Charts I'm Watching: January 31, 2012

UPDATE:  7:50 PM
Charles Hugh Smith's Of Two Minds blog is a delight.  Recently, I linked to his brilliant Dear USA: Your Account is Overdrawn.  Today, he tops himself by providing a sound argument for the incarceration of the most prolific counterfeiter in the world: the Federal Reserve.  Read more at: Counterfeit Money, Counterfeit Policy.

UPDATE:  2:50 PM

Crickets.  So, let's take a quick look at gold, which has exceeded the level the channel indicated.   Is the harmonic picture indicating more downside in danger?  Recall that we're tracing out a Crab pattern marked below in purple. 

B1 was a .886 retrace of XA, qualifying it as a potential Crab (although it would be a Butterfly if we throw out the extremely long tail.)  As a Crab, it should put in a Point C somewhere below Point A and then extend to the 1.618 level (or greater) at 1203.

I would be perfectly at ease with that forecast -- but for the recent strength that saw it break out of the channel.  Most forecasters I read are calling for continued strength, and there's certainly some logic to that view.  On the other hand, we can view Point X as the vertex of recent fan lines that argue for further downside.

Note how the break of Fan Line 1 led to a sharp drop, establishing B1 as the 2nd point for Fan Line 2.  A back test ensued, eventually setting up a H&S pattern (FL 2 as neckline) that saw another drop to B2.  B2 became the 2nd point for Fan Line 3.  The back test of FL 2 is underway, and in fact has gone as far as it can without breaking through to the upside.

The Crab pattern is perfectly fine as is as long as prices stay below C1.  If they should exceed it, but stay below A, the pattern is still intact -- but with B2 (slightly lower than B1) and C2 as the turning points.  Note that B2 is also at the .886 retrace of XA, and thus points to a D at the same level of 1203.  This scenario is shown below.

The red, dashed line is a TL that goes back to 2008, so it's significant that it was recently broken (B2).  A drop back down to test FL 3 would obviously also break the long-term TL.

Importantly, we're currently sitting at a .786 retracement of the C1 to B2 drop and .886 of the decline from the latest high (1767 on Dec 2) to B2.  Although neither of these moves is in and of itself a harmonic pattern, these are significant Fib levels and, along with the fan line back test, are a good argument for a reversal.

Bottom line, gold, just like equities, is pushing the limits of the patterns that normally guide price movements.  It's overbought for sure, but I've learned the hard way that gold can go on being overbought for a long time after it should reverse.  I believe the short term bearish case is still intact, but have to temper that view due to the channel break.

If prices should break the fan line in a significant way, I'll be inclined to step out of the way and wait to see if prices reverse before Point A at 1924.  We should know in the day day or two.

UPDATE:  10:20 AM

VIX is rebounding strongly, about to test the falling wedge at 20.2 or so.  It's in the early stages of forming a Bat or Crab, which would imply targets of at least 22.68.  It will also complete a little IHS at 20.4 with a target of 23.8.

 

UPDATE:  9:50 AM

Chicago PMI down from 62.2 to 60.2, the second decline in a row and greater than the drop expected to 61.5.  The improving economy story is getting a little harder to swallow.  Consumer confidence is up next.  UPDATE:  Consumer Confidence down from 64.8 to 61.1.  This should complete this morning's bullish burp.  Case-Shiller came in at -1.3 for November, -3.7% for the year-on-year.  Total drop since 2006 is -32.9.  Wonder if that might shake Consumer Confidence just a tad.

UPDATE:  9:40 AM

In addition to the Crab pattern that completes at 1289, we've now formed most of a Gartley that points to the same level -- shown below in purple.  Keep in mind that, because it's just shy of the .618 reversal for Point B, it could also qualify as a Bat or a Crab -- which would take it to the .886 (at 1283) or the 1.618 (at 1242) respectively.

If the new H&S pattern completes, it currently points to 1265ish.

ORIGINAL POST

The futures are flashing a 6-pt gain on "renewed optimism over the Greece situation."   Gotta admit -- it's hard to even type those words given the number of times (all of them, so far) that the optimism has been just plain wrong. 

This morning, we'll see the Case Shiller 20 City Index, which should be negative, and consumer confidence (10am), which might continue to surprise to the upside.  Fellow Americans seem not to realize how deep is the puddle of stinky goop in which the country has stepped.  Chicago PMI is due out at 9:45am.

