1. Discretionary Spending. After consumer discretionary spending took a nose-dive in mid-February, it bounced from a trampoline at the end of February and has since settled back into its previous 5-month range. The result is that February weighted composite discretionary spending dropped only a tiny amount from January.
http://www.consumerindexes.com/history.html
Based on my 2007-2010 analysis, this means discretionary spending is not yet predicting a huge SPX drop to start in the 4-6 months ahead. The August spending bounce which led to the current narrow 5-month range portended an SPX spending cycle low around late February +/- a couple weeks with a subsequent large rally. In the previous bear market, we saw the spending cycle lows preceded by 10-30% SPX drops. Outside of the bear market in 2007 and 2009-2010, we saw the spending cycle lows preceded by 9-18% SPX drops. However, keep in mind the sample size is only 6, and we had a similar setup for a spending cycle top in November with projected 9-30%+ drop that only resulted in a 4.5% double bottom drop. A 5% drop from 1344 would target 1279. A 9%+ drop would target sub-1224.
2. The Shanghai-Midnight indicator. A Shanghai drop of more than 2.5% below all key weekly MAs was never confirmed and that stock index has rallied well since then, so this indicator is not likely to occur in the next couple weeks. We'd need to see an 8%+ fall. If anything, I think an SPX drop could coincide with a Shanghai test or piercing of its January low which might add conviction to a buy signal with a reasonable stop below.
3. System with Cycles. My new System takes the highest closing daily value in an uptrend and uses the lowest intraday low of that candle and the previous 2 candles to determine support. My new System also uses a 1.5-2 month cycle. When a support break occurs in the first 3 weeks of a cycle, it offers a buy opportunity often around the 10dSMA or 20dSMA. When a support break occurs in the middle week of a cycle, it portends a choppy week that could result in a new downtrend or continued downtrend. When a support break occurs in the last 3 weeks of a cycle, it offers a sell opportunity with support often occurring near the 20dSMA, 50dSMA, 200dSMA or lower BB20. To aid in profit-taking and re-entry points, I use well-studied technical daily indicators like NYAD, TRIN, Dynamic RSI, VIX, 10dBB, pivots and retracement levels.
Below, you will see a 1+ year chart with cycles and System support breaks. The horizontal blue lines represent projected cycles based on 38 +/- trading days starting at momentum lows which sometimes coincide with price lows. In some cases, you'll see 2 stacked horizontal lines which means that particular cycle could have started on one of 2 days, because I look at multiple RSI timeframes to determine momentum lows near a projected cycle end date and sometimes different RSI timeframes produce different momentum lows. In those cases, you'll often see a double momentum bottom at the end of the next cycle matching the 2 potential start dates OR you'll see one low in between the 2 projected cycle end dates. The blue circles on the chart are 3-candle support breaks early in a cycle offering buy points. The red circles are 3-candle support breaks late in a cycle offering sell points. The black circles are 3-candle support breaks in the middle week of a cycle offering a decision point for the market. You'll notice every buy and sell point worked for multiple percent gains. The record is not perfect in my studies back to 2004 but it works very well. Trading in real-time is ALWAYS tougher, but if you trust the System, it pays off over time based on many years of backtesting.
My study of larger cycles up to 4.5 years in length suggests a convergence low in early-to-mid March, while the 1.5-2 month cycle suggests a March 23rd low +/- 2 weeks. Assuming SPX breaks 1294, that confirms the drop from 1344 is a significant new downtrend likely into the cycle low. Cycles do not tell you whether SPX will make a higher low or lower low, but we have had 4 consecutive cycles with higher lows and it is rare for the 5th one to do the same. So, SPX is highly likely to pierce the 1271-1276 range and possibly go much lower. The current cycle low is not likely to occur before March 9th and could carry to March 23rd or beyond. On the chart, you can see that as a cycle end is approached, a bottom is almost always preceeded by a multi-week daily TRIN high 1-4 days prior and that usually coincides with extreme NYAD/TICK lows, stoch below 30 for a second time within 1 month, RSI divergences and VIX near its 20dSMA or BB20.
To arrive at more precise targets...
1344-->1294=50=wave A/1?, so 1332-(A*1)=1282 and 1332-(A*1.62)=1251
1011-->1344=333, so retracements would be 23.6%=1265, 38.2%=1217 and 50%=1177
So, a common ABC down from 1344 could easily reach 1251-1282, and, if 1344 was a more serious top, SPX should test the previous 1173-1227 pivot congestion area. The multi-month TRIN high on Tuesday supported the current bounce to 1332. The 20dSMA is now important. If bears can get below it particularly on a closing basis (1322-1323 on Friday), their chances are good for a continued downtrend. Otherwise, a new cycle high willl likely be made above 1344 with a 20dSMA back test near 1330 in a couple weeks. One last thing...I saw a chart today that reminded me that the 1980 and 2008 recessions started with inflation-adjusted oil (WTIC) in the $80-100 range, the only other times that happened other than the last few months. So, based on that indicator alone, the odds favor that the US is entering another recession in 2011. The NYAD setup on the chart below can be an initiation setup, but not usually 5 days after a low, so the odds favor a down-to-sideways move over the next 1-3 days and the high TICK and VIX near its 20dSMA supports the same. Good luck.
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