I got the reversal confirmation that I was looking for yesterday, albeit
not by much. We broke the declining channel I posted yesterday, cleared
the neckline of the IHS comfortably enough, though getting much past it
was a slow and painful business. The Vix closed under my channel
trendlines on the 60 min chart, just a little bit but enough, and the
RSI on the SPX daily chart broke up from the declining resistance
trendline of recent weeks. For my money, we're there, and the interim
low is in.

Even EURUSD has risen from the deathbed it has been
occupying in recent weeks and is showing some signs of life. I have a
retracement target if reached within two weeks of slightly over 1.30 for
EURUSD, and of slightly over 1.50 for GBPUSD over the same period. 

My $SPX:$VIX indicator on the 60 min chart, one of my favorites as it
tends to trend and pattern well, broke up from the recent broadening
descending wedge, retested the broken trendline and broke upwards again.
Normally this wedge would indicate a return back to the highs and lows
of SPX and Vix respectively, but I don't tend to regard such targets as
firm for this sort of derived indicator:

Now some of the more bullish EW analysts have regarded this fall from
the high as an ABC correction and are regarding wave C as completed. If
so, we can expect that we would make a new high within the right angled
and ascending broadening formation on SPX in the 1250 area.

Possible, but unlikely I think. If they are right though, we'll find out
when EURUSD and GBPUSD reach their retracement targets and then break
upwards from their respective declining wedges. In the event that
happens, this will be worth another look.

In the interim however, I'm sticking with my primary EW count, which is
that we have just finished wave 1 down, and have now started wave 2.
That is important, as wave 2 retracements are often very deep, and can
retrace almost all of the preceding wave down in some cases, as we saw
with the first two waves after EURUSD peaked a few months ago. I don't
think that's likely, but it could happen, and I'll be looking for some
indicator and forex confirmations before I short the top of this too
heavily.

On the SPX 15min chart the IHS still looks pretty good, which is
reassuring as the right shoulder was beginning to look a bit of a mess
on ES yesterday afternoon. I'm expecting that the neckline at 1090 SPX
should be a firm floor for SPX in the next few days, and that any drops
below it will weaken or even invalidate the IHS, which has a target of
1140 SPX. I have marked in a rising support trendline on the chart, and a
very tentative rising channel line above as a possible immediate target
area. That only has one touch so far though, and until we see the next
short term reversal it is only an educated guess:

I've marked in possible fib retracement targets on the SPX 60min chart.
The main ones are the 50% retracement at 1130.29, which seems low for
me, and my preferred target of 1151.41 at the 61.8% fib. That would be a
typical wave 2 retracement, and I have two important trendlines that
will be near that level within two weeks. I have also marked in a
declining channel trendline from the top in early May that looks
compelling, and that I am seeing as the first serious resistance in the
1120 – 1125 area:

On the SPX daily chart I am seeing two key broken trendlines that look
interesting as potential resistance and they are the broken lower
trendline of the main SPX rising wedge, which will be in the 1150 area
within two weeks, and the broken lower trendline of the main SPX rising
channel from the March 2009 low, which will be in the 1170 area within
two weeks.

The main declining trendline from the SPX high will intersect the broken
rising wedge trendline in the 1150 area in two weeks as well, and that
too is likely to prove significant resistance and is another reason why I
like 1150 as the retracement target from the low this week:

In terms of timeframe no doubt you'll have noticed that I'm using a
working timeframe of two more weeks for this retracement, specifically
with a speculative working target of Friday 11th June. That is a
workable contender for a turn date, and I don't think that the USD
currency pairs leave room for a much longer retracement period unless
they break up from their declining wedges. In practical terms I am
assuming that we have at least another week of retracement and perhaps
as many as three.

(Editor's Note: this has got to be one of the coolest, cleanest, most interesting guest posts ever; wow! Thanks, SJ! – Tim)

After the amazing day yesterday I have spent a lot of time reviewing
various charts. The first thing I have looked at is the wave count on
SPX. After yesterday I don't think there can be any real idea left that
the low on May 6th was just a 'fat finger' error. It was a powerful
third impulse wave down, and the wave count so far looks pretty obvious
from the SPX daily chart, even though I definitely wouldn't regard
myself as an EW expert.

Whether we are in the first wave down of an ABC correction, or of a five
wave bear market move, doesn't really matter at this point. I favor the
first scenario for longer term reasons that I'll explain in a weekend
post soon, but until we reach the end of the third wave down, it doesn't
make a lot of difference.