We've filled all the gaps up to the upside, but there are plenty down below.  We closed yesterday below the SMA 10 for the first time in what feels like ages, saw the stochastic and MACD turn over, formed a bearish hanging man candle, and saw the EMA 3 and SMA 10 cross negative.  The put-call ratio remains overly bullish and the McClellan Oscillator is preparing to flash a sell signal.  In other words, most of the negative momentum indicators I watch are now negative.

The case is growing for 1333 having been the Wave 2 top, but the door won't be closed until we see a significant downturn that destroys the upside case -- probably somewhere around 1270.  The SMA 50 has moved above the SMA 200 by 71 cents.  Watch VIX this morning.  It's done a very good job of indicating major turns, and it's currently positioned very near the apex of a huge falling wedge, having recently closed below its Bollinger Band.

Now that we're working on a new H&S pattern, the key will be whether we can close below the new neckline.  It's the downward sloping dashed yellow line below.

more later.

Charting a Possible Top: January 30, 2012

UPDATE:  1:55 PM

We just hit 1311.71 on what looks like an A-B-C corrective wave, very close to the 1312 back test target discussed at 9:40 below (which, upon closer inspection, should top out around 1313.8)   We've also tagged the 15-min RSI TL, meaning we should turn back soon if this bounce is going to be limited to a back test.

We're sitting at the 10-period MA on the 60-min chart, and the 50-period MA on the 15-min chart -- both of which should help contain any further upside.  The 10 day SMA on the daily chart is just above at 1313.37.

UPDATE:  12:00 PM

The market bounced at 1300, one of the three levels we were watching, and is currently back testing the neckline of the little H&S pattern that started everything (see first post below.)  The RSI TL is also being backtested, and should provide a clue as to when the back test will fizzle.

If the neckline holds, the next H&S pattern to play out should be tilted the other way -- that is, the right shoulder will be lower than the left.  Interestingly, the neckline of this pattern would complete right around the TL discussed in my last update.

The ability of the market to push through this TL would manifest in a strong decline.  In fact, the target of the new H&S pattern is currently around 1264 -- the .786 Fib level of the 1158 to 1333 move and the level of horizontal resistance from Dec 7 and Dec 27.

UPDATE:  9:40 AM

Nice clean break of the 60-min RSI TL.

For this decline to really take off, we'll want to see a break of the TL on the daily RSI.   Note the proximity of the 50 and 200 SMAs.  The only thing that could keep the 50 from peeking (and peaking) above the 200 would be a very sharp correction.

If this decline sticks, it'll be the first time we've closed below the SMA 10 since December 19.  The SMA 20 waits for us at 1297.30, very close to the 1.272 extension at 1298.60 -- two of the three primary reasons I've drawn in a bounce at 1298.  

The third is that 1300 should produce a "round number" bounce and, depending on the timing of the decline, might intersect with resistance from a couple of TL's on the price chart.  We discussed this last week... it would be quite normal to see a pause at the yellow dashed TL that has investors scratching their heads, wondering whether this is a significant downturn or simply the fleshing out of a channel.

The bounce, wherever it comes, will likely take the form of a back test of the H&S neckline (red, dashed) -- which means it could go as high as 1312 or so.  It would give bears another opportunity to add some shorts for the next leg down.  Place stops accordingly.

Financials face a similar test.  XLF, which has spent nearly two weeks above its SMA 200, broke its 60-min RSI TL and the price channel it's been in.  The real test will be to break back beneath the 200 and to break the daily RSI TL.

ORIGINAL POST:  2:45 AM

This is a continuation of several posts last week in which I suggest 1333 was the Wave 2 completion.  Taking into account negative divergence on most time frames, excessive bullishness, poor breadth, etc., I believe 1333 was at least at an important turning point.   Almost every indicator I watch is calling for a significant downturn just ahead.  A quick glance at the past few days confirms there's a clear path lower.

Recall that we just completed a Butterfly pattern (and Bat) that call for a sharp decline.  As we discussed over the weekend, the pattern targets 1010 or 1050.  The question arises as to how we get there.

