A New Analog: Aug 3, 2016

I love analogs.  I love the way they clearly lay out a very tradeable path, slicing through all the noise and the head fakes.  Our first was a doozy, correctly forecasting the 21% Jul-Oct 2011 correction with deadly accuracy [see HERE.] 

Our most recent one, posted in Mar 2015, forecast the 12.5% correction that would occur almost five months later [see HERE.]



Although I dislike day trading, it's become a necessary evil.  Gone are the days when a weak close practically guaranteed a weak opening the following morning. It's just as likely, if not more so, to result in a gap higher.  Strong closes are almost as treacherous.

So, it's always fun when a new one appears on the horizon and we get a chance to take some longer-term positions.

First, let’s take a look at the REALLY big picture for the last 20 years.

Notice how SPX:

• completed a backtest of the huge white channel midline in late 2014
• reached the top of the rising red channel (within the white channel) in late 2014
• reached the top of the rising purple channel in Feb 2015
• despite reaching those channel lines, SPX continued rising to the yellow 1.618 (2138, actually reached 2134) in May 2015.

After reaching 2134 and tagging the top of the rising purple channel again, SPX had all kinds of problems.  But, the downside was contained to the 1.272 extension at 1823.

In fact, 1823 has been backtested seven different times — including the time they failed to contain it on Jan 24, 2014 (it fell 85 points in 9 sessions, popped back up in 4.)  The following times — Apr 11, 2014, Oct 15, 2014, Jan 20, 2016 and Feb 11, 2016 — they held it to within 13 points.

Two things should be quite obvious from this.  First, having not cared one bit about 1823 as resistance on the way up, they wanted to make damn sure it served as solid support in the event of any declines (SPX should have reversed strongly at 1823, as it completed a huge Butterfly Pattern set up by the plunge from 1576 to 666 between 2007 and 2009.)

Second, it’s the clearest indication of market manipulation one could ever hope for.  You simply don’t get severe intraday reversal of the sort that occurred on those days without some heavy interference (Bullard hinting at QE4, USDJPY spiking, oil futures doubling in price, etc.)



But, none of that will come as a surprise to regular readers.  We’ve documented market manipulation on a regular basis for the past five years.  The reason I mention it is because it has a direct bearing on what to expect from the “market” going forward.


continued at pebblewriter.com…

Mucking About

~reposted from pebblewriter.com~

ES came within .09 of our interim target from Monday [see: CIW Oct 21] and is reversing nicely, though we're a day behind the schedule discussed on the 17th.

The implications are that this sell-off might be a little less deep than I originally thought. Still, as we discussed yesterday, it should be steep enough to flesh out the red channel within a few days.

The dollar reverted to the pale blue .886 before falling back to a higher low, having been rebuffed by the falling wedge's lower bound.  It'll be interesting to see whether the equity plunge is frightening enough to produce a real dollar rally -- or merely slow the bleeding.

SPX's 90-pt plunge in late June (1654 to 1560, in yellow on the chart above) produced a dramatic spike in DX -- which then continued to rally with stocks until they had recovered their losses.  For now, at least, the dip below the critical 78.725 has been averted.

I'm often asked why, if the larger harmonic patterns are so clear, one should muck about with the smaller patterns, channels, etc.  The rally from 1640 to 1754 demonstrates the value quite well.  The 110 points, alone, would have been a 6.7% return -- not shabby for a 12-session holding period. 

Yet, as the chart below shows, there were several reversals that were fairly "by the numbers."  The purple .786 (yellow .618) provided a 20-pt reversal, and the purple .886 another 11 points.

Adding in those extra 62 points alone (the reversals and their retracements) would have boosted the 6.7% return to about 10.5%.  But, more importantly, the harmonics alone don't tell the whole story.

Consider our forecast from July 15, when SPX was about to register a new all-time high.  Based on harmonics, I expected a reversal at 1712 (it came at 1709) and subsequent rally to 1765, followed by a 45-point retracement on the way to 1823 -- all by late August.

A buy-and-hold investor would have done reasonably well with that forecast.  SPX came within 6 points of that 1765 target before reversing yesterday -- a modest 4.6% gain from 1682.  There's nothing wrong with 4.6% for three months (about 18% annualized.)

