2.  To me, the A-B-C move off the lows is pretty clear.

I'm not ranting and raving about this count because I know more about Elliott Wave than anyone else.  Far from it.  But, as I've posted for several weeks now, this top is ridiculously similar to that which we experienced in 2007-2008.  I'm not going to bore everyone a restatement of the premise.  If you have no idea what I'm talking about, go back over the past month and read forward to today.  Deja Vu on June 6 is as good a place to start as any.

So, where do we go from here?  Am I turning bullish?  Absolutely not.  The intersection of all those fan lines and trend lines is still hanging out there at around 1322 or so (my favorite spoiler candidate is the trendline off the May 2 and June 1 highs.)  So is the target of the inverse H&S set up at the recent bottom.  Also at 1322, we'll have completed both a bearish Bat and bearish Crab patterns I talked about in the recent post about Patterns

Could we overshoot?  Absolutely.  Once the bears capitulate and/or the margin calls get to be too much, I can easily imagine a higher move.   As I understand it, the medium-term bearish case is still alive unless we exceed the May 2 1370 high.

And, given that most -- if not all -- of this bull has been attributable to Fed manipulation, who knows what else BB might have up his sleeves?  I'm certain they'll try; not very sure at all that it'll work.  Certainly wouldn't bet the farm on it.

So, no, I don't think we'll establish a new high.  I think we'll stop somewhere shy of 1330 and begin [i] of 3 of (1) of P[3] down.  I expect it to take us down to 1300  (any lower would make it difficult to trap more bulls.)  The bounce back up, the last bullish frenzy, will falter on or around July 15th (the 87th day) at the above-mentioned trend line -- probably around 1310.   If this all plays out as expected, look for the low 1200's from [iii] of 3 down. 

Once caveat:  many are calling this a wave 4 triangle, and I can see the logic in that.  If so, we hit the very same targets above.  Except, after the bounce from 1310 to that trend line, we keep on going.  The one thing that's been consistent about this market is its propensity to leave the greatest number of options on the table as long as possible.    I'll be watching for that possibility.  A study of previous tops tells me it's a slim, but distinct possibility.


Remember, just because someone rants and raves like a lunatic, they're not necessarily crazy.




UPDATE:  11:50 AM PDT

The market's taking a breather here as bears, especially EWers assume we're starting wave 4 down.  There's even a way to draw the trendlines so that looks to be the case.

I don't think it is.  I continue to believe we completed wave 1 of (1) at 1258/1262 and are in corrective wave 2.  It should take us to 1320 (probably a little higher).

IMO this rally isn't over until we reach the TL drawn off the 1370 high (see the chart below.)  Going short now should be okay in the medium/long term, but there is a better entry point waiting just a little higher.   VIX puts look like a steal here with SPX at 1202.



ORIGINAL POST:

Here's where the market is this morning, with my original projections plotted in red.  SPX currently at 1303.  I'm expecting a backtest this morning, but otherwise still expecting 1320 in next few days.  Keep an eye on VIX, nearly back to 18.  I suspect we'll end up closer to 16 by the end of the week as bears capitulate.  I'll be looking for good entry points, preferably in the 15 range. 


I'll try to post again at the end of the day.  Good luck to all.

Tuesday, June 28, 2011

Deja Vu, the Sequel

Okay, folks, I need help from someone who knows a lot more than I about Elliott Waves (which is pretty much everyone.)

Anyone out there who's looked at the 2007 EW count vs the latest from 2011?  Maybe one of you has charts from way back then, or can look at this and see all they need to see.



I've been pounding the table on the similarities in the markets for several weeks, now.  Except for the attempt to crash oil the other day, they could be twins.  At least cousins.

But, to my blurry eyes, the EW counts look like they could mesh pretty well too.  What say you?









Intra-day: June 28, 2011

UPDATE:  1:00 PM PDT

Should see a little backtest here, possibly down to 1292, before the next leg up.  We pushed to 1296.80, just shy of the 1298.61 and 1297.62 highs from the 14th and 15th.  So, natural for there to be some momentary indecision about whether we'll be able to establish a higher high or not.  I continue to believe we will, with my target still at 1320 or so.

We'll keep an eye on the technical picture, currently getting a little frothy but not necessarily topped out.  A 5-7 point  breather should relieve some of the froth and give us ample room to continue the push tomorrow.  Here's the updated daily chart.  The path to 1320 and [c]/2, which looked so far-fetched two weeks ago...



is looking decidedly "near-fetched."





