SPX Breaks down and out of Channel

The SPX has now clearly broken down and out of the uptrending channel. There are actually two relevant channels: R1/S1 and the narrower R2/S1. Generally, when a break out of a channel occurs you can expect a drop of the width of the channel projected downward at the breakout level (~1440 in this case).

The breakout of the R2/S1 channel implies a drop to O1 which is about 1% below the current SPX value.

The break out of the R1/S1 channel implies a drop to O2 which is about 2.3% below the current SPX value.

Neither of these drops all that significant and therefore we must choose how greedy we want to be. We are very bullish for 2007. Do we want to possibly miss out on this rally to save 1-2.3%? We've also been very successful so far in 2007 trading the channel so we can afford to take a small drawdown.

Therefore, as long as the SPX is below 1430 at our fund cutoff time we'll go 100% long at the close into SPX related funds hoping for a retest of S1 and possibly getting lucky on a quick move back to 1450 (#2 in the possible scenario below).

Could Symmetry take Control?

The SPX is showing early signs of symmetry. Once Symmetry sets up, we assume it will continue until proven wrong. Assuming Symmetry continues:

1. Today's drop is a mirror image of the last rise off of S1 ending at (A).
2. The SPX would rally off 1430 up to 1450 mirroring the drop starting at (B) to S1.
3. Then the SPX would drop back down to 1420 mirroring the move from (C) to (B). This drop would satisfy O1.
4. Then the SPX would rally back up to 1440 mirroring the drop from (D) to (C).
5. Then the SPX would drop down to 1400 mirroring the rise from E to D and satisfying O2.
6. Then the SPX would rally back up to 1430 mirroring the drop from F to E.

At this point the SPX will have formed a possible large Head-and-shoulders Top with the neckline at about 1400. If the SPX then drops from 1430 and takes out the neckline, a drop to below 1340 will be implied resulting in the ~10% correction this market really needs.

NDX gap also Calls for a Bounce.

The NDX gapped open on 02/14/07 (G1). These gaps act as a spring pulling the market back down (or up) to fill the gap. With the NDX recently above 1840 and a gap far below that had not filled it was a very obvious opportunity to buy NDX put options which we just closed at a huge profit as the gap filled.

Now we have an overhead gap (G2) on today's open that should eventually fill and therefore this gap should act as a spring pulling the NDX and the rest of the market back upward for a bounce.

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