by Pebblewriter, Pebblewriter.com
It’s sometimes difficult to keep track of the various channel lines appearing on charts — especially in close-up views. To help with the big picture, here are a few of the key channel systems I’m tracking.
Given their size and scope, there’s plenty of room for error when it comes to whether or not prices have crossed a particular line on any given day. But, smaller channels that can be more precisely drawn almost always tend toward the same slope over time — often nesting, for example, between the 0-.236 or .236-.500 lines.
I’ll update this page from time to time, but the whole point is that these channels don’t change a lot. The market moves in accordance with them rather than the other way around. I’ve layered them to better illustrate which has come into play at various key moments. And, each chart is presented in log scale.
Last, there are usually many ways to draw a channel. The only way to know for sure whether or not a a particular placement is precisely correct is to look at it in hindsight. But, like other chart patterns, they give us important clues as to what to expect.
Channels indicate the prevailing direction and the magnitude of “normal” deviations. And, they point towards something; i.e., they provide a sense of future prices in specific time frames.
Importantly, they tell us when something has changed. If prices shoot above or dip below a well-established channel line, it usually signals a change in direction. Combined with other chart patterns and harmonics, they are an excellent tool with which prices can be forecast.
The purple channel system depicts potential resistance at the .382 line which, given its influence, could just as easily be drawn as a midline. Either way, it’s obviously important.
The yellow channel, on the other hand, depicts ongoing support. The entire recovery since 2009 has been contained within a channel (the yellow 0.00 -.146 lines) featuring the same slope as the 1993-2000 bull market (.886 – 1.000.) Note that any time a yellow support line has been crossed, the market suffered — sometimes dramatically.
The white channel is easier to see in isolation. The move since mid-2009 has been largely contained within the .146-.236 lines. Like the yellow channel, this system depicts support and drops through key lines have often led to large losses.
Putting all the systems together, the chart starts to look a little crowded. But, it’s pretty clear that they’ve defined most of the major rallies and corrections.
Major channels’ intersections frequently signal key turning points. Prices have to “choose” one course or the other, which means a continuation of the current price trend or a change in direction. SPX faces such a situation at the present time.
So, what does it all tell us regarding the rest of the year?
continued for members…The white .146 has acted as strong resistance for several breakout attempts. While the bottom of the yellow channel has provided strong support since the 2009 lows. Combined, they make for a rather striking rising wedge — highlighted below with red dashed lines.
My favorite exercise with rising wedges is to try and fit them in harmonic price and time grids. It has led to both spectacular successes and failures, so take this with a grain of salt.
I’ve set the apex (always an exercise in guesswork) at 2138.04 — the 1.618 extension of the 1576-666 drop. And, I’ve set the time Fibs in such a way that several major highs/lows are captured by key levels: the Jul 2010 low, the May 2011 high and the Sep 2012 high.
Sometimes a major bottom represents inception point for a RW time Fib inception. But, sometimes the RW entry point works best. In this case, it makes for a less forced apex of Jun 2, 2015 with the May 2010 and May 2011 tops and Nov 2012 and Jun 2013 lows. It’s shown below in yellow.
Combining the two, we get quite a few reversals lining up with time and price Fibs. It doesn’t mean there are no other time frames at work, just that these have a reasonably good chance of mattering.
The two time Fib levels that catch my eye are Aug 26 and Dec 29 that line up with the red and yellow .786′s respectively. RW’s often peak or break down at the .786 mark. These two happen to match up with a scenario we recently examined that called for a drop to 1555-1576 in late Aug/early Sep and recovery to 1823 around the end of the year.
As we’ve also discussed, SPX could just as easily spurt up to 1823 in the next two weeks and then drop. Adding the big Butterfly Pattern from 1576-666, with that prominent Point B at the May 2011 highs, makes it all a little easier to see.
By adding some smaller parallel channels to the large purple, yellow and white channels, we get a sense of the possibilities.
I’ve placed the smaller purple channel roughly in between the larger purple .236 and .382 in such a way that its midline fits with major reversals since Mar 2012. The top intersects with 1800 around the 26th. But, its midline intersects with 1576 at that time.
I’ve squeezed a smaller yellow channel in between the larger yellow bottom and .146. Note that the smaller .236 has provided stiff resistance ever since June 2012 and as recently as last week’s 1709 high.
Also important: the bottom of the yellow channel intersects with the purple midline around Aug 26.
The smaller white channel is a little out of sync with the others. On Aug 26, it’s down around 1555 — which could serve as the bottom in an overshoot situation. Remember that 1555 was an important Fib level (the 1.618 of 1474-1343) that SPX completely disregarded in all the silliness this past Spring. And, 1553 was the 1.618 of 1370-1074.
A drop to either 1576 would not only flesh out the rising wedge, it would complete a Bat Pattern at the .886 of the purple harmonic grid (1576) and tag the neckline (also the purple channel midline) of a large potential H&S Pattern targeting 1460 or so. It would also come very close to a .382 retrace (1569.74) of the rally from 1343 (Nov 2012) to 1709 (last week.)
A drop to 1555 would do all the above, but would constitute a .886 retrace of the rally from 1636.03 (Apr 18) to 1709.
At this point, all of this is no more than a theory — a potential scenario. It’s pretty obvious from the way the PPT swung into action this morning that TPTB have no interest in an uncontrolled sell-off.
On the other hand, a controlled sell-off might be just fine. A shake out of 100 points or so could rid the books of lots of weak bulls — just in time for a 250-point rally.
If there’s anything Wall Street likes more than a senseless, unfettered bull market, it’s a senseless, unfettered bull market with lots of Muppets on the wrong side of the trade.