Clear the Decks: December 1, 2011

EOD:  7:00 PM

The broken RSI trend line on the 60-min chart may or may not have completed its backtest.  If so, it was feeble, but may have been enough.  Regardless, the RSI hit a 6-month record high -- significant in and of itself.  The hourly MACD also turned negative.

Another interesting development today, we completed a Bat pattern on the hourly chart and most of a Gartley on the 15-min chart.  The Bat is seen below in green.  The small purple pattern seen at the terminus (near the letter C) is a Gartley, better seen on the 2nd chart below.

On the 15-min chart, we can also see the makings of a symmetrical triangle.  These can break either way, of course, but the last symmetrical triangle we had broke for 100+ points to the downside.  And completion of this little Gartley could help it on its way.

Extrapolating out, a competed Gartley could also set up a little head & shoulders pattern that would ultimately target 1215.    I'm always on the lookout for H&S patterns on the way down after a big run up like we had.  Given the interim stops along the way up, there's a good chance we get some cascading H&S patterns on the way down.



UPDATE:  3:15 PM

If we do hold at these levels and the reversal begins tomorrow, this is what a Gartley Pattern would portend.  Shown here on the 60-minute chart:

And, the daily chart:

I've drawn the downdraft to 1121 because it's the .786 Gartley target.  But, remember, Gartley's can extend as happened on Aug 1.  The decline stalled at the .786 (1279), resumed falling to the 1.618 (1200) where it stalled again, and didn't stop falling until it had reached 1101 3 days later at the 2.618 extension.  Lots of money left on the table during that plunge, including by yours truly.

Just for grins, here are the corresponding values this go 'round:

 .786  = 1121 (-11%)

1.272 = 1015  (-18.3%)

1.618 =  940  (-24%)

2.618 = 722  (-42%)

If this is a 3rd wave down, any of those numbers is very reachable in the next few months.  Each of them is significant, too, corresponding with horizontal support or a major trend line.  But, I'll address that topic if and when we head in that direction.


UPDATE:  1:50 PM

Just noticed the 60-min chart RSI has broken its trend line.  Not a good development for those waiting for more upside.  The MACD looks like it's going negative by the end of the day, too.  With any luck, we'll get a slightly higher high on the day, but a lower RSI on the backtest, setting up negative divergence on the 60-min chart. 

ORIGINAL POST  10:40 AM

This feels very much like the quiet before the storm.  Yesterday's ramp is showing absolutely no follow-through as of yet.   Even the mainstream media, after a day of deep thinking, has realized that the central bank love fest, while leaving everyone feeling all warm and tingly for a day, is likely to result in an embarrassing new rash.

Here's a quick look at our daily chart:

Note we're reached the apex of the triangle we talked about so much over the past two weeks.  It's formed by the trend line down from the Oct 27, 1292 high and another trend line up from the Aug 9 low of 1101.   I originally charted the apex as December 2 or December 5, but it looks to be about there now.

I've labeled this as Point C of a potential Gartley pattern that started with Point X at 1074, Point A at 1292 and the crucial .618 Fib Point B at last week's 1158.   If the pattern plays out, the next stop is Point D at the .786 Fib level, or 1121.  This is a significant 10% move in the very near future.

Could we go higher?  Absolutely.  Many Elliott Wavers insist we will.  But, I have very strong reservations.

Take a look at the descending red RSI trend line.  Note that it's stopped six advances in their tracks.  The only time the RSI broke through was the 1292 high, which I have always viewed as an overshoot.  We've bumped right up against it a 7th time.  The odds favor another downturn.

The purple RSI trend line, which has acted as support since August 8, was broken on Nov 16.  Since then, it been in back test mode.  Yesterday's advance brought RSI all the way back to the line, but it couldn't climb back on top.  This adds to the bearish case.

Tomorrow, of course, is the 150th day since the 1370 May 2 high.  In 2008, the 150th day was the beginning of the final 10-month, 50% plunge.  While the price comparisons have become less relevant over the past few weeks, the timing of several reversals has been in sync.  Here's a current look:

BTW, the beginning of the end in the 2000 topping pattern occurred 157 days after the high.  The 2000 equivalent of our 1292 (day 125 in 2011) occurred on day 112.  There are other similarities, such as our July peaks (days 46 and 57), and some pretty major divergence in terms 2001's days 67 - 112.

But, the inescapable similarity is that day 157 completed a back test of the trend line off the pattern lows (the solid yellow line coming up from day 15.)  We've done the same here in 2011, and I expect the results to be similar.  The 2000 market lost 25% over the next 4 1/2 months, 35% over the next 10 months and nearly 50% over the following 20 months.  Here's a better view of all three tops:

2000 Top and Back Test

2007/8 Top and Back Test

2011 Top and Back Test

Next, the parallel, downward-sloping channels (purple, dashed) that have guided this market since last February argue for a reversal right about here.  The line currently in play got the party started when it stopped the Feb 18 advance.

It subsequently stopped the April advance, several May declines, a June advance, the initial July decline and movements both ways of 8 of the past 28 sessions. There's something very symmetrically pleasing about a trend line that extends from the first day to the last day of a market top.

Last, when we add parallel trend lines to those which define the above-mentioned triangle, we can see pretty nicely defined channels.  The pair of solid yellow lines guided the market up from the August lows.  The pair of dashed yellow lines have guided the decline since the 1292 high.  This channel also argues for a reversal at this point.

The day is young, but we're establishing a candle pattern that looks suspiciously like those of Jul 22, Aug 22, October 28 and Nov 25.  I've taken profits on most of my long positions and am easing into an overall short position.  If I don't see a resumption of the upside momentum muy pronto, I'll likely set up for a fairly strong reversal in the next day or two.

Good luck to all.