 

We need one slightly lower price move in order to complete the H&S pattern we're tracing out.  And, the fact that Friday's low came at .786 of the 1306 - 1333 move tells me we might be working on a Butterfly pattern.  These typically complete at the 1.272 or 1.618 extension (1298 and 1289, respectively) -- which is pretty cool as the H&S pattern completes at 1288.

As mentioned earlier, we have a decent shot at some cascading H&S patterns playing out on the downside.  It wouldn't take much to build some momentum.

***

BTW, I don't have a lot of pet peeves, but it kills me (not literally) to see how often the word "literally" is grossly misused.   We've all heard someone say "his eyes literally popped out of his head" or "her butt is literally as big as a house."

Thankfully, the speaker usually means the word "figuratively" or "practically."  Here's a promo that popped up on the newswires this morning.  I'll leave it to my astute readers to decide whether or not the Renaissance Orlando Resort just announced a Valentine's weekend special for cannibals.

Meanwhile, the Euro-mess continues to display strains between the haves and the have nots.

The Big Picture: January 27, 2012

UPDATE:  3:10 PM

SPX has completed most of a head & shoulder pattern that points to 1288ish.  The idealized right shoulder comes in around 1322, although it's high enough to count as it is.

ORIGINAL POST:

Another quiet day price-wise, even though there's been plenty of negative news.  Clearly, the bulls aren't going to give up without a fight.

There are a few different ways to view the past four months price action.  Generally speaking, we have a bearish Butterfly pattern that completed (1.272 ext) at the apex of a rising wedge (in yellow) within a rising wedge (in red.)

I will consider 1333.47 the Wave 2 top until proven wrong.  There are a few scenarios that argue for a slightly higher price, say 1336-1339.  But, I don't expect them to come to fruition.  Traders should maintain stops, just in case.

The chart above also shows that we've violated and are back testing one of the trend lines (yellow, since Dec 19).  But, since we've cracked previous TLs on this advance, I don't put much stock in it.  The more important TLs to break will be the purple line off Nov 28 and the red one off of Oct 4.

But, rather than anguish over which TL will be critical, I suggest keeping an eye on the RSI trend lines.  The hourly RSI TLs (red, dashed) have seen some touches coinciding with instances of meaningful support.  A break of either line would signal a significant drop.  BTW, the yellow RSI TL is great evidence of the negative divergence we're seeing.

Now, for the big picture.  May's top at 1370 was 11 points from the .786 retracement of the 1576 to 666 decline.  That means we came back to within 11 points of recovering 78.6% of the loss from the original 1576 starting point.  This was a Gartley pattern -- incredibly effective at signalling potential turning points.

Once we top at 1370, we need to focus on Fibonacci level retracements of the 666 to 1370 rise.   The most common Fibonacci retracement levels are .236, .386, .500, .618, .786, .886 and 1.000.  We then go into extensions such as 1.272, 1.618, 2.0, 2.4, 2.618 etc.

There's a rule of thumb I use to determine post-pattern completion targets: 61.8% of the distance from A to D.  In this case, A is 666 and D is 1370; so, 61.8% of that distance is .618 x (1370-666) or 435.  Subtract 435 from 1370 and you arrive at 935 as the target for the reversal of the big Gartley pattern.  It's shown on the above chart as the .618 level of the purple pattern.

The big question is how to get there.  As mentioned above, we just completed both a medium-sized Bat and a Butterfly pattern.   Bats are similar to Gartley's, but retrace .886 instead of .786 of the initial leg.  I use the same .618 reversal target, however, which in this case would yield around 1173.  Nice, but not quite 935.  Let's look at the Butterfly.

Extension patterns like Butterfly's and Crabs complete beyond the point of origin -- 1.272 or 1.618 being the most common.  So, I typically look for a larger reversal upon completion.   A 1.272 extension/reversal from 1333 gets us to 1110 (1.272) or 1050 (1.618) on the downside.  Closer.

It's fair to say that reaching 1110 or 1050 would probably involve completion of a H&S pattern or two.  A casual glance at the chart reveals several potential left shoulders ready for action.  The price level around 1110 also looks like a great spot for a massive H&S pattern to complete, with the Jun 2010 and Oct 2011 lows as potential neckline points.  Such a pattern would point to 790 or lower.

Reaching 790 isn't so far-fetched when you consider we've completed 3 of 4 legs for a huge Bat pattern that targets 747 as the .886 completion point.  It would work nicely with a H&S pattern as that described above.

