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:

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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!)

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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.



 

Zwieg Thrust Bust

Came close Friday, but didn't happen.  A ZBT requires a move from .40 to .60 in 10 sessions or less.  Here's a successful signal from Sep 2011:

And, here's where we ended up Friday -- the 10th session from the .40 cross:

Ditto for NYSE & DJIA too, BTW.

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.

What's Next

Long-time readers know I'm a huge fan of analogs.  They enabled us to catch the July-Aug 2011, April 2012 and September 2012 downturns to the very day  [see: Pebblewriter: Analogs]

To coin a phrase, analogs been berry, berry good to me.  Here's the latest reason why:

Our SPX Forecast from Oct 31 

[pebblewriter.com:  A New Old Analog]...

SPX price action through Nov 29, overlaid

The picture going forward has changed somewhat.  For full details, and to be in the know next time we post one, consider joining pebblewriter.com.

The current membership promotion expires this Saturday.  Make a $100 or greater contribution to the Hurricane Sandy relief effort and get 25% ($200) off the price of an annual membership.

Beat the price increase coming next week, and do well by doing good!  Details HERE.

Harmonics Are Your Friend

reposted from pebblewriter.com...

It seems longer than seven weeks since we led with this chart on Sep 14 [see: The World According to Ben.]   QE3, the ECB's latest stick save and the German Constitutional Court's pro-ESM decision had all just been announced.  According to just about everyone, stocks were about to explode higher.

To me, it was a long-awaited shorting opportunity.

Meanwhile, SPX is nearing our 1472 target. I will ease some stops into the equation as we approach it, as I'd like to remain long for as long as possible.  This is a 35 point gain since we went long yesterday at 1437 with the Fed's announcement.

And, less than an hour later...

Going ahead and pull the plug on my longs here at 1474.  The 5-min, 15-min and 60-min charts are all showing negative divergence.  I'll place stops at 1475 or so, trailing lower as need be, just in case it makes another run higher.

It wasn't rocket science -- just a big Bat Pattern that had finally completed.  Those who simply hung on to that short position scored 86 points for a nice 5.8% gain.  For buy and hold types, it's been a great trade that is nearing an end.

For us swing traders, it's been a wild ride with (much) higher returns [Results] from anticipating the swings that had most analysts scratching their heads.  Yet, most of the swings were signaled by Harmonic Patterns, chart patterns and -- most recently -- an analog we've been following.

We were able, for instance, to short again just ahead of yesterday's plunge -- earning me some sympathetic private messages from well-meaning friends ["Are you sure, man?  This one seems kinda out there, especially without any election results yet."  B.B.]

What now?  Here's the same chart as above -- seven weeks later.  We're coming up on the next Fib level lower -- the .786 retracement of the 1576 to 666 crash.  And, it just so happens that we're nearing the SMA 200 at 1380.80.

Not shown on this chart, there's also a Crab Pattern completion at 1384.13, not to mention the .786 of the 1354 to 1474 run at 1380.30.  So, as the rest of the investing world is jumping on the bearish bandwagon, harmonics are signaling another important and unexpected turn.

continued on pebblewriter.com...

*  *  *  *  *  *  *  *

Did you know that generosity could benefit your investment returns? 

For anyone donating at least $100 to the Red Cross hurricane relief efforts, I'll knock $200 off an $800 annual subscription to pebblewriter.com.  Kind of a no-brainer, really...

1. Go to the Red Cross Website HERE. 
2. Contribute $100 or (preferably much) more.
3. Wait about 30 seconds for them to email you a receipt.
4. Forward a copy of the receipt to me at michael at pebblewriter dot com
5. I'll email you a PayPal invoice for $600.
6. Save 25% while enjoying of the best investment blogs going.

Of course, you could always sign up for a monthly membership for $105 (auto-renew), but this way you get a whole year's worth of great info for about half the price -- all while doing good for some very needy folks.   This offer is good until further notice.

Thanks.