However, by simply paying attention to the channels, we were able to spot the trend shift in early August that signaled a deeper dip than originally anticipated.  That deviation provided an additional opportunity of 54 points (27 X 2.)  The September dip from 1729 to 1646 provided another 166 points of potential return.

Suddenly, a 77-pt or 4.6% potential return becomes a 297-pt or 17.7% return (about 70% annualized) -- from simply tossing channel analysis into the equation.  By considering many other chart patterns, coincident developments in other securities and currencies, analogs, RSI channels and other, more traditional technical analysis, we've been able to do even better.

Let's be clear on one thing: it is highly unusual for anyone to catch the absolute top and bottom of every major move.  We've done better than most, but I still miss a lot more than I care to admit.  But, that's not important...because, it's not our goal.

Our goal is simply to catch "most of the moves most of the time."  This means developing the very best forecast we can and following it until it stops working.  Sometimes, it works for days or even weeks.  And, sometimes it works for all of five minutes.

The key is acknowledging when it's not working -- which means (1) having a discrete price level or chart pattern that provides a clear signal, and (2) setting aside one's ego and admitting that the forecast was hogwash in the first place (by far the harder of the two!)

continued on pebblewriter.com

Chart Patterns and You

ORIGINAL POST:  9:15 AM EST

Last night, the dollar tagged the .786 Fib retracement of its decline from Apr 4.  It subsequently sold off almost to the .618 but, so far, is hanging in a rising wedge.

The EURUSD re-tested the .500 Fib of its rise from Apr 3, and snapped back into its falling wedge and the (purple) channel that's guided prices since then.

The e-minis tacked on a few points overnight -- almost reaching the .786, only to give them all back with this morning's underwhelming Durable Goods report.  The Head & Shoulders Pattern that was looking pretty good at yesterday's open is now looking a little iffy, with a right shoulder that's already 15 points higher than the left.

UPDATE:  9:45 AM

SPX continues trudging toward the .786 retracement (1584.23) of its decline from 1597 to 1536.

After plunging beneath the channel that's guided it from 1343 to 1597 on Apr 17, SPX rallied and re-joined the channel yesterday.  This was a very bullish development, as long as SPX remained in the channel all the way to the closing bell.

Despite a five minute thrill ride from 1578 to 1563 (the channel bottom) and back, SPX managed to regain and hold the 2007 high of 1576.09 into the close.

It now sits perched on the neckline of an Inverted H&S Pattern which has either completed or not, depending on whether a 5-minute plunge qualifies as a shoulder.  Short answer -- I have no clue.

Here's what we do know:

1. Prior to Apr 17, SPX had been locked into that purple channel below since 1343 on Nov 16 -- an 18.9% gain in five months
2. SPX barely paused when it completed two big Crab Patterns -- the 1.618 extensions of the 1370-1074 decline and the 1474-1343 decline (purple and white below)
3. Instead, SPX exceeded the Oct 2007 high of 1576.09 (yellow)
4. SPX reversed at 1597.35, almost precisely at a trend line drawn between the 2000 and 2007 highs
5. SPX fell 3.8%, making a lower low, dropping out of the channel mentioned above and suggesting a H&S pattern that targets 1474 -- the Sep 2012 high (white pattern)
6. It roared back into the channel, retracing almost 78.6% of its drop
7. In the process, it topped the 1576.09 high and the 1553 and 1555 Fib levels and almost reaching the 1583 target of an IH&S Pattern
8. Depending on your interpretation, it might also have completed an IH&S that targets 1621.

What Does It All Mean?

When I forecast markets, I look for lines in the sand.  I try to determine price levels that, if crossed, would signal a change in trend.  When that trend switches from bullish to bearish, I want to be short.  When it switches from bearish to bullish, I want to be long.

A channel is one such method that features boundaries rather than absolute price levels.
As long as prices remain in a rising (or falling) channel, we can expect prices to continue to rise (or fall.)  It's rather simplistic, but it usually works.  We can make educated guesses as to future price targets based on where the channels point.

Of course, even well-formed channels (multiple tags on the top and bottom and over a sufficient time period) can't go on forever.  I look for moments when prices must choose whether to remain in or leave the channel.  A tag of a top or bottom bound or midline usually create opportunities, though other lines can as well.

