Fri 7/16. 10% down in 10 days? 20dSMA test underway.

Active SPX signal: No active signal.
Hourly trend: Still down with resistance falling to 1074.17
Daily trend: Neutral since another 20dSMA test is underway
Profit targets: n/a
Trailing stop: n/a
Last signal: Win. Buy signal at 1088 on 7/13. 1pt drawdown. 1/2 profit taken at a 1% gain at 1099 by rule. Closed on break of hourly support at 1091 by rule. Total gain 0.65%. 15 wins, 1 loss, 3 draws since 4/26.

System Notes: (See Terminology and Rules if needed)
The System Philosophy (see new link above) is designed to minimize subjectivity. Caution expressed Thursday night was warranted to put it mildly, so I have clarified and enhanced the System Rules (see link above) to reflect the more objective criteria I used to stomp on Thursday's borderline buy signal. As I mentioned when I started this blog, my System is on a journey with change expected. I have only made it public since April on the OEW blog, and it has grown out of my years of research and experience into late 2009. Thank you to those who made recent suggestions regarding charts and rules.

First, it may seem odd but I am making it a rule not to place a trade just in front of Options Expiration day. I have suffered more than benefitted from crazy Fed/govt maneuvers on such days but, aside from the personal aspect, the volatility and gap potential is not predictable enough with good enough risk/reward for my System's philosophy which includes hitting singles and doubles with minimal drawdown. This rule supports the rejection of the borderline buy signal on Thursday.

Second, risk/reward must now be considered by rule before opening a trade. Maximum risk is 2% and maximum risk-to-reward has been generously set at 1.5 which offsets an ideal 60%-to-40% trade winning percentage even though the System has done much better than that. That limit would have eliminated Thursday's borderline buy signal since the risk/reward was 17/11 or worse. Based on recent history, the drawdown of most System trades has been far under 1% with risk under 2%. System rules define profit-targets very clearly at well-defined profit intervals, key moving averages and pivots, and stops are well defined as well at trailing candle extremes and break-even points. So, there is minimal subjectivity in determining risk/reward making this rule fit the objective and high-win philosophy of this System. I do reserve the right to tweak the max risk and max risk-to-reward ratio over time.

Third, hourly and daily s/r (support/resistance) were being determined by the extreme price against trend for the last 4 and 3 candles respectively with leeway of a couple points based on nearby key moving averages and pivots. I refined that to include the specific moving averages I watch and S2EW wave pivots within .5% of the s/r candle. If a key price level is just barely more than .5% away from s/r, one can always enter a trade and take partial profits at that key price level as rules allow for a small win. I still expect most trade signals to be triggered within .2% of s/r so this new rule impacts profit potential minimally while allowing one to avoid high risk trades in a well-defined objective manner.

All of these rules combined probably serve to eliminate several trades per year, but they may also serve to keep some trades from being stopped out too quickly. I still think the System will average nearly 2 new trade signals per week with 1-2%+ typical profits on small drawdowns and a high winning percentage. We shall see. Feedback is welcome, although I first encourage you to read the tweaks I made to System Rules, S2EW rules and Philosophy in the links above.

Friday produced a 20dSMA Test Day by rule. So, a gap > .5% or a close beyond this Monday's high/low will set the next trend. I mentioned Thursday night that scalpers could trade a drop below daily support at 1080 for partial profits at 5-7 pts. That obviously would have worked and one could be sitting on a 1% gain right now. However, the risk was just under 2% and the risk/reward was too high with a stop back at 1100, so by new rules, the System did not issue a sell signal. I will be backtesting my max risk/reward and max risk rules in detail in August but better safe than sorry for now and there is plenty of potential downside to catch if the hourly and daily trends align back down.

Opinion:
Let's drill down from long-term to short-term. I'm not going to cover charts beyond a few years, because it doesn't impact my trading time-frame much and I haven't put enough time into older counts.

Regardless, here is the SPX 3-year daily chart with S2EW count. One of my favorite blogs (OEW) counts 2007-2009 as an ABC using objective indicators, but I am using my own objective S2EW indicators to arrive at an impulsive count for 2007-2009. However, both counts allow for the March 2009 SPX lows to be tested or broken within our own respective rules. For instance, the OEW count could morph into a double zigzag or other complex correction down from 2007 or it could make a wave 2 retrace all the way down to 667 (although that's not OEW's prediction), while the S2EW count could lead to a wave 3 down to SPX 100-500 or a truncated wave C to 700-800. So, regardless of my historical economic research which shows that the US is in severe trouble, I am open to the possibility that the stock market will diverge and not make new lows within the confines of OEW and S2EW.

