Sat 3/5/11. Critical week for bears.

(Update Wed 3/9/11 4:15PM EST)
System status has not changed. SPX sits between 1302.58 and 1332.28 which I believe are the critical levels for bears and bulls to break respectively. I looked back at the last several years for 11+ day consolidations in a 25-50pt range like we have today. It happened about 3-4 times per year for the last 3 years with a slight majority of them turning down although a couple of those had a slight upside poke out of the range before tumbling. Several of those consolidations lasted 11-14 days and several lasted 20ish days with one outlier at 30 days. That's not a big help for the next few days, but, as obvious as it sounds, what I found is that the subsequent established trend after the consolidation always lasted a few weeks and several percent and often much much more usually with a backtest mixed in. Today, SPX has traded between 1294 and 1344 for 26 days and between 1294 and 1332 for 12 days. My conclusion is that the odds favor that the SPX consolidation will breakout one way or another within the next 1-4 days. Within a week after that, the breakout area should be backtested followed by ultimate movement of 3%+ beyond the consolidation area. For a downside breakdown, that projects to 1256 within weeks with a 1290-1305 backtest. I've mentioned 1260 as potential support if 1271-1276 is pierced. That could happen within the current cycle window of March 23rd +/- 2 weeks or it could possibly carry into the next cycle down to 1173-1227. For an upside breakout, that projects to 1372-1384+ into April/May with a 1330-1345 backtest. The System is still on a sell signal from 1330. Good luck.

(Update Tues 3/8/11 12:15PM EST)
Despite the rally, the System Status is virtually unchanged. Since System support and resistance are largely candle-based, when you get huge moves in the span of 1-3 days like we had from 1344 to 1294, there is a lot of room for days or even weeks of consolidation price action without reversing or confirming daily trends. Hourly or shorter trends are a different story. The million dollar question, of course, is which way the current consolidation will break. Nobody knows for sure.

One could argue that yesterday's 1304 low marked the final wave E of a wave 4 triangle, but one could also argue that the current upleg is wave E of B/2 (2s are not usually triangles but that is not an EW rule). I slightly favor the latter because (1) the daily trend is down, (2) daily indicators are not oversold or in bullish configuration or confirming a strong reversal upward, (3) the 20dSMA was closed above and then quickly back below (although one could argue 1303 and 1306 count as retests of 1294 typical of this condition) and (4) we are approaching the projected cycle end date of March 23rd +/- after 4 consecutive cycles with higher lows which is historically too bullish. Obviously, if those technical conditions change, so would my projection.

If we are completing a bearish triangle, SPX could technically rise above 1332 and even possibly test 1339-1344 resistance without establishing a new uptrend based on my System. That is why I always recommend some profit-taking along the way to withstand situations like this. Bears need to break SPX 1303.99 to get things rolling on the downside and will have a better shot if SPX closes the day below the 20dSMA currently at 1322-1323. One new technical anecdote I can offer is that when NYAD makes a small change at an extreme low like it did yesterday, SPX usually trades lower into the next day before reversing and sometimes a 2nd or 3rd day lower. However, today's SPX low was higher and when NYAD leads to an immediate reversal without a lower low, that rally typically fails which fits the rest of my analysis. It's just the odds though. Assuming SPX does end up piercing 1271-1276 within the next few weeks as I currently project, please keep in mind the resiliency of this market despite all the Middle East, oil and debt headlines and the discretionary spending projection of a huge rally from March. I will only rely on the technicals to tell me the approximate low and whether the subsequent rally is likely to fail...not those headlines. Good luck.

(Update Mon 3/7/11 12:15PM EST)
Bears need SPX to hold most of today's losses and for 1302.58 to be broken. Then, sub-1294 is likely with some support at 1290ish and 1282ish on the way to the previous 1271-1276 cycle low which I expect to be pierced. Good luck.

New System Status
Weekly Trend: UP with support at 1271 and the 20wSMA at 1270ish next week
Daily Trend: DOWN with resistance at 1339-1344
Daily Indicators: Leaning bearish for 1-2 days. VIX has room to run. Stoch should retest 30. MACD has room to its support at 0. Breadth is reaching near-term oversold. RSI is neutral.
Next Projected Cycle Low: March 23rd +/- 2 weeks
__________________________
Check out the daily and monthly weigthed composite discretionary spending charts.
http://www.consumerindexes.com/
http://www.consumerindexes.com/history.html

The spending nose-dive in mid-February was followed by a rocket shot in late February. However, in the last week, another nose dive has taken place probably due to the knock-on effects of higher gasoline prices. Maybe snow was involved in the recent volatility too. We are only 3 days into March but, once again, daily spending has dropped into a position such that if it averages below 94.7 (which it has thus far), it will mark November 2010 as a pivot high. If if if that occurs, we should see a very significant top 15-23 weeks later based on the last 6 such pivot highs since 2007. The last 4 of 6 pivots led to SPX tops 20-23 wks later with the last drop only being 4.5% versus the previous 9-30%+ drops. The SPX top at 1344 was week #11 in the November pivot scenario, so 1344 cannot be the significant top my analysis might project. The top is much likelier to be in week 20-23 which is the last half of April thru the first half of May or possibly stretching into late May due to QE2/QE3.

