Butterflies and Crabapples: February 1, 2012

UPDATE:  12:30PM

We've popped up above the 1326.41 Gartley target, only to stop right at the 1.272 target (1329.11) of the much larger Butterfly.  It's also a stone's throw from the .886 (1329.71) of what I presumed was a Gartley pattern.  Remember, Gartley's Point B is at the .618 Fib level -- which was 1320.87.

We hit 1321.41, which is generally close enough to work.  Gartley's are also expected to reverse at their .786 Fib level, which was the 1326.41 level I posted this morning.  Prices dawdled at that level for three hours before popping up as high as 1329.1 a few minutes ago. 

The number we care most about, of course, is 1333.47.  It should present tough horizontal resistance, along with the Butterfly target (1329.11) and the Fan Line from 2007 which we just hit.  Here's the updated big picture of our fan lines, trend lines, channels and harmonics.

And, a close up...

Recapping:  current prices are right at the fan line from 2007 and are at the completion of the bearish Butterfly pattern (1.272 of 1292 - 1158) and the .886 of both the 1370-1074 drop and the last significant move (1333 - 1300), not to mention back testing the rising wedge that recently broke.

There's also pretty decent negative divergence across the board.

All in all,  an excellent case for 1333 as the top.  Does this guarantee it won't go higher?  Absolutely not.  Experienced traders know that $&#@ happens.  That's why they use stops -- as I always, always recommend.  Even when I'm positive about a call, I still use stops.

If you don't, you will lose money to the x-factor stuff that always crops up when you least expect it.  If the past few months has taught us anything, it's how precarious the markets are -- whether you're a bull, a bear or neutral.


UPDATE:  10:10 AM

The ISM Chicago's PMI numbers aren't bad -- from 53.1 in Dec to 54.1 in Jan.  Only fly in the ointment is that production and employment show declines, and inventories show a slower rate of growth.  These are the indices you want to see accelerating if a recovery is really in the works.

The inventory number is odd, because it shows a higher index but contracting direction and slowing rate of change.  This is especially troubling for the economy, since the lion's share of GDP growth last quarter was in inventories.  I believe the real growth ex-inventories was only 0.8%.

UPDATE:  9:35 AM

This morning's pop should not hold, as it is completing a bearish Gartley at 1326.41 that also back tests (for the third time) a fan line (dashed, purple.)  In my experience, rallies based on perennially inaccurate ADP numbers almost always fail.

ORIGINAL POST:  1:20 AM

Apple's high yesterday was only 7.63 from completing a bearish Crab pattern at 465.87 -- a price that would also exceed the channel that's guided AAPL's upside for many moons.  Check out the negative divergence on the hourly and daily charts.

This makes eleventy-some-odd Crab patterns I'm following in different stocks, indices and currencies, but that's another story.  Can the market (especially post AMZN earnings) keep it together long enough for the Facebook IPO to officially mark the top?

Wait, you say, NDX is bulletproof!  It just made a new 12-year high!  Yes, but it also made its fourth touch on a trend line (also a fan line from Oct 07), the previous three touches of which resulted in 8.9%, 9.8% and 16.6% plunges (7.1%, 8.2% and 18.2% on SPX) respectively.

NDX is also 2.22 away from completing a Butterfly pattern that calls for a sharp reversal.  The Bat completion on Oct 27 produced a 10.8% decline, and Butterflies usually reverse farther and faster.   And, lastly, Wave C up from Nov 08 has equaled Wave A in price and is barely over a Fibonacci .618 in time.

It occurs to me we've had this kind of setup before.  On September 16, I noticed AAPL was completing a Crab pattern whilst SPX was completing a Bat pattern and NDX a Gartley.  All three were screaming REVERSAL at the top of their lungs, so I wrote about it [see: Bats and Crabapples.] 

I didn't know it at the time, but it was the day before Wave 5 really got going.  Apple tacked on 11 more points the next day... then collapsed 16%.  SPX plummeted 12% and NDX plunged 12.6% collapse.

Technical analysts live for forecasts like that.  September was a very, very good month for my trading account -- second only to July/August.  This interminable Wave 2 has been difficult, what with several false alarms.  Even with stops, it's taken a toll both financially and emotionally.   I'm heartened to see we're back in a position to reap some nice profits over the next few days.

As always, good luck and keep the faith.