Wed 2/23/11. System won. Bounce and trounce.

(Update Thu 2/24/11 2:45PM EST)
Last post I swear. I got stopped out at 1303 for a 10pt gain. However, this intraday bounce has totally reset the daily indicators including TRIN and NYAD back to the way they were around lunchtime. So, yes, 1294 could be the low for the structure down from 1344, but Dynamic RSI just came within pennies of hitting the RSI achived at 1313 which is a common place for the downtrend to resume AND the daily indicators once again support one more bearish flush. I may re-enter short at 1304-1308 depending on what happens here in the next hour. Last post. More on Mon/Tues.

(Update Thu 2/24/11 2:15PM EST)
Well, that was a quick 9 pts. 5min RSI made new lows at SPX 1294 which makes it likely my 1284-1291 target area will be reached. TRIN is now above 2. If NYAD can drop into the close, the daily indicators will be in better alignment for an SPX bounce tomorrow. The 2nd GDP revision will be announced tomorrow morning but I don't imagine technicals will rule tomorrow. It could be dangerous to be long or short going into the weekend, because there was just a rumor Gaddafi could use chemical weapons in Libya but then again things could clear up over the weekend either of which could lead to a sharp SPX move Monday. My best guess is 1284-1291 into Friday morning with a possible bottom by the end of today and an outside shot at 1276ish before a bounce.

I have family visiting and will go back into my shell for a few days. I plan to exit my shorts within the next few trading hours if the 1284-1291 target area is reached OR if SPX 1303.26 (or Dow 12054) stops me out first. The, I'll wait for a backtest or 1-2 day piercing of the 20dSMA for a short re-entry ultimately expecting sub-1276 to 1244ish minimum and 1160-1180 likely by mid-March +/-. I just noticed SPX overlapped ats 1299 low after bouncing from 1294, so that tells me the downtrend may have concluded OR is setting up for an even larger downleg to 1276ish. Should know by end of day. I'll be watching the daily indicators I've discussed for clues. Good luck.

(Update Thu 2/24/11 1:00PM EST)
I sold the other half of my shorts at 1303 but re-entered short just below 1313 (those are OEW pivots) because the bounces to 1318 and 1313 did not cause Dynamic RSI to suggest the structure was over from 1344 down. It almost did, but I find that is usually when the market continues the trend. When I look at my daily indicators as they stand mid-day, I must say they heavily favor the bears. First, SPX has been below 0.1 on my 10dSMA Bollinger Band % for 3 days, and that rarely ever happens and, when it does, it portends more downside although sometimes with a 2-3 day consolidation first. Second, TRIN is at 1.65 which is the highest it has been the last few days but still not very high suggesting not enough panic yet. We saw 2+ TRIN at the 1174 bottom in November and the 1276 bottom in January and TRIN was much higher at earlier bottoms. Third, We are basically at the 1.5-2 month cycle mid-point which means the odds for a correction to turn into a downtrend are starting to swing into the bears' favor and when you combine that with a sustained drop below the 20dSMA, a new downtrend is highly likely. And, I mentioned, historically, it is very very rare to get 5 consecutive cycles with higher lows which is what would happen if 1276 is not broken, so that is a likely minimum target. Fourth, NYAD has actually bounced the past 2 days and is making a small change today. That is typically bad news for the bulls since it means the initial thrust down was an initiation move, not a completed correction move, and the small change portends high potential for a large move with odds favoring down. Fifth, Dynamic RSI is about to confirm the uptrend from 1040 is over which doesn't preclude the rally from 1011 continuing, but it certainly makes it unlikely, so a certain percentage multi-week retrace of 1011 is likely underway if SPX falls much lower (hard to say but maybe below 1295). Sixth, the VIX has refused to climb back inside its upper BB20. Sixth, volume has accelerated the last couple days.