There was a very significant spending pivot low at the end of August 2010. Spending pivot lows project SPX bottoms 18-27 weeks later since 2007. The last one was 26 weeks. The SPX 1294 low was week #25 and could have been it. The next 2 weeks are also candidates with the week of March 7th being week #27. Keep in mind, not every significant SPX low or high was predicted by a spending pivot, but most have been.

My 1.5-2 month cycle work suggests March 23rd +/- 2 weeks should be a low. Based on cycles alone, it is possible for SPX to make a new high in the next week or so and then drop into late March or early April possibly even backtesting 1303-1313 or 1332. But, larger cycles favor mid-March. And, in 2000-2001 and 2005-2011, there have been about 40 instances where SPX closed below its 20dSMA, then closed back above its 20dSMA any number of days later followed by yet another close below the 20dSMA within 6 trading days (usually 1-3). That setup occurred on Friday (actually twice in the last week which I count as a single instance) just as it did twice before the flash crash. This 20dSMA setup also occurred before the very first wave 3 of the previous bear market in November 2007 and before the financial-based SPX collapse in Sep/Oct 2008. Obviously, those large swift downdrafts account for only 4 or 5 of the 40 instances I studied. Although I can't say I studied that 20dSMA setup with super scientific diligence, I counted about 10 instances out of about 40 where SPX did not trade down for at least several days afterward, but, in half of those 10 exceptions, SPX did approach/break the recent low (1294 in this case) for 1-2 days before reversing higher. It should be noted that, in the approximate 35 of 40 cases that traded down for several days and/or tested the recent pivot low, there were quite a few instances of briefly going .5%-1% above the last high first meaning 1332-1345. And, I should point out that in all of those handful of instances where SPX did not trade lower after the 20dSMA whipsaw described, SPX was at the beginning of a new cycle. Based on my way of defining cycles, SPX cannot end its current cycle until at least Tues/Wed next week which will require a momentum low even if 1294 is not broken. This bearish setup is obviously erased if SPX gets above 1344.

In terms of the daily indicators I follow, VIX is bouncing off its 20dSMA after being initially rejected by its upper BB20. SPX is not likely to drop much further if VIX can close back below its 20dSMA especially if it happens for more than 1 day. MACD has plenty of room to drop near zero. Based on my anecdotal study of stochastics, when daily stoch drops below 30, it usually will bounce near or above 30 followed by another sub-30 trip within 1 month. When SPX fell to 1294, daily stoch closed right at 30ish, so that's pushing my rule but slightly favors another solid SPX drop within the next couple weeks since stoch bounced. There was a small negative divergence at the SPX 1332 high last week. TRIN is a tad high but not above the bullish 3 level and TRIN highs usually mean more near a cycle end date in my experience when upside pressure is ready to resume. NYAD and TICK are pretty neutral. ISEE and sentiment favor the bears. So, all my key signs point to a low in mid-to-late March with the odds favoring downside for the next few days after one more possible bump Monday. Bulls should hope for a successful retest of 1290-1300, followed by a new high and then backtest of the 20dSMA to mark the cycle end with further new highs after that. Bears should hope for a break of 1290.

I will continue to watch the discretionary spending data closely over the next couple weeks. If SPX breaks 1290 convincingly AND spending stays low, we have a recipe for a large drop with one more possible backtest of the 10-20dSMAs mixed in. The way cycles usually work is that, once SPX confirms its trip below the 20dSMA like could occur early next week, SPX will likely trade lower into the cycle low. If there is time symmetry, SPX could drop nearly into OPEX on March 18th/21st which is very near the March 23rd cycle projection. Then, SPX is likely to bounce to or above its 20dSMA often retracing 50-62% of the drop before making a decision as to whether it will test or break the previous lows. Reversal indicators usually help decipher that decision. Based on historical cycles not typically making higher lows 5+ cycles in a row which SPX would do with a low above 1271-1276, I believe the odds favor that SPX will pierce 1271-1276 before the current cyle ends. If we assume SPX will drop to 1265ish where there are Fibs too, a 50-62% retrace would reach 1304-1313 which is almost precisely the OEW 1303/1313 pivot area. Sounds plausible especially since, by my calculations, the 20dSMA would also drop into that range if SPX trades down to 1265ish over the next 2 weeks. Since my discretionary spending analysis is projecting an imminent SPX bottom, SPX may blast through the 20dSMA at that point or make a higher low after being briefly rejected by it. In order to see the SPX 1173-1227 level which is very possible for many reasons, SPX likely needs to trade below 1260 in the next 2 weeks OR would need to make a lower low early in the next cycle after rejecting the 20dSMA again. Those are possibilities but the latter scenario would almost certaonly stretch the next major low into April which does not fit my spending analysis projected bottom. So, I guess I'm saying that if 1173-1227 is to be seen before 1344+, we probably need to see sub-1260 in the next 2 weeks or so. Mon/Tues is critical to this whole scenario. Odds are odds. Stats are stats. Every situation is different. Cycles, the 20dSMA setup, my various daily indicators, discretionary spending, the oil spike and the strong history of significant March turning points since 2000 all favor further downside in March, but there are no guarantees and even if SPX reaches 1271-1276, we'll have to see if it can accelerate below 1260. If it does, the next spending-projected SPX bottom could still lead to a 10%ish bounce without breaking the 1344 high and set us up for a wave 3 down in June-ish. If it doesn't, then 1344 will almost certainly be broken in the next 1.5-2 month cycle with 1365, 1400 and 1440 being possible target areas. TBD. Good luck.