I normally use daily RSI5 and hourly RSI14 for counting, but as stated in my S2EW rules (see link above), I find those indicators work best in the timeframe of several weeks to several months. In this chart, we are talking 1-3 years for various parts of the S2EW count. So, the chart has annotated daily RSI14 showing how 2007-2009 perfectly conforms to a 5-wave structure. And, just as I use daily RSI5 to confirm hourly RSI14, I can use weekly RSI5 to confirm daily RSI14. It's not shown on the chart above, but OEW has that chart and it confirms the S2EW count as well with OEW's wave 4ofC RSI barely breaking OEW's wave 2ofC RSI which is not allowed in S2EW (when confirmed). Of course, my counting rules are different and I compare OEW out of respect since that's where I've blogged for 3 years and learned a lot from Tony.

Still, theS2EW 5-wave count for 2007-2009 is pretty common in the EW-blogosphere even if it's done using other rules. However, I have not seen the S2EW count for March 2009 to April 2010. Granted, most practicing Ellioticians believe SPX is in a correction since March 2009, but the counts vary with some still expecting new highs above 1220. The S2EW count seems rather unique to me, but it is based on rules, not just trying to be different for the sake of it. It is uncommon to see a wave 5 RSI surpass wave 3 in SPX and especially by as much as happened in April 2010. It is more common in commodities and currencies etc (check out USD recently). In addition, the run from February 2010 felt impulsive and somewhat exhaustive. It was short compared to wave "a" but nearly a Fib 38% multiple. It erased the NOPOZO (see Terminology) from 2008 yet never surpassed the 2008 SPX 1256 peak which I declared within a day or so would likely not be surpassed for years. It pierced decade-long price-volume resistance for a few months just like happened on the downside in early 2009. Volume favors the down moves as impulsive, not the up moves. The retrace to 1220 is somewhat weak for a wave 1 up of next degree. The daily and weekly 13/34 SMAs, 50/200SMAs and 50/200EMAs among other moving averages are in bearish configurations and crossovers. Dow and Transports are at risk of a Dow Theory sell signal. Many cycle folks believe that when a cycle rolls over in the first half of a cycle, it is bearish especially in markets that tend to have an historic bullish bias and typiclaly fall faster than they rise. If April 2010 was the 4-year cycle top from March 2009, SPX is highly unlikely to bottom in July/August. So, aside from the appalling economic downturn and S2EW rules, I think there are a lot of ancillary indicators that support the S2EW count.

Now, let's look at an SPX daily 4-month chart to zoom in some.

My 2 preferred counts are on the chart. The #1 count I've basically maintained without change since the flash crash is that the flash crash was a wave 3 with 1041 the end of Minor wave 1 nearly equaling Minor Wave 1 from October 2007. Once SPX made a new high On Tuesday, I felt like that count was on thin ice in terms of time expectations but let's look at price and time to see what we should expect if this count holds true.

First, time. The bearish 1-2-1-2 count shows Minor waves 1&2 took 40 days. Based on time symmetry and the previous bear market behavior, I expect Minor waves 3&4 to take a similar amount of time. However, Minor wave 2 was a flat that retraced about 50% in price and 80%+ in time, so based on the guidelines of Fibs and alternation I'd expect Minor wave 4 to be a zigzag or triangle retracing 23-38% of 1131 in less time. So, that means Minor wave 3 should be 25-30 days in time with Minor wave 4 being 10-15 days long. Adding 25-30 trading days from June 21st gives you July 26-Aug 2 which fits my initial thoughts about late July +/-. So, Minor wave 3 should end in the last week of July +/-.

Second, price. Since FIBBEWIE (see Terminology) projects Minor wave 5 to reach 808-862ish, I'm still expecting Minor wave 3 to fall shy of that at 850-925. From another angle, Minute wave 1 was 120pts (1131-1011), so FIBBEWIE projects Minute wave 5 (which concludes Minor wave 3) to reach 855-891. We all know the summer 2009 pivots are at 869 and 956. Also, you can see on my long-term chart that price-volume support exists at 830-900. The NOPOZO for wave "a" from March 2009 is also just above 956. The 50-61.8% Fib retrace of 667-->1220 is 878-944. So, a lot of things tell us that if 1011 is broken, SPX Minor wave 3 is highly likely to drop below 956 and test 875-950.

