Here is a 15-minute SPY chart showing the week’s downtrend channel (red lines), and what may be a falling wedge reversal pattern forming (blue lines). Click to enlarge:

Another way for a channel to end is for prices to plunge through the lower boundary-line, and then print a hammer candle. The market is pretty beaten down, so I will be alert for a reversal day.

That’s the good news. The bad news is that SPY’s daily chart has a pattern that is very similar to the Three Black Crows. That’s the pattern that preceded the 1987 crash.

So, if the market plunges, how can you tell if it will print a hammer or just keep right on crashing? One of the ways is to watch the TICK, as JungleGirl mentioned on May 6th. If it drops to absurdly low levels and just stays down there, then you have pretty good evidence that there is a panic going on and bids are being pulled.

Everybody has been predicting a bad earnings season, but will Oracle’s blow-out quarter change their minds? If so, then the market could make a sharp bounce. The McClellan Oscillator has come down from the nose-bleed level that I mentioned on June 16th, and is now in oversold territory. It could continue lower, but it usually makes a zigzag or two as it goes. And since its recent peak, it has just been straight down, so it is due for a bounce, no matter how fleeting it may prove to be.

In summary, the market will either plunge down or shoot up. Or maybe it will coil up into the apex of the falling wedge and break out of it with a gap on Monday. Up, down, or sideways – that about covers the possibilities, right? But seriously, the first hour of trading may set the tone for the day: panic, euphoria, or nail-biting.

Miami Real Estate “Boom”
I got a letter from a real-estate agent saying that a condo here recently sold for a higher price. A couple of years ago it sold for $415,000 and it recently sold for $417,000. I guess that’s a major milestone. Of course, it could be because the Gulf Coast of Florida will soon be covered in “Peak” oil, and the Atlantic side of the state will consequently enjoy a boost in real-estate values.

SPY developed an uptrend line on its intra-day chart Wednesday, however it may turn out to be the lower boundary of another bearish pennant pattern. Here is a 15-minute chart of this week’s trading (click to enlarge):

The red line is this week’s down-trend line. The blue lines show the bear pennant (or flag) that appeared on Tuesday morning. The purple lines show the symmetrical triangle that appeared on Wednesday. The triangle itself is a neutral pattern, but when it appears in the context of a strong trend, it implies that the trend will continue. It may end up looking just like the blue triangle.

So, if SPY does in fact break down on Thursday, let’s look at some targets on this 60-minute chart:

I start my Fibonacci extension (red lines) from 111.39, which is the point where the whoosh down began on Tuesday afternoon. A 100% extension takes SPY into its June 10th gap, which is a likely place to look for support. A 78.6% extension and a bounce off of the top of the gap might turn out to be a bullish development, while a 127%+ extension and a complete fill of the gap a bearish development.

There is no guarantee that the market will break lower. SPY could make a false breakdown out of the purple triangle on the first chart, make a double-bottom, and then rally. One of the ways to determine a false breakdown is if the breach of the trend-line occurs with lackluster volume.

QQQQ and IWM have the same lines and patterns. Often, they will lead SPY, so watching them can give you a clue as to what SPY will do.

Now, if you want to be extra-hopeful, you can look at Wednesday’s action like this:

The FOMC announcement at 2:15pm didn’t end up moving the market hardly at all. So, if we just ignore the gratuitous gyrations, the purple triangle goes away and we have a more promising uptrend channel. Of course, as you may have noticed, optimism hasn’t been paying-off lately.

Here is a 5-minute SPY chart of the last two days showing a bear flag (click to enlarge):

On this 60-minute chart, we see the flag making a 100% completion right at the June 15th gap:

With the flag making a 100% extension right on the gap, this leg down looks complete. It was a very sharp move, and the TICK is in a severely beaten-down condition, so the market is ripe for a retracement. The SPX could certainly continue to drop, but perhaps shorts will want to take profits ahead of Wednesday’s FOMC announcement at 2:15pm.

Michael Pento thinks that the Fed will ease soon by reducing or eliminating the interest that they pay to banks on their reserve balances held at the Fed. Pento doesn’t think that the Fed will announce this on Wednesday, but if they did, it might surprise the market.

The Fed pumped a bunch of money into the banks so that they could pretend to be solvent. But it didn’t want that money to get into the economy and cause inflation, so it gave an incentive to the banks to keep the cash in their reserve accounts by paying interest. Eliminating that interest would be “stimulative” and a large quantity of money might gush into the system. If it isn’t announced on Wednesday, it is definitely something to keep an eye out for.

The “reserve interest” issue is a pet of the gold bugs, who are always, of course, predicting hyper inflation.

The SPX futures gapped-up and rallied Sunday night. But then at 9:08pm, they went into a nose-dive, plunging from 1127 down to 1116 in only 19 minutes. That was a precursor for what the SPX did Monday morning. The SPX will often repeat the behavior, more-or-less, of the overnight futures action. It will test the same highs and lows, trend with the same momentum, etc. As I write this, the futures are still acting crazy. They just popped 7 points and then flopped 7 points in less than 45 minutes, so I’ll be alert for some more wild moves from the SPX today.

On CNBC Monday, Steve Grasso said that he was still shorting the market. He has also been saying that the mutual funds will prop-up the market until the end of the month. So, why is shorting it?

On “Fast Money” Monday night, they had a guest on who talked about the massive outflows from mutual funds. Maybe they got wind of my “Mutual Fund Monday” criticism and decided that it was time to restore credibility and not shill quite so hard for Fidelity.

China has announced that it will let its currency strengthen against the dollar for the 47th time. Nonetheless, it appears to have inspired a few shorts to cover up and the market will gap up at the open. Let’s see if a bull-flag pattern develops on the intra-day chart today.