Charts I'm Watching: October 25, 2011

UPDATE:  4:30 PM

Good, strong close at low for the day.  Guess I'm not the only one looking for disappointing news from Brussels. Here's a peek at the DX daily chart.  Note the .618 Fib intersecting with the SMA 200 and a reversal candle for the day. 

And, just for grins, here's a pattern that doesn't quite fit in any traditional harmonic pattern.

A Gartley Point B should be at .618, with a D at the .786.  So, this is a little high on both (53 and 37 points.)  It could be a Butterfly, which has a B at the .786, though we came up 15 points shy of that.  If so, Point D should be at the 1.272 which is 2548.  It could be a Bat, but B should be below .618.  If it were, it would have a target of the .886 at 2392 - 3 points beyond yesterday's high.

My guess -- Butterfly.  If the market's up tomorrow, look for the Butterfly to play out to the 1.272 at 2548 before reversing.  If the market's down, my bet is it'll be down big and the form of the pattern won't much matter.


UPDATE:  3:15 PM

SPX just completed small H&S that could produce a quick drop to 1210.  It echoes the pennant we made earlier in the day, and would leave the index appropriately close to the center line of the regression channel we're following (dotted yellow line in daily chart below.)

Given the structure of the rise these past two weeks, there are several other H&S patterns that could complete, depending on how the next day or two go.  A bump back up from 1210, for instance, could form a right shoulder for a 50-pt pattern that helps get us to the 1160 area.  Worth keeping an eye on.

Recapping the forecast...

The Purple Line:

If we don't do a big Euro-dump tomorrow, we'll likely bounce off 1205-1210 to one last high around 1265-1270 before Wave 3 gets started in earnest.

The Yellow Line:

If we sell off big, I'm looking for a leg down to 1160ish for starters.  If that comes off as our B wave, then the final push should be to 1307 or so.  If B is done, then the floor drops out.  The big question will be how to know which one it is.  Here, we'll just have to pay attention to the quality of the news -- dead deal or more can-kicking.

ORIGINAL POST:

Interesting that we paused at the .618 (from the May 1370 top to the 1074 bottom.)   Remember that Gartley patterns reverse at the .618, retrace .382 - .886 of that, then reverse again to test the .786 before heading back in the other direction -- typically at least .618 of the last leg, potentially 1.618 or more of it.

Just speculating here, but if we should reverse here and follow the yellow line, completing a more significant B wave in this corrective wave 2,  I'll be on the lookout for a C wave that terminates at the .786, completing a Gartley pattern at 1307.   Note that this would potentially intersect with a trend line (purple, dashed) off the May 2 and Jul 7 highs.

That's not to say we couldn't get there without a more significant B wave; it's just that this rising wedge is getting very, very long in the tooth and I can't see it continuing to melt up without more of a break.

I'm going to go ahead and alter the yellow line to reflect this possibility, but keep in mind this is speculating on what I consider an alternate count.  My preferred outcome is a sell-off following disappointment over what's (not) happening in Brussels.

Speaking of which, I'm starting to see more and more expectation management out of the Eurozone.  My favorite is this one:

He's correct when he says they "never talked about this summit as the decisive summit."  The decisive summits were February 14,  March 24, June 23, July 21 and September 16.  Here's a great visual from Reuters, courtesy of Zerohedge.  It does a great job of charting Italian bond yields over the past year of promises and missteps by the Eurostooges.

More later.

Too Far, Too Fast: Oct 24, 2011

In looking at the 2011 v 2008 analog, it's obvious we've advanced at a much faster pace these past two weeks than the analog would suggest.

From a price standpoint, we've very nearly reached our wave 2 target a good month or more early.  We can debate the causes -- everything from "animal spirits" to expectations of a Euro miracle.  It's also possible that the analog I've been following since May has simply become too well known.

I have no idea whether someone else noticed it before I.  But, in August, EWI started talking it up.  And, just this morning, I saw a chart in a recent Demark interview that looked oddly familiar.  It's entirely possible folks have taken such a shine to it that they jumped the gun, trying to get out in front of the last rise before the downturn.

There I go again, saying "downturn" when I mean "crash."

Thanks to the speed and distance of this rise, I get to redraw the internal channels of the 2011 pattern.  One fun discovery is that the revised slope is...wait for it...the same as the 2007/8 top.  At least, it could be.  The reality is that there are dozens of ways to draw these channels.

But, given the similarities between the two tops, I think it makes sense to look for similar channel lines, too.  Take a gander.  First, the original:

Note the channels in 2011 are steeper than those is 2007/8.  That made sense when it appeared that wave 2 would be bouncing back from 1040.  Here's what we got instead:

A little closer view...

And, the close up.

If you look closely, you'll see there are two paths from today's close.  The yellow line starts down right away, forming a real B wave instead of the sissy B wave we had last week.  It then takes its sweet time forming a C wave that ends in December -- maybe around 1285. 

The purple line wastes no time.  Like the yellow line, it reverses this week -- maybe even tomorrow around 1266, but doesn't stop running until Bernanke is reduced to a quivering blob of pale, green jello and Merkozy's love child springs from the womb shooting stardust and rainbows from its fingertips. 

Personally, I'm leaning toward the first option, reaching 1266 Tuesday or Wednesday, at which point the whole Euro-agreement should be ready for the shredder.  Or maybe we just gap down from here.  Our high today was within $1 of the .618 (from 1370 top to 1074 bottom) and within $2 of the Jun 16 low.

I show the two courses coming back together in Jan-Feb 2012, doing a side-step for a month before heading down to complete Minor 3 of Intermediate 1 at around 650.  The SMA 200 is around 1274, and the put-call ratio is back down to .53 -- very toppy.   The RSI, stochastic and McClellan Oscillator are all looking bearish.

More later.