UPDATE:   9:30 AM PDT

As we climb past 1290, two things.  First, a backtest is to be expected.  Second, keep an eye on the technical indicators.  Rallies tend to be contained at around 60 on the RSI.  Check out the asterisks on the chart below.  Also, note the diverging downward trend of the RSI and MACD/Histograms.  And, the fact that ADX is on the downswing - meaning the momentum is waning as the market rises.

Also, I forgot to mention earlier that we completed the H&S pattern on VIX -- the one with the upward sloping neckline.  Should give the bulls a shot in the arm.  The flat neckline pattern will complete at around 18 and should be just in time to trap some bulls into a falling market.

Stay groovy.  Meaning, as we approach 1300, it's a good time to review stops and plan out the next couple of days.





ORIGINAL POST:

We've completed both a bullish inverse H&S and a bearish Gartley.  Battle of the chart patterns.  Also, the hourly SPX is bumping up against its 200 period MA.  And the daily is bumping up against an important trendline drawn off the 5/5 lows.  It previously supported the market on May 17, 23-26, 6/1 and 6/2.  Turned to resistance on 6/3 and stopped the 6/21 and 6/22 rallies.

Should at least take a breather here while the bulls work up more courage and the bears consider drawing another line in the sand.

Monday, June 27, 2011

Patterns, Patterns and More Patterns

SPX is off to a strong start, up 11 at 1279 with Personal Income about where it was expected, positive rumblings on the Greece problem, and a White House pow-wow to try to break the debt ceiling impasse. The way we've started, I expect today to leave a bullish engulfing candle on the day.

Last Thursday's high was a .618 retrace of Wednesday's high, and we've retraced .786 of the rise from Thursday's low.  In other words, we're about 3/4 of the way through a Gartley Pattern.  It sets up for a possible reversal at 1290.69 (.786) or 1294 (.886) with a .618 target of 1276.

Gartley?  Crab?

But, the downturn may not be that substantial.  If momentum remains strong, we will have completed an inverse H&S we've been working on since June 10.  The upside potential would be 1320.

At 1320, the CD leg in the Gartley Pattern mentioned above would also have extended to 1.618 of the XA leg and 3.14 of the BC leg -- a perfectly-formed Crab Pattern.    But, look what else happens there: a big, fat Bat Pattern that's retraced 78.6% of its June 1st high at 1345.


Bat Pattern?

If you read this weekend's post Cliff Diving, you know that a bounce to 1320 would be perfectly in keeping with historical retracement activity and would reflect very accurately the price action when the 2007-2008 market topped.

I was telling someone just last night that I love it when various indicators come together, pointing toward the same result.  These harmonics-based possibilities rely on certain things coming together -- chief among them, now, that we complete the IHS at 1290.  But from there, it seems like a reasonable roadmap to 1320 that would catch a lot of bears off guard.

As regular readers of this blog know, 1320 is the intersection of lots of important trendlines.  You can read more about it here.   The bulls will be popping champagne and lighting cigars with $100 bills again, anticipating new highs.  Won't happen.

I expect the resistance provided by the line down from the 1370 top to stop any further advances cold and mark the termination of Wave 2 of (1) of P[3].  The completed Bat and Crab patterns will also point the way down.

The initial target would be 1291, the 61.8% Fib level.  Aside from a brief bounce, we should head down to test and ultimately break through the previous lows at 1258.

I'll be traveling most of the rest of the week, so won't have much time to blog unless something big happens to change my viewpoint.   Have a great week everyone.










Sunday, June 26, 2011

Cliff Diving

While there is plenty of speculation that this will be the week we experience a flash crash, I don't think it's likely.  And, if it should happen, it won't be the market disaster that many expect -- for the simple reason that such severe drops almost always retrace significantly in a relatively short amount of time.

This time could be different, but as a technician I keep my distance from such thinking.  As regular readers of this blog know, I've been banging the "all market tops are alike" drum for a while (previous posts here and here.)

As I posted on June 22, I view the current market as particularly similar to 2007 both in terms of the run-up to the top...

2007 vs 2011

...as well as the price action within the top itself:


Date:  6/22/11

In my opinion, we've completed wave 1 of (1) of P[3] down and are in the process of tracing out corrective wave 2, which should take us back to the midline of the channel created over the past four months.  This is a count similar to 2007's, in which there was also dissension over the initial impulse wave count.

2010 - 2011
Since Feb 18 High

That midline currently stands around 1324 or so.   The simple average of the most recent high (1370) and low (1258) is 1314; but, I've been more focused on a broadening channel running roughly parallel to a simple regression channel with boundaries of +/- 2 standard deviations.  My channel is drawn off significant highs leading up to the current pattern and is explained here.

