Since the March 2009 low of 666.79, the S&P 500 has had two corrections over 15%. We fell 17.074% from April 26^th, 2010 to June 28^th, 2010, and 21.58% from May 2^nd, 2011 to October 4^th, 2011. Draw a trend line connecting the last two highs immediately preceding those corrections, and we can see that the current price is close to bumping up against this resistance once again. I believe that sometime in the next month (as early as this week), the $SPX will tag 1687.41 (a BC 224% extended price target off an ABCD Harmonic pattern that completed at 1563.62), coordinating with this multi-year resistance line. These are the three possible scenarios I’m anticipating, in order of likelihood:

1. We get a “summer top” at 1687.41, correct 5-7% then resume uptrend sometime in late-Q3/Q4 (price target 1766.35).
2. We get a “summer top” at 1687.41, correct anywhere from 14-22%, then resume uptrend sometime in late-Q3/Q4 (price target 1776).
3. We blast through resistance at 1687.41 and continue uptrend (price target 1776).

I believe the first scenario is by far the most likely. The last time we touched this overhead resistance in 2011, we first corrected 7%, then bounced back to make higher highs before finally rolling over 21%. This follows very common psychology at market tops. The last leg up in rallies is usually fueled by eager bears and weak longs who move aggressively on the first sell-off.

Here is what it looked like in 2011:

If this scenario does play out in a similar way, I expect us to find a bottom this summer around 1568-1600 (the scene of the multi-year break out to all-time highs), then resume the march north. I think 1766-1778 offers the greatest shot at our first 15%+ correction since 2011 (there will be an extended price target around 1830, but we need to see where we stall first to get an accurate price). The exact targets will change slightly as the actual prices print, so I will update these scenarios as necessary.

For context: The major ABCD Harmonic pattern $SPX is currently in has an extended price target of 2145. I don’t think there’s much chance of a “crash” (-40% or more) until we get to this level. I’m not saying we must crash at 2145, but this level offers a pretty good chance (see our post about the fundamentals of market tops in Bullish or Bearish: Conflicting Market Signals).

Originally posted by me, @freemrktcptlst, at TradingVega.com

On Friday I took the 8% rally in Alpha Natural Resources (ANR) as an opp to take a 1/3 off the table. It was a good thing since by the EOD, that 8% rally had become a 4% rally. In Japanese candlestick theory, ANR printed a pretty textbook “topping candle” Friday, so I’m expecting some much deserved rest this week. We know that one candlestick does not a pattern make, so obviously we’ll be looking for confirmation. If I’m wrong, I’ll just have to take my 65% postion to war, and wait for another pullback to add. If we do correct, I’m looking for support at 7.50 (where I’ll buy my first lots back), but I’m willing to take pain down to the 6.90 area. I intend to buy back the 1/3 I sold, and another 1/3 on top to position for my 16 Jan target. I”ve been using JAN13 10c’s to play ANR since I didn’t know when QE was coming. Now that QE is here, I’ll be looking to add closer months as well.

Visa (V) acted very well Friday. Mild, benign consolidation on the lowest volume since the b/o, and closed off the LOD. Exactly what you want to see. Some more quiet consolidation between 134-136 would be healthy and constructive in terms of the b/o. The b/o is in jeopardy on a close below the previous ATH at 132.58. I’ve been playing V through SEP 135c’s, and had taken 60% off the table going into Friday. If V consolidates more Monday, and the market is down, I’ll add. My thinking is if the market is up Monday, it will be down Tuesday and Wednesday, so V won’t be able to fight the tape; hence I won’t add. I’ll just take my 40% postion (which has tons of cushion) into OpEx. If V is up, and the is market up, I’ll take another 10% off. V, along with ANR and AAPL, are my top picks going out half a year, so with these 3 names I’ll always be looking for good entries to roll a % of profits into forward months for the foreseeable future.

