Sat 7/30/11. Projecting the crash.

(Update Fri 8/5/2011 3:45PM EST)
I have heartache, acid reflux, whiplash, twitchy eye, a migraine and a rash after today's action. Is there a doctor in the house? I suppose it's my fault for watching every tick on TV. For one's health and sanity, it may be best to stay flat over the weekend. Unless the new European solution falls apart over the weekend or some other disaster, it would make sense for the market to breathe a sigh of relief and continue the rally on Monday to test 1216-1220 and possibly 1230+, but that's a big "unless" and common sense and government intervention don't always go hand in hand. I added 25% more short at 1212 on the second Dynamic RSI test (which held for the time being) because hourly resistance at 1222 has not been broken and the System has gotten me far, but I'm only 50% short so I can sleep a little more peacefully. I expect to be stopped out. Looks like Mr. Market may be pinning 1200 for weekly options expiration. I'll look at the closing indicators and August 19th OPEX max pain over the weekend. I truly wish you and your family good health and a great weekend! I hope I'm not too burned out to post on Sunday night or Monday morning. Good luck.

(Update Fri 8/5/2011 12:15PM EST)
Wow. This post is getting long. Europe QE? The markets finally got some "good" news to latch onto and we got our first rip-roaring rally. 2% in minutes. That's typical when volatility gets so high. Many of you probably remember bigger moves over and over again in minutes during late 2008 when VIX was twice as high as it is today. S2EW with Dynamic RSI suggests this could be our first wave 4 since the downtrend from 1347. If so, a 24-50% Fib retrace of 1261-->1168 (which was near the 869-->1011 uptrend line by the way) would be 1190-1215. 1190 was already achieved and briefly rejected. The NOZO is below 1234 to wherever the current rally ends. System resistance has fallen to 1222. So, if we see 1222 or recent RSI highs broken, the downtrend from 1347 could be considered complete, but, for now, we must suspect this rally will fail at 1200-1220. The System dropped from 50% to 25% short on the initial drop near 1288 and will reload short at 1210-1220 with stop above 1222. The good European news helps, but damage has been done with technical breakdowns and margin calls and bear market/crash confirmations, so don't get fooled by the rallies. Having said that, Europe may add details to the news over the weekend to juice the markets and Europe should rally hard on Monday (assuming the news does not get reversed) since the news happened after their close. Let's watch the RSI I charted plus the Europe news and the 1218-1222 level. Good luck to you and your family.

P.S. 12:48PM EST - With SPX hitting 1205, 30min RSI20 has already reached the lower portion of the charted RSI cluster of previous highs. If SPX can close the hour above 1210-1215, we should be able to say the downtrend from 1347 is likely over (I'll explain the exceptions if it happens) with a Fib retracement of 1347-->1168 likely to 1210-1238 with a bullseye likely around 1230 and max upside potential to 1260ish. Should know shortly.

P.P.S. 1PM EST - If today was a significant low, 30min RSI19 is slightly better than RSI20 using Dynamic RSI, and the previous RSI cluster was at 42.49-45.10 and the last half-hour just ended at 42.94. So, we are at RSI resistance. SPX may need to close the next half-hour above 1315 to confirm an RSI breakout, and given likely price resistance at 1216-1222, that might be a good place to sell longs or go short if such a spike happens. SPX could pull back right now from 1212 but you risk a larger drawdown with a System stop being just above 1222.

(Update Fri 8/5/2011 10:30AM EST)
We've reached volatility levels where it gets extremely difficult to navigate and project daily movements and the market looks sick. Given my experience years ago with margin calls, traders are given 4-5 days to resolve their accounts. Maybe its less now. The majority of sellers should be done between late yesterday and late today, but a sizable portion of accounts will hold out hope for better prices for several days adding consistent pressure on any rally. Then, there is the average Joe and investor universe which will likely sell at least some of their holdings into any larger rally after seeing Dow -500. My group of friends mentioned it last night without my influence, and I have never once heard them discuss stocks in 2+ years of going out together. All that means the market is likely to stay fairly volatile with downside bias for several weeks and is likely setting up for a capitulation point or two in the near future. Expect a rip-roaring rally or three, but the dynamics I just described will almost certainly prevent them from nullifying the breakdown. The 30min RSI20 and RSI35 that I charted yesterday have now both set new lows which opens up the possibility that SPX is STILL completing wave 3 from 1347. If so, 1231-1235 becomes the NOZO on an hourly chart and the next sizable wave 4 rally will merely retrace 20-40% of the downleg from 1261 to maybe only 1200-1220 or lower if SPX gets below 1180. Scary since once the 1347 downtrend is over, we still need wave 5 downtrends corresponding to the wave 1s that started at 1356 and 1371. But, to be honest, I don't trust EW at this level of detail, so I'm just sticking to the sell-the-rally mantra for a few weeks. Good luck.

(Update Fri 9AM EST)
Futures suggest a small rally this morning. I rushed out my chart last night before I went out on the town. I updated it with a full count. I still think we will see much lower lows, but let me explain the 2 variations better. The primary blue count suggests 5 waves have completed (or nearly completed) from 1347 with a NOZO (no overlap zone) at 1261-1275. The red count suggests only 3 waves have completed from 1347. Until we see the cluster of circled RSI levels exceeded and probably higher than that, we cannot be sure the 1347 downtrend is over. The RSI bounce cluster and RSI low suggests there could be more lows in this downtrend. But, you can see there is a count calling for a wave 4 corresponding to the 1296-->1347 wave 2. A typical 20-40% wave 4 retracement of 1347-->1200 would be 1229-1258. The commonly approached previous degree wave 4 target would be 1261. 1296-->1347=1200-->1251. If SPX has not completed the 1347 downtrend, we will not see RSI get above the circled clusters in the chart and we would not likely retrace more than 50% of 1261-->1200 and definitely not overlap 1234. So, it appears that 1220+ is a very possible rally target even in the uber-bearish scenario. If SPX pulls back before1220 or 1230 without breaking the RSI cluster, the more bearish count is a higher probability. If SPX surpasses 1230 and breaks the RSI cluster, I expect the blue count to win out. That would suggest a rally to 1230-1260 followed by a trip to 1150-1180 and then another rally above 1200 followed by a trip to my ultimate target of 1100-1150. Below is the slightly enhanced chart. Keep in mind, there will be lots of people selling once certain old levels are reached, and as I predicted during the flash crash, there will be margin calls for the market as a whole after such a rapid decline, so any relief rally is to be sold. Given the Aug 1-3+/- mid-cycle low projection, Aug 4th may have been it, and now there is room for a 4% rally sometime soon to satisfy the sizable (but not major) rally predicted by discretionary spending for the 1st 3 weeks of August. We may still get a rally/consolidation into the Fed meeting, but don't count on anything since the selling pressure can come back in at any moment. Good luck.