The Real World

Recall that we shorted SPX at the 1597 high on the 11th [see: Big Picture], riding down to the channel bottom where I went long at 1554, expecting at least a bounce.  We got one on the 16th with SPX rallying up to 1575 -- the channel .25 line.

We closed our long position, going short the following morning for the trip back to the channel bottom at 1555.  We tried another long position there, but were quickly stopped out as the channel was broken -- signalling a bearish trend change.

So, we shorted again, playing quite a few bounces down to 1540 where we eventually went long in anticipation of establishing a H&S Pattern neckline [see: Dollar Daze.]

At that point, I expected a back-test of the broken channel.  We got it, reaching 1565 on the 22nd but closing beneath the channel's lower bound.  Note that this move completed 5/6 of a H&S, but the right shoulder was underdeveloped relative to the left.

Anticipating an intra-day retracement to 1567 (the .500 Fib) or 1574 (the .618) the next day (yesterday), I stayed long -- trying without much success to anticipate the top.  Since SPX topped the .618, the next up on the chart is today's target: the .786 at 1584.23.

Going Forward

With all that as preamble, here's what I expect going forward.

...continued on pebblewriter.com...

After the Funding's Gone

~reposted from pebblewriter.com

After a scary drop in equity futures overnight, the market looks to open soft...but not exactly panicked. I remain short since 1525.34 on the 28th, but will continue to play any significant bounces that come our way.

The dollar is still looking strong, reflecting both plenty of fear and euro weakness.  Note, DX reached our intermediate target range from last month (the red .618 @ 82.22 & white 1.618 at 82.28.)

The next level of resistance is the red .786 at 83.064 where it intersects with the purple 1.618 at 83.122.  The acceleration channel that's carried prices skyward since Feb 1 intersects that nexus this week.

Also intersecting there are two channel lines -- the large white midline and the much larger yellow midline -- seen here on the weekly chart.

Daily RSI still shows plenty of upside potential, though we've also seen some negative divergence start to creep into the picture.

As noted back on Feb 21, the EURUSD has broken down from its rising channel (white) and has accelerated to the downside, breaking the Jan 4 1.2996 low and the psychologically important 1.30 level.

The intersection of the purple .618 and two white channels at 1.38 will have to wait (until my next visit across The Pond, no doubt.)

Losing the rising white channel hurts momentum quite a bit, but it's the drop back through the 75% line on the falling white channel that represents the bigger problem for the pair.

This channel dates all the way back to Dec 06. Reaching the top for the third time is still possible, of course, but it's that much harder now that the pair needs to retake the higher channel line and mount a fresh attack.

I've redrawn the falling white channel as red and will lower its top (for now) to reflect the brick wall it ran into.  I've also sketched in a more relaxed rising channel (light blue) that reflects potential channel support at current prices (the intersection of the falling red .75 and the rising light blue .25.)

I don't know whether the pair needs to retest the falling white midline or not.  The bottom of the new light blue channel intersects with the red .75 in mid-March.  Also there is the .25 of the very large rising purple channel, which provided a huge bounce in Jun 2010.  It's easier to see in the LT chart below.

Recall that we closed a long position and last went short at 1525.34.  From there, SPX fell nearly to our initial target (1496-1500), reaching 1501.48 Friday morning before the bounce to 1519.99.

As we discussed last week, the reversal at the red .786 could be the full extent of a corrective wave on the way lower (the B wave in an A-B-C)  that is meant to test the bottom of the white or purple channels.  But, it could also be the Point B in a Butterfly Pattern targeting 1531 or 1540.

continued on pebblewriter.com... 

 

Playing the Cliffhanger

reposted from pebblewriter.com ~

We remain short from SPX 1447 on Dec 18.

The dollar is either finding support at a channel midline (purple) or about to find it at the bottom of a channel (white), depending on which channel ultimately holds.

DX RSI shows great channel support either way.

The EURUSD is still hanging in there, backtesting the red channel midline again in the midst of the major white channel back test that's been going on since Dec 18, and post the rising wedge break of Dec 19.

