Just got done with work. Long week. No CNBC and few intraday chart opportunities. I felt it was important for me to follow-up on my warning post from Monday night about crash potential if 1290-1300 was broken. Obviously, 1290-1300 held and the projected July 19th cycle low proved to be important. Dynamic RSI confirms that the structure down from 1356 is complete. The point pattern (and potential nested 1-2 pattern) I described Monday was broken. The uber-bearish scenario was avoided for now. 1317 was surpassed and 1331 is being challenged. A 50%+ retracement was achieved in a little over 24 hours. So, I can only conclude that either SPX completed a double zig-zag or a wedge from 1356 to 1296. The zigzag would allow for new highs as part of a 5th wave after a multi-month triangle but can also extend lower. The wedge could be a wave 1 or A with lower prices soon. So, I am more keen to watch key moving averages and my cycle dates now. As I charted on Sunday night, the bullish option is for August 2nd +/- to form a higher low probably around the 20dSMA. If bears cannot get SPX back below the 20/50dSMAs within the next couple days, I'd say a challenge of 1356 is likely followed by a backtest of the 20dSMA. If bears do take back control this week, they'll need to avoid a retest of 1296 or slightly lower with positive divergence. Bulls pulled the market back from the edge and can probably breathe a sigh of relief if they keep things above key moving averages for a few days and also surpass 1331/1333. Good luck.
(Update Mon 7/18/11 7:30PM EST)
1356-->1333=23pts
1344-->1316=28
1331-->1307=24 (LDT)
1318-->1296=22
Using the uber-bearish count, SPX has dropped 4 times in wave 1s at 22-28pts each with 11-15pt rallies in between sufficing for 38-62% Fib wave 2s. Today's afternoon rally to 1306 was 10pts so it might extend a few more points. A 22-28pt drop from 1306-1311 would end at 1278-1289 with 1280ish having a confluence of Fib, trend line and moving average support. However, even in an uber-bearish count, the nested 1-2s must come to an end at some point with an identifiable wave 3. Once we see a drop exceeding 30 points (and likely 40pts), we probably have it. If SPX continues its pattern, it will drop near 1280 and the 200dSMA followed by a rally to the 1290s and then a drop near 1270 this week where the bull market would be on extremely thin ice.
I identified a downtrend "gap" line from 1344 early in its life as pivot after pivot and gap after gap occurred there. That line will reside in the low 1270s at end of week within a few points of the 1268 low and the critical bull market uptrend line from 667. Somehow, I think the "gap" line will come into play again. The most uber-bearish scenario would be for the nested 1-2s to continue down to 1270ish and possibly even 1250-1260 followed by a 40-60pt wave 3 down that should leave a NOZO (no overlap zone) just below 1249 on the way to 1150-1200. One could marry that technical setup with the Eurozone Greece meeting this Thu/Fri and 1st soft debt ceiling deadline of Friday July 22nd. The resulting stock market panic and August 2nd deadline would obviously be the impetus for a temporary SPX low. Of course, as you've known for weeks, August 2nd +/- happens to line up with a small low projected by discretionary spending and my System's mid-cycle pattern.
Perhaps counter-intuitively, a slightly delayed bearish scenario would require a large 30-40 pt drop now from 1306-1313 down to 1270ish rather than stair-step action. That would still support a nested 1-2 count but with a larger wave 1 for 1331-->1271(?) which would thus allow a larger wave 2 bounce back to maybe 1300-1310 on the Thu/Fri news.