(Update Thu 8/4/2011 5:40PM EST)
dRSI14 closed at 23.99, well below the 30 bear market confirmation. SPX got the 5billion+ volume that was lacking yesterday and it sure felt like capitulation. TRIN was >4 for the 2nd time in 3 days. That only happened once since year 2000 (in 2008) from what I can tell, and the next 1+ day rallied about 4% and then collapsed. I used a 30min chart to discuss Dynamic RSI a bit. If the downtrend from 1347 continues strongly tomorrow, it likely confirms that today was the heart of wave 3. If we get a solid rebound from 1200 or slightly lower that causes RSI20 to exceed 43 or causes SPX to exceed 1235, it likely confirms 1235 ended the heart of wave 3 with the rally to 1261 and that rally as wave 4s likely leading to 1 or 2 more 4-5 combos into the Fed meeting. In any event, unless SPX can rally above the OEW 1241 pivot area, it now appears that the 1347 downturn has more price and time left. There will be a big 2-5 day wave 4 rally at some point corresponding to the 1296-->1347 rally of 51pts but that is likely to come from 1150-1175 and backtest 1220/1227 and definitely not surpass 1258. Then, we'd get a wave 5 to either end an ABC from 1371 or likelier yet another large 4-5 corresponding to the 1371-->1258-->1356 waves. To sum it up, depending on what happens tomorrow, I think we are or will shortly be in some stage of the 4-5 wave combos from 1347 which should last at least 2-3 more days into the FOMC meeting if not longer and that should then be followed by larger 4-5 combos for the 1356 and 1371 downlegs. That interpretation is probably wrong if SPX moves above 1247 in the next couple days and certainly wrong above 1261. If my interpretation is correct and akin to my Scenario 3b, my 1100-1150 target may need to be lowered shortly. Good luck.

(Update Thu 8/4/2011 3:55PM EST)
EDT eliminated. Wave 3 feels right but RSI hasn't confirmed in http://draft.blogger.com/blogger.g?blogID=5608959678334546595#editor/target=post;postID=5941944724916456551most places. I'm dropping to 25% short at 1200 and taking my chances that I miss a panic day tomorrow, because frankly this day feels like a panic day and profits are a good thing and my wildest expectations for this week have been met. TRIN and VIX have skyrocketed and there is European and jobs risk tomorrow and there is 5% upside to the Dow/Nasdaq 200dSMAs (SPX won't make it to its 200dSMA). I may even take a personal long position if there is another washout tomorrow. Danger Will Robinson was right. Sell/short the rallies.

(Update Thu 8/4/2011 3:30PM EST)
Volume is surging on my 5min chart. Is it an EDT capitulation low ending wave 5 of 3 from 1356 or nested 1-2s? Not sure. Staying 50% short. It looks like Europe and the jobs report will decide. More big moves ahead...mostly down until September. Good luck.

(Update Thu 8/4/2011 1:30PM EST)
Regardless of my constantly flowing intraday projections and count prognostications (at least lately), I don't want anybody to lose sight of the forest for the trees. Here are several key big-picture summary points.
1. Breaking 1258 confirmed a crash setup with high odds since 1980 to lead to a further 8-10%+ down leg within a few weeks. That projection is 1132-1157.
2. Breaking 1220 confirmed a bear market with a lower low expected after the next significant bounce usually within a few weeks. If that next low breaks 1130, then we'll get yet another lower low after the next multi-week or multi-month bounce.
3. The discretionary spending delayed connection to SPX since 2007 suggests that SPX will form a HUGE bottom around the 1st week of September.
4. My System cycle work suggests the next cycle low will occur September 7th with possible mid-cycle lows around now and late September.
5. Oil spikes especially those sustaining $80-90 have always led to a recession which is now given 25-50% odds by most economists who typically underestimate.
6. Large cycles like Terry Laundry's T-Theory, Peter Eliades Mega-T Theory, Martin Armstrong's 8.4-yr business cycle and the QE1&2 cycles all suggested a MAJOR multi-year top around May/June 2011, and the coming 4th presidential year and 4-year cycle should make 2012 ugly.
7. My Shanghai Midnight indicator was satisfied by a 7% drop after it was triggered a month or two ago, but Shanghai Composite has merely backtested its multi-year triangle breakdown and is poised to confirm a downtrend which should lead to the more extreme losses seen after Shanghai Midnight in September 2008 and other market panics.

All of that should make one uber-cautious. The puzzle pieces continue to tell the following story regardless of the day-to-day action: SPX will likely test 1100-1150 into September with a probable 1250 backtest in the fall.

With that in mind, I looked at all my SPX charts over lunch and I looked at Dow and Nasdaq as well. My previous Scenario 3b called for a 1-2-1-2-1-2-1-2 setup as SPX approached 1275. Since SPX has fallen pretty hard since then, it remains a possibility. RSI does not really confirm it except on 60min RSI14 which suggests the downtrend from 1347 needs to continue 12+ days into Tuesday at least which coincides with the Fed meeting. That would mean yesterday's rally to 1261 was the first wave 4 with several more needed. Wave 4s don't typically retrace a whole lot so 1316-->1331 may have been sufficient or maybe SPX will rise to 1235ish before making another low. In any case, Dow and Nasdaq both pierced their March lows today (SPX did so yesterday) by a few points, so they are now at a key support level like SPX was at 1249/1258. That tells me we are either in Scenario 3b which will likely break down after the Friday jobs number turning 1220-1260 into resistance for the next few years OR we have finally ended wave 3 from SPX 1356 which calls for a 2-4 day rally back near 1260 for a death kiss. I am now 50% short at 1330 but I've got to decide if I want to be 50% or 75% short going into the close. If SPX rallies to the mid-1330s, I'll almost certainly go 75% short. Whatever you decide to do, please keep the big-picture summary in mind.

