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

Anatomy of a Market Top

reposted from pebblewriter.com~

The 2000 top shows just how "messy" tops can be.  Here's the finished picture in perfect hind-sight.  It's a very crowded chart, but every single pattern had a say in how the top unfolded.

SPX had zoomed from 442 to 1478 in about 5 years, a not-too-shabby 234% gain for an annually compounded 27%.

Once SPX broke out of the falling purple channel, it had "permission" to pursue several harmonic patterns in the works.  SPX shot up 66 points in that one day -- blowing through every Fib level between .618 and 1.000.

It finally came to rest at 1458, completing a Bat Pattern at the purple .886.  But, the small white 1.272 was just above at 1477, as was the rising purple channel midline and the 1.272 from a much larger pattern seen below.

An IH&S target waited at 1497 - tantalizingly close to a nice round number of 1500.  And, the all-time high of 1478 from two months earlier beckoned.

SPX got up to 1477.33 before reacting, falling to 1466 over the next two days.  Close, but not quite.  Someone watching closely might have noticed the Flag Pattern it constructed, targeting 1562.  Someone else probably pointed out the biggest Crab Pattern target of all -- the 1.618 extension of the 13% correction from 1420 to 1233 from Jul-Oct 1999.

On Mar 21, 2000 SPX shot up through the channel midline, the cluster of Fibs around 1477 and, importantly, the 1478 high and raced up toward those higher targets.

On Mar 24, it reached 1552.87, which cleared the IH&S target at 1497, the purple 1.272 at 1519 and the last remaining Crab Pattern at 1535.  What ultimately stopped it?  The .75 line from the big purple channel dating back to Jul 1999 -- almost to the penny.

Total move: 17% and 227 points in 20 sessions.  Could it happen again?  Stay tuned.

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Charts I'm Watching: Mar 20, 2013

~reposted from pebblewriter.com:

9:00 AM EDT

The ECB's vow to do "whatever it takes"apparently translates into strong-arming the Russians into bailing out Cyprus.  Still no break out on the EURUSD, though.

It makes sense to play along with the upside on SPX, but keep stops close.  Not sure whether this rally will have legs.  The dollar looks like it's finding support here.

UPDATE:  09:33 AM

Just reached the .786 of the move down from 1563.62 (purple) and the .886 of our proposed path to 1576 (white.)  Full short again, stops at 1561ish.  Revised charts in a few...


UPDATE:  09:55 AM

The daily chart tells the story.  The most prominent features include:

• large 1474-1343 Crab Pattern completion at 1555.57 (yellow)
• large 1370-1074 Crab Pattern completion at 1553.39 (red)
• small 1530-1485 Crab Pattern completion at 1559.32 (white)
• small broken rising wedge -- at 1563 top
• long-term TL and channel top (white) at 1560

UPDATE:  11:10 AM

SPX continues to position itself for a run at 1576.  The 5-min chart shows a small potential Crab Pattern with a 1.618 at 1577 and a Flag Pattern targeting 1576.

It has broken back above and backtested the purple channel midline and retraced nearly .886 of its drop from 1562 and a little more than .786 of the drop from 1563.62.

While it's positioned for 1576, there is no more certainty than when we first broke 1555 on the Mar 14 overnight ramp job.  The large, bearish patterns listed above have still not produced the kind of sell-off they normally do.

And, it's all because of the Fed's media's cheerleaders' TPTB's determination to be able to tout a swell new all-time high for the S&P 500.

In addition to the little Crab Pattern (purple) that targets 1577 and the flag pattern targeting 1576, there's an obvious effort to construct an IH&S pattern targeting 1580.  It could benefit from a lower right shoulder, but bulls must beware of crossing back beneath the purple channel midline.

The S2 shoulder isn't quite legit, BTW, as the neckline doesn't quite connect on the left side.  But, the S1 shoulder is quite a ways down there.  So, if the pattern plays out, be prepared for some serious chop.

UPDATE:  1:00 PM

With the FOMC announcement a little over an hour away, let's resume our chat about the big picture.  If it seems like we're "lost in the reeds" as one reader so aptly put it, it's because we are.