So, there's a certain pace that needs to occur to reach 875-950 by the last week of July +/-. Let's take the middle ground on price and time estimates and say SPX needs to fall 220pts in 28 days (1131-->911, June 21-July 28). If so, SPX needs to fall hard next week. Not testing or breaking 1011 this coming week or will put this count in jeopardy although there's always the chance of a flash crash type episode the following week or an small time extension into the first week of August. In any event, a 10-17% drop over the next 2 weeks +/- a couple days would be quite dramatic. A subsequent rally into late August would fade as Minor wave 5 down took over into September. By then, bearish sentiment should be very extreme just as the typical Oct/Nov swoon is expected. But, SPX could rally for 2-4 months into late 2010 possibly spurred by a 1-2 year partial extension of tax breaks near the elections.

Now, my chart's alternative count is a contracting LDT from 1220 with wave 5 still needed to a new low below 1110. Since wave 3 cannot be the shortest wave, wave 5 cannot be more than 120pts to 979 (=1099-120). The bottom of the triangle is at 1000ish now and will be at 1090ish in the next 1-2 weeks. Plus, I think sub-1000 may be needed to really scare people. And, wave 1&2 each took about 20 days while wave 3&4 each took about 9 days, so I'd expect wave 5 to take 6-10 days. And, the LDT wave 3 cannot go any higher without becoming an expanding LDT which is unlikely. So, the LDT target is 980-1010 with 985-995 being likeliest next week or a couple days into the last week of July. Then, SPX would bounce for 2-4 months probably near the elections. Bulls would declare an ABCXABC from 1220 to 1000ish in this count using the flash crash as the first A, and so they'd declare a new bull market and probably worry even less the next time SPX revisited 1000. If you have followed my S2EW rules closely, you might argue that I have a rule against wave 4 RSI exceeding wave 2 RSI, but the rules state that this can occur in triangle scenarios which includes EDTs and LDTs. And, often LDTs and EDTs cause expanding RSI with each wave making a lower low and higher high as we've seen during 1,2,3 and 4 thus far. So, this count is definitely possible within my rules.

In both counts, 1100 needs to hold to avoid the verge of elimination. And, in both counts, we're looking for a strong move down this coming week. Both counts would support a test or break of 1011 this week or early next week, but the LDT count would be eliminated below 979. If the bearish count were to play out, a picture perfect EW path to complete Minor wave 3 would be 1131-->1011-->1099-->1045-->1065-->980-->1000-->950-->990-->875-925 but that is just a pure fantasy projection and like most fantasies, it is unlikely to come true. 1058 should be a support area if the bulls are in charge. If SPX drops much below that on Monday, I suspect 1058-1070 will become resistance. If SPX manages to break 1100 and especially 1110 at this point, bullish counts and more drawn out bearish counts will need to be considered.

Finally, keep in mind the System which is in neutral 20dSMA test mode. The result of this test will tell us the next trend direction...more than likely before the counts are eliminated above 1100-1110. If there is a gap down > .5%, the System will chase it in this scenario if it can get a price above 1052 to keep risk below 2%. I suspect such a scenario could lead to an attempted gap fill on Mon/Tues, but maybe not since SPX is possibly starting the heart of Minor wave 3. If SPX were to gap up > .5% Monday, the System will not buy it until it clears the 20dSMA at 1072 and turns the hourly trend up at 1075. Those are all the scenarios that I am trading on this coming week.

