Fri 8/12/2011. Double crash alert!

(Update Fri 8/12/2011 3:58PM EST)
The only 5mil+ volume bars on SPY 5min since the first hour have been during the intraday down moves. So, I think SPX has been too overbought to breakout (no volume appears at the highs to indicate buyers), but then short-covering due to fear of a breakout and more government intervention like short-sale bans keeps occurring on the drops. Mix in the final margin calls and you have a consolidation day. If I had to guess odds, I'd say 60% up Monday, 40% down Monday...at least early Monday. But, I don't feel comfortable putting money on that low-odds guess. I'll take my chances missing downside on Monday.

Today's long consolidation and difficult wave count and broken Dynamic RSI also opens up the possibility that SPX has already completed an ABC from 1102 and is now finishing an X wave with Y=W*.618 at 1220-1230. It appears there is no panic to end the day. People are worn out. Maybe a bullish Monday/Tuesday is needed to catch people unaware again. The margin call pressure should be gone for now. But bad news can change everything in a heart beat. We'll see. Good weekend.

P.S. 4:02PM EST - The last few SPY 5min volume bars were the biggest since the opening hour, but they were not even in the same ballpark as the closing candles in the last week. And, the EOD candles were a mix of bullish and bearish all less than 10mil. So, my theory is that doesn't mean much and SPX can go either way on Monday as Captain Obvious would tell you a consolidation predicts. The negative side of today's rally is that financials sucked. But, if there is no bad news over the weekend, I suspect they will catch up a little bit sparking an even bigger rally. Man, my head is spinning. All the volatility can make for big wins, but it can also make for more risk and sleepless nights and of course big losses. So, I think I prefer medium volatility...enough to trade swings every few days but not enough to hurt my health.

(Update Fri 8/12/2011 3:30PM EST)
I just reviewed a 4-year SPX weekly chart. The vast majority of weekly hammer candles (red or not) like we are getting now were bullish at least for another week or two. A few briefly retested the lows in the following week or so, and only 1 out of the 20+ I found had more than a 1% gap down on Monday. And, interestingly, the only one that was decidedly bearish for multiple weeks ahead was the weekly hammer candle caused by the Thu/Fri short sale ban on Sep 18-19, 2008. Sound familiar? Hmmm. But, even that next Monday September 22nd opened essentially flat before the crash started. Maybe that won't be the effect after a crash...unless SPX plans to double crash. See how I tied that in with a bow on top? Still, a double crash is not my prediction...just a reasonable statistical possibility to be aware of. Which scenario will happen this Monday? What do you think?

(Update Fri 8/12/2011 2:35PM EST)
The SPY 5min volume trick has worked today although I haven't traded it. The last 15min surge yesterday suggested a morning rally which we got. The subsequent gap fill occurred on a surge of volume suggesting another rally which we got to a new high. Since then, volume has been pretty pathetic with the biggest surge (only big by relativity) occurring in the last 30mins with SPX falling to 1176 (thus far). Maybe that means we'll get another rally, but the volume is not high enough to be conclusive. If we do get another rally near the high, it will still look like an ascending triangle (possibly a strange EDT) but one that extended out all day. The 3-3-5 flat pattern looks unlikely now because Dynamic RSI broke support strongly, so we're likelier to get a triangle breakout/breakdown Fri/Mon. Not sure which. Technically, I'd favor up, but sentimentally, I'd favor down. I have not yet made a trade.

BTW, I see some people calling for doom with consumer sentiment at May 1980 lows. I decided to pull up a chart, and the stock market basically rallied hard for 7 months from that month. I'm not predicting the same now but it's food for thought. And, I should add that SPX tested that Apr/May 1980 low 2 years later before the secular bull market really got going. So, another way to look at it would be things will not take off in bullish fashion for at least 2 years. Probably best not to read too much into it. Good luck.

P.S. What will the news be over the weekend? If only we knew. It's a crapshoot in my opinion, but anything short of negative news should support more short covering. Technically, I'll be calling it a triangle breakdown/breakout. Have a great weekend!

(Update Fri 8/12/2011 12:15PM EST)
Since I made 2 new posts in about 12 hours, some of you may have missed my post from last night with new charts. Check it out. Today's action has pushed SPX above the lowest 1187 OEW pivot into my 1190ish resistance area (bullseye 1191-1195).

Is 1189 the top? Probably not, but it's probably close enough to start building a short position. But, I would not go 100% long or short with the upcoming weekend risk. I'll decide my short position size (25-75%) based on the technicals.

1. The Dynamic RSI resistance box on my 60min chart has not been reached yet. A top can occur before that but it is common to test it, and it would probably take a rally to 1200+ to reach the bottom of that zone. 1220+ might push the RSI too high unless SPX wedged.
2. The 1-5min charts suggest 1 of about 3 patterns.
a. An EDT 5 of C from 1102 needing at least one more slight new high to 1190-1191ish.
b. An ascending triangle 1-2-1-2 of 5 of C from 1102 needing another 15-20pt surge up to 1210-1220.
c. A 3-3-5 flat wave 4 of C from 1102 needing another trip down to 1170ish followed by a rally to 1200+.
3. Wave 1 and 3 up from SPX 1118 on Wednesday were 38pts and 41pts respectively. From the current 1170.74 wave 4 bottom, w5=w1 at 1210ish and w5=w1*.62 at 1196ish and w5=44 (38...41...??) at 1216.