After the 10/11/2007 peak, that market dropped 10.8% in 31 days.  It then recovered to its channel midline in just 11 days.  This represented a price retracement of 68.8% in 35.5% of the time it took to reach its low.

These numbers are very consistent with other significant declines.  I looked at market drops since 1987.  I started with the crash of August 1987 and worked my way forward, setting a threshold of a minimum 7% drop within 35 trading days or so.  I chose the time periods in a rather unscientific way -- I eyeballed them.  It's quite possible I missed some or included some that shouldn't have been, but the results were fairly consistent.


Some of the declines were significant in the short run, then extended on for a longer period.  August 1987 was one such decline, as were March 2002 and April 2010 (I show both short and long periods for comparison purposes.)

As can be clearly seen, the minimum retracement of one of these significant declines was 35%.  The average was 56% -- which supports my assertion that markets tend to retrace to their midline before leaving the topping pattern.  Viewed from a Fibonacci standpoint, the most common retracements were 50% (12), 61.8% (11), 78.6% (3) and 38.2% (2).

The average retracement time was 38% of the time it took to decline in the first place.  The frequency of common Fib's was 50% (9), 38.2% (7) and 61.8% (4).  Like the price retracements, this jibes with common perceptions about market moves in general.

If 1258 was indeed the low, the decline we've seen since May 2 took 32 days -- very much in keeping with the study averages.  In those 32 days, this market lost 8.2% -- a little on the low side, but within the study range.  If we perform per the historical averages, the market will retrace to its midline of 1322 within 12 days -- or, July 5.

My own charting -- based on comparisons to 2007 -- indicates Friday the 1st, which would be 11 days.  Pretty close.  My price target of 1324 is also pretty close to the 1322 the study indicates.  A move to 1322 would also be a 78.6% retrace of the 6/1 1345 high and a 50% retrace of the 5/2 1370 high.

If it plays out as I expect, we'll have also completed a bearish bat pattern (since 6/1).  The initial price target would be the .618 retracement, or 1297.  And, a continued decline would complete a huge H&S pattern indicating downside below 1200.  But, we'll deal with that in the coming days if the pattern develops as I suspect.

The one thing this study doesn't spell out is whether 1258 was the low.  This could be one of those 35-day patterns that loses 20%.  But, I don't think so, but we'll know in the next few days.  Just know that, if it is, we'll bounce back accordingly before diving straight for 666.

Can we retrace 54 points in 5 days?  Sure.  We've had two 20-point days in the past 9 trading sessions.  And, most technical indicators indicate we're somewhat oversold (more on that later.)  The market seems very news-focused lately, so I suspect a positive trigger relating to Greece, the Fed, the debt ceiling or economic indicators expected out this week.  Also, Friday is options expiration for the quarterlies, so keep an eye on OPEX related anomalies.

I'll try to update the technical picture before the opening tomorrow.  In the meantime, plenty to think about.

Friday, June 24, 2011

Intra-day: June 24, 2011


UPDATE:  10:10 AM PDT

The bears are hanging in there, not about to go quietly.  We've dipped below the 1272 target I had in mind, and did something interesting in the process.  

The rising wedge I drew this morning (bottom chart below) was a little too cute.  It led right to 1320.  Since rising wedges almost never reach their apex, but fall out somewhere around the 66% (time) point, this troubled me.  It meant I either had drawn it wrong, or we'd probably not reach 1320 anytime soon.  The market just told me which.


By recasting the wedge as a channel, the market has adjusted the upside from "40 points" to "unlimited."  If we can hold at these levels, and at least bump along the bottom of the channel, we should close somewhere between 1272 and 1275 on the day.

Staying in the channel guarantees only 6 points per day (at this slope), so I expect a swing to the channel top either today or Monday.  One caveat:  the H&S we just formed on the 5 minute chart.  If it works, it has downside potential to 1258.


UPDATE:  7:25 AM PDT

SPX just completed a little Gartley pattern on the 5 minute chart.  Didn't think it would fly, as the B didn't quite make it to .618.  It might take us down to the .382 line at 1272 before we start up.



I've been watching the 5 minute chart intra-day, as it has an uncanny ability to forecast short-term turns on its RSI.  A touch near 20 almost always marks a bottom, and 80 or above a top -- though it can and does "overshoot" when the momentum is strong.


 ORIGINAL POST: 6:50 AM PDT










Thursday, June 23, 2011

While You Were Sleeping

The market nearly succumed today following a dramatic test of the All One Market hypothesis.