End of the Ride

posted on pebblewriter.com Tuesday, Nov 6:

Finally, another important milestone under our belt.  My perspective has been that The Powers That Be would keep the crap game afloat long enough to maintain the status quo come election time.  And, from all accounts, that’s exactly the case.

While there is plenty to be worried about, you’d never know it from the way the markets have performed.  The S&P 500 has rallied 121% since March 2009 and sits only 50 points away from its recent high which, itself, was only 100 points from an all-time high.

All it took was $16 trillion of deficit spending, a few trillion in quantitative easing, some serious arm-twisting overseas, and a Plunge Protection Team that paid very careful attention to chart patterns.

Some economists (and central bankers) maintain that these steps were necessary in order to free the economy from the worst recession since the Great Depression.  I maintain they were taken primarily to keep global banks from failing.  Ending the Great Recession is the hoped-for side effect.

In my opinion, the books of the world’s largest banks are being cooked (with central bankers’ blessings) to such an extent as to make their balance sheets and income statements a farce.  They are being allowed to carry distressed and dead assets at book value, and to report their trillions in derivatives as a matched book without providing any details to investors.

Why do I harp about government, Fed and bank balance sheets?  Because, in the end, they must be dealt with.  The enormous sums are somewhat manageable with historically low interest rates, a co-dependent regulatory environment and a complicit mainstream media.

But, eventually, the scales will tip.  The truth will out.  Simple arithmetic will once again be accepted and the severity of our situation acknowledged.   The key to higher stock prices isn’t whether everything is getting better.  The key is how much longer TPTB can catapult the propaganda.

 
While I enjoy making money in the markets as much as anyone, I am saddened by the circumstances that make the analog we're following [see: A New Old Analog] possible, if not inevitable.

continued on pebblewriter.com...

Forcasting Made Simple(r)

reposted from pebblewriter.com...

For those not incorporating harmonics into their trading strategy, I can only imagine how utterly confusing the market's last drop must have been.  In fact, the entire past six weeks have been a market maker’s dream — constant whipsawing that would have been impossible to anticipate based on earnings, economic data or the advice of the financial media's talking heads.

Seen through the prism of harmonics patterns, the reversal at 1474 was simply a Bat Pattern completion that paid off the 1576 – 666 drop between 2007 and 2009 [see: The World According to Ben].  And, every reversal since then has followed the rules of ordinary harmonic patterns — with an occasional assist from chart patterns (mostly channels.) 

As can be seen from the chart below, the initial drop from 1474 to 1430 was a Bat Pattern retracement and channel line tag.  It, in turn, set up a Bat Pattern (in purple) that signaled a reversal at 1469.50 (came at 1470.96) and established a declining channel (in white.)

The next move down was to the bottom of the new channel and a .618 retracement of the 1396-1474 rally.  It was followed by another Bat Pattern (in green) targeting a reversal at 1465.78 (came at 1464.02.)

The final move down was initially to the white channel bottom, but pushed through to complete a Bat Pattern .886 retracement of the 1396 to 1474 move, as well as a Crab Pattern (1.618 extension) of the 1430 to 1470 move.

By reaching 1405.45, it also solidified the upside case originally discussed back on the 17th [see: Charts I'm Watching - Oct 17, 2012.]

If 1474 was a normal wave 3 or wave 5 high, we would typically be open to a corrective wave of greater than a .618 retracement.  Look what happens if we make it a .786 or .886 retracement.  Suddenly, the yellow 1.618 lines up very nicely with the other 1.618′s up there at 1515-1518.

In other words, a Crab Pattern with 1405 as its base instead of 1425 (the previous low) is consistent with the 1515 Crab Pattern target established by the 1347-1074 drop from July to October 2011, and the 1518 Crab Pattern target set up by the 1422-1266 drop from April to June 2012.

In hindsight, the harmonics and chart patterns have done an outstanding job of showing us the way — even though there were times when the direction suggested made no sense at all.  I'm almost certain that any unsuccessful trades I’ve made in the past six weeks were the result of “knowing better” than the charts and ignoring their signals.

