Mon 1/24/11. The System, the Cycle and Shanghai Midnight.

(Update Tues 1/25/11 2:30 PM EST)
There are various supports at 1282 on the 60min chart, but this is now the 4th test of that level in 3 days. In addition to my System indicators and the potential nested 1-2 EW setup, the odds favor a 4th test of 1282 won't hold this time. However, until that is broken, the stop still remains the same above 1289. The 20dSMA is not far below, so, if SPX can get down to say 1279/1280, it will likely cascade under the 20dSMA at which point the market will have another decision to make once the 20dSMA gets backtested possibly around the Fed or GDP news. Good luck.

P.S. The whole down move from 1291.93 looks like it could be classified as an expanding triangle (versus the nested 1-2 setup) but it seems out of place to end a C/Y wave from 1296, so it's more likely an A/1 of C/Y/3 meaning SPX should head back down after it retraces a sizable portion of the drop from 1291.93. I'm fitting EW to the likeliest projected outcome of my other indicators versus the otehr way around, but a triangle can explain a sharp reaction in any case. Under that circumstance, a stop above 1291.93 is more appropriate, so that's what I am doing with risk back to losing 3 pts on my trade.

P.P.S. SPX rallied to positive. An extremely choppy day indeed within a 1% range. Now I can argue 1292 is being tested for the 4th or 5th time just like 1282 was. Tricky. Technically, 1296 and the 20dSMA are the keys in my System, but 1292 or 1281 are the bracket levels for the last few days with 1292 obviously in danger of getting gapped over. Keep in mind, 1271 could have been the cycle low although the time window is still open for 8 more trading days if the 20dSMA can be broken. I've seen new cycle rallies last as little as 2 days but they usually last 2-4 weeks at least and the shorter variety often occur on dead cat bounces backtesting the 20dSMA which is not the current situation, so the odds favor a break of 1296 leading to grinding highs for a couple weeks even if 1313 or 1325 is as far as it can go. Since there is now a lot of congestion around 1290, a re-entry into shorts on any fakeout breakout should be no worse than that or the 20dSMA whichever is higher at the time the next rally fails.

(Update Tues 1/25/11 11:00AM EST)
I am short from 1289 with a stop at 1292 which is just below the 1290-1294 range I wanted to enter. I narrowly missed getting my short filled at 1291 at the close yesterday and again narrowly missed catching the jump to 1291 this morning. However, even 1289 is a very cheap short in my opinion with a potential mini wave 3 down imminent and possibly a larger 3/C. If SPX 1285 is submarined, I will lower my stop to break-even 1289 and then trail from there appropriately with expectations that the 20dSMA will be targeted at a minimum. That 20dSMA area is where I would expect the market to make a decision to either start the next cycle up (which I'd expect to be very bearishly left-translated) or to drop further for a few days to 1250-1260 minimum. SOTU tonight, the Fed tomorrow and GDP Friday are 3 widely-watched events in the next 3 days that could influence markets. Good luck.

(Update Mon 1/24/11 3:35PM EST)
I am looking for one more intraday SPX rally. However, just like Dow made a new high Fri/Mon while SPX did not, I believe Dow could make an intraday high without SPX, and Dow may touch or come within a few pts of 12000 as a nice round number. In any case, my personal plan has narrowed a bit to opening a leveraged short at 1290-1294 with a stop at 1297. If SPX gets above 1296 and especially if it confirms above 1302, we may get a pullback near the 20dSMA again, but it will be a new cycle buy point, not a sell point. If SPX fails to exceed 1296, the possibility remains for a strong 5-10 day swoon. Good luck.
_________________________________
First, Shanghai. Amazingly, after I gave my stats about Shanghai Midnight (my crash predictor when the Shanghai Composite closes a trading week > 2.5% below all of its key weekly moving averages), Shanghai Composite rose enough Friday to close almost exactly 2.5% below its key weekly MAs. So, that leaves us in a bit of a quandary but definitely puts us in WARNING mode. Maybe Shanghai bounces for 1, 2, 3 weeks, but if it can't definitively get above its key weekly MAs, it will ultimately trigger an SPX crash or mini-crash. And, if Shanghai continues down this week as it has on Monday thus far, a big SPX drop is imminent starting within a week if not today.