In a lame attempt to curry favor with voters, the administration waged war on high oil prices.  They brought a peashooter to the front lines, but their first shot hit the market right between the eyes.  In a move as carefully orchestrated as the silver take-down in May, oil fell a swift 5%. 

Ah, but the law of unintended consequences.  Stocks fell in lock step, matching oil's decline to the minute [see: Not Terribly Slick].  And, the $800 million which might be saved over the next week or so of lower crude prices was quickly dwarfed by $50-100 billion in market losses.  Oops.

Luckily, Benny and the Jets came to our rescue (was there ever any doubt?)  The Plunge Protection Team dispatched trucks of cash to every street corner in Manhattan, free samples for anyone promising to buy a share or two of stock.

The DJIA, which was down 234 at one point, closed down a relatively tame 60.  SPX closed down 3 instead of 25.  And King Dollar, up almost 1.5% since yesterday's close, fell back to a more princely .6% gain.  Almost every index I watch left either a bullish hammer or a shooting star on its daily chart.

For the faithful who read and believed Deja Vu All Over Again and Deja Vu All Over Again, Again, this was an enormous buying opportunity.  Consider the June 132 SPY calls, which traded as low as .02 and subsequently rose to .12.   I hope at least a few of my brothers in arms felt as I did and added to their longs at 1265.

Although the politicos threw us a curve, the topping pattern is still intact.  There was some question as to when the B in the A-B-C corrective wave would make its appearance.  The trend line off the 4/21 gap was doing a great job yesterday and up until just after I posted about it last night, but obviously got clobbered by today's action.



The pattern found a substitute support trend line -- the latest fan line from 10/31/10 that was formed when we put in the 6/16 low.  It's seen in the above chart, running from (1) to (4).  If history repeats, and it always does, this line will come into play again in the next week or two -- probably as support at Point B and resistance as we're backtesting from Point D.

Also, note how the various numbered points generate meaningful fan lines.  Point (1) is the intersection of an important low with the trend line from the Mar '09 lows.  Its top line provided primary support from 3/16 to 5/16.  Once the market dropped through it on 5/23, it acted as resistance for the backtest -- determining the 6/1 interim high of 1345.   The middle fan line from Point (1), also our Mar '09 trend line, will define Point A.  And, the bottom fan line has, as already stated, saved the market's bacon on two occasions: 6/16 and today.


Examine the other fan line points of origin.  Point (2)'s top line determined the 4/8 and 5/2 highs.  Its middle line, the 3/16 low and future Point A.  And, its bottom line coincided with the 6/16 low. Note that each subsequent origin point has its own sphere of influence, but they often intersect. 

These points of confluence are especially important to market action.  Examples include Point (4) and future Point A.  I'm expecting another near the backtest of the channel bottom and will probably move Point D to reflect that once it's revealed.  My best guess is that the 4/18 low will act as a point of origin, possibly determining Point B and the backtest intersection point.

At 7:30 pm PDT, the futures look to erase all traces of today's debacle.  Tomorrow should continue what would/should have happened today.  I fully expect to reach Point A in the next several trading days.  We have a bullish hammer candle and very positive technical indicators that should see us to at least 1300 tomorrow. 

At that point, we will have completed a (somewhat lopsided) Inverse H&S pattern that has upside potential to 1328.  The rising wedge I was following obviously paid off with today's plunge, but we may have established a new one with a wider base.  I'll be watching it, as a similar pattern played out at the equivalent point in 2007.



A strong opening tomorrow should also complete the H&S pattern I've expected in the VIX.  Believe it or not, the potential target here is 11 -- a number we haven't seen since 2006.  We looked at this pattern here and here.  While I don't believe we'll actually reach 11, the mere completion of the H&S will generate a lot of bullish enthusiasm.


I expect it to drive the market to Point A with enormous enthusiasm.  Even after we pull back, most will expect it to be a corrective wave on the way to a new high.  It will be the last and bloodiest time anyone's tempted to BTFD for a very long time.

Stay tuned.

Not Terribly Slick

The White House's brain trust thought this would help?

US Plans to Release 30 Million Barrels of Oil From Strategic Reserves

http://www.cnbc.com/id/43508255

Come on, guys; everyone knows that markets are very much in sync these days.  This little stink bomb took crude down $4 and an already fragile market down another 20 points.



While lower gas prices will please the guy filling up his Suburban this morning, his joy will be somewhat tempered by the margin call he'll get from his broker this afternoon.



Let's suppose the market does rebound as I expect it to.  There's still the issue of the Strategic Petroleum Reserve being, well... strategic.  While not a very good defense against crazy things happening in the Middle East, at least it was a defense.  Sort of.

And, then there's the arbitrage -- in this case, a negative one.  This is oil we bought for a lot less money when the dollar was stronger.  When and if we replace it, it'll be at a much higher price with a much weaker dollar.

If lower prices stuck around for awhile, I'd say it's worth it.  But, 30 million barrels, even though it sounds like a lot, isn't.  It's about one day's supply.  If the effects last for a week (unlikely) the $4 per barrel savings translates into $840 million theoretically saved (30MM x 7 days x $4).  The bad news is that the DJIA alone lost $50 billion in value (1.5% of $3 trillion) since news of this stunt leaked out around midnight.

This is a political gimmick that's been tried before and always, always fails.  Always.

Intra-day: June 23, 2011

Once again, the financial establishment must be wondering how to cancel the Bernanke Show.  Though, that's not the real reason the market is down 21 points to 1265.  It's the economy, of course.  With a little help from a bone-headed move to tap the strategic oil reserve.  And, this morning, we get a little taste of what things will be like in the coming weeks.

The pony in this pile of crap is that if SPX holds at these levels, we will have established a new higher low.  Technical indicators are all through the floor, indicating a short-term oversold situation.  Even the daily MACD is threatening to hook back down and the histogram is hinting at a return to negative territory.

I'm adding to long positions here, as the upside case is still intact.  The Inverse H&S on the SPX and the H&S on the VIX that I talked about last night are simply that much closer to completion now.




Interestingly, both will feature a spike in their right shoulders, just like we saw in the smaller patterns completed on the 20th. 



To recap, the SPX IHS indicates an upside to 1328, and the VIX H&S indicates a target of 11.  Yes, 11.  Not saying it'll happen, but just the prospect of it might take bullishness to a new extreme (provided we survive the bearish mauling this morning.) 

If this rebounds in the next few hours, it'll make for a heck of a bullish hammer on the day.

Stay tuned.

Deja Vu, All Over Again. Again.

I've been posting for the past month about the similarities between this topping pattern and those of 2000 and 2007.  [see Deja Vu, Channel Surfing, You've Got a Fan, etc.]

Here are the charts I've developed that show just how similar they are, and what I think they tell us about the next month or so.


In 2007, the market tagged the lower bound of its channel, then rose in a rising wedge to Point A, which happened to be the intersection of:

(1) the midline of the entire pattern
(2) the support trend line from Mar '03
(3) a trend line off the most recent highs
(4) a fan line from the next most recent high

That's a whole lotta intersecting going on.  It fell back to B, which marked the same trend line that paused the market on its way to A, then rebounded.  It stopped at C, also along the same trend line mentioned above (4).

At this point, the market falls sharply back to the bottom of the channel, hangs around and backtests for a few days before dropping nearly 200 points in 5 days.  It immediately tries (in vain) to recover and backtest the channel bottom, spending months before finally giving up and heading south for good.

Now, let's look at the current market.



Pay particular attention to the intersection of all those trend lines at Point A.  They're all there: the long term support from March '09, the medium term support from Nov '10, the trend line from the recent highs, the fan line from the next most recent high, the midline of the channel.

While there's no guarantee the rest of the pattern will play out as it did in 2007, I think it's highly likely.  My charting program isn't precise enough to pinpoint an exact top, but I'm thinking anywhere from 1320 to 1330 -- which just so happens to match the harmonics indicators.

It's worth noting that if the pattern unfolds as I expect, we'll have formed a massive H&S pattern dating back to last December.  While a little lopsided, it would indicate a drop to 1130 or so.  There are numerous, other harmonic patterns that would come into play, but those can be dealt with in future posts.

BTW, if the entire move down from 1370 to 1258 were counted as [i], this corrective wave would be [ii].  I favor that count over [iv] since, as I understand it, a rise beyond 1311 would violate EW rules of [i] and [iv] overlapping.  I'm no EW expert, but I believe the 2007 count unfolded similarly.  

I'm looking for a very sharp move up -- possibly even by Friday.  VIX should plunge to 15 or less as investors incorrectly assume that the bull is back.  Optimism should be at a fever pitch and bears thoroughly demoralized before we commence wave [iii] of P[3], which should see prices below 1100 by year end.