(Update Thu 8/4/2011 11:50AM EST)
Bear market confirmed at 1220! Whatever significant low is established below 1220 should be revisited within weeks (or sometimes months). There has to be a 4-5%+ multi-day bounce before I'd call a significant low, but that next big bounce should lead to very profitable shorts if you can withstand the potential for a few days or weeks of consolidation after such a bounce. Of course, you know, I am expecting all of this to end around Sep 7 or possibly Sep 20th so such a lengthy bounce/consolidation is unlikely right now. Looks like I sold too much of the short position this morning. An irregular flat rally looks implausible now, although it's not easy to count 5 waves down from 1261. Yesterday's rally seems too small in price and time to be the wave 4 paired up with the wave 2 at 1296-->1347, so the EW count is a bit up in the air and it's probably best to continue to sell the rallies as key resistances and technical indicators are reached. Although I don't really see a clear 5 waves down this morning, I have found my 1min EW to be much less reliable than my 60min/daily EW, so, given the continuing 60min/15min posd and the projected Aug 1-3 mid-cycle low, I think the likeliest count is that wave 5 of 3 of 3 from 1356 needed another leg down today (making w5=w3*1.5) and now we'll get the 2+ day wave 4 back near the previous degree wave 4 and support breakdown near 1260. The other uber-bearish possibility is that SPX is still nesting in 1-2s and still has a 50pt down day coming today or in the next couple days with stop at 1261. A nested wave 2 at this point could retrace 38-62% of 1261-->1216 which would target 1232-1244 with a backtest of the 1235 breakdown a good bullseye. I may add to my shorts there and trade around 25-50% of my position in case the rally continues up near 1260 which I slightly favor. Just think...the market dropped 3% today and 7% in barely more than 3 days without as much panic as you'd think we might see. It apparently will take a larger down day soon if not today or overnight. Danger Will Robinson.

(Update Thu 8/4/2011 10:20AM EST)
IF IF IF SPX holds around 1234, SPX could make a sizable double bottom rally. I sold 25% of the short position at 1242 after the open and 25% more at 1234, and I will reload to 100% as any rally unfolds near 1260 OR on a backside test of 1230-1235. The market could still break down here, but bulls have an opportunity to get the 2-4 day rally that the market probably needs to alleviate negativity before the expected panic downleg. Sell-the-rallies is still the new game in town for a while. Good luck.

P.S. 11AM .1234 was broken with some panic to 1227. Tough call now. Irregular flat C-wave rally next (must start almost immediately while today's drop still looks like an ABC)? Or continued collapse to force the Fed's hand on Tuesday? Under normal circumstances, there is more than abundant posd across timeframes, negative sentiment and oversold technicals to get at least a 2-3% bounce, but crashes do act differently and we did get one 2% bounce yesterday. Dangerous. Crash now or crash in a few days. Not exactly the ideal choice for the average Joe.

(Update Thu 8/4/2011 8:35AM EST)
1244-1251 is the Fib 38-62% retracement range for Wednesday's intraday 1235-->1261 rally. Daneric has one interesting count that calls for one more lower low before a multi-day rally. Similarly, my EW-side was thinking that SPX could use one more move down yesterday. With futures down by 10+pts, that is possible. However, the 2007 analogy (into January 2008) suggests that SPX fell far enough and only needs 1 more day of rally, and the wedge formation into the close favors an A wave. Interestingly, the intraday rally on January 9th 2008 that mirrored August 3rd 2011 (yesterday) rose from 1378.70 to 1409.19 which was 30pts compared to 1235-->1261=26pts. As if these analogous numbers aren't close enough, percentage-wise, that rally and the drop below 1258 support were even more identical to the start of the last bear market.

What happened on mirror-image January 10th 2008 so we can predict today? That day started with a 14pt drop in the first half-hour and then rallied 34pts. The equivalent today point-wise would be a drop to 1247 followed by a rally to 1281 while 1249-->1279 would match better percentage-wise. Of course, I don't expect the numbers to continue lining up so precisely, but it's a basic template. I suspect that the opening gap down will be wave "a of B" from 1235, so there should be a small bounce, retest of the opening low and then C-wave rally to the 1260s or possibly even 1275-1285 if SPX decides to mimic the point pattern on January 10th 2008. Assuming the basic day-by-day 2007 pattern continues, SPX will drop hard on the Friday jobs number, consolidate for a day, drift lower into the Tuesday Fed announcement and then collapse.

Having said all that, I am not going to get too stubborn about a rally today and such an exact analogy. The bigger picture is that SPX triggered a crash setup below 1258 and should be pressured below 1150 into the September 7th cycle low. Futures suggest SPX may test 1244 this morning which is the 62% retracement level. That's pretty deep for a B wave, so it's a tough call as to whether we'll get a C-wave bounce or merely a wave 2 bounce as part of the next downleg, and even if we do get a C-wave bounce, I wouldn't count on it getting much above 1263 which was the H&S neckline. I'll be trading around a short position regardless, because the System is in a confirmed bearish configuration which won't change unless SPX gets back above 1300.