The large Crab Pattern completions promised a good-sized dump last week at 1553/1555.  Instead we've inched higher.  Why?  These patterns completed in the middle of harmonic no-man's land: the gap between an .886 retracement and a double-top.

The .886 retracement (of the 1576-666 crash) produced a 9% reversal back on Sep 14.  Since then, SPX came screaming back to retake the 1576 all-time high -- but slammed into the Crab Patterns and a very important channel line along the way.

Now, it doesn't know what to do.

Double tops usually produce reversals, too -- sometimes meaningful ones as we found out on October 11, 2007, when SPX scooted up past the 1552 top from 2000 by a whopping 24 points before dropping 58%. 

The 2000 top itself shows just how "messy" tops can be.  Here's the finished picture in perfect hind-sight.  It's a very crowded chart, but every pattern on there had a say in how the top unfolded.

Once SPX broke out of the falling purple channel, it had "permission" to pursue several harmonic patterns in the works.  SPX shot up 66 points in that one day -- blowing through every Fib level between .618 and 1.000.

It finally came to rest at 1458, completing a Bat Pattern at the purple .886.  But, the small white 1.272 was just above at 1477, as was the rising purple channel midline and the 1.272 from a much larger pattern seen below.  An IH&S target waited at 1497 - tantalizingly close to the nice round number of 1500.  The all-time high of 1478 from two months earlier beckoned.

SPX got up to 1477.33 before reacting, falling to 1466 over the next two days.  Close, but not quite.  Someone watching closely might have noticed the Flag Pattern it constructed, targeting 1562.  Someone else probably pointed out the biggest Crab Pattern target of all -- the 1.618 extension of the 13% correction from 1420 to 1233 from Jul-Oct 1999.

I don't know what the catalyst was, but on Mar 21, 2000 (that date sounds awfully familiar) SPX shot up through the channel midline, the cluster of Fibs around 1477 and, importantly, the 1478 high and raced up toward those higher targets.

On Mar 24, it reached 1552.87, which cleared the IH&S target at 1497, the purple 1.272 at 1519 and the last remaining Crab Pattern at 1535.  What ultimately stopped it?  The .75 line from the big purple channel dating back to Jul 1999 -- almost to the penny.

Total move: 17% and 227 points in 20 sessions.  Could it happen again?

continued for members...

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Mad Men, Liars & Thieves

reposted from pebblewriter.com

It's hard to believe the numb nuts running the big show in the euro zone could be so stark-raving mad.  Raising taxes on countries with 25% unemployment seems positively brilliant compared to the idea of confiscating 10% of bank deposits -- especially those that are supposedly insured.

Get ready for the media interpreters who assure us "it's only Cyprus" --  which reminds me an awful lot of "it's only Bear Stearns" or "it's only Lehman."

The issue, of course, isn't the size of the depositor base in Cyprus banks.  It's the effect this action will have on depositors in Portugal, Spain and Italy.

 By now, even the most clueless depositors have to be wondering just how safe their deposits are.  The smart ones already know.  And, the brilliant ones moved their money a long time ago.

This bone-headed action also calls into question the ECB's willingness and/or ability to support troubled nations/banks.  If they can't float a lousy $13 billion to bail out Cyprus, how will they react when other, larger systemic risks pop back up?

And, last but certainly not least, what effect will this action have on the $700+ trillion derivatives market?  It's a spiders nest of complicated agreements whereby one party guarantees another that credit quality/interest rates/etc. won't slip past a certain level.

These private contracts are bought and sold countless times, to the point where no one usually knows the true exposure of any given player until it's too late.  When a bank fails, it's very difficult to discern how many counterparties will be affected.  It quite rightly shakes confidence in the entire system.

Cyprus is a reminder that the euro zone is not "fixed."  It's a reminder that much more is needed to fulfill the promise of "whatever it takes."  And, it's a reminder that the Fed and the ECB either don't have as much control as they'd like us to think, or are losing interest in preventing every little hiccup along the way.

*  *  *  *  *  *  *  *

The dollar may have just completed the transformation we discussed at length Friday -- reverting back to the risk-off safe haven to which we're accustomed.

The smallest rising wedge on SPX has clearly broken down and should now try to establish a channel something like the one drawn below. Look for a playable bounce here around the midline between 1543.43 and 1546.

