Mon 6/20/11. Secret weapon & 1220/1345.

(Update Thu 4:15PM EST)
Daily indicators did end in a potentially bullish bullish setup and SPX closed only 3 pts below the 10x gap line. And, the large daily reversal candle is one only seen a few times per year and 90% of the time it's a good bottom or the day before a bottom. Unless something changes the fundamental view of the market tomorrow, SPX is likely in a multi-day (and possibly multi-week) uptrend, but 1287 must be broken. I think the 1293-1295 resistance area was weakened by the rally earlier this week to 1299, so a solid break of 1287 should allow SPX to rise to the Fib, price and OEW pivots at 1302-1317 (and probably on up to 1312-1330).

One more thing. Discretionary spending has leaped to its highest levels in about 1 year. http://www.consumerindexes.com/ Spending is due for a short-term cycle down next week, but the last few weeks of higher highs add significant weight to the March 2011 spending low which points to a likely SPX low around September 1st +/- based on spending/stock lag time. Let me emphasize that means a BIG Aug/Sep SPX bottom is still highly likely and growing in probability. See my unedited chart below from 2 months ago. I was projecting a May top followed by a test of SPX 1249 and the bull market uptrend line followed by a retest (or break in the crash/bear market scenario) into Labor Day. As you know, I believe SPX must break 1220 to make a new bear market likely. It just so happens that is about where the July/August 2010 uptrend line crosses around Labor Day and that same line crosses 1200ish in July. Remember, my ideal crash scenario projects a July break of 1258 to 1200ish followed by a quick backtest and drop to 1100ish, but one bullish scenario could see SPX hold up at 1220-1250 around Labor Day while the ultra-bullish scenario requires SPX to surpass 1345. Essentially, the bull market uptrend line has helped support SPX now (precisely if you use closing lows) and I think the summer 2010 uptrend line will do the same at either 1200ish in July briefly or 1220-1230 in Aug/Sep. Good luck.

(Update Thu 3:15PM EST)
There is no official System signal to exit the short position opened at 1291 or to open a new long position, but the System gives leeway to close 25-50% of a position until s/r is broken. I have now closed 50% of the short position at an average of 1275. I was going to move the System into short-only mode, since we likely had a mid-cycle bounce at 1258 and daily indicators were not oversold enough to indicate a typical bottom. But, today's rally certainly has reversal potential, the Greek news temporarily reduces the risk on one large world economic issue, SPX did not quite reach a common 38% retrace at 1302, some of the record sentiment/breadth levels could need a little more time to be worked off and sentiment was leaning heavily towards a break of 1258, so a reversal is not out of the question and I am going to treat today as another potential bottom and move my short exit and long entry down to 2-candle resistance at 1287 until today's low is broken. Until 1287 is surpassed, I'll remain short and probably add once SPX breaks back below a key level like 1273-1277.

Even with the IMF/EU 5-year deal for Greece, the Greek government still has to approve austerity next Tuesday, but that seems very likely despite the jaw-boning especially given a long 5-year deal. After that vote, we head into end of quarter window dressing and July 4th weekend with quarterly economic and earnings news in July and a debt ceiling climax by early August. IF IF IF SPX can get back above the "gap" line which is currently at 1287ish and oil finds temporary support, I can see a scenario where SPX trades up into the Tuesday vote forming an ABC from SPX 1258 which could top if Greece votes against austerity forcing a possible 1258 test on July 1/5 or could extend higher to 1312-1330 as I originally proposed with a possible 1258 test on July 12/13 and collapse into end of July through all the earnings and economic news followed by a dead-cat bounce upon approval of a new debt ceiling. I don't know which way this is going to go, but I feel comfortable with the System trading position right now regardless of the market's choice. Crazy stuff. Good luck.