As far as how the 2007 analogy fits in with the upcoming Tuesday Fed meeting, I think the Fed will only (A) recognize the worsening economic numbers with a continued wait-and-see approach AND/OR (B) soften their language slightly to extend "extended" or other such craziness. I do not think they will indicate QE3 to start in the coming weeks, because oil and inflation are at or above their targets depending on the stat you look at and they know that any further commodity spikes will surely worsen our economy and employment against their 2nd mandate. So, I think the Fed's hands are tied until deflation kicks in again with oil, real estate and stocks down further which will line up with my September cycle lows and the September 20-21 Fed meeting. That, of course, makes it likely we'd see a negative market reaction to the Fed next week, and the only real positive leg holding up this market (QE/Fed) will be temporarily kicked out sending the wobbly stool crashing into the ground so that our politicians and Fed can "save us" again. Good luck.

(Update Wed 8/3/2011 4PM EST)
The System and I reloaded 75% short at 1260. Will add 25% more Thu/Fri. Possible rally wedge has completed or 1-2-1-2. dRSI14 avoided the bearish 30 level. VIX dropped pretty hard. Nothing is overbought. Those are reasons I decided not to go 100% short yet in addition to the 2007 analogy which supports a 2 day rally and 4 day total consolidation. I'm sticking with the story laid out below though. Beware and good luck.

(Update Wed 8/3/2011 12:25PM EST)
I was gone all morning. The SPX drop today seemed to deviate from the year 2007 analogy at least at the level of precise detail that I described, because SPX did not stay between the SPX 1249 and 1258 lows. However, year 2007 did have a larger 36 pt gap between its 1370 and 1406 lows as compared to 1258-1249=9pts, so there was more room for a spike capitulation washout below key support like we got today.  Year 2007 briefly washed out 27pts below key 1406 support, and today SPX washed out 23pts below key 1258 support. Hmmm. So, I'm sticking with the year 2007 analogy that has worked for weeks, and it supports a 2-day rally but obviously from the 1230s instead of the 1250s. All my bottoming indicators still apply but, as you know, they sometimes take a day or two as oversold gets more oversold. SPX 60min RSI14 divergence was narrowly eliminated which is bearish for the market, but 60min RSI5 divergence and 15min divergences were not eliminated which supports a short-term rally. Some might argue that 1235-->1252 was sufficient for a relief rally and that is possible, but it's on the weak-side in terms of price and time, so I still think the odds favor a longer and higher rally from 1235 or thereabouts.

If my uber-bearish scenario #3b is playing out since it successfully projected a rapid drop to the 1230s where numerous Fib supports exist, SPX may be completing the heart of wave 3 from 1371. However, the RSI drop was not that impressive compared to most wave 3s with some positive divergences stacking up on certain time frames, and wave 3s usually have a NOZO (no overlap zone) which would be eliminated above 1258. So, if SPX rallies above 1258, it is probably completing wave 3 from 1356, not 1371! That would fit the 2007 scenario well which counts as...
1371-->1258=w1=113pts
1258-->1356=w2=98pts
1356-->1296=w1of3=60pts
1296-->1347=w2of3=51pts
1347-->1235=w3of3=112pts nearly 2x wave 1
1235-->????

If that count is accurate, the wave 4of3 rally should not exceed 1296 and would typically retrace 20-40% of wave 3of3 to 1257-1280. That actually makes perfect sense because 1258 was broken support and 1270-1285 was the broken bull market uptrend line as well as the 200dSMA. That would lead to a projected count something like...
1235-->1266=w4of3=31pts (62% of w2of3 and 50% of w1of3 and in the middle of key resistance/Fib)
1266-->1200=w5of3=66pts (w3=w1*1.382, approx w5of3=w1of3, 1200 round number)
1200-->1237=w4=37pts (w4=w2*.382, OEW 1241 pivot, Fib 1230s Fib targets, today's 1335 low)
1237-->1130=w5=100pts (approx w5=w1, 1130=next key bear market marker, 1121=50% of old bear market)

The final wave could also be w5=w1*.618 at 1165ish or w5=w1 at 1117 but those multiples are based on projections and they all support 1100-1150 with a small chance of a bottom or temporary support at 1165ish. SPX dRSI14 is currently below the typical bear-market marker of 30 but it must be judged at the close. Good luck.

2PM EST update: The System sold 50% of its short position from 1320 at 1257 yesterday, 25% more at 1240 and has now reloaded 25% at 1257 with stop at 1268 and full reload expected around 1260. I'll trade in and out with a 25% portion, because the current rally could turn into 5 waves which would support a 3-wave 30-50% retrace followed by another rally into Thu/Fri with VIX expected to slide possibly to the 20dSMA. August 3rd may prove to be the final real low before people recognize a crash and bear market, and the Friday jobs report is likely to either start the next downleg or provide the final rally surge. 1258 was just surpassed, so the 2007 analogy and count above is looking more probable. I only projected 1266ish as a top for this rally and we're almost there already, so the 1270s are now possible for a backtest of the 667-->1011 trend line breakdown. All my numbers would only adjust slightly in that event. I think you guys are smart enough to do the math.

(Update Tues 8/2/2011 8:30PM EST)
Bam! 2007 all over again. Just like 2007, it took 7 trading days from the failed rally (closing) high of a 1-2-1-2 to land between the previous 2 bull market lows. The entire trip from low-to-break took 32 days now below 1258 versus 28 days then below 1406. Eerily similar. To keep the mirror-image alive, SPX needs to make a small 2-day rally from the 1249-1258 area back to the 1270s (not overlapping 1296), chop down for a couple days and then collapse for a week. Interestingly, there are 2 days between now and the Friday jobs report, so I suspect the ADP employment report and NFP will bookend a short rally even if SPX drops at the Wednesday open. Further, it is interesting that an FOMC meeting is scheduled for Tuesday August 9th (which I was not aware of until today) which might support 2 days of chop after the initial NFP reaction followed by a collapse if the Fed does not offer any market-friendly easing signals. The following Fed meeting is not scheduled until September 20th, late August and September have not been very bull-friendly and earnings season is nearly over, so there is a long window for damage given the negative fundamental and technical conditions.

Today, August 2nd, was the bullseye target for the mid-cycle low with August 1-3 being ideal. If SPX bottoms on August 2nd or 3rd, it is likely we'll see key System cycle bottoms around September 7th (next cycle low) and 21-22 (possible mid-cycle low) which line up pretty well with Labor Day and the next FOMC meeting.

