Thu 6/9/11. SPX bounce targets.

(Update Fri 2:05PM EST)
System resistance has dropped to 1275.37 where the System would attempt another long...the first long was a loser 1293-->1285 and the second was a draw at 1284. There has still not been a 30% retrace of the drop today much like what happened on the gap down from 1345 making a System short unsafe by rule and unfortunately keeping the System out of juicy short positions. Now, System resistance has fallen close enough to current price under imminent bottom indications to justify a long again if resistance is broken. Looking back at my in-depth hourly chart studies (which encompass just over 1 year), there have been several occasions of 3 whipsaw trades before getting a sizable winner, so there's a chance we'll have to endure 1 or 2 more whipsaws or the System could even convert to short-only mode even without a sizable bounce if SPX can trade sideways for 2-4 days and relieve bottoming conditions or show bearish reversal signs.

I am not yet sure what to make of the count/pattern. I suppose all 3 of my projected scenarios below are technically still alive, but now there is the additional possibility that Scenario #1 is being finished now with a wave 5. However, the drop thus far seems too small and short to be a wave 5 of the same degree as 1371-->1312, so I'd discount that possibility unless SPX trades much lower forcing another whipsaw trade or two. Nonetheless, today's drop lowers the price targets for any rebound with 1295 gaining even more importance. The trend is still down with normal odds for a short-term reversal very high. Have a good weekend.

P.S. Just after the close...Official daily RSI5 and RSI14 posd plus 7th hRSI5 posd since SPX 1306. NYAD quadruple dip without overbought relief and TRIN spike 4-day carryover were also confirmed at the close...very rare. The crazy thing is despite the relentless down move and horrible sentiment surveys, SPX is still only 7% from its top with VIX fairly tame and no obvious capitulation day. I guess you could say it feels worse than it is when I look at it objectively. You can look at that both ways: crash or dash. Thus far, the System has only taken 1 small jab playing the normal signs of a bottom. That will change if SPX gaps down huge on Monday, so I'm not real comfortable here to be honest. But, then again, the 1 hour 11pt rally in the afternoon shows how quickly things can turn up 20-30pts so a heap of caution is advised for bulls and bears alike. 1295 became extra important today although Fibs and moving averages are now moving down closer to that level so it's not exactly smooth sailing for bulls above 1295. It is looking more and more likely that the bear market has started, but I suspect bulls have at least 1 good dead-cat rally still in them based largely on historical charts. More on Sunday or Monday. Peace.

(Update Fri 9:55AM EST)
System support was at 1287.68, but SPX gapped down below it, so the best exit was 1284 for a draw. Based on more than a 10pt drop from 1295, the System requires a 30% retrace before entering short. But, I am not inclined to take that trade with SPX already near the low and many conditions still pointing to an imminent bottom. We are now testing lows on the 4th day after the 2nd TRIN spike which is unusually extended. NYADV is making its 4th spike down without climbing above 2000 which is also very unusual. Hourly RSI5 looks like it may make its 7th positive divergence which is likewise unusual. Oversold can get more oversold and the trend is down, but the typical conditions for a 40%+ retrace rally are there. Good luck.

P.S. SPX has made a new low below 1275 with hourly and now daily positive divergences...thus far. Hourly resistance will drop down to 1289/1284/1279 if SPX closes lower in the coming hours. The downtrend should not be traded against until resistance is broken. The System has now been stopped out twice trying it with a minor loss as SPX has traded another 1%+ lower and a 3rd such case would be unusual. The new low changes the potential wave counts a bit, but I'll reevaluate after the close.
______________________________
For 1-2 weeks each month, I am either traveling or swamped with work deadlines that limit my posting. I am ending one of those periods now, so I should be able to post brief updates more often during the next few weeks. I haven't traded any in the last 1+ week until this morning on a System long signal.

System
Based on daily indicators suggesting an imminent bottom, I lowered System resistance to 2-candle hourly resistance at 1292.75 on Tuesday and placed the System in long-short mode. That resistance level was broken issuing a System long trade and then that position was stopped out at 1284.71 for an 8-pt 0.6% loss. It turns out that 4-candle resistance was never broken at 1296.93 which means the System would not have gone long if I would have placed it in short-only mode. However, it is fairly common to get stopped out once and occasionally twice for break-even or a small loss when trying to time an imminent bottom, but my study shows there are typically more gains on the upside than downside in those situations and you know from your own experience that relentless cascading bottoms are the exception to the rule and System stops are put in place to avoid getting caught in one. The key is only going long against the trend at imminent bottoms for which I have fairly well defined signals. Since that long trade on Tuesday, the System went short at 1284.71 on Wednesday and was just stopped out of that trade for a 1pt profit at 1283.95 where the System also went long. Hopefully, the whipsaw trading period is over, but it's the price paid for maximizing gains near bottoms using my System. Interestingly, the June 8-9 echo low date suggested by my cycle work and the mid-cycle 1295 low appears to be playing out although I certainly didn't expect it to play out the way it did.