Everything continues to point to the same target zones (1190s or 1210-1225). The EDT or ascending triangle pattern should complete today, while the flat pattern (2c) may not be resolved until Monday. The rally after the ascending triangle could carry into Monday a little bit. I don't know which pattern will play out, but the flat might not fit Dynamic RSI very well. Regardless, all of these should complete within the next 1 hour to 1 trading day. Of course, even if SPX tops today or early Monday, the correction could certainly get more complex and chop for a few more days. However, the convergence of stats that I laid out earlier this week suggested a top between Friday and Tues/Wed. So, all in all, SPX could top at 1190ish or make 1 more rally above 1200, but the top is near. The odds tell us that the next down move will retrace at least 50% of the bottom with 78.6% likely and a lower low most probable. I will probably change my tune (by raising the next downtrend projections) if SPX can clear 1235. But, even if SPX rallies to 1235-1260, I strongly believe it would backtest 1200ish, so building a swing short position at 1190-1220 should have minor risk and much larger potential reward especially if the double crash occurs. Good luck.
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I've been expecting a severe decline starting in May/June for most of the year, and back in June I posted a probable "crash" scenario based on my analyses from 1980. There were 12 cases between 1980 and 2010, and I mentioned that one could argue a back-to-back crash in 2002. http://s2trading.blogspot.com/2011/06/mon-61311-when-will-crash-occur.html

In reviewing the 12 (now 13) crash scenarios since 1980, I found that not only could 2002 be considered a double crash but it could also be considered a triple crash with 2008 being a double crash. Keep in mind, that means only 2 of the 12 previous crashes led to near-immediate follow-up crashes. That's 2 times in 30+ years. So, I'd be pressing my luck to predict a 2nd crash right now. However, both cases occurred during the last 2 bear markets, so there is recent precedent for it, and it has occurred 2 times in the last 9 years.

Remember, I defined "crash" as an 8-10%+ drop with a 25%+ retrace of the previous major pivot (usually 38%+ and definitely less than 100%) followed by a break of the original downtrend low and another 8-10%+ down from that breakdown. In today's terms, SPX fell 1371-->1258 (8.2%), retraced 1258-->1356 (86.7%), broke 1258 and then fell 1258-->1102 (12.4%). SPX definitively "crashed". A back-to-back crash setup would require...
1. an 8-10% initial drop. Check. 1356-->1102 = 12.4%
2. a 25%+ retrace of 1347/1356--1102 = 1163-1166 with a 38% retrace likely (1195-1198). Check.
3. a break of 1102. Undetermined.

Of course, all 12 previous crashes met requirements 1 and 2. Only 2 rolled over severely enough to crash again. Assuming the crash setup occurred again, SPX would have strong odds of dropping another 8-10%+ from 1102. That target would be 992-1014 or lower. Obviously, that would be an undeniable test of the 1011 low with the possibility of overlapping the next bear market confirmation level at 956, and I would say 950-1015 is not completely unreasonable.

How did the previous 2 double/triple crashes look? It's hard to feel confident from 2 samples, but 2002 only had short 3-day rallies in between its crashes. SPX is potentially now on day 4 of its rally if it breaks above 1186. The 2008 double crash retested the first crash bottom (839) twice after 5 and 10 days. 2011 tested 1102 after 2 days thus far. The 2008 bounce after the crash never exceeded its initial 3-day rally to 1044 but did take 16 days to top at 1007, 23 days to break the 839 low which led to a huge 1-day rally and then 5 more days to reach 12% below 839 to 741. So, not only is this a small sample size, but we have 2 wildly different behaviors after the initial crash. However, if SPX manages to rally beyond today which would roughly match the 2002 and initial 2008 (839-->1044 in 3 days) post-crash rally length, I'd guess the back-to-back crash scenario is slightly less likely to occur and more likely to be choppy like the 2008 scenario if it does.

My final observation about the double crash possibility is that 9 of the 12 crash periods prior to 2011 did make much lower lows after falling 6%+ below the initial crash breakdown and bouncing slightly (even though most did not qualify as a double crash). Only 1 of the 12 crashes bottomed after the initial drop 6%+ below the breakdown. 2 of the 12 double-bottomed 1-2% above the initial bottom like 1987 did. You could argue March 2009 was a "V" bottom, but SPX broke nearly 8% below 804 to 742, then bounced a few percent, then fell hard to 667. I call that a stair-step bottom which is what happened in most of the crashes. The only true "V" crash bottom occurred in September 2001 and that was an extraordinary event that most people believed was a 1-time event. So, 11 of 12 previous crash scenarios since 1980 suggest that the 1102 bottom will be tested again while 10 of 12 cases suggest that 1102 will be broken noticably perhaps to 1040-1070 and 2 of 12 cases suggest that SPX will reach 9-82-1014 or lower.

So, I am not predicting a 2nd crash, but, along with my TRIN and other historical analyses, I do think 1102 will be retested, and a 2nd crash is possible in a test of 1011. After that, the chances would be slim for a 3rd consecutive crash (1 time in 30+ years), so, if you get the chance to build a long position at 950-1050, the odds highly favor strong profits over the subsequent few months. Good luck.