Fri 8/19/2011. Big gap down Monday? Wishy washy to me.

Well, unfortunately, the System never got re-short. I am personally only about half short. If I had used a stop slightly more than .25% above 1150.43 due to volatility, the System would have stayed short, but it worked successfully in backtests of other heavy downtrends and tends to cut risk, and I suspected a rally to 1160-1180. Maybe the System will have a chance to get short on Mon/Tues.

There is a good chance that SPX is in a 1-2-1-2-3. If so, SPX should gap or run down hard on Monday with little more upside. However, there are some things that bother me about that scenario which befits my short position size and explains my wishy washy title.

1) All the action for 1134-->1155-->1122 can be counted multiple ways due to all the chop. Although the 1-2-1-2-3 count seems cleanest, at this point, I think you could also claim an ABC or WXY from 1208 for the triangle count OR an irregular flat with one more 5-wave impulse needed to 1140+.

2) The SPY 5min volume ramped up gradually for the last 3 hours as SPX fell culminating in a 7mil down bar and 15mil down bar that has recently portended a gap up.

3) TRIN hung around 2 for two days now. That actually hasn't happened that often...in fact, less than TRIN spikes well above 2. My quick chart scan back through 2008 seems to indicate that almost always leads to a flat/reversal/up day and often a multi-day reversal. That does not give strong odds for a 4%+ down move that a wave 3 is likely to give us.

4) NYADV formed a zigzag at Thursday's close. That signal is pretty much only good for 1 day, but it often leads multi-day reversals and usually leads to dojis or white bars visible on the daily chart. The worst one recently was during the crash in which SPX lost 4pts. Today was the worst performing. Maybe the morning rally from 1131 to 1155 was sufficient to satisfy that, but that seems doubtful. Maybe it's a sign of EXTREME bearish potential or volatitlity. Not sure, but it's just another small thing that makes the 1-2-1-2 count doubtful if we see much of a Monday rally.

5) SPX held above the key 1118ish area for the 3rd time. It could be gapped across befitting a wave 3, but if it is not, that also puts the 1-2-1-2 count in question.

6) Thursday's volume spiked on the big down day but it was lower than the 6 days surrounding the 1102 low. Today's volume was still above average but considerably lower than yesterday despite the OPEX volume boost. I don't typically put much weight at all in daily volume, but this is a warning flag if the momentum does not pick up on Monday.

7) The 1155-->1122=33pts drop is already larger than 1208-->1184=24pts and shorter than 1194-->1131=63pts, and it is very close to common 138% and 50% multiples for a wave 5. If SPX does not drop hard on Mon/Tues, the wave lengths put a 1-2-1-2 count in jeopardy.

8) Time-wise, 1208-->1184-->1194 took 1 day, 1194-->1131-->1155 took 1 day and 1155-->1122 took nearly 1 day. Those are OK time frames for a 12345 or 1-2-1-2, but if SPX rallies all the way through Monday, it will look odd to have a well-nested wave 1-2 taking so long versus weakening as it should.

Having said all that, I am leaning towards the 1-2-1-2 count for all the reasons I posted earlier including Dynamic RSI which favors the 1-2-1-2 or triangle counts, but the evidence suggests that if Monday does not gap/run down hard with limited upside to maybe 1140ish, SPX will likely rally in a wave 2 of 5 from 1356 OR a triangle wave 3 of 4 from 1356. Either of those rallies would likely retrace 50-80% of 1208-->1122 which would target 1165-1191 over 2-3 days. A bearish Mon/Tues below 1100 will set up SPX for a rally on the August 26th Fed meeting. A bullish Mon/Tues above 1150 will set up SPX for a 5-10% down move after the August 26th Fed meeting. The rumor seems to be that the Fed wants a crash to 1000 to justify QE3. Although I don't doubt plenty of hidden Fed intervention, I'm not so sure the Fed can do such a thing yet, since dissenters (some of which specifically mentioned not basing decisions on the stock market), the recently high inflation data still in the pipeline, the recent 2-year zero interest commitment, the USD on the precipice and the average Joe's growing distaste for stimulus that only helps the rich as seen in growing violence even in the UK & Germany will probably not realistically allow it...yet. Who knows, but I think you can shape a story for the Jackson Hole announcement either way. BTW, August 26th is only 7 trading days prior to the projected cycle low of Sep 7th +/- 10 days, so it can be a possible low, but the downtrend can also last into mid-September, so we'll just have to judge the indicators as they unfold. In any case, the fundamental and technical backdrop are negative right now.

The System will go short on a 30%+ retracement with a stop currently just above 1143. If SPX rallies hard above 1140, there is a risk that the System will get briefly whipsawed like it did at 1208 so one can either just hang on to shorts enduring a larger drawdown or trust the System's success and the likelihood that SPX will rally to 1160+ for a better short opportunity. If SPX gaps down hard on Monday, the System will wait for a 30% retracement to short unless we get strong bottoming indicators. Another thing I want to add is that regardless of count, there are strong Fibs/pivots/supports at 1070-1100 so I expect some sort of reaction there, but if that ultimately fails as I suspect, there is some support around 1040ish which might get a small bounce, but 1011-1019 is the next very strong support area. So, all bears will need to be a little more cautious once SPX gets below 1102, and one way to do that is to take at least 25-50% profits on every large spike down and wait to re-enter on quick large spikes up like we had to 1155 today and probably reduce position size the lower SPX gets. Volatility will be very high under 1102, so the spikes should come fairly rapidly. There will be less room for error. Another option is to sit out once 1070-1100 is reached and wait for good bottoming indicators to catch a 10%+ ride up.

Interestingly, the FTSE came within 1pt last week of breaking its 2010 summer low. DAX already broke it and has entered the lower region of its late 2009, early 2010 choppiness. That would seem to provide reason for another week or so of consolidation, but, depending on the market you look at, it is not hard to see 5-10% declines in the weeks ahead for all of them. RUT and SPX have fallen to only 10% above their summer 2010 lows. The Nikkei is 6% above its earthquake 2011 low. Germany has 4-6% below its current low before piercing its early 2009 inverse H&S peaks. The FTSE must make 5-6% lower lows to reach its same 2009 peaks. So, 5-10% lower lows across the world seems plausible. For SPX, that would be sub-1045 making 1011-1019 a good target spike low. It's just a matter of time.

I'll review the charts more over the weekend although my time will be limited due to visiting guests, so I may not post again. I think I have sufficiently covered the scenarios that are likely for Mon/Tues. Good luck.