As Reeodd mentioned on Disqus Friday, the H&S pattern that completed (see the 2:50 entry) would look better formed if the right shoulder were a little higher.  This is definitely true, though the past six months has seen many very lopsided H&S patterns play out perfectly.

Bottom line, the pattern completed -- but it didn't close beneath the neckline.  We saw a bounce right at the close that allowed it to remain just above.

 I don't usually count these patterns as "in play" until a close below the neckline.  But, in this case, I think that rule is mostly academic.

The reality is that the market will move today in accordance with the news out of Capitol Hill, which might be in keeping with normally reliable chart patterns -- or not.

I have no inside knowledge of the goings on in Washington.  But my view has always been that Congress, while recognizing the need for Fiscal Cliff-type changes, cannot ever be expected to commit political suicide by actually voting for them.

Old guys in strongly partisan districts might be the exception, and we're seeing olive branches extended (even aisle-crossing) by some.  But, young turks whose anti-establishment vitriol got them elected are unlikely to fall in line -- as happened with Plan B last week.

And, if that sounds like I'm hedging my bets, it should (metaphorically, anyway.)  Betting on the outcome of the political process is a crap shoot, pure and simple.  I express an opinion because that's what members expect.  It should, in no way, be considered as fact until after midnight tonight.

Our forecast still calls for much lower prices in the next 9 sessions.  Thus, I remain short. But, anyone uncomfortable with the very real risk of a short position imploding as the result of a last minute political stick-save should really be on the sidelines until all the dust settles.

continued on pebblewriter.com...

Attention Prospective Members:  Membership rates are slated to increase on January 1, 2013.  I have been following a practice of charging about $10 for every percentage point of return.  Our results for the first nine months of the new site (since inception March 22) total a little over 95% [DETAILS HERE], so the new rates will be:

• Quarterly:              $375
• Semi-Annual:         $550
• Annual:                  $950

If we're fortunate enough to continue averaging a little over 10% per month, annual memberships would be $1,200+ in March.  Wouldn't it be great if you could lock in your rate now?  You're in luck!
I announced a few days ago that the first fifteen to sign up for an annual membership at the current rate of $800 would be granted Charter Member status.  

Charter Member rates are locked in for the life of the site, so you'll never pay more -- no matter where annual rates end up.  And, Charter Members will also be eligible for discounts on other services currently in the works. 

The response has been pretty strong; and, I'd hate to exclude anyone stuck on a plane or a ski slope.  Okay... it might also have something to do with a busy weekend with the family (yesterday was my 17th wedding anniversary) and the fact that I haven't had time to put together a new Sign-Up page.


Regardless, consider the offer extended just a little longer (but, don't push your luck!)

SIGN-UP NOW

Winding Down

Today's post concludes a week of publicly available intra-day posts, my little gift to those considering a pebblewriter membership.

Seems like everyone's talking about the fiscal cliff.  I'd like to take a moment and talk about another important issue: the Fee-scal Cliff.

As announced on Monday, subscription prices will increase on January 1.  In keeping with our practice of paying for performance, the annual rate will be about $10 for each percentage point of return since the new site’s inception on Mar 22, 2012.

We’re up about 95% over those first nine months [SEE DETAILS HERE] so the new rates will be as follows:

• Annual:  $950
• Semi-Annual: $550
• Quarterly:  $375

The first fifteen to sign up for an annual membership at the current rate of $800, however, will be granted Charter Member status.  Charter Member rates are locked in for the life of the site, so you’ll never pay more — no matter where annual rates end up.

If we are fortunate enough to continue averaging a little over 10% per month, annual memberships would be $1,200+ in March.  So, locking in current prices is a no-brainer.

Sign up HERE.

*  *  *  *  *  *  *  * 

Time is running out for the Heroes of The Hill.  Market corrections don't require that everyone turn bearish -- just the handful in the middle whose selling turns the tide.   Those investors who have been wondering, waiting hopefully for a fiscal cliff deal to emerge from Washington... might at least a few of them decide to rein in their equity exposure today?

Watch this morning for the Chicago PMI -- due out at 9:45 EST.  Last month, it turned up slightly, but was considered bearish due to the decline in new orders.  From Briefing.com:

Briefing.com puts out great graphs, such as this one on the relationship between pricing and the PMI itself.  Not a terribly bullish looking chart.