Earlier, I stated that a rally should be expected if SPX enters the 1250s with a TRIN spike, dRSI14 falling near 30, positive RSI divergences and volume approaching 5 billion. TRIN closed very high at 4.47. dRSI14 closed at 31.25. 60min and lower RSIs have positively diverged for several consecutive lows. Volume was the highest in 5 months and did exceed 4 billion but not 5. These all suggest today was a short-term washout with a bottom imminent. We can never eliminate a cascade-type move lower and maybe a negative ADP number could do that, but the odds and the 2007 mirror-image favor a short imminent rally. However, let me emphasize short-term as in days, because daily RSI confirmed the new price low below 1258 as did the 60min RSI versus the 1258 low. If SPX not only breaks below 1249 but eliminates the hourly positive divergences and closes below dRSI14=30, any SPX bounce becomes less likely and smaller.

And, I should mention that my crash setup was triggered!!! SPX had an 8-10% drop to 1258, then a 38-62%+ retracement that fell short followed by a breach of the first low within 1-2 months. That does not guarantee a crash but 11 of 12 crash scenarios since 1980 have followed that script and I'd say the odds are now greater than 50%. When you combine that with a 7-month consolidation in a 10% range that looks a lot like a triangle or diamond or H&S or 1-2-1-2 pattern, you definitely have the recipe for a 10% breakdown so the crash projection of 8-10% below 1258 fits. 1258 - (8 to 10%) = 1132-1157. One H&S neckline interpretation projects 1263-(1371-1254)=1146. The next bear market confirmation level after 1220 is 1130. Although 1130 is just below the projections, I think SPX will pierce 1130 in September before rallying for a few months, and that piercing will confirm a test of 956/1011 months later. Good luck.

(Update Tues 8/2/2011 11:15AM EST)
New low. System hourly resistance/stop has moved down to 1289 and will fall with each lower hourly close. The System short position was initiated at 1320 with some trading in-and-out recommended every 1% lower or at key supports like 1290ish. For now, I'm sticking with the 2007-mirror count that SPX is finishing wave 5 of 3 of 3 to the 1250s, but that wave 5 could form an EDT that overlaps 1275 in which case 1265-1270 might be as low as SPX goes before rocketing back up to previous 1290 support-turned-resistance. Short-term bottom signs are growing. TRIN is near 3 after being 1-2 for several days, and VIX is negatively diverging with SPX support at 1270-1275 and at 1249-1258 and with the mid-cycle low expected today or tomorrow. So, a rally is likely after one more spike down to pierce either 1270 or 1258. If the rally starts at 1270ish, there's a good chance we'll see 1290ish. If the rally starts from the 1250s, there's a reasonable chance SPX won't exceed the 1270s. The 2007-mirror count would match more precisely with a dip to the 1250s. If the bull market uptrend line and 10x gap/pivot line from 1344 hold at 1270-1275 without even a brief piercing, the bearish case will be in jeopardy and I will get more cautious. That is not what I expect but bears need to push the pedal down one more time today, then let off the gas a little bit in preparation to make a bigger turn down. Good luck.

(Update Tues 8/2/2011 8:35AM EST)
Futures suggest SPX will test Monday's low. I had a bit of an epiphany this morning. Like I said, the 2007 pattern was much like today. It suggests we are NOT forming another nested 1-2 today although the outcome is not a whole lot better and essentially the same as I charted my projections anyway. Here is the EW count from 2007 applied to today's action and projection.
1371-->1258 = w1
1258-->1356 = w2
1356-->1296 = w1 of 3
1296-->1347 = w2 of 3
1347-->1250s? = w3 of 3 (we are still finishing this)
1250s-->1270s = w4 of 3 (could last 2-5 days but shouldn't reach 1296)
1270s-->1190-1220 = w5 of 3 = end of w3
1200ish-->1245ish = w4 (probably will backtest the 1250 breakdown but not overlap 1258)
1245ish-->1130ish = w5

Breaking down the count above even further, SPX is likely forming wave 3 of 5 of 3 on Tues/Wed in which case SPX should fall into the 1260s or lower, backtest 1270ish and make a final low in the 1250s or 1240s on Wed/Thu before rallying back up to the 200dSMA and/or bull market trend line at 1270-1285 for 2-5 days. Good luck.

(Update Mon 8/1/2011 10PM EST)
Let's look at the closing technicals. NYAD finished in a zigzag up pattern as I noted early in the day, and that seems to have about a 2/3 chance of producing a strong 1-2% pullback and often more. Daily and 60min RSI are not positively diverging, and the 15min posd at today's 1280 to 1275 lows could have already been satisfied by the late-day rally to 1289. TRIN was nearly 2 which usually leads to a rally within 1-3 days. A VIX buy signal was triggered by a close back inside its uBB20. SPX closed a point above its 200dSMA, while the Dow is 1.25% above its own. The System's mid-cycle pattern points to a probable low on Aug 1-3. MACD dropped below 0. Stoch is below 20. RSI14 is at 39 which is still above the typical bear market sub-30 lows. The previous 1249 and 1258 lows led to RSI14 of 33.5 and 31.9 respectively. Most of the key pivot lows for the last year (not 1258 though) saw about 5 billion shares trade on SPX while recent volume has been around 4B.

The last 6 months have tracked the late 2007 pattern about as exact as any multi-month pattern can. Here are the numbers side-by-side.
07/07 1556 = 02/11 1344
08/07 1371 = 03/11 1249
10/07 1576 = 05/11 1371
11/07 1406 = 06/11 1258
12/07 1524-->1426-->1499 = 07/11 1356-->1296-->1347

01/08 7 days down to 1379 between the 1371/1406 bottoms =
?08/11 7 days down to 1249-1258?

If the pattern continues, we'll see SPX trade down to 1249-1258ish in the next day or two followed by several days of consolidation probably around the Friday jobs number backtesting the 1275-1285 area concluded by a 5-6 day 10% crash to 1130ish.