I have about twenty other patterns currently under surveillance.  Let's see how this week plays out, then I'll try to string them together in a coherent fashion that also takes into account the other chart patterns at work.  Suffice it to say, there are plenty of ways to skin this bull.

Do or Die: January 26, 2012

UPDATE:  3:00 PM

The H&S pattern we discussed this morning is "growing" as the decline continues.  The new nominal target is 1306, at which point we have more opportunities for it to expand further.  If this one plays out and if the next one does set up, it could target somewhere around 1280 - 1288.

The nice thing about rapid ascents is they leave a trail of strong downside opportunities in their wake.

BTW:  Starbucks reports after the close today.  I don't follow the company at all, but this is not a bullish chart.  Working against the upside are the 1.272 harmonic level, a long-term trend line of resistance and a very well-formed rising wedge.

UPDATE:  1:45 PM

I don't focus much on the DJIA, but it's getting a lot of attention right now, as it climbed within 35 points of its May highs earlier today.   It's an important level, to be sure.  A climb past 12,876 invalidates a lot of wave counts.  A stop at 12,876 makes for a deliciously bearish double top.

Check out the little Crab pattern setting up on the 15-min chart.  The 1.618 extension happens to be at 12,878.25.   At this point, the Dow is showing much better performance relative to the SPX than it should -- a variety of divergence that should concern those betting on new DJIA highs.  Hmmm....

UPDATE:  1:05 PM

Here's the NDX chart, showing the Butterfly pattern completion at the 1.272 extension.  Remember, this follows a Bat pattern that played out perfectly with a 10.9% decline in late October.  All things being equal, Butterfly patterns generally produce greater reversals.

UPDATE:  12:40 PM

Here's the chart concerning the Baltic Dry Index I reference in the comments below.  It's from InvestmentTools.com, who publishes some really cool charts with all those neat combos and ratios we love to watch.   This one speaks volumes:

Check out the little H&S setting up on SPX.  It targets 1311 in the short run and could set up some larger patterns if it plays out.

ORIGINAL POST:

More later.

Charts I'm Watching: January 25, 2012

UPDATE:  11:35 PM

No point in rehashing the Fed news today.  Bottom line, they continue to try to influence the markets with promises of QE.  Actually unleashing more QE is problematic from a lot of standpoints (political fallout, distorted credit markets, etc.)

The bigger problem is that if the Fed whips out their biggest gun (QE3) and it produces even less benefit to the economy than the last two iterations, it would reveal: (1) just how desperate they are; and, (2) how limited are the alternatives.  Zerohedge has been running an interesting series on the race to the bottom between the Fed and the ECB -- well worth your time if you're into macro-econ.

It's interesting to me that the USD's weakness these past few days outweighs the Euro's strength.  But, they're both at a turning point based on harmonics, fan lines and channels.

Gold was on a tear today, topping 1700 for the first time since Dec 12.  It's possible it's breaking off its run to 1357 (or 1200, see Fleeced); I've nudged the channel lines just about as far as I think is reasonable to capture today's rise.

Recall that we're still north of a long term trend line that, until broken, points the way to a zillion by Christmas.  With today's Fed action, there are plenty of folks who are more convinced than ever it'll get there.

 

But, there's an interesting little fan line off Jan 2011 that provided the July, September and October bounces (white, dashed.)  We broke through in mid-December and have been beneath it for the past month.  Now, however, we're tagging it from underneath -- a back test -- at the upper channel boundary.  GC is also showing negative divergence on every time frame of 60-min or shorter.

(This is the exact same type of back test, by the way, as we're seeing on BAC.)  If it is going to turn, it'll need to do it pronto in order to salvage the harmonic patterns.  We'll watch this one closely. 

Stocks are likewise rapidly running out of fan line resistance options to halt their advance.   As we examined last week, there are a few different ways to draw these, depending on whether you include shadows or not.  Today, we bumped up against the highest of the four.

We're within .81 of the Butterfly completion at the 1.272 extension -- the 1329 target I've been eyeing.  We're also just a few points shy of the .886 retracement of the 1370 - 1074 drop (1336.)  Technically, Wave 2 isn't toast unless we head higher than 1370.  At only 44 points away, the bear case is starting to run out of room.  The 50 day SMA is only 4.43 below the 200 SMA.

