(Update Fri 1/28/11 12:30 PM EST)
The SPX drop came a few hours later than I expected and has now broken 1285-1290 testing the 20dSMA. The extra day of wedging up inevitably made the next move more explosive. This is VERY normal for starting a new cycle up IF SPX does not lose grip on the 20dSMA for long or by much. There is an outside possibility that 1271 will be breached by Mon/Tues, but, since we are already 5 days beyond the projected cycle end and since a 20dSMA backtest is normal and since 1296 was broken earlier this week, I will be going long as soon as my reversal indicators are in bullish favor. That may occur at the close today or at the close on Monday in which case I will go long the following day with a stop below the pivot low. There will possibly be a VIX uBB20 signal to buy SPX on Mon/Tues. IMHO, the odds are heavily against a drop to 1250 or lower, but, if SPX breaches 1271, we'd have to review the indicators but we could possibly have a severely left-translated cycle ending at 1303 which would be VERY bearish into March. So, I'll be playing the long side for a couple weeks given a decent setup on Mon/Tues but very cautiously knowing a HUGE down move is projected into March by 4 of my cycle periods converging just as an overextended 5th consecutive 1.5-2 month cycle is stacked upward, by my discretionary spending analysis, by the high percentage of March turning points since 2000 and by the extended bullish sentiment without commensurate economic improvement. Good luck and good weekend.
(Update Wed 1/26/11 4:45 PM EST)
Several things favor some weakness Thursday. Looking back a few years, the NYAD double top setup seems to lead to a 0.6%+ retrace more than 2 out of 3 times, and most failures are merely flat to slightly up days. Of course, there were a couple notable exceptions but they were exceptions nonetheless. Also, daily RSI14 bumping 70 usually leads to a small pullback at a minimum. VIX dropped a little below the 20dSMA but is likely to backtest it at a minimum. Obviously, Dow 12000 and SPX 1300 are providing psychological resistance. The USD is due a bounce so watch that. The daily SPX upper BB20 was nearly touched today after it was pierced last week. If you look back at charts, you'll see it is common to pierce the uBB20, fall back and then nearly reach it again before failing. MACD is backtesting its cross-down which is more often than not rejected the first time after a few days of separation. TRIN fell back and has not crossed 2 since the 1271 low. None of those things are particularly compelling on their own which to me favors a bullish conclusion in the coming days as my cycle work favors, but it statistically favors a 6-12+ pt pullback Thursday which targets 1285-1290 with an outside chance of a 1281 and 20dSMA retest. CPCE spiked today which happened before and during the flash crash but has also happened at several short-term bottoms in the last year, so that once again supports a bullish outcome unless bears can somehow take out 1271. There is data risk in the morning with Initial Claims and Durable Goods, but the expectations are a little high. So, overall, I am favoring a little downside tomorrow to 1285-1290 (with one more poke at 1300 possible beforehand) followed by a multi-day and probably multi-week rally starting Thu/Fri surrounding the GDP reaction. Good luck.
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My System suggests the trend is up again. My nascent cycle analysis for the last 5+ years suggests that 1271 last week was a 1.5-2 month cycle low since SPX has cleared 1296. That will only change if SPX breaks below 1271 and then fails a 20dSMA backtest which would be extremely bearish, but my study shows no such examples.
SPX is entering its 5th cycle continuation (higher lows in this case) since July 2010. The last 3 occurrences of so many stacked cycles led to the January 2010 9% drop, the 27% rise from November 2008 and the February 2007 7% fat finger drop. All 3 cases lasted 4-7 weeks into their last cycle before turning which would equate to the last half of February 2011 or even March. Other cycles have certainly been left-translated ending quicker than that. Although the data set is limited (about 40 cycles), there was only 1 situation I could find where a cycle made a short-term low near its projected end date, then made a new high and then broke the previous cycle low. That was in early 2006 and the high was broken by .4% followed by a break of the low by .9%. That is why I say breaking 1296 today suggests 1271 began a new 1.5-2 month cycle. There is always a first time for everything, and my studies only go back to late 2005 thus far, and there were several cases where price came within pennies of a high before continuing the cycle lower, so I am confident, but not certain, that SPX will move higher in the days and likely weeks ahead. Still, in the long-in-the-tooth stacked cycle situations, price tends to back-and-fill a lot and another test of the 20dSMA or 1282 is not out of the question even if a new cycle has started. Any long positions should take profits more often or in more volume than normal since a large drop is projected into March by my cycle analysis, my consumer spending analysis, the active Hindenberg Omen and the Shanghai Midnight indicator. If SPX somehow manages to climb into late February or early March, I'd expect a fast 7-10%+ drop in 1-3 weeks. That low should be followed by a barnburner rally and possibly new highs in a final exhaustion but there would be an opportunity for a bearish breakdown once the 20dSMA gets backtested.
As far as my personal short trade Monday, I would have served myself better by sticking with my lowered 1289 break-even stop and not reverting to my original 1292 stop, but I got a little lucky the gap up wasn't bigger and a 3.5 pt loss was worth the risk to me due to the huge potential reward. Due to my analysis above, if SPX gives me any potential oversold reversal signals in the next couple days, I will intitiate a long position cautiously. Good luck.
Update 12:30 PM EST
Just some passing thoughts...If we assume a new cycle began at last week's low and that a break much below 1271 is unlikely for weeks, I think we can judge the choppiness of the last 4 days as a series of nested 1-2s with a large wave 3 up expected anytime OR we can judge the choppiness as the start of some ascending wedge. Obviously, the Fed announcement in an hour could decide that. If SPX trades below 1281, the wedge takes the forefront with the possibility of an irregular flat if 1271 is breached. On the other hand, if SPX bounces from 1285-1290 or just goes straight through 1300, the standard impulse up will be favored carrying to 1313-1325 initially. That probably doesn't help much except to say there are still bullish interpretations of any Fed-induced drop, and 1280-1285 is a Fib 50-62% retrace target for 1271-->1299.
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