Am I forgetting someone? Think…..think….Oh yea…Research In Motion (RIMM)! Kidding, kidding. Let’s look at Apple (AAPL). Just like ANR, AAPL printed a somewhat bearish candle, but given the headline risk we face Monday, I’m not quite as bearish about AAPL as I am ANR. Overall, here’s the issue right now; we have plenty of b/o’s and pretty charts, but a toppy, OB market. So, in AAPL‘s case in particular, you have a huge amount of headline risk going into Monday even though the market seems toppy. That’s why I’ve stayed long my SEP 700c’s, and bot some SEP 720c’s right at the close Friday. More than likely AAPL is going to report aboslutely, and I quote, ‘incredible‘ numbers in presale orders for the iPhone5. 3m, 4m, 5m? I’m not sure, but I expect the stock to open up and get to 702 at some point Monday. I think ES_F will be on the right side of this one too, going back and testing those multi-year highs at 1468. If this scenario plays out, I’ll take the opportunity to get flat AAPL, and short ES_F. I think  Tuesday and Wednesday we’ll see a retrace to 1435-1440 on ES_F, and fill the Friday gap in AAPL at 683. I expect buyers to come in, and Thursday and Friday we’ll rip tits. My targets would be AAPL 713, and ES_F 1477-83. If this scenario does not play out, and we just continue marching higher on the major indices, I think AAPL can do 725-730 by OpEx. I’ll give the latter about a 40% chance of happening. While I think the higher probability bet Monday will be on the short side, it’s well known that “hated” rallies tend to go much further than people think. And with the talking heads on CNBC calling this “the most hated rally in history”, you’re not going to catch me leaning heavily short into anything.

I hope you read my previous blog post.

With some sort of stimulus almost certainly coming out of the PBOC before the week is out, where should we turn to profit?

I’m sure many of you have read the blog post from NYT making the rounds, Beware the Jobs Report of July, which I found very informative. It explains that the Bureau of Labor Statistics “adjusts the (NFP) number to eliminate recurring fluctuations — such as from teachers going on summer break — so long-term trends are more visible.” Then they reveal that “some economists believe economic turbulence has disrupted the calibration of those adjustments, undermining the accuracy of the bureau’s estimates.” The main point of the article is that this distortion will be especially apparent in tomorrows NFP report because ” (the July report) is annually adjusted by a larger amount than for any other month save January, when holiday workers lose their jobs.” That seems to be the obvious take, but my first thought went the other way. All year you’ve been hearing about in an election year, the government will “massage” the numbers to make the economy seem better than it actually is. They obviously haven’t done that yet this year. I mean look at the last 4 reports. So, what better time to start than right here when all they would have to do is increase the “seasonal adjustment” from -1.3m to -1.1m and BAM, 200k jobs. Now, I don’t know yet how I’m going to play #NFP. This was just the first thought that came to mind when I read the NYT blog, and everyone else seem to have the opposite reaction. Right now I’m holding 50% of normal size from RTH at 1356 with a stop at +3. I’ll wake up and figure out what do in the morning. I mean, I’m still not sure whether we want a good report, or a bad one. I thought we were still in “bad numbers = QE3” mode, but my stream seems to suggest we want a good report. Anyway GL.

The indicator on the lower subgraph plots the cumulative sum of the NYSE $TICK values. The horizontal lines on the indicator represent average values of the cumulative tick at 10:30, 12:00, 13:30, and 15:00 EST. There are separate averages for days with a positive closing cumulative tick, and days with a negative one. By comparing today’s value to the average lines at a given time you can get a sense of the strength of the day’s trend in relation to the historical average. Ideally, you would like to calculate the average value lines over a larger time period than 20 days and a smaller interval than 5 minutes. The best you can do with TOS is 20day 5min.

You can see that by noon on Friday cumulative $TICK had blasted through all the averages and actually ended the day at it’s highest level since 6/19. Also interesting are the big two red volume bars at the open. If you listened to @tradersaudio (or you were in the pit) on Friday you would have heard paper getting run over; selling and shorting like mad men into the melt-up. Obviously they got it wrong.

Studies created by thinkscritper.com

I was doing a little research and stumbled upon this. The 10 period SMA (yellow line) on the Monthly timeframe has been a perfect tell at predicting the major sell-off’s and rallies during this bear market. Notice that the slope of the 10 period SMA (yellow line) always turns down first as the initial indicator, then commits the “death cross” through the 20 period SMA (aqua line). The exact opposite is true during the rallies. Look at how perfect the indicator has been the last 13 years. Now, look at how close we came during this years sell-off to committing the “death cross” again. Escaped it by the skin of our asses. I’ll be keeping a close eye on this one.

Not a new revelation but I believe that we are in the last cycle of a secular bear market. Before we complete this cycle, I think the S&P 500 sees 450. I also think that before this happens, we will run up to 1570 making a decade-long triple top. I think this “central bank intervention” is the beginning of the march to 1570. Apple will reach $1000 a share marking the end of a decade. I’d be getting super long here. I’ll be looking to take the other side of this trade early next year when all seems fine and dandy and it’s a “how could we ever go down?” situation. This is just my gut. I’ll be watching closely to see if this scenario is negated. But for now, bears shall see no MERCY

I’m not sure what’s working for you guys recently but this setup has kept me a step ahead. Top Left: $TICK Top Right: /ES Bottom Left: $ADVN-$DECN Bottom Right: /6E