The question now is whether reaching our 1405 target really suggests a move to 1500+, or is it merely setting the stage for a massive bull trap?

For help, I’m turning to an analog I think looks very promising.  We have done very well with these in the past [see: Why Analogs Work.]  The 2011 as 2007/8 analog knocked the cover off the ball last summer.  And, the latest took us from 1422 down to 1266 and back to 1474 in spectacular style — earning us 60%+ returns over those six months.

This new analog is important not just for its capacity to protect investors from losses, but its potential for nice gains for those who don’t mind speculating a bit.

continued at pebblewriter.com...

When Wishes Come True

Everyone's heard the expression: "the markets can stay irrational longer than you can stay solvent."  Most of us have lost money on occasion by not observing that truism -- watching markets veering off on a tangent from our brilliantly calculated forecasts.

But what about the Yin to that Yang?  Every once in a while, the market does exactly what I expect -- but in a way that makes me question the results.  This morning's ramp was like that.  

Although we went long last Friday at 1426 with an initial target of 1455.80 on the way higher, the action of the EURUSD and DX this morning had me thinking about fading this rally.  

At times like this, it's best to let the market prove itself.  Find a channel you can live with, and resolve to not even think about bailing unless the market breaks from that channel.  Keep an eye on divergence -- a great early warning tool.  And, as always, use stops wisely.

It's fine to be nervous when there are inconsistencies between markets.  But, those excesses (usually stocks getting ahead of themselves) can yield some of the juiciest returns.  If my thinking was sound in the first place and I follow my own advice, there's no reason to second-guess the results. 

* * * * * * * * * * * * *

reposted from pebblewriter.com...  

note: we entered this morning's session long SPX from Friday [see: CIW Oct 12] after capturing 54 points since our Oct 5 short at 1469 [see: Target 2.]

ORIGINAL POST:  7:45 AM

I'll likely fade this rally.  The prospect of a breakout is there, but there's just as great a chance that it falls back.  Best to follow with tight stops and see where it takes us.

EURUSD has reached our targets (C? and d? below) two days ahead of schedule, but has also reached serious resistance just beyond the .886 of the decline since the 5th and is bumping up against the long-term channel.

The dollar has also reached a potential turning point, the .786 of the rise since the 5th for a potential Gartley -- though the potential exists for a Bat completion down at 79.309.

UPDATE:  9:50 AM

We've reached the top of the former red channel and the white channel midline.  If we break through here, look for at least a back test of either/both.

The currencies are standing back and watching, meaning this rally is nearing a pause at least, and likely needs to gather more strength before advancing any further.  I'm guessing this is just about it for now, and am raising my stops to 1449.

UPDATE:  10:05 AM

Just topped 1450 and the .500 Fib of the 1474 to 1425 drop.  This would be a likely spot for the market to turn.   If it pushes any further, the first .618 is just ahead at 1453.61. 

EURUSD just tagged the original apex of the rising wedge from last week -- still hasn't broken through the last high and is beginning to look quite extended.

DX hasn't quite reached its .886/1.618 channel back-test at 79.309.  However, it did also reach its apex from last week.  It's not only not moving inversely to equities at the moment, it's actually strengthening.

When SPX turns, don't be surprised if we get a back-test all the way to 1443-1445.


UPDATE:  11:05 AM

This is likely the final thrust.  Two .618's just ahead:  the .618 of 1470-1425 drop @ 1453.61 and the .618 of the 1474 to 1425 drop is 1455.80.  The .382 of the 1430-1470 is right in there, too, at 1455.46.   The higher target level of 1455ish is therefore the more likely.

We probably need a pull-back first to gather strength.  SPX is running on fumes as it is.  Yet, there's still no negative divergence to be seen on any time frame.  So, if/when we pull back, the prognosis is for more upside.

Haven't decided yet whether to play the expected pull back from 1455 to 1434ish.  Probably so, as the last time SPX tagged a .618 after a big ramp like this (morning of Oct 1, retraced .618 of 1474-1430 on its way to completing a Bat at 1470) it tumbled a good 18 points.