Interestingly, that pattern fits pretty well with the technicals and my red pattern in the chart projections from this morning. Maybe the computer algos are stuck on repeat. It would confuse bears and bulls alike and kinda makes sense since there will probably be a fair amount of both buyers and sellers around 1245-1260 that could battle it out for a few days with a slight supside bias to work off oversold conditions while not moving too far away from 1249 and merely backtesting the 200dSMA and/or bull market 667-->1011 trend line. It would also allow for a bottom prior to OPEX, a sizable 4%+ bounce in late August to satisfy the short-term discretionary spending analyses and then further damage to lower lows into September to satisfy the System cycle low, the HUGE discretionary spending low and an EW 5-wave count down from 1371.

Maybe I'm smoking something, but let's see if the puzzle comes together like that. If I see a TRIN and volume spike with dRSI14 near 30 and SPX dropping to the 1250s, I will sell 50-75% of my personal short position and 25-50% of the System short hanging on to the remainder until stopped out with a 4-candle hourly signal and wait for a re-entry point likely at 1270-1285. Technically, the bullish triangle scenario is alive until 1258 is broken, but I mentioned that 1290ish was key support and 1275ish was a low-odds last-ditch support level and it's played out thus far, and now the bears have little threat of getting surprise-attacked by an event such as a huge 3-4% rally based on a Greek bailout or a debt ceiling deal or a blowout Google earnings report since they've already happened and the Fed appears to be handcuffed for at least a month or more. So, I'm still leaning towards the crash scenario to be confirmed at 1258 with a bear market confirmed at 1220 and targets suggesting sub-1150 while preparing to take well-shaven profits if SPX rallies back above 1300. Enjoy Shark Week on Discovery Channel and Good luck!


(Update Mon 8/1/2011 3PM EST)
It appears the initial drop to 1280 wedged down to 1275, so the current rally is likely retracing 1307-->1275. A 50% retrace would be the OEW 1291 pivot, and, if we are in nesting wave 2s, they should theoretically be weakening, so I wouldn't expect a rally much if any above 1291. In fact, a 30-40% retrace to 1284-1288 would seem most likely. If I split the difference, the next down leg should exceed 33pts to 1286-33=1253, so it now appears we'll either pierce the old 1249 low and bounce 10-15pts or just cascade through. Of course, that assumes SPX does not break well above 1291. The overnight deal is looking a little more shaky as the day goes on, but I don't think the market likes it whether it gets done today or in a few days with some tweaking and will focus on the poor economy anyway. However, if Congress has to go back to the drawing board, we could see a much more harsh crash than I already think we're going to see. There seems to be a lot more risk to the downside. The fingernail that the bulls were hanging by has just about ripped off. If it fully rips, I'll quote the sidekick in A Knight's Tale..."pain. lots of pain." Good luck.

(Update Mon 8/1/2011 12:20PM EST)
Obviously my 1 post-a-week idea with minimal updates has flown out the window. But, I can't resist now that the crash scenario has come to an inflection point. For my own personal sanity, I'll try to back off in September once my projected 2-4 month rally begins (or if we see a sudden huge bullish reversal by tomorrow). Anyway, SPX has now broken 1280 and appears to be consolidating above 1275 (the bull market line) which is typically not bullish. The initial drop this morning was 1307-->1280=27pts. The rally ended at 1289, a 33% retrace. If the bearish scenario is playing out, SPX should now drop to at least 1289-27=1262 and probably a little further with rallies weakening. IF IF IF SPX breaks below 1270-1275 especially on a gap down, I've charted 2 probable EW scenarios below. One allows for another 10-15pt nested wave 2 at the 1249/1258 pivot area which would backtest the trend line breakdowns, while the other bearish scenario melts right through that with no sizable bounce until SPX reaches to 1200-1220. Good luck.

(Update Mon 8/1/2011 10:40AM EST)
The System is still short from 1320 (with some trading in-and-out) since resistance at 1313 was not broken this morning. If SPX closes this hour at 11AM below 1290, System resistance will move down to 1307. SPX was rejected by the 50dSMA. Despite the new low, NYAD is forming a zigzag up pattern which is typically bearish 1-2 days for SPX, but that indicator must be evaluated at each daily close. It was interesting to hear the new debt deal details. Although the TV talking heads are saying Republicans got about as much as they could hope for, my perception is that Republicans had Democrats in the corner and then got knocked out by a last-minute uppercut, because they admit that (1) tax increases are possible in the special committee decision in November, (2) if tax increases are not agreed upon, Democrats will likely stick Republicans with large military cuts in the trigger, (3) the reason that $1 trillion in alleged savings actually allow for spending increases, not decreases, is because they presume the Bush and Obama tax cuts will expire at the end of 2012 and bring in more revenue which is conveniently not being discussed, (4) Obama will be able to turn the tables on Republicans through his elections by using the expiring tax cuts and trigger military cuts as leverage, (5) there is virtually zero chance for a balanced budget amendment and (6) no serious progress was made to alleviate our debt problem or the potential credit issues in the marketplace. I am registered Republican although I am more Independent or Libertarian, and my opinion is that Republicans snatched defeat from the jaws of victory. I am not always in tune with the market, but it sure seems like the economy, politics, cycles and technicals are aligning negatively.

All 3 of my scenarios are still alive, but bullish Scenario #2 is now hanging by a fingernail. Today's rally above 1304 makes 1356-->1296-->1347-->1283 look like a 1-2-1-2, so you know what comes next unless bulls reverse this thing hard. Italy and Spain may be falling apart right before our eyes laughing in the face of the latest Euro/Greek-bailout. The US Dollar may have begun its wave 3 rally this morning after completing an irregular flat for a couple months, and that would likely put pressure on SPX for the weeks ahead. It is very possible for an SPX gap down below the bull market uptrend line at 1275ish and/or the 10x gap/pivot line from 1344 at 1270ish, so the gubbament will need a strong overnight stick save if SPX decides to close at 1270-1280 because that is probably the last nail in the coffin before we see a crash setup confirmed at 1258 and bear market confirmed at 1220.

