The markets tested the neckline of a two-month head & shoulders setup.  There was no decisive break and the markets should now test the 20 day exponential moving average (purple line).  Note how this has provided support well into the June timeframe, with the latest round of consolidation between the neckline at 870 and shoulder of 920.  Yesterday produced a ‘wr7′ signal – widest range in 7 trading sessions.  Expect today to produce a very narrow range, perhaps an ‘nr7′ – narrowest range signal.

12:00 pm update – An intraday test of the 900 century mark and 20 ema levels.

12:10pm – A 5-wave advance on the hourly chart nears target levels.

Hourly chart approaches the key pivot of 742 – the November 2008 spike low mark.

Markets often have a way of consolidating at the 1/2 way mark of a swing in price action.  It is the very basis of a measured move setup (aka bull flag or bear flag).  The structure is an impulse followed by a shallow counter-trend movement (the flag or a-b-c retrace) before resuming the directional movement.  Here is one of rin’s charts outlining a downside target on the 45min timeframe.  Notice the unfilled gaps which are a confirmation of the trend direction.

As far as the Elliott wave count is concerned, we have not reached an intermediate wave 3 low.  The numbering which I presented in the previous post needs revision, and in this context, we use Fibonacci projections to determine some time of price level at which the markets may produce the next consolidation sequence.  There is a nice confluence of measured move target and 162% extension of wave 1-2 around 650 in the S&P.  Another number which is often bantered around is 600 – the eventual wave 5 of (5) downside target comes into play and would create a perfect Elliott wave structure where wave 1 price impuse is equal to wave 5.

3:30pm update – A third measured move is completed in this week – futures are testing the 666 devil pivot.

4:05 pm update – Amazing how numbers like 666 can ignite a fire.  Obviously the media headlines are a bit behind, since the move happened in the last 30 minutes of market action.

9:30 am – Markets open right at the wolfewave target measurement from yesterday’s setup.

12:20 update – Slow ooze lower into the lunch hour, a completed 5-wave down sequence at smallest time scale.  Watch for a counter-trend lift to complete during this temporary interlude.

1:20pm – As expected, an a-b-c retrace completes over lunch

3:05pm – Small overlapping structure suggests that there may a lift from these levels.  A place to flip long with a tight stop.

3:50pm – A quick lift, followed by a plunge to match Monday’s measurement.  Tuesday/Wednesday was a small interlude to form the bear flag.

Oddly enough, the hourly chart ends with a slight positive divergence (lower prices, higher momentum).  The last time this was seen on this time scale was at the previous Elliott wave 1 lows around January 21.  Is this perhaps a clue for Friday’s action?

1:00pm – A small measured move pullback meets target measurements following a lunch consolidation.  A bull flag setup for the afternoon session.

2:40pm update – bull flag targets = retest of previous spike highs.  This is the third push higher, so beware of higher prices / lower momentum divergence.

3:00pm – A full measured move target tag.

This lift in equities, as mentioned yesterday, is on the reversal stick of the US dollar – as the dollar falls, equities lift.

4:20pm – markets settle down with the news crossing the tape that mark-to-market accounting will be reconsidered.

The hard sell-off into the close and overlapping wave structure suggests a move to retest the 700 level.  A wolfewave pattern on the 5min chart.

12:00pm – The EUR/USD cross is a great way to get leading signals on the S&P market movements.  It is the same as saying that the equities move inverse to  the US dollar.  Here are examples of the EUR/USD vs. ES futures 5 minute charts.  Notice the correlation in price action as well as 5/35 MACD (a momentum indicator).

3:30pm update – small a-b-c completes an hourly bear flag.  Testing lower bounds of the pattern setup (a confirmation zone / make-or-break level) here.

The dollar is retesting the 2008 highs.  Although it will likely go higher, an equity rally will undoubtedly be triggered first by a pullback in the greenback.  Pay close attention to this index as it test the highs.

Yen update – The previous head & shoulders pattern has evolved into a double top setup. Once again a place to tighten stops as this pattern approaches to target measurement.  This will also constitute a 62% retrace from the daily swing high and represents a multi-year breakout pivot at 0.98 that should provide very strong support.

2:00pm – ES registers a major breakout from consolidation on intraday charts, combined with a huge TICK reading.  Solid reversal sequence on the smallest timeframe.

At the same time, the VIX (volatility index) gets crushed and registers a possible ring high on the daily chart.

As soon as Bernanke shut up, the markets took off to the upside.

1:10pm – ES has tagged a parallel channel downside measurement.  Pattern target here.

Dow Jones weekly retest sequence – thanks to Buffy for the chart.

final update – note where the 1:10pm pattern completion sets a low-water mark and a wolfewave reversal takes effect.

11:15am – markets are playing channel games as we head into expiry.  Does past support turn into future resistance?

12:05pm – channel measurement target, measured move a-b-c completes around 782

1:25pm – another a-b-c measured move completes on momentum swing high

2:50pm – small wolfewave presents itself following measured move target and overlapping wave structure.

4:20pm – no reversal presents ifself on the wolfewave setup and insead falls to day lows to close AM gap up.

11:15am – The first pattern that presents itself is a small momentum divergence, a measured move setup.

1:45pm update – A second measured move pattern completes, pocket trade to 10am spike lows

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2:15pm – wolfewave pattern presents itself on 5min chart, overlapping wave structure

3:00pm – wolfewave target tag

4:00pm – glide to a finish

10:00pm – possible Elliott wave 5 termination sequence on hourly ES futures charts