Deja Vu, All Over Again

First, a quick recap of the forecasts currently in play:


 June 8, Deja Vu:  Comparisons of this pattern to the 2007 top; expected rebound to 1320 -  intersection of rising wedge, fan line from 2007 top, trend line from May 2 top; target date June 29.

June 10, Channel Surfing:   Should bounce off 2-std dev channel being established (not the 1249 horizontal support or the 200 SMA), then return to channel midline at 1328-1330.

June 13, Matryoshkas: Butterfly inside a Butterfly inside a Crab inside another Crab Pattern -- indicated 1329; should return to channel midline of 1329.

June 15, Still Playing Bounce:  Called 1261.90 the bottom; target of 1328 on June 21-23.

June 16, You've Got a Fan:  Compared and contrasted 2011 top to previous (2007, 2000, 1938); constructed the fan lines and trendlines guiding the pattern, replaced the concept of 2-std dev channel.

June 16, Intra-day:  VIX Butterfly pattern indicated 19.12 first stop, ultimate target below 15.

June 17, Intra-day:  Inverse H&S developing on SPX indicated 1300+; H&S developing on VIX indicated 17.30.

June 21, Different Perspective:  Expect pause at 1295, pullback to 1289-1290 to fan line, possible pullback at 1310 to 1285, on way to 1320.

June 22, Intra-day:  Pullback should be contained at 1287, might take place of pause expected at 1295.


So, how are we doing?

We obviously dropped through the bottom of the rising wedge since Mar 2009 (log scale), signifying the beginning of the end for the bull market.  My 1261.90 bottom call came close; the recent low was 1258.

Since then, we've made it just shy of 1299, so the Inverse H&S worked out nicely.

Yesterday's pullback to 1286.79 is a tad lower than the 1287 I expected, but close enough for government work.  BTW, I consider this action merely a backtest of an important trendline -- more on that below.

VIX beat my 19.12 target, is close to my 17.30 target, touching 17.72 both yesterday and today.  More below on whether 15 is in the cards.


What's next?

The huge Crab Pattern discussed in Matryoshkas is still unfolding.  It targeted 1329, which is within spitting distance of my target.  The Inverse H&S pattern I was tracking completed, and in so doing formed the head of another, larger IHS that's in the works.  This one, also with a rising neckline (white, dashed line) indicates an upside of 1328.  I'm also watching a developing rising wedge, indicated below as the red dashed line. 


From a technical standpoint, the daily MACD has turned positive and the histogram is back in the black.  The RSI is around 45, plenty of room for upside to run.  All the other indicators I watch (McClellan, bullish percentage, summation index, etc) are all turning bullish.

I'm still expecting this pullback we saw today (and is continuing overnight) to be contained at 1287, meaning the futures will have to snap back before the open.  The hourly futures MACD looks like it's bottoming (@ 12 am, PDT) and the histogram bottom is in.  The RSI is back to the mid 30's.

We reacted off the 20 SMA, but more importantly, we hit an important resistance line that I'll discuss below.  The more important 50 SMA will be more problematic.  It currently stands around 1320, but should increase a few points over the next few days.

Volume has been light, which indicates to me that the masses aren't fully on board the rally just yet.  A strong push tomorrow should take care of that.

If VIX bumps up at bit in the morning (possible given the futures' action tonight), then a drop back to around 18 would complete another, larger H&S (since 6/10) with an indicated downside of 11.  Not terribly likely, as we haven't seen those prices since 2006; but, it'd sure get folks' attention...



From a fundamental standpoint, nothing in the FOMC announcement or BB's press conference changed the expectations picture.  My biggest takeaway is that BB seemed particularly nervous.  His voice quavered like that of a child telling a whopper of a lie.  Makes sense, since he no doubt knows that things are much, much worse than anyone's letting on.

CBO, for instance, announced that our national debt will reach 101% of GDP in just ten years.  To put that in perspective: without any improvements, in 2021 we will be where Greece is today.  Scary thought, indeed.

Tomorrow morning, we get initial claims and new home sales numbers.  I think they'll either look good, or be spun as looking good.  Either way, expect happy, smiling faces on CNBC.

Okay, this post is officially getting too long.  I'll put up some interesting charts in the 2nd installment.

Wednesday, June 22, 2011

Intra-day: June 22, 2011

The Bernanke managed to not send the markets down this time.  He struck as neutral a tone as possible, giving both the bulls and the bears something to hang their hats on.  Bottom line: no impact.  The climb to 1320+ should continue as planned.