1290-1300 has NOT been broken and thus the bullish scenario to new highs is still very possible especially given we are now at my System's primary July 19th +/- target low with some positive divergences and some fear. If SPX breaks above 1317, the bullish odds increase while a break above 1331 would make new highs likely. However, sentiment and fear are nowhere near bearish extremes despite the potentially earth-shattering situation the world finds itself in, and my personal experience is that most people (even bears) are expecting a large rally on a debt ceiling agreement and/or oversold technicals. I'm not even convinced such agreements will be seen as good anymore, because they are likely to include austerity, write downs, inflation and/or defaults all of which are bad for many years ahead. Regardless, I have not seen a single blog talking about the nested 1-2s that I am favoring. I have seen a few mentioning the large H&S with head at 1371 but it's not in the MSM and the stair-step action downward keeps people guessing and off the bandwagon and in a likely position to chase once a breakdown occurs. Many people have given up on the USD rally. Only a handful have mentioned the Shanghai multi-year triangle breakdown with backtest just completed. Nobody is using discretionary spending analysis to predict the stock market which points to a likely lower low ahead. Nobody else is talking about the crash setup which I detailed for you in 12 cases since 1980 that requires 1258 to be broken in the next 2 weeks. I could be wrong, but I personally built my initial short position at 1324 and my System started shorting around 1342, so I won't get hurt too badly if wrong. I have drawn a line in the sand at 1290-1300. Perhaps, I should draw my line at the 200dSMA at 1280 or perhaps I should draw my line in the sand at the bull market uptrend line and gap line around 1270. Perhaps. But, my System cycle studies suggest that it's statistically bad news when a rally from a significant low exceeds a 62% retracement of the top only to trade below the 38% retracement level on more than a brief spike. And, OEW says 1291/1303/1313 is critical. And, most triangle wave Es as my lead bullish count favors from 1344 do not retrace much more than 62%. And, any further downside below 1290 (if it happens Tues/Wed) will almost certainly break most positive divergences. Need I go on. This is the 2nd or 3rd time since 2009 that I have mentioned a potential crash-type setup. The others did not pan out, but we have now reached or exceeded the typical bull market length in price and time with less ammunition and hope and with more complacency. My uber-bearish call is not triggered until 1290 is broken for more than a few hours and is not confirmed until 1258 is broken, but it is foreboding. Even if 1290-1300 is broken, it might get backtested in my delayed bearish scenario, but don't count on it. Please be cautious. It may sound like I'm talking out of 2 sides of my mouth, but one must also honor reasonable stops on the upside because government manipulation has been obvious for years. However, that also favors the bearish scenario because there is no Fed meeting or OPEX or low-volume holiday in the next 2-4 weeks when manipulation is easiest. There are GDP and jobs numbers scheduled in that time period but those are looking increasingly miserable and will probably, at best, beat declining expectations. I could look like a fool with these statements in a few days but you know my bull and bear lines and I'm just passionately expressing the culmination of my studies for what is very possible here and don't want anybody to lose their shirt like I have before. Good luck.
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Consumer discretionary spending has skyrocketed in the last week or so. Check out http://www.consumerindexes.com. That deviates from the recently released retail spending and consumer sentiment numbers, but I've proven that discretionary spending leads the media fodder. So, the previous projection for a big SPX low in late July to early September with Sep 1 being the ideal low should lead to a very large SPX rally. The question becomes at what price SPX will rally from.
In my work, the key dates for likely lows are July 19th +/- (System cycle low which could already be in), August 2nd +/- (System mid-cycle low based on pattern from last 3 cycles plus the approximate short-term spending bottom and early window for an intermediate-term spending low) and Sep 1-9 (probable intermediate-term spending bottom plus early window for the next estimated System low). Those lows are not required to be lower lows.
In my work, the key price range is 1290-1300. If SPX falls below that, it will overlap the 1258-->1299 rally, break the OEW pivots at 1303/1313 as well as lots of price pivots and exceed a 62% retrace of 1258. Currently, ES futures are down 6pts, although ES jumped 1-2pts after-hours on Friday, so the aggregate drop is small currently and futures have not been reliable lately as they rebounded 1% a couple times last week. Regardless, the multi-day NYAD pattern that closed on Friday resulted in nasty 2-day drops the last 2 or 3 times it occurred. Still, SPX sits right under the downtrend line from 1331 and the previous upper channel line (1293-->1299-->), so a rejection or breakout could easily lead to a 10pt+ move. Also, Dynamic RSI has not eliminated the drop from 1356 as a wave 4 unfortunately, and there is a lot of positive divergence on 60min and lower charts. That means a wave 5 rally is possible from current levels or after 1 more drop to 1290-1305 with positive divergence. Obviously, a drop overlapping 1299 would support a multi-month triangle count from SPX 1344.
When I merge S2EW with Dynamic RSI and my System cycle work and my cross-market analyses (particularly spending and Shanghai but also USD, transports, financials etc), I arrive at 2 likely scenarios that deviate at 1290-1300.
1. SPX will rally in a final wave 5 to 1380ish or 1440ish from the current low at 1307 or probably after one more drop to 1290-1305 likely with some positive divergences.
2. SPX will test 1250-1270 in the next 1-2 weeks followed shortly by a collapse to sub-1200 confirming a new bear market and likely wave 3 down from 1371 ending around Aug 2nd +/- with wave 5 down ending around Sep 1-9.
I favor scenario #2, but we'll know soon enough anyway, and I'll just continue trading around my swing trading short position until a key resistance level is broken like 1331. Below, you will find a few charts that describe my scenarios. In the first chart, the thick blue uptrend line comes from 667 while the black uptrend line (old broken channel line) and 200dSMA lie just below 1280. The thin dashed black downtrend line is the "gap" line from 1344 in which 10+ pivots and gaps have approximated. Good luck.
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