Under normal circumstances, I told you strong drops typically end on the second day which was yesterday when I exited my first short position at 1303. And, even when they contiue, they usually end on the 3rd day which is today. However, as mentioned above, Dynamic RSI supports yet another leg down which looks like it could be wave 5 from 1344. And, the other indicators and reasons I gave above tell me there is a high risk that another drop will occur and that drop could be somewhat violent (1-2%+). So, 1276 has a shot to come into play before we get the expected bounce which may just test the 20dSMA currently at 1316. If I view 1344-->1325 as the first wave 1 or set of wave 1s down, that's 19pts. Wave 3 in that count would be 1336-->1300 which makes w3=w1*2. So, wave 5 could be some smaller multiple of wave 1 like 5=1*0.618 to 5=1*1.618. From yesterday's 1313 bounce, that targets 1281-1300. In terms of price target, we already hit 1299 today and we are oversold enough to make that as far as we go down for now, but the indicators certainly support the strong possibility for another leg down before a big bounce and 1281-1294 would be likeliest using the Fib multiples if we get that one more drop. When I look at S2EW down to the 5min level, I suggest that 1313-->1299 could be 1of5 down today and FIBBEWIE (see terminology) suggests that a full wave 5 in that interpretation would end at 1283-1286 +/-. OEW 1291 is a pivot and it would be broken below 1284, so pulling together those estimates, I suggest a more narrow target of 1284-1291 if 1299 is broken today. In any case, there should be a backtest of the 20dSMA within the next few days, but I recommend against going long until I see the daily indicators align for that because the air could come out of this one quickly with a lot of people trapped by the shallow retracements. Good luck.
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Once SPX dropped below 1329.5, the new System's 3-day candle rule was broken and a test of the 20dSMA was nearly assured, although not usually so quickly. Of course, I had already gone fishin' short at 1330 last week. Once again, it goes to show how I rarely outsmart the System. The System did not recommend exiting longs until 1329.5 was broken as a hard stop while it did recommend profit-taking into the 1344 top especially as the 10dSMA BB indicator was at or above 0.9 for 3 days and NYAD made a small change with volume and momentum waning. So, the System would have made more money than I did and I sweated out a 1% draw down while it did not and of course the trend could have continued upward burning me. And, once an uptrend is broken with plenty of room to the next key SMA, the new System recommends waiting to short until a 30%+ retrace is made, so it would have beaten my 1330 short entry too. SPX fell to 1325 this morning, so a 30-50% retrace would have made 1331-1335 the recommended shorting zone and SPX reached 1336.

I have frequently made the amateur mistake of picking tops way too often. The good part is that I've gotten better over the years at being patient for opportunities so my top-picking is better and less painful, but still painful far too often. However, I am gradually coming around to sticking with the trend and trusting my System. My 2 longs a couple weeks ago worked well. The new System is a little less focused on the 20dSMA and adds focus to cycles. It's the cycles that allow one to be more confident at picking tops and bottoms. Tops usually occur in the second half of a cycle with some exceptions like backtests of key moving averages after big tumbles. Bottoms usually occur near the end of a cycle with indicators to help determine the likelihood of a W versus V versus zigzag bottom. So, I know dips with oversold daily signals are typically buying opportunities early in a cycle and vice versa. That cuts the top-picking in half and gives me the confidence to buy at cycle bottoms which is something I never had before. Combined with the various reversal signals I watch, my top-picking is not eliminated but significantly reduced and my bottom-picking which was nearly non-existent is now equally powerful.

Today, virtually all of my trusted daily reversal indicators suggest SPX will bounce tomorrow, but the odds are about 60-65% it will go a little lower first and only 35-40% that it will either hold today's low or drop into a 3rd day. The fact that SPX is at the 20dSMA also provides support. So, there might be one more shakeout lower between OEW's 1303 and 1313 pivots tomorrow, but a decent bounce is likely after that. Since the cycle is within a couple days of its halfway point, a new high is getting less likely but still possible. It might depend on what the dollar and the international news does for the next few days. In any case, TRIN was harmless today which helps the bears, and we're on the 5th consecutive 1.5-2 month cycle with a higher low thus far and that is unlikely to last historically meaning SPX has a good shot at falling below 1276 in the next 4 weeks. Of course, I think it will drop further. For now, I think a bounce to 1325-1336 is likely followed by a probable new confirmed downtrend into mid-March. Dynamic RSI has not yet confirmed that the uptrend from 1011 is over and it probably won't do so on the daily time frame until SPX drops somewhere below 1300, but Dynamic RSI suggests the uptrend from 1173 is on the verge of completion which is another reason why I expect a bounce tomorrow at least temporarily as the previous RSI low provides support. I took some profits on my shorts at 1313 today and will take the rest if we get a drop below today's low. I will try to post charts this week. Good luck.