The current retreat, as discussed yesterday, should be contained at 1287-ish, the trend line that marked resistance on 6/7, 6/9 and 6/14.  That resistance is now support and should limit any further sell-off on the day.  That TL also coincides with a longer TL connecting the 4/8 high to the 4/20 gap and the 5/23-5/25 and 6/2 bottoms.  It runs parallel to the major fan lines of its big brothers from the 5/2 and 2/18 tops.

These prices probably mark the last best chance for bulls to play this bounce to 1320 or so.  The short term technical indicators are all oversold, while the 1 hour and 30 minute now have sufficient room to make another run to the upside.

We should see another pause around 1310, but there's also a small chance that this .50 retracement of the 6/1 highs counts as the equivalent 10/31/2007 .618 retracement before that market's final push to 1523.

Tuesday, June 21, 2011

A Different Perspective

UPDATE: 11:25 AM PDT

The market is currently around 1295, up big on the day as expected.  I'm expecting a brief pause here at the 20 SMA, with a possible pullback to the fan line at 1289 or 1290.  But, the trend is still up.

There is a more significant correction coming, probably around 1311.  It should take us back to the fan line at 1287 before the final push up to 1320-1325.  There is still the possibility that we'll continue beyond this range, but that's in the hands of Bernanke and the sales job he's able to do on Wednesday. I'll be looking to snug up those stops as we approach 1320.

I've updated the second chart below with expectations for the next couple of months.  Anyone who wants to throw an EW count against the wall based on these charts, have at it.


ORIGINAL POST:  6:30 AM PDT

There's nothing about the economy, the employment picture, the global credit market, military conflicts breaking out everywhere,  etc. that I find promising.  Long term, we're no doubt screwed.

But, in looking at market tops all weekend long, I still can't find a single instance of a market falling off a cliff without, first, some kind of retracement to the midline of its recent price action.   I'm staying with my June 16 call for a strong rebound this week.

The target of 1320 looks good, depending on timing.  We just need to break through the fanline that's been limiting us, currently around 1290.

Next, we'll pause around 1310, maybe retrace 5-10 points on our way to the trendline (A) off the 1370 top -- the limiting factor to this whole rally.  It's at 1327 today, but the target gets a little lower every day.   So, our upside is strictly a factor of how quickly we get there.

I'll put a prettier chart when I get the chance, but this is roughly what I have in mind.


It'll be important to keep some perspective.  As the rally unfolds, it'll start to feel very bullish.  Many will call it the next Minor 5 up.  I don't think it is.  I think we'll be contained by that trendline and work our way down from there.  My plan is tight stops all along the way, taking into account the pause at 1305-1310.

I imagine the massive head and shoulders pattern will be obvious by time we make our lower high around July 4th, and aside from some backtesting of the lower end of our channel, the market should plunge around mid-August to it's first stop around 1200.

Here's the updated chart as of 11:25 AM PDT.  



More later.

Friday, June 17, 2011

Intra-day: June 17, 2011

9:35 PDT

Watching the 5-minute on SPX.  If this little correction bounces here at 1269-1271.50, we'll complete an inverted H&S pattern and a bullish 5-0 pattern that could send SPX to 1300+.






Also, keep an eye on VIX.  It's possibly forming a H&S pattern that could send it to 17.30.


Thursday, June 16, 2011

Intra-day: Jun 16, 2011

UPDATE 12:35 PDT

The Gartley busted as the VIX took off for the moon.  Busted Gartley's often become butterflies, which is exactly what happened here.  The .786/.786/1.272 pattern completed at 24.23.  The .618 reversal target is around 19.12.  Any extension, not uncommon in butterflies, could take VIX much lower.

The 1.272 extension, for instance, would take it down below 15 -- extremely bullish for stocks.    This is a large and well-formed pattern, dating back to Mar 18.  So, I take it very seriously.



ORIGINAL POST:

A bearish Gartley pattern just completed on the VIX since 3/21.  Should take it back around 17, bullish for stocks.

Note: I revised the B point to 20.03 on May 23.  Missed it in all the excitement this morning.

You've Got a Fan in Me

Last week I proposed a methodology for defining market tops in Channel Surfing and in the follow-up, Update: Channel Surfing.  I described it like this:


...characterized by a multi-month pattern within a rising market that has at least two significant touches (of the index or its Bollinger Band) of at least 1.5 standard deviations on the upper and lower extremes of a regression channel commencing after a post-correction new high.  It's capped off by a third touch on the lower boundary and subsequent return to at least the midline before a final plunge to new lows. 

In playing around with the charts this weekend, I discovered another way of looking at these things.  First, look at the SPX over the long-term -- something I don't do often enough.