UPDATE:  10:10 AM

We got the expected bounce at 1545.13.  If the bears can keep the trend going, it should fail before the next higher channel line -- currently around 1558 -- or the yellow TL up at 1560.  But, of course, there's no reason it has to be more than 1553.39 (the 1.618 extension of the 1370-1074 correction in 2011) or 1552.19 (the .382 retracement of the move down from 1563.32.)

As legitimate as the little white channel above appears, it's merely a conjecture.  A pitch.  If Cramer & Co. can convince the average small investor to ignore the implications of Cyprus and embrace a market selling near all-time highs, the channel is proof of the absence of risk in the markets.

It coincides nicely with the midline of the larger purple channel that's guided SPX's upside since November.  To bulls, this morning's dip looks like nothing more than a successful test of the midline.

Here's a close-up, showing the tag of the .236 Fib (red) and slight push below the purple midline.  Important for the bullish case: (1)  the white 1.272 is even still intact, and (2) prices are re-testing the 1.618 Fib at 1553.39.

If SPX pushes higher than 1553.39, it reinforces the idea that the Crab Pattern set up by 2011's plunge from 1370 to 1074 is going to fail (8 points would be a failure.)  If it drops below, then the push up to 1563 can be characterized as a momentary blip of irrational exuberance.

The technical elephant in the room, of course, is whether or not SPX will continue to take a run at the previous high of 1576.  It's not as though bulls will throw in the towel over Cyprus.  Take the move down from 1563, for instance.

If this bounce from 1545 retraces all the way to the .786 at 1559.66, it will have set up a potential Butterfly Pattern that targets 1575.   Look for the little white channel to turn by the .500 (1554.38)  in order to construct another leg up.

UPDATE:  1:25 PM

Where does this morning's dump fit in with yesterday's LT charts from the last post [see: Do or Die]?

continued on pebblewriter.com...

RUT: End of the Line?

RUT has reached the upper bound of a well-defined channel that dates back to 1998.

It could leak a few points higher in reaching for the top of the large rising wedge and one potential Butterfly Pattern target, but I suspect RUT has reached a turning point.

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... 

 

Is It or Isn't It (a Recession)?

~reposted from pebblewriter.com...

ECRI's Weekly Leading Indicator (WLI) came out Friday at 130.2 -- up from 129.6 the week before.  Further, they reported that the index's annualized growth rate increased from 8.2 the previous week to 8.9% -- the highest since May 2010.  I wondered: are they retracting their Sep 2011 recession forecast?  Are things really getting better?

CAN'T WE ALL JUST GET ALONG?
There's currently an argument raging between various economists and analysts as to whether the US is still in/dipping back into a recession or is on the mend. ECRI is pretty sure we're in one, while folks like Doug Short and, of course, the mainstream media think not.

There's no question that we've seen an uptick in several economic measures. My own thesis is that most of these have been not secular, but cyclical swings.  In other words, I don't yet see evidence of a sustainable trend change, only natural swings from one side of a channel or wedge to the other.

Here's an example I posted last week. Total Confidence has traced out a pretty solid-looking channel, while the Present and Expectations indices have formed expanding wedges (and are nowhere near their upper bounds, especially given the recent downturns.)

 

Hardly a day goes by when I don't second guess myself.  Is all the "good news" just one big, well-coordinated head fake or am I missing something?  I spent much of the weekend studying ECRI's historical WLI (who says technical analysts don't live exciting lives!?) and found a lot to think about.  First, a brief primer on Harmonics.

HARMONICS

Regular readers of pebblewriter.com (heck, even the irregular ones) know all about Harmonics and that the corrections experienced in April 2010, May 2011 and Sep 2012 correspond to the important Fib levels of 61.8%, 78.6% and 88.6%.

For the uninitiated, measure the drop from SPX 1576 (Oct 2007) to 666 (Mar 2009) and multiply it by a Fibonacci 61.8% and you get 1228.74.  SPX reached 1219.80 in April 2010 (within 10 points) and promptly sold off by 17% over the next three months.

In May 2011, SPX peaked about 10 points away from the 78.6% Fib level (completing a Gartley Pattern) and plunged 21.6%.  And, in September 2012, SPX reached the 88.6% Fib level (completing a Bat Pattern) and corrected by almost 9%.

Those of us who follow Harmonics were well aware of each of these downturns well in advance [see: HERE, HERE and HERE] and profited nicely from the market's plunges.  Those who rely solely on fundamentals or [involuntary shudder] the mainstream media...not so much.

THINGS THAT MAKE YOU GO "COOL!"

While I had noticed the WLI's channel-like general decline before, I never noticed that it also complied with the rules of Harmonics.  From its all-time high of 143.73 in Jun 2007, the WLI plunged to a low of 105.40 in Mar 2009.

Like SPX, it found its footing (thanks to QE1) and started higher.  Its first big pause was in Oct 2009 at the 61.8% Fib level.  It paused again in Jan 2010 near the 70.7% Fib, and eventually reached the 78.6% level in April -- completing a Gartley Pattern as SPX had finally retraced 61.8% of its drop.

One could infer from the mismatched Fib levels that the economy -- as measured by ECRI's leading indicators -- was ahead of the market at this point. The WLI had retraced 78.6% of its drop, while SPX had only retraced 61.8%.  In any case, they both suffered from the removal of the QE drip - SPX shedding 17% and WLI 11%.

When the Fed realized their patient would flatline without more QE, they were back with QE2.  The market took off, reaching the 78.6% Fib in May 2011.  This also completed a Crab Pattern, a 161.8% extension of the amount of the Apr-Jul 2010 slide.

The WLI, however, retraced only 78.6% of its slide since its 2010 high.  In other words, the market was now officially ahead of the economy.

Following the expiration of QE2, SPX plunged 21.6% to 1074 through October 2011, while WLI gave up 8.9%.  From there, SPX climbed to 1474 primarily on Fed jawboning and promise of more QE -- which it finally delivered the day before the 1474 high.

The timing was no doubt an effort to send the SPX soaring right through the 88.6% Fib retracement of the 1576 - 666 crash.  I seriously doubt that "two points over" was what they had in mind (the market sold off anyway, correcting a respectable 8.8% to 1343.)

The WLI, in the meantime, topped out at 127.77 -- only an 88.6% retracement of its decline from its previous high in 2011.  Again, the market was outpacing the economy.

IS IT OR ISN'T IT?

The world of market prognosticators is, as always, divided.  There are those who believe the economy is improving, and the market - as a leading indicator itself - is all the proof we need.  Then, there are those who believe the market is priced well in excess of levels justified by the underlying economy -- which remains in or is dipping back into a recession.

Whether QE has "saved" the economy or not, I don't know of any respected economist or technician who doubts that it has significantly goosed (i.e. "manipulated") the markets. And, we should pay attention to the disconnect between the markets and the economy as evidenced by the SPX/WLI comparison.

The WLI just hit an important Fib level (88.6%) after demonstrating that it does, indeed, pay attention to such things.  This occurred at the same time that the S&P 500 hit several important Fib levels and is thus, by my reckoning at least, poised to correct [see: Satisfaction.]

We all know the old truism "the market isn't the economy." However, another quarter of negative GDP following the tax hikes recently enacted and spending cuts in the works would certainly remind investors that the market and economy are, indeed, joined at the hip.

I care about the economy because I have children.  The Fed's unprecedented experiment in QE will quite possibly end very badly for the country, for my children and for yours.  But, there ain't much We the People can do to influence Fed policy.  They don't answer to us or our political "leaders." So, we play the cards we're dealt.

As an investor, my goal is to capitalize on whatever the market throws at us -- regardless of how manipulated it might be, and regardless of what economists call the current business cycle. If depression or hyper-inflation come along, we'll hopefully see it coming and be well-positioned.

Are we still in or dipping back into a recession? Will the current QE4-ever result in another 2009-2011 run, or does the market's yawn last September signal the end of QE's effectiveness?  We'll find out in time.  In the meantime, we have some very good tools at our disposal that have provided excellent returns in a very difficult market.  I'll continue to call it as I see it, and appreciate having you all along for the journey.

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Interested in learning more about Harmonics and Chart Patterns?  Want to learn how to apply their predictive powers to your investing?  Check out pebblewriter.com, a leading independent website dedicated to educating its members about market analysis and forecasting.  For membership information, click HERE.

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...

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.