If the bearish Scenario 3 plays out, let's look at some projections. 1356-->1296=60pts. 1347-->1283=64pts. The next leg down is likely to exceed 64. 1307-64=1243. That falls in line with my price projections for Scenario 3c which had a bullseye in the 1230s, but I presumed that would occur around a debt ceiling deal which has now already happened and produced a likely failed rally. So, now, there is a much larger chance that SPX blazes through the 1230s with maybe a quick pause forming a 100+ point wave to 1200ish followed by a bunch of wave 4-5s down to 1100-1150 corresponding to the wave 2s at 1307, 1347 and 1356. Good luck.  
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Last weekend, I gave 3 potential scenarios while favoring #2 and #3 which both correctly called for a lower low.
1) 5-month triangle ended at 1296=new highs (least favored and now eliminated)
2) 5-month triangle needed one more low at 1290ish then new highs (on life support but still possible)
3) 1371 was the top with 1356/1347 being nested wave 2 tops and a wave 3 crash ahead

This weekend, I will retain Scenario 2 and propose variations on Scenario 3 (3a and 3b).
2) The 7-month consolidation and 5-month triangle from 1344 has ended at 1283 with a slight possibility that 1283 will be briefly pierced with positive divergence. Then, new highs will ensue to 1380ish or 1440ish.
3) 1371 was the top with 1356/1347 being nested wave 2 tops and a wave 3 crash ahead
a. SPX will rally from 1283 (or possibly the 1270s) to backtest key resistance before crashing
b. SPX will drop hard this week to 1220-1250, rally back to key resistance and then crash

Scenario 3a calls for a multi-day rally starting Mon/Tues this week from the 1270s or 1280s, because...
1. that would be the market's reaction under average circumstances since many indicators are very oversold for several days now approaching typical maximum streaks. e.g. VIX above its uBB20 for 3 days, TRIN > 1 for 3 days...
2. the bull market uptrend line is at 1275ish
3. the downtrend gap/pivot line from 1344 is at 1270ish
4. the 200dSMA resides at 1285
5. 1356-->1296=1347-->1287
6. this would keep hope alive for bulls favoring the triangle scenario
If Scenario 3a plays out, it might coincide with a positive market reaction to weekend debt ceiling negotiations or a last minute August 2nd deal followed by a negative reaction to the Friday jobs report or a last hoorah on that report.


Scenario 3b calls for a 3-5% drop this week followed by a brief backtest and crash through August, because...
1. technical indicators exceed typical oversold levels a couple times per year during severe down legs
2. if the 1270s support mentioned above is broken, I think many traders will presume a test/piercing of 1249-1258 is nearly guaranteed and sell their positions temporarily
3. 1371-->1258=1356-->1243=1347-->1234 so 1234-1243 is a target area
4. 1220-1227 are key bull market tops that must be pierced to confirm a new bear market, and it is possible SPX would pierce those in this scenario, but I think it's more likely for that level to not be touched temporarily. That makes the 1230s a likely support area.
5. 1226-1233 has several key Fibs. 1233 is a 38.2% of 1011-->1371. 1226 is the 38.2% level between 1011 and 1576. 1229 is a 61.8% retrace of 1576-->667.
6. There may be brief capitulation as stops are triggered below 1249 which makes the 1230s likely support.
If Scenario 3b plays out, it might coincide with a panic drop due to no debt ceiling deal on Mon/Tues followed by a reversal once a deal is announced and then a crash once the market realizes the economy still stinks.

Bullish Scenario #2 takes center stage if SPX turns 1320 into support, while 3a and 3b are separated by the 1270s. If SPX immediately rallies on Monday or rallies from 1275-1280 on Mon/Tues, then Scenario 2 and 3a will be favored and 1320ish will become the distinguishing factor. If SPX falls below 1270 early this week, then Scenario 3b is almost certainly in play.

My System cycle work suggests August 2nd +/- will produce a mid-cycle low, or perhaps more appropriately described as an off-cycle low that has occurred for the last 3 System cycles. Technically, based on how the System measures cycle lows by using RSI5 and RSI19 which can sometimes differ by a couple days, the projected off-cycle low is actually either August 1st or August 3rd +/- which is why Friday could have been the low at 1283 or this coming Friday could even be a low. Cycles are not exact but my custom cycle work has worked well in my System since I started using it during the last few months. But, what it does mean is that Scenarios 2, 3a and 3b should all bottom time-wise between last Friday and this coming Friday. This week's expected off-cycle low plus all the reasons listed in 3b led me to not entertain the serious possibility of an immediate crash.

Also, my discretionary spending analyses suggest that a sizable low (usually 4%+) should occur in the first half of August. Normally, a monthly spending pivot break as we had to end June leads to a sizable bounce 4-7 weeks later. There were a couple occasions during the bull market where a similar top signal merely produced 3 weeks of consolidation, but that has never happened for a bottom signal probably due to the way fear works faster than greed. The 1296 low came way too early and was immediately reversed. So, I expect a sizable low in the next 2-3 weeks. Of course, since my System cycle work points to this coming week for a low, I think that congruence adds weight to this coming week versus the 2nd or 3rd week of August. And, the soft August 2nd debt ceiling deadline plus the Friday jobs number add weight to this coming week as well. The only problem with this analysis is that a sizable 4% rally (approximately 52pts) would currently reach 1330+ thus favoring Scenario #2, and most spending-induced rallies last 2-3+ weeks which doesn't fit any of the bearish scenarios. And, even a drop to 1275 first followed by a rally would test 1320+ putting the bearish scenarios in jeopardy. So, I believe that any strong rally next week will merely satisfy the off-cycle low and not the spending low scheduled for the first 3 weeks of August unless SPX reaches 1330+ at which point bullish Scenario #2 is likely and more August rally should happen. In Scenarios 3a and 3b, a bounce next week should be short-lived and a 2-week crash scenario should ensue at which point a 4%+ 2-week bounce would make more sense around OPEX and Labor Day. Hmmm...sounds confusing, but I guess we can summarize by saying that the next projected small spending low suggests that SPX is either (a) rallying to new highs starting this week through August OR (b) going to bounce big from a crash low around the 3rd week of August.

