3:00pm – A divergence is registered in the hourly S&P 500 index – higher prices, but lower momentum.  This is the first clear signal since the ‘dancing with the devil’ early March lows.   Beginnings of a profit-taking shift?

The dollar got a bounce exactly where expected.  Pixel perfect.  Along with foreign exchange gyrations, the markets where subjected to the whim of options expiration and quadruple witching.  Max-Pain is the order of the day.

This is a multi-year pattern developing in the dollar – a cup & handle, or inverse head & shoulders.  The key to this setup is symmetry – notice how each pullback this past year corresponds with low marks in the years 2004-2005.  Much like the yen surprised every trader banking on a cheap source of fund borrowing, so too the dollar is in the beginning stages of a  move higher, especially if there is a breakout above the rim now clearly defined around 90.  This area of ‘pocket resistance’ is a key pivot in the months ahead.

Talk about quantitative easing!  Bernanke has induced a wholesale rout of the dollar in response to (yet) another round of government-sponsored spending.  This is now a remarkable 5% loss in spending power over two days – and yet another tool to inflate equity and commodity prices.  This is testing a make-or-break level for the dollar, since 83.25 represents a spike high support from June 2007 and rising trend line.

This is a follow-up to the March 10 wolfewave setup in the financials.  They are now at target levels after a remarkable week.  Technically, this is the first solid lift above the daily 20 exponential moving average.

US Dollar index update – the setup which was first flagged on March 3 as the dollar was retesting its 2008 spike highs has indeed produced a clean pullback.  It is now approaching target levels – and as expected, dollar-denominated equities / stocks / commodities have lifted nicely in response to movements in the foreign exchange markets.  With the Fed action expected today, I believe that the target levels will be met around 85-86.  In the larger context, this will be an inverse head & shoulders pattern in the making.  A day to book profits in short dollar positions (long EUR AUD) after the Fed announcement in any late surge.

7:00pm update – Wow.  The Fed announcement that they would be buying up to $300 billion in long-term goverment bonds sends the dolllar into a hard tail spin, ending much lower than the projected wolfewave target.  At this juncture, it has pulled back exactly 59% of the previous swing high on the daily chart.  Interestingly enough, this is the same percentage at which the swing low was recorded on the weekly chart in mid-December retracement.

A follow-up to the March 12 setup – markets have now retraced to the January spike lows around 800.  The Advanced GET software is suggesting that a 5-wave advance has completed on the hourly charts.

The S&P has completed a 50% retrace of the previous leg down from the February highs.  This is the same retracement that defined Elliott waves 1-2, and has also completed a channel measurement before yesterday’s rally fizzled.  Are the markets now poised for the final chapter – fifth of 5 of (5)?

12:45pm – A push to retrace into the Brach zone (62-78% Fibonacci levels).  Is this a possible B wave high in an a-b-c sequence?  The overlapping structure on the 5 minute chart is giving a head’s up signal that price action could stall at these levels.

9:00pm update – Markets have continued to lift thoughout the day, calling into question the Elliott wave count.  It may well be that the ‘dancing with the devil‘ 666 level sets a low-water mark and would be labelled wave 5 lows.  This would also confirm the count and make-or-break levels as provided by the Advanced GET folks in the March 10 blog entry.

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.

These are charts posted yesterday by the Advanced GET traders indicating that the counter-trend rally was imminent.  This software program has a very sophisticated method of interpreting market structure and ordering it according to Elliott wave principals.  The cyan/magenta line is considered a ‘make-or-break’ (MOB) level at which we are to watch for a reversal sequence, especially if a 5-wave sequence has completed as shown below.

“This week could offer us some hope in a very dark market place. Last week, the Dow reached its MOB on the Daily low, setting up a counter trend BUY on the Daily chart. The S&P and the NASDAQ both had more room to go before encountering support. On Friday, the S&P finally made its mark, coming down on the MOB right at the first time objective. Thus, two of the major market indexes are now set up for a counter trend buy on the daily charts. The NASDAQ has been the strongest of the majors, still having yet to make a lower low than we had back in November. I think we have enough at this time to make a play for a possible SHORT-term rally.” — Episode 1, A New Hope

Here is the hourly chart showing a similar reversal sequence taking shape:

Today’s result –  NOTE: The historical track record of Friday bottoms hasn’t been very good. And based on the past 21 bear market lows, dating all the way back to 1929, there have been only two occurrences on Fridays, while twelve have occurred on Tuesday or Thursday. The most likely day for a climactic bottom is a Thursday in either October or March (44% probability).