The Best Laid Plans

The best laid plans of mice and men
Go often awry,
And leave us nothing but grief and pain,
For promised joy!

Robert Burns, 1785

ORIGINAL POST:  6:45 AM EDT

The wedges we've been watching on DX and EURUSD are playing out.  EURUSD has broken out...

...and DX has broken down.

But, it's the USDJPY that I'm watching especially closely this morning.  It still hasn't broken 100 since our Apr 8 observation [USDJPY update] that it was running out of steam:

"...there is growing risk of a downturn as it approaches 100... it appears the pair might have hit at least interim resistance at today’s high."

It topped out 3 sessions later at 99.94, and two weeks later is in danger of a larger pullback.

Remember, weakening the yen was a critical element of the BOJ's stimulus program that was supposed to generate inflation, boost Toyota sales and send Japanese investment funds flooding into foreign markets.

Instead, Japanese investors are repatriating their funds from abroad -- a net Y9.5 trillion ($95 billion) since the first of the year.  Why?  As any US investor could tell you, QE might not inflate economies, but it sure as hell inflates markets.

The Nikkei 225 is up 65% since last October's lows....

...and, still hasn't even recovered 2/3 of its losses from the 2007 crash.  The Dow and the S&P 500, by contrast, have recovered all of them -- and, then some.  So, to many, the Nikkei still seems the better value.  It's hard to argue with success.

But, I'll do it anyway.  In reaching 14,020 a few hours ago, NKD tagged the .618 Fibonacci retracement of its 2007-2009 crash from 18,365 to 6990.

To those not familiar with harmonics, this tends to be a big deal.  When SPX reached the equivalent point in April 2010, it plunged 17%.  The DJIA fell almost 15%.  The USD, represented by DX, soared 9.3%.

But, the yen positively soared.  USDJPY started a 17-month slide that took the pair down 20% from 94.98 to 75.78.  NKD, which had just reached its .382 Fib, shed 23% over the next 4 months, eventually reaching almost 30% in Nov 2011.

Could the USDJPY's failure to break 100 be telling us something?  You better believe it.  I called a top a few weeks ago because the pair had reached several important Fib levels as well as the midline of an important channel (in yellow, below)...

...that dates back to 1995.

There's no guarantee it won't push through instead of retreating, but the RSI picture supports the danger of a significant retreat.

Daily RSI has backtested the broken yellow channel twice, but the trend is clearly down -- with the latest push being rebuffed by the purple midline.

And, a close-up reveals that a breakdown has already started.

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...