BTW, you might be interested in reading about nearly real-time consumer spending data at http://www.consumerindexes.com/. Basically, late June saw a small bounce due to hot weather and July 4th sales, but new lows were just set this week. The ISEE sentiment index (http://www.ise.com/WebForm/viewPage.aspx?categoryId=126) just had a reading of 66. The 9 readings in 2010 <= 77 led to lower short-term prices, while one reading of 78 led to a couple percent higher into the 1220 top before plunging, so at least initially, the bearish sentiment on ISEE is a leading indicator. WLEI indicators are only .2% above recession-prediction levels. Unemployment benefits expired in June wreaking havoc on hundreds of thousands of unemployed according to the latest UE claims report. Maybe an extension approval by Congress in late July will be the catalyst for Minor wave 4 in the bearish scenario or a 2-4 month ABC in the LDT scenario. Consumer confidence and manufacturing indexes dropped hard last week and are suggesting imminent economic contraction. Jobs are not growing without government largesse and more state and local govts are facing imminent bankruptcy. Stats show the inventory rebound phase from 2009 is over. Government stimulus is past its peak as approved and what was done only brought demand forward as evidenced by home, auto and appliance sales. Basically, the last month's data has been absolutely horrible and unless you expect things to turn upward in the next 3-6 months, you gotta believe the stock market is going to reflect a double-dip recession pretty quickly. Then, the next leg down after that if we get it as I suspect would be pricing in a depression unfortunately. You can see the next 2+ weeks of stock market activity into the first week of August are probably critical to determining what economic path we're on for the rest of the year. The LDT count suggests more muddle-through, spurts and sputters for a few months maybe into the elections, while the bearish 1-2-1-2 count suggests double-dip recession this year and getting above 1110 suggests stable slow growth the rest of the year. That's my opinion anyway. Good luck.

Sunday night update (7PM): Just thought you might be interested in a few links.

McLaren has a different technical perspective, but he points to July 24th as a likely turn date, either top or bottom. http://www.mclarenreport.net.au/articles/articles/237/1/July-09-2010-CNBC-SQUAWKBOX-EUROPE/Page1.html
Since July 24th is a Saturday and his numbers are not meant to be accurate to the day, McLaren's take would support a low at the end of this week or early next week. That syncs up better with the LDT timing (my alternate count within S2EW rules), and his possible low projection of 950 also syncs up better with the LDT although I contend it should not drop below 979 in that count.

Terry Laundry over at TTheory.com has yet another technical perspective based on breadth and time symmetry over 30 years. http://ttheory.typepad.com/files/srtvo20100716pdf.pdf
His latest chart and audio analysis suggests a lower top around August 26th. A few weeks ago or so, he believed SPX would drop into late July and then bounce into late August. Now, even though SPX has been rejected by his mid-channel price line he believes the recent 1011 bottom was significant with positive divergence on breadth and now a backtest of the breadth 0 line which means SPX will bounce to a lower high into late August. He also uses ARM/TRIN to support his views and TRIN was at 5 Friday. However, when I look back at the TRIN spikes near 4+ over the last 6 months, it looks like the vast majority of them led to some down movement the next morning followed by a 1-2 day rally but then the odds favored further downside. Also, Terry himself stated that ARM/TRIN will likely need to spike higher in this next bear market than the previous one to have the same rebound effect. Having listened to his weekend audio for a couple months now, I believe if SPX fails after a few hours or maybe 1-2 days on its next TRIN-induced rally attempt and his breadth indicator breaks below 0 for a couple days, he will revisit his initial prediction of a low in July with higher than normal TRIN spikes followed by a rally into late August, because his theory is best at predicting approximate rally end points than the turns in the middle of his Ts as was evident during the initial flash crash. Thus, I think T Theory also supports a late July low and lateAugust rebound to a lower top. T Theory then expects a drop and (near-)retest of that August high before it gets really nasty for a couple years. Honestly, the LDT could fit that theory by making a final low in 1+ week followed by an A wave into late August and a weak C wave into late Sep/Oct before nasty downfalls begin. And, my bearish 1-2-1-2 count could also fit if wave 3 concluldes in 2 weeks +/- with a Minor wave 4 rally into late August followed by an Intermediate wave 2 rally a little above that August high in Q42010 before nastiness begins. Still, I think the LDT would match Terry's data a little better.

Cobra has a lot of data supporting one more low into late July +/- including moon & solar stuff, consumer sentiment backtesting, Gann and Fib time retracements.
http://cobrasmarketview.blogspot.com/
One thing he posted that caught my eye even though I do remember seeing it months back is the Mutual Fund cash %. Mutual Funds are holding the lowest cash % (about 3.5%) since the data going back to 1950. It's about a tie with the 2007 stock market top. Hmmm. That certainly supports the long-term bear case. About half of the cash-raising 1 year spikes in history have been 2-3% like the 2007-2009 bear market. Spiking 5-8% over 2-3 years has happened a number of times in bear markets. The 1990s, especially 1995-2000, was supported by a 9% cash-reduction. It is an undeniable fact that the huge baby boomer retirement bubble over the next 20 years will deplete retirement funds unlike any other time in recent decades, and more unemployment and lower pay means less stock purchases even if savings % increases. Combine that with Mutual Funds decreasing their stock holdings in favor of cash as history says they will soon to reduce risk, and you have the meeting of 3 powerful forces against stock prices. And, in this case, the startting point is more extreme since true unemployment is historically high, mutual fund cash is historically low and there has not been a spending/retirement bubble like the baby boomer bubble since the 1880s which was mitigated by immense immigration. Basically, that Mutual Fund Cash % chart is just another piece of the puzzle that shows that the US best case is a muddle through economy and worst case is a massive depression.