 

UPDATE:  9:44 AM

We remain short from 1447 on Dec 18.  RSI has a long ways to go before finding any channel support...

Why am I always talking about RSI? It might be the fact that it's helped me call almost every major turn the past couple of years.  As regular readers know, I employ a deceptively simple-looking practice of channeling RSI values in different time frames.

Combined with Harmonics and other chart patterns, it has been very effective in forecasting.  Consider the past six months alone...

April 2 -- Shorted:  SPX completed a Butterfly Pattern at a channel top at 1421.05.  It was also the third lower RSI value in a row on higher prices (negative divergence) after RSI tagged a channel midline.  See: All the Pretty Butterflies.

June 1 -- Went Long:  SPX reached the bottom of an RSI channel, back-tested a falling wedge and found harmonic support -- all at the price levels forecast by an analog that had been going gangbusters since April 9.  See: Why I'm Buying.

September 14 -- Shorted:  SPX had completed a Bat Pattern that dated back to October 2007, tagged RSI and price channel lines.  VIX and DX RSI channels also indicated impending reversals. See: The World According to Ben.

November 16 -- Went Long:  SPX had reached three important harmonic targets, reached a H&S Pattern target, tagged RSI and price channel bottoms -- all at a price level forecast on October 31.  See: CIW Nov 16.

December 18 -- Shorted:  Prices overshot our forecast target by 6 days and 10 points, completing a Gartley Pattern set up by the 1474 - 1343 drop. But, in the process, daily RSI completed a perfect back-test of the recently broken channel that had governed the rally since June.  See: CIW Dec 18.

Together, these major moves accounted for returns of about 40% since the new site's inception on March 22.  The other 55% came from interim swings ranging from an hour to a few weeks [see: Results.]  But, all of them were influenced by RSI channels.

I don't know of any analysts who use them.  A Google search for the term "RSI channel" shows a whopping 3 hits in the past month -- two of them from this site.  Have folks tried them and failed, or are they just too complicated?

Though they're almost always obvious in the rear-view mirror, RSI channels can be very difficult to use in forecasting.  Charts drawn in different time frames can suggest very different results.  They're tough to use in choppy, directionless markets.  And, divergence is always a challenge.

In short, RSI channels aren't for everybody.  It helps if you enjoy staring at charts for hours at a time, and can pick out patterns in a jumble of seemingly random lines.  It also helps to understand higher math, as RSI is essentially a derivative of price movements (magnitude and velocity of price changes.)

If you're thinking about using RSI channels, you might want to start with an aptitude test -- available here.  Or, just tune in each day and I'll let you know what I think.  After a year of practice and a few thousand charts, I view them as an indispensable secret weapon.

UPDATE:  12:20 PM

Chicago PMI [download here] actually increased from 50.4 to 51.6 this month -- though it would still have been below 50 if not for the always handy "seasonal adjustment."

The increase again conceals a troubling development: employment and capital spending are both sliding.  New orders rebounded almost to October levels, but CapEx hit a new 28-month low, while employment plunged from 55.2 to 45.9 -- the lowest level in three years.

continued on pebblewriter.com...

Charts I'm Watching: December 26, 2012

I hope everyone had a lovely Christmas.  Intra-day posts will be open to the public this week, my little gift to those considering a pebblewriter membership.   Sorry, but our forecast will still be available to members only.

As announced on Monday, subscription prices will increase on January 1.  In keeping with our practice of paying for performance, the annual rate will be about $10 for each percentage point of return since the new site's inception on Mar 22, 2012.

We're up about 95% over those first nine months [SEE DETAILS HERE] so the new rates will be as follows:

The first fifteen to sign up for an annual membership at the current rate of $800, however, will be granted Charter Member status.  Charter Member rates are locked in for the life of the site, so you'll never pay more -- no matter where annual rates end up.

If we are fortunate enough to continue averaging a little over 10% per month, annual memberships would be $1,200+ in March.  So, locking in current prices is a no-brainer.
Sign up HERE.

*  *  *  *  *  *  *  * 

We remain short from 1447 on Dec 18.   Per the 1:10 post in the members section:

SPX just tagged the .786 mentioned above, pushing just beyond 1446.44.  I’m closing my intra-day longs (again) here at 1447 and will see what kind of reaction we get here.  Charts in a few.