Patterns
I didn't have time to post my findings like I am now, but, late last night, I was looking at recent cascading downtrends such as May-June 2010 and Sep-Oct 2008. I already mentioned that TRIN spikes typically lead to bottoms within 0-3 days, but I also mentioned that double TRIN spikes produced a couple exceptions. Monday formed a double spike which fit previous exceptions and allowed a couple more downside days than normal. Now, I've noticed that once 60min RSI5 hits an extreme low, the most serious downtrends will produce 4-6 positive divergences with price making a new low on a higher hRSI5 low before price rallies hard. That is not to say that each RSI5 reading is higher than the next, just that they are all higher than the original extreme low. There is a similar setup for RSI14, but it typically only reaches 2-3 positive divergences. Well, the last hour Wednesday low made the 6th hRSI5 positive divergence (and the 3rd hRSI14 posd) as compared to the original RSI low seen at SPX 1306 which happened just hours after the previous 1312 cycle low was broken. In addition, there was a possible EDT 5th wave down from 1297. So, there was a definite setup for a big SPX rally although SPX could have continued its last posd for a few hours this morning and chose not to. I will add that all of the rallies I studied (admittedly a limited set) off those extended posd bottoms retraced at least 40% of the previous key pivot. In this case, a Fib 38.2% retrace of 1345 is 1304 and a Fib 38.2% retrace of 1371 is 1313. That lines up with the 1303-1313 OEW pivot area that I targeted for a minimum bounce on Tuesday. I'd say that target still stands.

The contracting EDT scenario from 1174 is eliminated, but the megaphone pattern from 1249, a diamond pattern from 1249 or an expanding EDT from 1174 are not eliminated all of which would allow new SPX highs. Don't get me wrong. I don't buy any of those now that we've had such a cycle failure but I won't entirely dismiss the possibility of a double top like we had in late 2007. From SPX 1374, I can count 5 waves down with a long wave 1, shorter wave 3 and even shorter EDT 5th. I previously suggested an LDT for 1371-->1312 as the 3 choppy bottoms supported. So, we have a potential 1-2-1, 1-2-3 or ABC count for 1371-->1277. You know how all of these setups have turned out for the last 2+ years. Bullish.

Is today different? Very likely. Why?
1. The previous cycle kept extending to the outer limits of my cycle window at SPX 1312 suggesting strong downside pressure.
2. The current cycle ended in a few days never quite obtaining a bullish configuration and quickly falling below key moving averages and support. That had not happened since the last bear market.
3. We had lots of long-term cycles and systems suggesting a huge top between April 27th and late June was extremely likely. Most of them indicate 9%+ downtrends which we have not quite achieved, although I should say a near-7% correction fits the weaker resulting downtrends in the past.
4. SPX is in a bearish configuration now although the bottom indications suggest there is a chance SPX could break that configuration soon, but it will likely need to reach 1330+ to do so.
5. The fundamental economic news is horrible.
6. Seasonality from May to September is working against the market.
7. The USD is bottoming although I suspect it has another couple days or weeks of downside probably breaking the 2011 low with posd. A strong USD rally should hurt stocks and commodities.
8. Even without USD strength, commodities look like they are all the final phases of rally or dead-cat bounces. USD strength should make their next drop more persistent.
9. The Shanghai Midnight indicator. It could have already been fulfilled since SPX fell more than 4% from the signal near SPX 1345 and SPX has fallen nearly 7% from 1371. Those percentage drops are on the weak side historically for Shanghai Midnight but not out of the realm of possibility. Still, I posted a Shanghai Composite chart a couple times recently and it clearly shows a 3-year triangle that likely broke down a couple weeks ago although there is another interpretation for a larger triangle that held. In either case, an important decision is likely within weeks. And, Shanghai midnight accompanied the 2 biggest SPX routs in the past decade, so it's not to be taken lightly especially if the triangle breaks down. I projected a 2-4 week Shanghai bounce off its key trend line from 2008, and we are in week 2 now.