Anyway, all 3 of these links support my 2 preferred S2EW counts with lots of supporting evidence. However, 2 of the 3 give at least equal chance to a continued rally into late August (McLaren and TTheory) and all 3 seem to lean towards my alternate LDT count in their bearish interpretations. I mentioned a week or so ago that my LDT scenario was growing on me, and part of the reason for that was that RSI at 1099 surpassed RSI at 1131 by more than a point or two. That's allowed for wave 2s but the higher RSI goes adds weight to a triangle situation. Still, my count since the flash crash has served well so I'm not going to officially change my preference until needed although I'm fully watchful for an LDT wave 5 low at 980-1110 (probably sub-1000 to scare off double bottom callers). Even if the bearish 1-2-1-2 count is in play, I fully expect SPX to bounce from 980-990 before resuming downward, so either count will be viable at that point and sentiment, RSI, System etc will be important to watch in such a scenario on the retrace downward of that bounce off 980-990.

Update Sunday night 9PM:
OK. Although I mentioned earlier this week that my USD count looked destroyed and I don't like biasing my SPX analysis too much with other indexes, the correlation makes sense to me even in the 90s when SPX and USD both rose since I believe strong stable economic growth and stable monetary/rate policy drive both markets although the kicker is that USD is relative to other countries. During 2003-2007, SPX rose based on reasonable economic growth and accomodative monetary policy, but USD recognized that growth wasn't stellar especially relative to places like China and Brazil and that monetary policy was not stable or as strict as other places like Europe, so USD fell in negative correlation with SPX. I think we are now in a period where economic growth is weak if not becoming depressionary and monetary policy can't get much more accomodative, so SPX is in danger of falling while USD sees that economic growth may be worse in Europe and severely slowing in emerging markets with monetary policies abroad that have room to get a lot more accomdative in terms of interest rates and bailouts versus the floor the US has hit. So, SPX can fall as USD rises in that environment. Now, if the Fed/govt openly prints money or economic growth surprises, that scenario may change. Basically, I see a negative correlation continuing for another year or two. I'm not going to trade purely on that, but I'd be even more confident about my uber-bearish SPX scenarios if we see USD rally as confirmation.

Let's revisit the USD chart I posted a few days ago, but now I've replaced my 1-2-1-2 count with an ABCX count that still fits the S2EW rules since wave C often ends with higher RSI than wave A. All the other 5-wave impulse RSI stuff I noted still applies for wave ABC just like it did for 121. The ABCX count also better explains the weak 25-30% wave 2 retrace since wave Bs are more often 23-38% Fib retraces. And, currencies and commodities seem to move around more in 3-wave moves than 5-wave impulses. The X-wave has nearly retraced 50% and has intraday overlapped wave A but has not completely retraced wave B. IMHO, this is a perfect spot to bounce imminently. If so, it would support either of my bearish counts. However, if you look at the behavior of waves 1&2 since December 2009, you will see that SPX tends to trade sideways in USD wave 1s up and then strongly higher during USD wave 2s down. It is not until USD wave 3s up that SPX falls hard. Once again like the links earlier tonight, that seems to fit the LDT scenario best to me because the last 2 USD wave 1s lasted 1.5-4 weeks and SPX could trade choppy sideways (maybe 990-1070) during that time period and then spike higher to 1100-1180 when USD has its wave 2 followed by an SPX collapse once USD hits its next wave 3 up. However, if USD wave Y is going to be more powerful than wave W, then I'd expect USD to rally hard and that could support the more bearish SPX 1-2-1-2 count. So, if SPX falls in the next week or so near 1000, we will hopefully be able to use USD as one guage of which bearish scenario is occurrring. On the other hand, if USD tanks this week, I might start to favor the USD wave 2 down scenario or even a more bearish count that would support a more drawn out SPX rally or even SPX bull market.