After spending more time on my cycle charts, I discovered that my September 12th projection for the next cycle low is slightly off. The real date is actually September 7th. Of course, that date is +/- 10 days anyway. But, I also discovered a potential interpretation that would project a low in the last half of September. I marked 1296 as the previous cycle low on July 18th. It was originally projected for July 19th. However, cycle projects are +/- 10 days, and a Fri/Mon/Tues momentum low is still within the 10-day window of the previous cycle projection. So, it's theoretically possible that the current cycle started on Friday or possibly this Mon/Tues if SPX falls early this week. If that turns out to be true, the next projected cycle low would be September 21-23 instead of September 7. Interestingly, that interpretation gains weight because it would re-synchronize the odd pattern of cycle and off-cycle lows SPX has seen for 5-6 months which actually makes sense given the triangulation that is likely concluding. And, it is a common phenomenon in larger downturns to have 1 cycle end well below the 20dSMA/50dSMA and then fail on a backtest of those key moving averages to produce a bearish left-translated cycle.

A few other notes...The HUGE discretionary spending-induced SPX low is estimated to occur on week 26-28 from April 1st which is August 29-September 16 with a Labor Day bullseye. That lines up pretty well with the currently projected September 7 cycle low or even the potential cycle or off-cycle low of September 21-23 +/- 10. The Shanghai Midnight indicator was satisfied by the recent 7% SPX drop, but the Shanghai rally merely backtested its multi-year triangle breakdown and key moving averages and some Shanghai Midnight indicators have witnessed SPX crashes like September 2008 and 2001. So, a crash is still possible based on this indicator. And, my previous crash analyses from 1980 to present suggests that crash odds are extremely high if 1258 is broken in the next couple weeks, since SPX met the first 2 criteria of an 8-10%+ drop followed by a 38-62%+ retracement. The 3rd criteria is to break the original low (1258). Then, another 8-10%+ drop from 1258 is a very high probability and that projects to 1132-1157 or lower. And, finally, my previous bear market analyses suggest that previous key bull market tops that are surpassed by 7-10%+ and then pierced has near-100% odds of leading to yet another low after the next large bounce and if that subsequent low pierces another key bull market top, the pattern continues down. Currently, the key bull market tops lie at 1220 and 1150 and 956. By this rule, SPX is in a confirmed bear market if it falls below 1220 and that bear market will continue if 1150 is pierced and will continue further if 956 is pierced.

In summary, there are 3 probable scenarios. The bullish scenario wins if 1320 becomes support, and we'll see new highs in late August or early September. The bearish scenarios only differ by the next significant bounce level which will either be 1270-1283 or the 1230s +/- and will occur this week. A bounce from the 1270s would likely retrace to 1295-1315 while a bounce from the 1230s would likely retrace to 1270-1300, and those bounces would likely only last 3-5 days before a 2-week crash occurs. In the crash scenario, there would be a large 4% 1-2 week bounce starting around August 21-23 followed by further lows into mid-to-late September. Good luck.

I will probably add a little to this post on Sunday night or Monday morning after I see all the weekend news and futures. You will find my spending and cycle charts at the bottom.
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Another thing that lines up with the bearish scenario is the calendar. The big late-June rally brought SPX to break-even for Q2 making those quarterly 401K reports look OK. We might see something similar in Q3. 1258 is not only the June pivot low and 3rd crash criteria but also the closing price for 2010. In the bearish scenario that I laid out, we could get most of an A leg bounce in late September that makes Q3 a large, but more palatable loser. Then, the ABC bounce would finish into year-end at 1250 or higher making 2011 a break-even and possibly profitable year as virtually every 3rd presidential year is. Such a bounce would likely be supported by some new Federal Reserve stimulus which will be less and less successful at fighting the economic black hole. Given that further downside into September would make for a 4-5 month downleg from 1371, it is not unreasonable to expect a corrective rally for 3-5 months into the end of 2011. That would allow for an early 2012 top followed by a test of 1011 in Mar/Apr delaying the real damage and test of 667 into fall 2012. March and fall are the most common bottoming periods with a summer swoon usually mixed in, so the calendar fits the bearish scenario well.
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I'm an extremely strong proponent of implementing a real 5-10 year plan for a 100% balanced budget with teeth regardless of what form that takes, Constitutional amendment or not. There is not a single person I have ever met that does not agree that government spending and debt is excessive and that government should be more efficient and that a balanced budget is a good thing for people and organizations, yet almost nobody wants the pain that comes with balancing the national budget. The problem is this...most people think the chances of bankruptcy are almost zero or don't care, so they have no incentive to support any painful cutbacks. That gives the politicians plenty of cover to continue the kleptocracy. Unfortunately, I think even if people start experiencing more pain forced upon them by the market, they will not choose the pain of a balanced budget. The problem will NOT be resolved until the market forces it wholly upon us violently. All the deals being discussed are tiny band-aids on a massive festering wound. Sorry for my sad view on reality, but I do believe a balanced budget can be combined with most or all of massive tax reform, massive energy reform, massive educational reform and massive immigration reform to mitigate the pain short-term and propel America to economic dominance for generations to come. If those proposing a balanced budget have any hopes of winning, they must combine their proposal with other massive reforms to spark the economy in counter-force, but that's probably asking a deadlocked Congress too much unless they see death is near. May god bless America.
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A tentative debt deal has been agreed upon. Futures indicate that SPX will surpass Friday's 1304 high and test the OEW 1313 pivot area. That pivot's force-field extends to 1320, a 50% retrace of 1347-->1283=1315 and the previous degree wave 4s are at 1316 and 1320. So, it appears that SPX is playing out either Scenario #2 (bullish, 5-month triangle has ended) or #3a (bearish, 1-2-1-2 from 1356) with 1320ish being the distinguishing factor. If the bearish scenario wins, I now doubt it will wait to start wave 3 on Friday. There is still some serious drama to play out this week with the debt deal, credit ratings and jobs. Good luck.