Overly bearish sentiment by many surveys and technicals is a wrench in the works of the bearish case, but it just means any downtrend is likely to be choppier than most expect. I see and hear a lot of bearish people targeting the 1249 pivot or a little lower. I've been suggesting 1220-1250 as a target for July and potentially even Aug/Sep for a long time, so I feel like I'm on a bandwagon that is starting to get full but not quite full yet. The only way I see a downtrend avoiding a lot of chop is if the 1220-1250 area is broken causing a "recognition" event. That would likely require the heart of a wave 3 coinciding with a H&S breakdown which would dually suggest that 1220-1250 is merely the halfway point from 1371 thus targeting 1070-1120 minimum. IMHO, the uber-bearish case needs to break SPX 1220-1250 to see true capitulation even if sentiment is already extremely bearish.

Current bounce targets
The OEW pivot at 1291 and recent action around 1294 makes the 1291-1294 area likely resistance as we've seen today. However, there is stronger resistance overhead that I expect to be tested in the coming days. 1304-1313 includes the Fib 38% retrace of 1345 and 1371 as well as a 50% retrace of 1345, 2 key OEW pivots, the 20dSMA in about 3 days, the previous cycle low of 1311.80 and the h89SMA and h89EMA. That's a lot of potential resistance as far as the things I watch, and it would fit the typical bounce seen after 4-6 consecutive posd readings for hRSI5 as I described above. If that 1304-1313 resistance is broken, there is minor pivot resistance at 1318ish and further Fib resistance at 1321-1324 and again in the 1330s with the 50dSMA near 1330. Until SPX reaches a bullish configuration likely at 1330-1335, I will keep the System in long-short mode, and, if I see strong daily reversal indicators on this bounce, I will move the System to short-only mode until stopped out. This bounce could last several days possibly past the June 13th confluence date or into June 17th OPEX or the June 14-22 McLaren top window, but 'm expecting it be a dead-cat bounce in any case.

Downside targets

Let's assume SPX cannot achieve a bullish configuration above 1335, because, if it does, that opens up another set of possibilities, mostly bullish. I can see 3 scenarios unfolding.
1. The 1371-->1277 drop was a 1-2-3. If so, SPX should not exceed 1311.80 although it could pierce it in an LDT scenario if it happens quickly. Wave 5 would likely approximate wave 1 at 59pts although a Fib multiple of 35-73 would be possible. Even if SPX tops at 1293 today, none of those targets would support capitulation below 1220. And, I suspect SPX will test 1303 at a minimum and take a little more time to bounce before falling for another couple weeks. In any case, such a drop would not likely last until the projected cycle end date of July 19th, so the cycle end would likely occur on wave 2/B of the subsequent rally.
2. The 1371-->1277 drop was a 1-2-1. If so, SPX could technically rise as high as 1345 and would likely approach a 50% retrace at 1312 but would not likely exceed the 1320s. Then, SPX would likely drop 68+ pts matching or exceeding the length of 1345-->1277. In such an event, SPX might travel 1310-90=1220 or 1320-70=1250, but, once again, you can see the 1220 capitulation level is not likely to broken. Also, such a 1220-1250 low would likely occur by early July which would make it a questionable cycle low. So, we'd likely get a bunch of 4-5 waves into mid-to-late July near the 1220-1250 area to end the cycle OR we'd get another nested wave 2 bounce in early July with a wave 3 down into mid-to-late July well below 1220 with the subsequent cycle bounce ending in a wave 4 bounce below key moving averages.
3. The 1371-->1277 drop was an ABC as part of a multi-month sideways triangle or diamond pattern. If so, SPX could test the 1330s before dropping one more time to the OEW pivots at 1291-1313 in choppy fashion into July. The mid-to-late July cycle low would then likely become a blastoff point for a final rally into late summer or early fall, and the price low would already be in for this cycle at 1277.


I give the least credence to the 3rd scenario, but I do not dismiss it. If SPX can reach the 1320s or 1330s, we will have eliminated scenario #1 and will be looking for clues between scenario #2 and #3. If SPX tops at 1304-1313 or so, we'll be looking for clues to favor scenario #1 or #2. Ideally, we'll see some daily reversal indicators and hourly negative divergences to give us an early warning of a top. If SPX can top at 1320ish, the most bearish scenario #2 will jump to the front of the pack and give us more bearish conviction, but I doubt we'll get so lucky. In every scenario above, I am expecting the current bounce to be an ABC, so any 5-wave rally is likely to be followed by a shallow retrace to maybe 1285-1290 and then another strong rally. Keep in mind the Shanghai Composite and US Dollar. If we see Shanghai back test its bearish triangle breakdown and then head back down along with a USD bottom, you have a potent setup for bearish Scenario #2 with bad fundamental news to fuel it. We'll see. Stay awake and good luck.