But, many of our technical indicators continue to look bearish.  There's negative divergence across the board, from 60-min on down.  VIX, which closed below its Bollinger Band yesterday, is also providing nice divergence and is at least 90% of the way towards a falling wedge apex.  It completed a bullish Crab pattern, filled a large gap and tagged the wedge's lower bound yet again today.

I see sign after sign of a top.  Whether the market chooses to follow those signs right now, however, is anyone's guess.  But, we're drawing very near to the point of "now or never."  I might be a little early, but I opened some short positions today in anticipation of a turn (and, yes, I'm using fairly tight stops.)

The first wave down should stop short of 1267 if it's going to keep bulls' hopes alive.  It'll look bullish from a wave count perspective, and allow the channel promising more upside to take proper shape. 

I'll leave you all with a chart that illustrates just how overextended this market is.  TZA, a leveraged inverse ETF on small cap stocks, has gone deeper into a falling wedge than I've ever seen.   Good luck to all.

UPDATE:  12:15 PM

It's important to keep a close eye on the potential channels and wedges forming on SPX.   But, given the variety of legitimate interpretations, it might be more valuable to watch the RSI trend lines.  On the hourly chart below, two of the more obvious channels are the light blue and the yellow.  You could also easily form a rising wedge by combining the upper blue line with the lower yellow line.

Rather than agonizing over the right interpretation, focus on the RSI trend line.  It's repelled each of the dips pretty handily and will be the first sign of a meaningful break to the downside.  Likewise, we can watch for upside breakouts as well.   Consider the 5-min chart RSI:

A breach of the solid yellow line would be a good warning sign.

ORIGINAL POST:  1:50 AM

The Nasdaq 100 futures look to have tagged the fan line off their Oct 2007 highs.  As reported last week and back in July, this has been a very good indicator of a top several times in a row.

EURUSD looks like it's completing a back test of the last diagonal as well as a trip across its channel.  

There's a Crab pattern completing on the 60-min chart at the 1.618 extension that should put the brakes on any further upside.

And, gold is also completing a run to its channel boundary, depending on whether you include the shadows.

I've probably written those same words (re the shadows) a dozen times in the past week -- which, in itself, is probably a sign of how prices have been pushed to extremes.

AAPL's results might be the catalyst to get SPX up to 1329, completing the Butterfly pattern we've been watching.  Keep a close eye on this after the cash markets open, especially if we gap up a little on the open.

More later.

Charts I'm Watching: January 24, 2012

UPDATE:  6:55 PM

Not much action during the day, but Apple's making news after the close.  According to unconfirmed reports, Apple is purchasing the other 499 corporations comprising the S&P 500.  Said CEO Tim Cook, "imagine my surprise when I learned there were other stocks out there; this will simplify things for everyone."

In after-hours trading, AAPL is indicating 452 after trading as high as 469.  The only FLi in the ointment is a bearish Crab pattern that completes around 465.87.  AAPL has been locked in a crazy steep channel since 2008, and 469 tomorrow would complete the Crab and take it north of the channel boundary.   Here, for your iZonely.

 

It'll be interesting to see if RSI tags along for the ramp, or whether it falls victim to its two year-old trend line.  If so, could get some nice negative divergence.

This should also give NDX the last little push it needs to meet its bearish Butterfly target at the trend line we've been watching.   Almost there...

 

ORIGINAL POST: 

Another day, another broadening of the rising wedge.  We've had three RW failures in a row, so it's normal to be a little gun shy at this point.  For now, my target remains 1329.

We completed a little H&S pattern that points to 1297.60 -- the broadening I was alluding to yesterday.  If it plays out,  though, it'll be in line with the intra-day lows on 12/21 and 1/13 and look suspiciously like a channel.  It might also appear as a "back test" of the wave ending at 1292 -- in other words, a corrective wave rather than an impulse down.

Going out on a limb here, but I don't think the MM's are done jerking us around.   I'm watching a lot of indicators, but one that always speaks to me is RSI trend lines.  Check out the 60-min chart.

The trend line connecting the RSI lows since November 21 has stopped every downturn since from becoming more serious.  I would think twice before loading up on shorts until at least that trend line is broken. 

I would also tell anyone going long or short here to make careful use of stops.  The game is just about up, but there is plenty of danger in taking an unprotected stand one way or the other.