Second, the System (with new rules I gave yesterday and will update in the blog tabs in a month or so after I've finalized my backtesting). The new System (in progress and unofficial) triggered a sell signal on Wednesday at 1280 with support and profit-taking at the 20dSMA at 1272, and it worked on Thursday. Any break above 1296 should be bullish for at least a few days and possibly a few weeks more with one more retrace back towards the 20dSMA likely during that period. Any break below the 20dSMA at this point and yesterday's low at 1271 is bearish for at least a few days.

Third, the Cycle (30-45 trading days). My analysis shows a cycle low projected for Jan 24th +/-. The lows sometimes come in a few days early and as much as 8-10 days late. Thus, Thursday's low at 1271 qualifies as the potential final low of the cycle. Since we are in the time window for the cycle low, we can safely say that a new cycle has started (or will imminently start) IF 1296 is surpassed. Now, if it turns out to be that 1271 on Thursday was the final cycle low, that would make 4 consecutive cycles of higher lows since July 2010. In my backtesting to late 2005, there were 3 other occasions with 3+ consecutive cycles in the same direction. In late 2006 into early 2007, there were 4 consecutive higher cycle lows and nearly 5 until the Fat Finger February 7% 2-3 week swoon occurred. In 2008, SPX made 4 consecutive lower cycle lows, bounced one cycle nearly 30% into January 2009 and then made the final bear market low. From the 2009 SPX 869 low, there were 4 consecutive higher cycle lows into the middle of the 5th cycle at which point SPX swooned 9% in 2-3 weeks. As you can see, the 3 cycle series since 2005 that stretched as far as the current situation led to minimum 7-9% corrections in a span of 2-3 weeks, but, if 1296 is surpassed in the next few days, we can expect a choppy grind higher into mid-February (and possibly even as long as March 1st) with a subsequent drop below 1271.

Considering EW, I think 1282 is important for bears to break now. Ideally, SPX will bounce to 1291-1296 today and then fall for 5-10 days down to 1225-1250 with 1262 likely to provide some support. I will be shorting any cush bounce with leverage and a trailing stop initially at 1301.

This past weekend, I looked at larger cycles, and, thus far, I have not been able to get comfortable with how to trade them like I have for the 30-45 day cycle which also seemed useless at first until I applied the System and a few custom cycle rules to make sense of it. However, frequently in my study, larger SPX pullbacks have occurred when multiple cycles are projected to end in a similar timeframe. My crude analysis thus far suggests that all 5 of my studied cycles (from the 2 month to the 4+ year) are slated to end between late January and late March 2011. The 4-year cycle could arguably have completed in summer 2010 but the odds are low. Now, cycle lows can come early or late to some degree with the smaller cycles having less wiggle room in terms of trading days. So, with that in mind while looking at the chart cycles, I conclude that there is a huge likelihood of a significant SPX low in March 2011. Yes, depending on how the current low plays out, I suppose late February or even early April is possible, but March, particularly early-to-mid March is likeliest based on the cycles. My expectation based on S2EW and fundamentals and QE2 is that the subsequent market high will be the cyclical bull market top leading into a strong 9-18 month bear market.

I will add one more thing that supports an imminent low plus a larger March low. My consumer discretionary spending linkage to SPX faired well with timing a November top, but a 9%+ correction never materialized and the 5% correction may have been smaller than typical due to a combination of QE2 and the minor spending support in mid-November (see dashed blue line). Now, there is minor spending support in mid-January meaning a low should arrive in the next 1-2 weeks maximum (fits the cycle max perfectly). And, there is major spending support slated to occur between now and early March. If SPX drops far enough in the next 1-2 weeks, then the subsequent rally into mid-February may suffice as the major AND minor spending bounce. However, if SPX only drops to say 1250-1260 and then makes a slight new high, I suggest March is when major spending support will kick in. Also, we must keep our eye on current spending which has been in a tight range (near extreme lows) for 4-5 months suggesting the next breakout/breakdown could be very significant for the economy and stock market looking months ahead. The latest spending-SPX chart can be found below. Good luck.