For this first wave down though, it seems obvious enough that the first
subwave bottomed at 1181.62, and that the third subwave bottomed at
1065.79. Subwave 4 was almost exactly a 76.4% fib retracement of wave 3,
topping out
out a few points below the bottom of wave 1. The subwave 3 low was taken
out on ES last night in what is obviously the current subwave 5.

Occam's Razor tells us that the simplest explanation is often, if not
usually, the correct one. I've seen a lot of EW counts over the last few
weeks, but this count looks to be the simplest and most obvious
explanation, and more than likely it is the correct one:

Where will this first wave end though? The third subwave down was 143.57
points, and the fifth subwave will probably be shorter, though not
necessarily. From the subwave 4 top at 1173.57, that would give a likely
wave range down to 1030 SPX for the completion of the first main wave
down.

The target of the broadening bottom that I posted yesterday was 1044 ES,
which is very close to the February low and would be a good subwave 5
target. If we do bottom there, it would strengthen a pattern setup that
would be pure chartist poetry for the next two waves of this bear move.

It would confirm that there is a right angled and ascending broadening
formation on SPX (66% bearish) and would also finish the head for a huge
head and shoulder pattern within that broadening formation. Both
patterns would indicate to the July low at 870, at what was (or is) the
most important support and resistance level for the bear market. We
would reach the top of the right shoulder on the next main wave up, and
then the third main wave down would carry us through the neckline to the
target:

The strangest thing about yesterday was the powerful move up in EURUSD
at the same time as the powerful move down on ES. This may signal that
the usefulness of this positive correlation between the two is at an
end, but I suspect it just means that ES is lagging EURUSD by a few
days, and that after making an interim bottom on ES shortly, we will see
that return to normal. I hope so, as EURUSD has been a very good
indicator for equities for quite a while now, and if the correlation
fails completely, that will be a great loss.

In the short term, the IHS that I posted yesterday has now formed,
broken the neckline and started to play out. The target is 1.282:

That's what I would expect from EURUSD, which bottomed where I expected
it to this week within the current broadening descending wedge. These
wedges are very good performers on EURUSD, as I mentioned earlier this
week, and as you can see from this weekly chart of EURUSD over the last
few years.

The only wedge that failed to make target on this chart was the
broadening descending wedge that ended in late 2008, and that target
failure was signalled both by the pullback in early 2009, and by the
boundaries of the subsequent rising wedge. Another interesting thing to
note on this chart is the rising wedge into mid-2007 that broke up, as
rising wedges do 31% of the time. I mention that because EURUSD is
currently in a broadening descending wedge, and these break down 45% of
the time.

Barring imminent apocalyse though, EURUSD is due to correct up to the
top trendline of the current broadening descending wedge, currently at 1.33 and
declining rapidly. We may see a period of sideways trading where EURUSD
slowly moves towards the line at a lower target of 1.282 to 1.30, but we
are due a bounce here and one seems to have started already. During
such a period, we would expect to see SPX trading up or at least
sideways. It is disturbing that we haven't seen that since EURUSD
bottomed early on Wednesday morning:

The right-angled and ascending broadening formation is perhaps the
characteristic pattern for where we are right now on equities. There are
quite a few of these as well as broadening tops across various indices.
Here is another example of one on the FTSE, and seeing these is a large
part of the reason why I think that if we don't bounce soon, then we
may fall a great deal further over coming weeks.

As you can see from this chart, we are right at the bottom of the
pattern, and it is an ominous sign that after a partial rise, the FTSE
has returned to retest the lower trendline. That signals an imminent
downward breakout 81% of the time, but until we see SPX break support at
the February low with conviction, I would regard it as subordinate to
the SPX pattern, as the FTSE is really just one tail on the SPX dog.

If SPX does break support there though, and then takes out the November
low at 1029.38, then this subwave 5 would be longer than subwave 3 down,
and the potential would open up to go a great deal lower in the coming
weeks.

In that event the recent action on the daily chart for 30 year US
treasuries would also look very ominous. For the past year, these
treasuries have been trading in a large rectangle, and have broken up
from it this week. These aren't always reliable when they take more than
a few months to form, and the eight month rectangle on XLF that broke
up in April failed to make target at 18, but FWIW, the target is 134,
which is what I would expect to see if we get a very major flight from
risk over coming weeks.

So there we have it. We bounce very soon, or equities continue falling
into a chasm of unpredictable depth. Should be fun either way, but it
will be a lot easier to trade this if we do bounce, so that's what I'll
be looking for here.