P.S. With only a few minutes left before the close, NYAD is making a small change near a bearish extreme on the 2nd day of a reversal, TRIN is a little overly bearish still, MACD/stoch avoided bearish crossovers, SPX bounced strongly off its 200dSMA again and VIX has dropped back down not too far above its 20dSMA. All of those things are potentially a very bullish setup. SPX is creeping up near the 1287 stop level, so there's a chance the System will get gapped out of a trade (above the line from 1344 that has 10 gaps around it) for less profit but dems da berries if it happens. Bears probably need the latest Greece news to be debunked. wow

(Update Thu 12:45PM EST)
The System was stopped out of its remaining long position Wednesday morning at 1291.75 for an average exit price of 1293 from an entry at 1269 thus turning a profit of 24pts. Being in long-short mode, the System entered short at the 4-candle break at 1291.75 with a stop .25% above 1298 at 1302. SPX closed 1 point below the 9x "gap" line from 1344 on Wednesday and then gapped down big. Daily indicators will need to be evaluated at the close, but they are not currently oversold enough to indicate a reversal.

The first 2 criteria for a crash setup have been met: an 8-10% drop and a sizable retrace (11 of 12 crashes retraced to the 20dSMA and 33%+). A break below 1258 would satisfy the 3rd criteria and increase the odds of a crash greatly. Such breakdowns historically occur on day 7, 11 or 18ish from the momentum or price low. We are on day 5-6 (depending on how you count it) from the price low and day 11 since the momentum low, so Fri/Mon is one probable breakdown day followed by July 1/5 or 12/13 if SPX somehow manages a bounce. About half of the breakdowns chop near the breakdown point for a few days or backtest the breakdown within a few days, and the main crash damage is usually done within a few weeks, so my July 19th +/- cycle date could turn out to be a crash low followed a sizable bounce and then further weakness into late August. There is the possibility for an EW 5th wave completion below 1258, but the intermediate-term bottom in USD, my Shanghai Midnight indicator, the discretionary spending lag and various large cycles favor more weakness ahead. A new bear market is highly likely if 1220 is cracked as I described in detail below. Good luck.


(Update Tues 3:55PM EST)
Here we go. Nearly a 38% retrace of 1371 on day 4 of the rally breaking the 1290 "gap" line from 1344 (9th gap around that line counting a couple gap 'n gos like today). Typical minimum bounce behavior has now been met in terms of price and time. Ultimately, I thought 1312-1330 would be reached to fool the most people, but almost all of my daily indicators are setup for a daily reversal, so the System is exiting 25% of its long trade (from 1269) at 1296 and another 25% if there is a nice move up on Wednesday. The Greece news and Fed news tomorrow has real potential to create a big move, but I think any big rally will be sold at least temporarily. Good luck.

(Update Mon 3:50PM EST)
I am probably foolish to even raise the possibility of a large gap up, but please recall the odd line that I mentioned last week that was at or near 8 different gaps from SPX 1344. It is at 1290ish now. SPX is probably too low to gap through 1290, but the Greece news is potentially explosive so the next 2 mornings are at risk for large gaps in either direction followed by the Wednesday Fed announcement. Today's small NYAD change suggests the same explosive possibility, and it would normally favor down but it's more neutral once you get to day 3-6 of a rally. Good luck.
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There has apparently been a blog upgrade. I tried to edit my previous post several times since Thursday night, and I received site errors, so I finally decided to make a new post today only to see the new design. Anyway, let's discuss technicals.

The System was almost stopped out at 1258 by rule in long-short mode off a likely bottom, but the System remains long from 1269. Virtually every rally off significant bottoms in the last few years retraces 38-62%+ of the previous high within 4-7 trading days with mixed results after that. If SPX can break 1279, such a rally could take hold with a target of 1302-1328 +/- by Fri/Mon.

Obviously, economic and world news has been horrible. The limited good news can basically be categorized as short-lived artificial stimuli, can-kicking, jaw-boning and/or results better than worsening expectations. There is absolutely nothing that convinces anybody that any of their top 7 economic concerns will get significantly better in the next few years. For almost every middle-class person, those top 7 concerns are jobs, housing, health, energy, food, retirement and education. For almost every lower-class person, they know the government handouts and tax breaks are about as good as they can get. For almost every upper-class person, they know corporate profit margins and balance sheets as well as the stimulus-induced stock market rally are about as good as they can get. What do you think happens when almost everybody expects their situation to stagnate and likely worsen? Collectively, they buckle down, spend less, invest less, vote for change and prepare for leaner times. After seeing 2 deep stock market selloffs and recessions in the past 10 years with the failure of stimulus this go-round, America and much of the world is at a "recognition" point. It is for that fundamental reason that I believe that the stock market is at or near a HUGE turning point ultimately breaking below the 2009 lows with sentiment getting more bearish than we've ever seen it due to the growing core bearishness of nearly every man, woman and child on a longer-term basis. Sure, I have technical reasons for short-to-long term tops in SPX, but fundamental recognition of the climax of artificial debt-induced leveraged growth certainly adds weight to those technicals.

