Mon 7/11/11. Once a week posts.

(Update Thu 7/14/11 4:05PM EST)
SPX has vascillated +/- 1% around max OPEX pain at the 1320 strike price with max pain leaning slightly more to 1310 than 1330. Unless we get some bad EU/debt news overnight, there are a few things that could push SPX up near 1320 on Friday. (1) The debt ceiling $1.5 trillion agreement rumor. (2) Great Google earnings just reported. (3) A potential 2-day wedge (LDT/EDT?). (4) OPEX max pain. (5) A potential 1-2-1-2-1 count needing a 40-60% retrace (1371-->1258-->1356-->1316-->1331-->1307). Regardless whether or not we get a 1-day bounce now, the time window I've painted for a possible bearish crash scenario based on cycles, spending and other analyses is closing, and the bears need to break 1290-1300 within the next few days without letting SPX back above 1331 since Dynamic RSI does not favor a 5-wave count for 1371-->1316or1313or1307 and there is no more time to overcome such a rally. If bears succeed, you could easily see a 100+ pt drop over the next 2-3 weeks +/-, but since we are approaching the 1st ideal cycle low of July 19th with choppy action, strong 1300ish support and some daily bottoming indicators, one has to be fully prepared to turn bullish for a rally to 1380+ if 1331 is exceeded or 1290-1300 holds in a6-month triangle scenario. One thing that bothers me for the bearish scenario is that a debt ceiling agreement is likely to lead to a 1-2 day rally, but, assuming politicians wait until near August 2nd, the damage could already be done OR that could be the news that appears to make a 1258ish test successful only to see it fade and trap retail bulls that subsequently panic. Not sure but all the macro news and government intervention does not make trading easy, so I'm just going to trade around a large short swing position until I see the bearish case fail or sub-1200. Good luck.

(Update Wed 7/13/11 3:15pm EST)
Short update (can't help myself): Dynamic RSI narrowly did NOT confirm the rally from 1258 is complete. SPX missed my 1300-1312 target range by 1 pt , but I expected an imminent 1%+ bounce hanging around 1320ish probably into OPEX Friday and that is playing out thus far. My analyses on cycles, spending, Shanghai, USD etc suggest downside pressure into late July at a minimum. So, if our new line in the sand at 1313 is broken, 2 EW counts will have equal weight: the 6-month sideways triangle from 1344 with new highs into the fall OR a new bear market with sub-1200 target in August. If SPX gets below 1290-1300 support, the odds for the bearish count increase dramatically. You know my System has a target cycle end date of July 19th +/-. Sometimes, I have 2 cycle projections when the previous cycle has a different RSI5 and RSI19 momentum low and that is not the case now, but, for 3 consecutive cycles, I have noticed an overlapping mid-cycle low and those lows have also been VERY significant at 1294 in February, 1294 in April and 1258 in June. That cycle pattern projects "a" low at August 2nd +/-. The 1st week of August happens to line up perfectly with a spending-projected medium-size rally of 4-5% +/- (larger rally projected to start as early as late July with bullseye target of Sep 1st +/-. And, we'll be through most earnings and the monthly job report then. So, overall, I would not be surprised if SPX makes one major low next week followed by another low the first week of August followed by a 4-5% bounce. In the bearish scenario, that would line up with a test of 1258-1268 in a week or so, a sub-1200 drop in early August, a 4-5% failed rally and then another severe drop possibly into Labor Day. In the triangle scenario, that would line up with a test of 1290-1300 in the next week followed by a wave 1 rally and then wave 2 low in the first week of August before taking off higher. Bears likely need to break 1290 next week for the bearish scenario to play out. Today's rally is fading fast as I type, but I suspect we'll get a C-wave bounce or a wave 2 bounce before the real damage begins. Good luck.
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For the next few months, I plan to limit my posting to once a week typically on Sunday night or Monday morning. At some point, I plan to re-dedicate myself to detailing System rules, trades and backtesting, but I need to focus on other things for a while.

After getting whipsawed over 4 trades for a small 1/2% loss as SPX bottomed at 1258, the System made huge gains over 3 trades culminating in a 1287-->1334 trade. Since then, I kept the System in long-short mode because SPX was in a bullish configuration while entering the window for a sizable cycle low. The result was whipsaw with a 15pt loss followed by a short at 1341 which has resulted in a 20pt gain thus far. Since 3-day candle support was broken and the ideal cycle date of July 19th lies just ahead, I am now moving into short-only mode likely for at least a few days. However, TRIN is currently above 4, NYAD is making a small change at a bearish extreme and VIX is bumping the underside of its 20dSMA. So, starting between now and Tuesday morning, it is very likely that SPX will bounce 1% or consolidate for 1+ day. It would be ideal if SPX can close below 1320 at 3PM thus pushing hourly resistance down from 1344 to 1324 where the System would fully exit its long position with a nice profit, but if we are not so lucky, then the System will exit 1/2 of its short position at 1324 to protect some profits.

Outlook: Since the System confirmed a bullish SPX configuration last week while my analyses of Consumer Discretionary Spending, Shanghai Midnight, USD, cycles etc confirmed a likely significant low between late July and early September, I mentioned last week that a large multi-month SPX triangle makes good sense. If so, a probable target would be a 50-62% retrace of 1258-->1356 to 1300ish (1290-1312). SPX is not quite there, but a low this week is on the early side of all my projections and most people are talking about buying the dip again. So, my gut says SPX could surprise much lower. July 12-13 was the ideal historically average date for a test of 1258 if the crash scenario was to unfold, but the recent action is similar to late 2007 which had one of the longest delays between the 1st and 3rd condition for my crash setup so late July is certainly possible. As I detailed in a recent post, I still contend that July is the ideal time window for bears to strike in which case they need to break 1258 which should lead to bear market confirmation below 1220 and further damage into August. In that situation, we'd actually have a 3rd mutli-month H&S since March 2009 with 3rd time a charm. In my experience with cycle rebounds like we had to 1356 above the 62% Fib retracement level, the bulls are in good shape but that quickly turns to serious danger if SPX then breaks below (and especially closes below) the 38% Fib retracement level which is 1295ish. Given the OEW pivots at 1291/1303/1313, the ideal 1290-1312 triangle projection, the 38-50% Fibs at 1295/1307 and the 20dSMA rising at 1301, it sure does seem like 1300ish is a key area for bears to break with 1290 as confirmation if they intend to inflict serious damage this summer.

Essentially, the System and I are leaning bearish for a few days but cautiously, because SPX is approaching an important support area at 1300ish early in the window for a cycle low within a potential bullish triangle pattern. Based on longer-term analyses, there is a real possibility that SPX breaks that support and confirms a bear market in July/August. But, until 1300ish support is broken, there are equal odds for a bullish move above 1371 to either 1380ish or 1425-1440ish.

Just for fun, I'd guess SPX will (1) trade down to 1300-1312 into Tues/Wed, (2) bounce around max OPEX pain at 1320ish for a couple days, (3) test 1249-1268 but not 1220 in the 2nd half of July, (4) bounce weakly on a debt ceiling agreement possibly to the 20dSMA in a left-translated cycle and then (5) crash into late August or early September fulfilling all my longer-term analyses. If that final drop were to break 1130, then a large fall-season bounce would fail and likely test 956. If 1290-1300 holds, the bear party will likely need to wait until late 2011 or even 2012. Remember, all just for fun. Good luck.