Notice how the market has climbed pretty steadily since the depression (logarithmic scale.)  It frequently departs, rising up from the trendline, but always falls back to the long-term slope.  We see five touches (1932, 1944, 1949, 1974 and 1982) each marking the end of a significant correction/crash.

Consider the first such departure: 1932 - 1942.   Follow along and we'll play with some trendlines.



 Here, I've drawn three trendlines (A, B & C) coming up from the period low.  Each is drawn to a significant swing low, as is easily seen.  These are called fan lines.  You can probably see other spots that might justify one, but let's go with these for now.  Notice how they act as support in two or more spots.  You can see that once the index finally drops through, these lines often act as resistance -- they limit any further rebound.

Next, we'll add a few fan lines dropping down from the period high (D, E, F & G.)  Notice how they act opposite to the fan lines from down below.  That is, they act as resistance until the index drops through; they then act as support.


Notice how many of the fan lines act as support to the index at one time, then turn around and act as resistance later on.  Now, let's go crazy with them, and find all the other ones that seem "significant."  One such line would be between D and E.  It's an important low, although we wouldn't know that until later.  I've drawn in a handful that kind of pop out.




I've highlighted the areas of increased consolidation.  Note that they're all contained within one or two fan line arcs:  1 & 2, 3 & A, 4 & 5 from the low,  6 & 7, 8 & F, 10 & G from the high.  I've highlighted these arcs and erased the rest.  I've also added a few horizontal trendlines that segment and capture horizontal support and resistance.  

I see a lot of applications and implications.  But, first,  let's focus on the topping pattern -- since that's the question of the day.  I've selected the 1935 - 1937 pattern.



The pattern, seen here, looks a lot like the 2000 and 20007 regression channels, right?  Enters at the midpoint, two high touches, two low touches, a final rise to the midpoint, then goodnight Irene.   But, notice that the "regression channel" lines are actually trendlines that were drawn from significant points on the previous tops.




The low line is connected to the previous high.  The high line is connected to the most significant high before that one.  The midline connects the apex of the high and low lines with the entry and exit points for the entire topping pattern.  The lower line has 5 significant touches; the top line has 3.

Hmmm, where have I seen that before?  Let's skip ahead a few years.


The 2000 top, which I referred to as a regression channel before, could also be described as contained within 3 fan lines.  The bottom line connects the pattern's lowest points with the previous significant high -- just like in 1936.  The midline and the top line have nothing to connect to, but if I run them out to the left they intersect nicely, forming an apex with the bottom line.

The 2007 top does the same.  The bottom fan line connects the pattern's low points with the previous significant high, just like 2000 and 1936.  The top line connects the pattern's high points to the next most significant high.  The midline, again, forms an apex with the both of them after they connect with significant highs in 2002, and significant lows in 2001 and 1998.  Hmmm...

That brings us to 2011.  Notice the bottom fan line that connects the pattern's low points with the previous significant high.  The top line doesn't have any other highs to connect to, but does extend out to a few very significant lows in 2002 and 2003.  And, the midline connects nicely to the apex.

The astute reader (with way too much time on their hands) might recall I pondered whether the current top was fully formed, or might expand as happened in 1999.  The first 3-4 months of that top looked very similar to the past several months of this pattern, then widened to a pattern that lasted another two years (see the 4th and 5th charts in Update: Channel Surfing.)

I worried that the current top wasn't large enough in size or time compared with the previous tops or with the previous summer 2010 correction.   With this new understanding, it's easy to see how and why the top patterns expand.  The 100 point range of the past month would grow to 125 points by the middle of August [Sure it Works in Practice] and 165 points by the end of the year.

So, is that what's happening?   Trust me, I'm working on it.

In the meantime, look again at the 2000 and 2007 tops.  Thanks to my fledgling understanding of fan lines,  it's pretty clear to me that many of the patterns in the current topping pattern have been driven by fan lines from the 2007 top and the 2009 bottom.


I drew the fan line from the 2007 top [The Trendline That Just Won't Quit],  the trendline from the Mar '09 bottom, the midline of this topping pattern, a trendline off the Nov 30 and Mar 16 lows and a trendline from the May 2 and Jun 1 highs.

Interestingly, they all intersect around June 23 at about 1320.



Now, I don't know whether we're in P[3] or Minor 4. I don't know whether to be more worried about the Puetz window or Three Peaks and a Domed House or the Egg of Doom.  Those are issues for another post.  But, I have a pretty strong hunch that we'll bump back up from these levels before anything else happens.

Stay tuned.