(Update Wed 3:15PM EST)
The System took 25% profit on its long position at 1307. It will take 25% more profit on any SPX spike to 1310+. The stop has risen to 1297. I expect to go 100% long again on a dip to 1295-1300 but I'll need to see the candles and MAs. Thursday is setup to gap down or reverse down depending on the news. The next 8-12 pt dip will likely be wave 4 of C from 1258 with wave 5 probably starting just before or after July 4th weekend setting up next week for a potential wave 2/B top at 1312-1330 counting down from 1371. Regardless of whether or not that EW pattern plays out, SPX can top at any time, but I think a "little" more time and price would help the bear case by working off some excessive bearish sentiment and trapped trades. Remember, bears need to strike in July, and if SPX breaks 1258 around July 12/13, the crash scenario to 1150 is highly possible based on historical chart patterns since 1980. The July 8th jobs report seems gift-wrapped to be an important date for bears whether that kicks off wave 3 (or 3 of 3) or ends wave 2/B. If bulls can stay above the 20dSMA through mid-July, the bearish case will be much less likely. New highs are possible. A bear market is not a high probability until 1220 is cracked. Good luck.
(Update Wed 11AM EST)
The System is still long from 1287 with rising support currently at 1293 and with 3 very successful trades in a row going long-short-long after 4 choppy trades. I continue to prefer the 1312-1330 target area. SPX is very likely completing wave 3 of C from 1258.
A=40.54pts. C=A*1.382@1319. So, 1319 +/- and a 1.23-1.62x Fib range fits well with 1312-1330.
w1ofC=21.37pts. w3ofC=w1*2.5@1316. So, 1310-1320 is a good target for w3ofC with 5ofC slightly higher.
Also favoring the 1310-1330 target area is the 50dSMA, the OEW 1313 pivot, four recent multi-day pivots at 1312-1318, Fib 50-62% retrace of 1371 at 1314-1328 and the upper BB20 at 1310. Indicators are overbought and I expect some small wave 4s back to 1295-1300 after wave 3ofC finishes imminently. If SPX manages to exceed 1330, new highs are likely unless the bears could immediately reverse strongly. Initial claims will be announced Thursday morning and it would be fitting of the trend if they meet or beat expectations and I've heard June is supposed to be a stronger month due to summer jobs. There will also be more Greece news probably solidifying movement towards a can-kicking deal. But, ultimately, I expect SPX to top any day between now and July 8th when the quarterly jobs report is announced. My 1.5-2 month cycle is not expected to make its final low (not necessarily a lower low) until July 19th +/-, so we are actually entering the most dangerous part of the cycle and the System will be more inclined to stay short especially once the 20dSMA is broken again. Good luck.
(Update Tues 9:15AM EST)
The System lightened up 25% on its SPX short position an interior 2-candle resistance break at 1273. Given that the System is still in long-short mode, the System will exit its short at 1286.61 at final resistance and go long if that level is reached.
Interestingly, the SPX line that has been gapped through/from 10 or 11 times since 1344 now sits within pennies of 1286.60 resistance. Futures suggest that level may be tested this morning. If SPX can get a few points above it, then it will likely become support and SPX will attempt to break the OEW 1291 pivot, 20dSMA and the 4 recent rally highs at 1293-1299. Obviously, the outcome of the upcoming Greek vote could be a catalyst. My suspicion is that Greece will vote for austerity and the stock market will rally until the real economy slaps us in the face with bad jobs and margin compression after the first few days of July, but, if 1287 is rejected or fails as support on the Greece news, the stock market is very vulnerable and could crash a week or two sooner. Good luck.
(Update Fri 6/24/11 4:30 PM EST)
After yesterday's late-day rally with potentially bullish daily indicators and a potential hammer candle reversal on one of the highest volume days in 2 months (albeit not extreme volume), I thought SPX would surpass 1287 today, but the System knew to stay bearish if 1287 wasn't broken and the VIX 20dSMA proved important. As planned, the System went back to a fully short position at 1275 almost exactly where it lightened up, so the position still has an equivalent price entry of 1291. Today, there are quite a few daily indicators suggesting a potential bottom (TRIN>2, NYAD small change again, MACD not crossing bearish, 200dSMA + lBB50 support), but nothing seems extreme enough and SPX is not far above some key lows at 1249/1258/1263 which could cause a quick flush. So, my gut says SPX will flush lower next week, but my gut is hit or miss and there is certainly plenty of evidence to support a strong short-term rally too. The last 3 days' action is similar to the 3 days into the 1249 low except SPX did not make a lower low this time and thus did not get as extremely oversold. And, this time, a crash setup, bear market setup, 200dSMA and new intermediate-term low are on the line. The stakes are higher. Will the market make another stick save like it typically has in this situation for the last couple years? A large gap either way on Monday wouldn't surprise me. Maybe more news over the weekend about the Greek 5-year deal or the Tuesday austerity vote will set the stage for better or worse. Good luck and enjoy your weekend.
