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SPX forming third of four harmonic legs

Kathy Garber

Recently I posted a harmonic analysis on SPX which showed the monthly perspective testing a bearish PRZ (Potential Reversal Zone, aka a region or zone where a harmonic pattern completes) and a daily perspective of price attempting to form the second of four legs for a new harmonic pattern.  This particular harmonic pattern has a completion target at 1520.17, thus putting the monthly ideal minimum pullback target more in reach.

2122014SPXMTS thumb SPX forming third of four harmonic legs

Harmonic patterns typically have four legs and each leg has an important minimum and maximum movement in Fibonacci ratio levels.  The triangle shows the first two legs; looking at the current daily chart, it shows price has formed the triangle and is currently in an upside move to form the third leg.  This leg has surpassed its minimum required movement and the maximum stretch is at the 1850.84 level.

So during this move to the upside there are some important aspects, the immediate one being that there is a rollover attempt in moving averages. This is not the first attempt by any means, but the fact that they are being tested along with the top of the GRZ (Golden Ratio Zone, aka the Fibonacci levels between 38.2% and 61.8%), as shown in the blue rectangle, suggests this is an important resistance test, and a hold below 1807.70 implies that the third leg has completed its movement and an attempt to form the fourth and final leg has begun.  If price holds below the GRZ, the probability increases that the third leg indeed has completed.

A hold above 1807.70 or the GRZ implies the third leg is still in formation and has the line in the sand or maximum target at 1850.84. If price pushes through there, this green emerging harmonic pattern ceases to exist and no longer has any business being on the chart.  A harmonic death per se, but not a time for mourning, for a hold above 1850.84 increases the probability of bringing to life the emerging ABCD pattern or even the monthly extended pattern, the blue Bearish Crab.

The emerging green harmonic pattern has a purpose to either validate the current 1850.84 as the rejection point and help attain at least the ideal minimum retracement target of that monthly (blue) Bearish Butterfly or validate the 1850.84 to transform from a resistance level into a support level with an opportunity to bounce off of to seek higher value in price.

Trade setups based off this harmonic pattern scenario: A hold below 1807.70 or more conservatively below 1781.06 offers a short opportunity to the double PRZ target of 1666 region and scaling point at 1737.92, and further breakdown has the ideal target at 1395.46 and scaling points at those green fibs.  I always like to be prepared for a move in either direction because price is typically at a decision point and there’s not much worse than price going the other way than anticipated and I’m  standing there with deer eyes staring into the headlights of an oncoming car on the highway.  With that said, a hold above 1807.70 offers a long opportunity to retest 1850.84 and above there has the top of the PRZ target 1923.44; this area here could be breached to test the nearby ABCD target at 1942.29, but upside continuation has the next PRZ from the monthly perspective that starts at 1987.33.

Daily charts take time to play out and one day can be a huge move from an intraday perspective, i.e. an hour or 15 minute chart, but if price holds either above 1807.70 or below 1781.06, it certainly not only sets up a swing opportunity, but also offers an intraday trend bias for higher probability entries.