But, I'll repeat my warning from Monday: bulls will be looking for opportunities to shift momentum, and it could be especially easy with low volume and the inattention that comes with a holiday week like this.

Keep an eye on the dollar index and the little H&S patterns on SPX this morning.  Some strength is to be expected early in the session, but there is the risk of a small breakout.

As we discussed Monday, the key SPX level to watch is 1432, which would take prices out of the proposed falling channel as well as complete the lopsided little IH&S that targets a Bat Pattern completion at 1441.  I'd put the odds at 50:50.

SPX's bearish H&S pattern has picked up a new neckiline -- the bottom of the purple channel above.  The neckline is rising, but it currently completes around 1425.

The EURUSD is coming up on its .618 at 1.3250 -- also the top of a well-formed channel.  The rally should fail at that point, with the key level to watch afterwards being the recent bottom at 1.3157.  Charts later.

UPDATE:  10:50 AM

SPX just broke below the neckline of the bearish H&S pattern (in purple below.)  If the pattern plays out, it targets about 1416 -- which intersects with a little Crab Pattern at the purple 1.618 at 1416.28.  The key level for bulls to hold is 1422.58.

A drop to 1416 would very likely see a decent bounce, as it also represents a Bat Pattern completion at the Fib .886 of the 1411 - 1448 rally between Dec 14 and Dec 18.

The slightly less likely target is the 1.272/.786 intersection at 1419.61-1419.81.  Either level marks an important channel midline, which -- combined with the harmonic pattern completions -- could elicit a strong bounce.

A drop through 1411 means much more immediate downside.

UPDATE:  12:00 PM

 We reached our primary target, reversing at 1416.43.  If SPX can break back through the white channel midline at around 1422, the top case is a bounce to the .618 just formed at 1426.53 (also a white channel line) or the .786 at 1429.28 (the top of the white channel.)

This is a short-term trade only, and is likely to complete by Friday.  As always, stops are strongly recommended -- so, 1415ish should do the trick.

Any breakout from the channel has upside potential to 1436.

UPDATE:  12:30 PM

DX tested the bottom of the little white channel I posted earlier, then zipped right back to its midline with the equities sell-off to 1416.43.

It has now tested the upper bound of the yellow channel twice in the past two sessions, and must either commit to the rapidly rising white channel  -- breaking out of the yellow -- or  consolidating further.

A break out of the SPX white channel would likely equate to a breakdown of DX's white channel.  If stocks get a rebound to 1436 as discussed above, look for the dollar to flesh out the proposed purple channel to around the .618 at 79.319.

Market Update

~reposted from pebblewriter.com

 

Strange things have happened around holidays this past year.  Though this is a short day (equity markets close at 1pm EST) it’s best to remain vigilant.  Equity futures have recovered most of their overnight losses, and TPTB would love nothing more than to undo the gains we’ve racked up (since shorting on the 18th) while no one’s looking.

Keep an eye on the dollar's proposed channel for any signs of weakness…

…as well as the EURUSD, which is trying to stage a comeback.  A move through 1.3232 would signal 1.3265 — 1.3238.

UPDATE:  10:15 AM

As to SPX, any push beyond 1432.78 carries the risk of a Bat completion up at 1441.27.  Though, there would no doubt be a reaction at the .618 of 1435 first.

Since the 1432.78 high on Dec 21 stopped just shy of the 1432.82 low the day before, it might mark the completion of a Wave 4 in the first subwave of whatever degree wave down we’re currently in.  Thus, the bulls might attempt to throw this most obvious bearish wave count into disarray by overlapping 1432.82.

It would then be easier to characterize the 1448-1422 slide as a normal A-B-C corrective wave rather than a bearish impulsive wave.  Regular readers know that I don’t use Elliott Wave for predictive purposes, but it’s good to be aware of what Wavers might be thinking — since breaking through key EW levels will likely get them moving one direction or the other.

Our bearish case would benefit most by a reversal right here at the midline of the proposed white channel.

More later.

UPDATE:  11:45 AM

SPX just completed a small H&S pattern (below, in purple.)  If it plays out, it will negate a potential IH&S pattern (in yellow).  If the purple pattern plays out, it targets 1417 or so, which is around the bottom of the little white channel that’s tracking pretty well so far.

If the yellow pattern completes with a return to the dashed yellow line at Friday’s 1432 high, it would target somewhere in the vicinity of the .886 retracement of the 1443-1422 drop at 1441.
A low-volume, holiday-shortened feel-good day like today would be the perfect time to execute a ramp job.  As discussed above, keep your guard up.

UPDATE:  1:00 PM

Things remain on track here at the end of the holiday-shortened equity trading day.  Any fireworks will have to wait until Wednesday.

 

BTW, I updated the RESULTS PAGE this weekend for those who follow such things.  Friday marked the end of the third quarter since the new site went live on Mar 22.  After Dec 31, reports will be based upon calendar quarters.

Since inception last March, we’re up about 95% as compared to 3.7% for SPX (without dividends.)  I don’t have figures for the same time period for hedge funds, but according to HSBC’s Dec 13 Hedge Fund Weekly [available on Zerohedge.com] the average ytd performance for all equity hedge funds was 5.15%.  The top-performing fund (BTG Pactual’s Distressed Mortgage Fund) returned 39.91%.

For more, click HERE.



 

Stay Groovy

"It was an expression used by small recon units and sniper teams in hostile terrain in Vietnam. They would tell one another to stay groovy when the danger level was so insanely high they popped amphetamines to stay awake and ready to rock twenty-four/ seven, because anything less would get them all killed. Stay groovy; take your pill. Stay groovy; safety off, finger on. Stay groovy; welcome to hell."

 The Watchman, Robert Crais

---

Those who have been following this blog or its predecessor for any length of time know I'm a big fan of analogs.  I was asked just yesterday why I thought they worked, and found myself fumbling for an answer.

Like harmonics, I know that they do, because they've enabled us to make some nice calls that were accurate as to price and time such as the big downturn in April and the subsequent 1474 top in September.

The big Kahuna, of course, was the July/August plunge in 2011 that mirrored that of Dec 07-Jan 08.  It's just plain scary how well that turned out.

I think analogs work mostly because of channels and harmonics.  In the simplest terms, channels keep prices pointed in a general direction for a noticeable period of time.  They can last for decades...

 

a few years...

...or a few days.

Regardless, I've found that most significant moves occur within or interact with channels.  Very often, as in the above chart, they're channels within channels.  Even big channels that seem to generate their own atmosphere are usually aligned with other big channels.

So, it's not terribly surprising when moves that bring the market to the brink of disaster or reach ridiculously overbought levels engender reactions of "Hey!  Just like last time!"

Harmonics, likewise, are usually related.  The easiest example is the 2007-2009 plunge from 1576 to 666 which, when followed by a reversal at its .618 Fib level, signaled both a Gartley Pattern reversal at its .786 retracement (the May 2011 high) and a Bat Pattern reversal at its .886 (Sep 2012 1474 high.)

Combining the two, and tossing in some other chart patterns and traditional technical analysis, it's easy to see why the market has done what it has most of the time.  If markets move in somewhat predictable and repeatable ways, then analogs can be viewed as a predictable aggregation of those predictable moves.

Of course, its not always as simple as that sounds.  Even great analogs usually present alternatives. Over the past couple of months, the one we're following now has hit our primary target at times and our secondary targets other times.

And, some can be tough to get a handle on.  The one from this past April [see: New Analog I'm Watching] that very capably guided us from 1422 to 1266 and back up to 1474 (the top chart above) worked beautifully from a price standpoint, but was way off in terms of timing (since licked, I think.)

And, last, there's a truism that's the bane of every analyst who charts analogs:

Every analog works forever...until it doesn't.

Even as we're counting down the last few points to the 10% downturn we charted all those months ago, a well-timed Bernanke comment or Hilsenrath article (is there really a difference?) could nudge the markets just enough to complete a Zweig Breadth Thrust event that ushers in a new high.

If that happens, never mind.  End of the road.  It's been a nice ride for the past nine months, but it's time to change partners.  If it doesn't, however, and we reverse in the next 10-15 points, it's just about time for the song.