P.S. Small caps and tech do not look as bearish as SPX/Dow after today's action. The waves are not obvious but they are largely overlapping so it all still looks corrective or like a series of 1-2 combos. If SPX/Dow does not gap up or down big on Monday and trades fairly flat to up on Monday (maybe 1265-1280 for SPX), I would be open to a triangle forming after the 1258-->1299 rally in which SPX is finishing its triangle c wave now. In that case, 1258-->1299=A, 1299-->1275=B (triangle apex?) and C=A*(62% or 100% or 162%) at 1300/1316/1332 so the 1312-1330 projection would come into play again if Mr. Market wants window dressing and holiday cheer into July 1/5. That's not a prediction, just a possibility that would allow for a more typical price/time retrace if SPX triangulates Monday. If SPX gaps down, FIBBEWIE favors 1227 +/- so 1220 could come into play. If SPX gaps up, FIBBEWIE favors 1306 +/- so the 1312 target could come into play. I probably won't post again until Monday unless I discover something worthwhile. Peace.
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SPX was unable to continue higher above 1287 this morning, so bears have an opportunity to retest the lows. A reasonable percentage of reversal candles like we had yesterday were retested/pierced but very few led to bear trend continuations. Putting the next few days aside for a moment, I think bears have a limited time window to inflict serious damage on the stock market.
Why?
1. Consumer spending: Yesterday, I mentioned that consumer discretionary spending has spiked near its highest levels in a year. Visit http://www.consumerindexes.com for details. I also mentioned that confirms the March spending pivot low which projects a very important SPX bottom on September 1st +/- a few weeks. I forgot to say that a new multi-month spending high is also likely at the end of June which projects a short-term bottom 4-7 weeks later in late July to mid-August. If you put the 2 projections together, SPX is likely to completely bottom in the first half of August OR bounce well in late July/early August and make a lower low in late August or September.
2. The Fed: QE2 ends on June 30th with limited repurchases in July. The Fed has not indicated that it intends to do anything dramatic, and nobody expects to hear anything significant from the Fed until at least August. The market struggled badly after QE1 and the economy appears to be downtrending again.
3. Greece: The Greek debt issue is likely to be resolved for better or worse for at least a few months after the Tuesday vote. Obviously, if Greece receives a lengthy and sizable debt extension by agreeing to more austerity, the market will likely react positively and vice versa. But, within a week or so after that event, the market will trade on other matters...possibly even other European countries and problems.
4. Shanghai Midnight: Since Shanghai dropped more than 2.7% below its key weekly moving averages and triggered my Shanghai Midnight indicator several weeks ago, SPX has fallen another 6%+ for a total of 8.25%. That fits well within the range of previous cases since 2000, so the damage could already be done, but there were 2 or 3 cases including 2008 that fell much further. Shanghai looks like it has either broken down out of a multi-year triangle that might need a little more backtesting OR it is forming a larger triangle which would lead to months of further chop. If Shanghai is backtesting its triangle breakdown, it should begin trending down again some time in July. Otherwise, a larger triangle leg up would be supportive of the SPX for a few months.
5. US Debt Limit: Supposedly, the deadline is August for raising the debt ceiling without inflicting damage to US credit ratings etc. The odds favor nothing getting solved until the deadline gets closer, and there will probably be a lot of jawboning in the mean time casting a dark cloud over the market. There is likely to be a relief rally once an agreement is reached by late July or August.
6. Cycles: Many short-term and long-term cycles pointed to May/June as a large SPX top. Nearly all cycles are rolling over to apply downside pressure to SPX, but cycles obviously have highs and lows and you can look back at bear market history to see most serious downtrends last 2-3 months (occasionally 4) and then retrace significantly. And, a new high is not excluded at this point. With the current SPX top on May 1st, August 1st would be 3 months, so, historically, we should see a significant downtrend low on August 1st +/- a few weeks. My current 1.5-2 month cycle projection is for a low on July 19th +/- 10 days.
7. Earnings and the economy: Mid-July starts earnings season and we'll see a lot of Q2 numbers into early August. In all likelihood, those numbers will point to continued margin pressure, economic problems and stagnation. If so, the July news should cause headwinds for SPX. However, the recent commodity drops will likely pass through beneficially to the economy over the next couple months and provide some temporary relief and positive news. The discretionary spending surge in the last few weeks confirms that to some degree. That means the non-Q2 Jul/Aug/Sep news should show some signs of improvement.
So, a lot of key factors suggest very little upside pressure and lots of downside pressure for SPX through July. However, that should reverse into Aug/Sep which suggests bears need to do their most stock market damage into late July or early August. If the damage is big enough, there will likely be a lower low into late August or September. A break below 1258 is needed to favor a crash to sub-1150. A break below 1220 is needed to favor a new bear market although 1200ish might be needed to drive the Dow below its March low. Using my studies of 12 previous crash scenarios since 1980, I believe July 1/5 or July 12/13 are the most likely approximate dates for a breakdown of 1258 if such a breakdown is to occur (and assuming the breakdown does not occur today or Monday which has precedence albeit lower odds), and that would certainly give bears the opportunity they need to inflict significant technical damage in July. If SPX cannot exceed 1287, then we could be in for serious trouble beginning within the next week. Otherwise, the top should occur in the first week of July to keep the most bearish scenarios alive. Good luck.
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