Now, let's discuss a secret weapon of sorts. While studying weekly SPX charts back to 1980 looking for bear market confirmations, I determined...if SPX exceeds a previous significant top by 8-10%+ and then breaks below that top, you can expect the next significant bounce to fail (before new highs) followed by a drop that will start a large bear market if it can break below the next lower significant top.

Let me put that in terms of today's situation. SPX must break below 1220 as the first condition for a lengthy bear market. In April 2010, SPX reached 1220 and then dropped to 1011. In February 2011, SPX exceeded the previous 1220 top by 10% at 1344 before falling to 1249. So, although most people are focused on SPX 1249, it would actually be quite common for SPX to penetrate that level and then make new highs. Historically, if bears can break below 1220, SPX will struggle for at least another month or two and probably start a new bear market given the other fundamentals and technicals that I follow. One problem we have in terms of forecasting what will happen if SPX breaks 1220 is that the range in which a large bounce will start is 1011 to 1220 with a bullseye at 1116. However, I think SPX would bounce from 1175-1200 first, because...
1. there was a minor high/low range at 1174-1227 that lasted about 7 weeks and created a lot of price-volume support.
2. the Dow must make a greater percentage drop to break its top equivalent to SPX 1220, so I think SPX will not stop a few points below 1220.
3. the next lower significant tops that occurred prior to SPX 1220 are 1150 and 956, and I think SPX will not break those on the same drop that breaks 1220. This has historical precedent although 2 or 3 tops can be broken in one crash like 1987.
4. it's a perfect mid-point bear market train station stop if I presume SPX will ultimately test 1000 and then break below 666.

Currently, SPX has NOT broken below 1220, not to mention 1249, so a bear market is NOT confirmed. However, if the next bear market lasts from May 2011 until late 2012 or early 2013 down to SPX 470 or 620 (there is old SPX support at 439-483 and 606-681) as my studies suggest, a time and price mid-pt would be March 2012 at 920-1000. Once the summer 2009 SPX 956-->869 range is broken, there is little support until 608-681 based on the significant SPX top in 1996. So, IF IF IF, SPX 1220 is broken and a bear market begins, I see the following bottoms based on my analyses above: 1200ish, 1100ish, 950ish, 650ish, 460ish.


Also, I should add that, historically, once a top pivot like we have at 1345 is broken, a bear trend is usually over and new highs are likely. That is not hard to believe at all today because 1345 is only 2% below the 1371 high.

To kick off a longer-term bearish scenario, we could still have a crash setup as I outlined criteria for last week. SPX has fallen 8.25% from 1371 to 1258 which meets the first condition, and a typical pre-crash bounce 2nd step would be a 38% or 62%+ retrace to 1302 or 1328+. If that occurs, then a subsequent break of 1258 would increase the odds of a crash. If we see the break after 7 trading days or preferably 11 or 18ish trading days (July 1-13), that would also fit most previous crash scenarios. However, I discussed how half of the previous crashes from 1981 had brief backtests before continuing lower. Since a lot of people are watching supports at the 200dSMA all the way down to 1220, I have a strong feeling that capitulation will build as SPX breaks the 200dSMA, 1258 support, 1249 support, 1233 Fib support and 1227/1220 pivot support ending in a final low around 1200 or a little lower as I projected above after most stops are taken out. Then, SPX could backtest 1250-1260 before dropping 8-10%+ to 1125-1150 or lower to my 1100ish bottom estimate in July likely followed by one more low around 1100ish (or possibly even 950ish) in late August or September when discretionary spending projects a low.

Anyway, all of that analysis is probably looking too far ahead, but the basic idea was to identify markers for bear markets and crashes. It is very helpful to swing trading and, in situations where daily indicators are muddy, it can increase your odds of being on the right side of most trends. In summary, SPX could be setting up for a crash trade at 1258 (or whatever the final low is near-term) and a likely bear market confirmation at 1220. If so, the best money will be made on the short side this summer and possibly into late 2012. Good luck.