That .618 tag, by the way, came up .57 short.  With this one, don't be surprised if we also turn before quite reaching it.


UPDATE:  12:10 PM

We just tagged 1455.51, which is good enough for me.  I'm taking profits on the longs we established last Friday at 1426.  I'll try a little short position to play the downside over the next day or two (tight stops, though!)  Forecast for the rest of the week coming up... 

* * * * * * * * * * * * * 

There would have been nothing wrong with taking profits at 1447 on the opening.  We went long last week at 1426, so it would have made for a nice 1.5% addition to a month where we're already up 10%.  But, 2% is better.  And, those half percents here and there really add up.

We won't get all of them, but if we get enough of them over the course of a week/month/year, they can easily add 10-20% annually -- making up for some of the many times when the market doesn't do what I expect.

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The Big Picture: October 11, 2012

reprinted from pebblewriter.com...

The Bat Pattern that completed on Sep 14 [see: The World According to Ben] has played out nicely so far.   Remember, Bat Patterns provide early warning of a reversal at a Fibonacci 88.6% of a previous significant move.  In this case, it was 88.6% of the 2007 -- 2009 crash from 1576 to 666.

Note:  In reality, the pattern paid off twice.  Since SPX reversed at the 61.8% Fib in 2010, it first signaled a Gartley Pattern.  These complete at the 78.6% Fib -- 1381.50 in this case.  SPX came within 11 points of this target in May 2011, providing an excellent opportunity for making money on the ensuing downturn.

Since reversing at 1474, SPX shed 44 points to 1430, then retraced 88.6% of that decline to complete a much smaller Bat Pattern at 1470 on October 5 (charted below in purple.)  Although 44 points is nothing to sneeze at, it doesn't measure up to the 98 points lost the last time a Bat Pattern of this magnitude completed in Feb 2007.

Harmonic patterns frequently nest inside and morph into one another.  An astute trader can either profit from the turns or, at the very least, protect a buy-and-hold portfolio from otherwise unforeseeable market plunges.

There are many ways to utilize Harmonic patterns.  I use them in combination with other chart patterns and technical analysis to enhance the accuracy of forecasts.  A stripped-down version of my current short-term chart shows the role that harmonics, channels and a large rising wedge have played over the past month or so.

The descending red channel did a fabulous job of guiding the downside from Sep 14 to Oct 3.  When it was broken on the 4th, a new channel was established (in white.)  This nearly horizontal channel proved its worth earlier today, signaling us to take profits on a short position established a few days ago at 1455.

All of this action has taken place within the confines of a large rising channel (in yellow above) that's guided prices since the 1266 low on June 4. This yellow channel, in turn, is contained in a larger white channel.  Together, they're playing out a familiar refrain.

As the market rises, it usually accelerates in a series of channels featuring continually steepening slopes (there are several others in addition to the white and yellow.) When the market tops out, it decelerates, breaking these channels one at a time until ready to begin the process anew.

Declines are typically contained in similarly-sloped falling channels -- seen above in red.  The falling red channel in the short-term chart above is barely visible in the upper, right corner of this chart -- providing context for the Bat Pattern reversal from 1474 thus far.

What does it all mean for the future?  The major indicators discussed above (harmonics, chart patterns, etc.) all point to the same conclusion -- a market running out of steam.  In fact, it appears to be in for a nasty downturn in the not too distant future.

Analogs, sometimes called fractals, are simply repeats of past price movements.  The 2011-as-2007 analog provided an opportunity to short the July 2011 crash in advance, accurately predicting the very day the downturn would begin [see: Why Analogs Work.]  Another analog posted this past March [see: Analog Details] accurately predicted the downturn from 1422 and subsequent return to 1474.

Tuesday, I posted a new and promising analog [see: Analog Alert] that shows the top is either already in or will be soon -- perhaps just after the election.  Check daily updates on pebblewriter.com for additional information.

GLTA.