Peering Down The Rabbit Hole

Well it seems I was right at least to be a nervous long on Thursday morning. We reached my EURUSD & equities downside targets mid-morning and then we blew right past them. Channels and trendlines broke and there was technical carnage. What a show!

We fell from 1120 to 1060 in five 1 minute candles, and rallied back to 1110 in the five minutes after that. Quite a sight.

So where does that leave us now? Well for starters it is now very likely that the five waves up, or three with extension,  from March 2009 are finished. We're now in either a three wave correction down lasting several months, or a five wave sequence down to new lows. Yesterday's move looked rather like the third subwave down of the first of those waves.

What happens next? Fujisan was saying to me yesterday that 'when there is a long wick, the market almost always comes to retest the end of the tail.' That makes perfect sense of course as the long wick would normally be a third wave, and you'd expect a fourth and fifth wave afterwards. We may well test and exceed that low in the next few days.

I posted three likely swing targets on SPX a few days ago and they were firstly 1150 SPX for the main rally support trendline, then 1120 SPX for the rising wedge lower trendline, then 1040 - 1060 SPX to complete the head on a potential head and shoulder pattern indicating to the 860 to 900 area. We made the last target and here's how it looks now:

If we make a slightly lower low near the Feb 5th low to finish the first wave down and then correct back to 1150ish for the second wave, then that potential head and shoulder pattern could well play out like this:

It is well past time for a serious correction on equities. In China the rally peaked last summer, largely unnoticed in the west, and Shanghai has been gently declining since:

 Meanwhile, USD blew right through the top of the rising channel yesterday on the flight to safety trade:

Gold also blew right through the top of the recent rising channel yesterday on the flight to safety trade:

There was an amazing spike to 40 for a while on the Vix:

Most of my shorter term channel and patterns got smoked yesterday, and I'll be looking hard at the new ones being established now, but I do have some longer term ones that are still looking ok. Here's the declining channel on the GS monthly chart. If it holds, then the next target should be in the zero area by the look of it. Time will tell: