Mon 8/22/2011. SPX blastoff imminent?

(Update Tues 8/23/2011 5:45PM EST)
I moved this update to a new post.

(Update Tues 8/23/2011 2:40PM EST)
Based on Dynamic RSI, the 1121-->1152 rally completed 5 waves, so the odds favor at least one more 5-wave rally and possibly 2 or 3 more. From the earthquake-enhanced drop to 1141 (I hope everybody is OK...I have lots of DC/Virginia connections and I've been in a couple small earthquakes), an equivalent rally would reach 1172. Many traders think we are retracing 1208, and that is possible. The 61.8% retrace of 1208 is 1175 and will be watched. I think it is very possible that SPX is retracing 1356 and the 23.6% Fib retrace is at 1177. The 89hEMA/SMA should reside at 1160-1175 over the next day or so. The 2008 analogy suggests those MAs will be broken and backtested and my historical analysis suggests that many rallies fail after such a piercing. SPX 1174-1184 formed 3 intraday pivots before the down leg to 1121. OEW has a pivot cluster at 1168/1176/1187. So, assuming SPX breaks out above 1155, I think it's wise to expect resistance in the 1170s and a possible backtest of the 1150s where the rally's strength will be tested.

Assuming SPX completed 5 waves down from 1208 to 1121, the blastoff scenario is my favored scenario, but SPX could also be rallying in a wave 2 of 5 and the 1170s would be a great target. What could happen is that all the bearish traders following that pattern might cut and run at 1155, get re-short in the 1170s and then cut and run again if SPX successfully backtests the 1150s and rises back to the 1180s. So, the blastoff scenario could lead to mini-surges above 1155 and 1180-1190 with congestion in between. Just an educated guess. Good luck.

(Update Tues 8/23/2011 10:50AM EST)
SPX has formed 5 waves up from 1121 to 1141. This time it didn't require an impulsive gap, so the waves are more convincing. Although a deep retracement is possible for maybe a wave 2 of A, I suspect it will be more shallow around 1131-1135. If so, 1155 would be cleared easily and possibly before end of day. Back below 1130 would be technically allowed but very concerning for bulls. I took a look at USD. It sure seems like it wants to pierce 72.70 to complete a huge wedge from June 2010, and, if so, that would normally support SPX temporarily. But, a USD explosion out of a 1+ year wedge on extremely bearish sentiment in what looks like its 3-year low would likely cause the SPX double crash to 1011-1019 and a final surge in gold. A USD break below 73.45 in combination with SPX exceeding 1155 would help confirm the brief SPX blastoff I proposed. Otherwise, all options are still open. Good luck.

(Update Tues 8/23/2011 10:10AM EST)
My personal short position is now completely closed at SPX 1130 after I traded in-and-out of my original entry at 1189. The System is idle and patiently waiting for a better short entry. The blastoff scenario has a chance, but the 1140s and 1150s have been sold so many times that SPX needs to exceed 1155. Above that, there would likely be some furious short-covering and a sentiment reset in preparation for a final washout into mid-September in time for some more meaningful European/Fed action. Good luck.
_____________________________________
I thought my title would get the attention of some bears. In case, you missed it, I posted my 4 basic System rules after the close and basically said the EW counts are wide open now. Many people are comparing today to the 2008 financial panic. I think it's appropriate. The problems were NOT solved, the players and elements in the story are nearly identical and it's the most recent comparison one can muster. However, a bearish conclusion at this particular moment may be wrong. I previously mentioned the falling wedge in October 2008 1% shy of the wave 3 low, and after today's much smaller wedge 2% shy of the August 9th low, I was compelled to put the 2008 and 2011 charts side-by-side. See below. The last 8 days are remarkably similar to 2008 while the previous 2 days appear to have been compressed from the corresponding 4 in 2008. Certainly, there are glaring differences. But, today's wedge opens up the possibility that 5 waves completed from 1208 to 1121. In fact, 1208-->1121=(1356-->1296)*1.44 which is in a nice common Fib multiple of 1.382 to 1.618 especially after such an extended wave 3 to 1102. For most of the last 2 trading days, Dynamic RSI argued that the Friday rally to 1155 likely concluded a 5-wave structure down from 1208 to 1131, but EDTs/triangles are the exception to the Dynamic RSI rule, so the 5 waves down to 1131 might have morphed into a 5th wave EDT.

I am not outright predicting an SPX blastoff Tuesday, but October 2008 versus August 2011 says it's possible and EW says it's possible if SPX just concluded 5 of 5 down from 1356. As I said after the close, what looks like a shallow EDT can turn into a descending triangle or 1-2-1-2-1-2 breakdown. I am not trying to have my cake and eat it too. I'm just saying that SPX may have forced itself into a BIG breakdown or a BIG breakout. In a way, it makes sense, because I'd say most of blogs that I read are expecting an imminent test of 1102 as low as 1070. Not many are expecting a low at 1121 and the minority are expecting a test of 1011. Those just might be the 2 likeliest outcomes. The equity put/call ratio 20dSMA is above 0.8 which has only happened a handful of times and usually marks a bottom or close to it, and CPCE spiked above 1.0 for the 2nd time in 2 weeks only to reverse today. Those things historically signal either an imminent capitulation bottom or an imminent reversal, and that fits the my story about SPX being boxed into a corner for a big move likely to last 3-5 days. In 2008, the rally at this point in the pattern lasted 6 days with a pause between the 89hEMA/SMA and 20dSMA. After that, SPX made a low more than 10% lower. If that happened today, SPX would pause on Tues/Wed at 1160-1200 before breaking 1208 then collapse for another 2-3 weeks. A low at 1121 today would be 12 days before the projected Sep 7 cycle low thus portending a straddle low 1-3 weeks after Sep7. Although I'm not eliminating the triangle wave 4 pattern from 1356 or a flat or other counts, I'd like to evaluate the 2 new possibilities that appeared after today's wedge action.

1) 1208-->1121 (or slightly lower) = wave 5 of 5 from 1356.
In this count, SPX could make a Fib retracement to 1177-1211 which is the 23.6-38.2% range. It is common for wave 4s of each succeeding degree to nest. 1208 and 1215 are previous wave 4 highs, so I'd once again say 1190-1200+ is favored while an extreme rally could reach 1220-1233 with 1225 as a bullseye. On October 28th 2008, SPX rallied a couple percent off a bottom, paused and then blasted off in the last 2 hours above the 89hEMA/SMA probably propelled by short covering. If another wave 5 is needed to match the 1371-->1258 down leg, I suspect we'd get a 1.38-1.62 multiple just like we may have gotten at 1121. As a ballpark target estimate for the next low, we could say 1210-(113*1.5)=1040ish.

2) 1208-->1121 = wave 4 of 5 down from 1356 as a descending triangle. If so, w5=w1 (1208-->1184=24pts) at 1100ish. I tend to think if 1100 breaks down by more than a few points that what appeared to be a wave 4 descending triangle down to 1121 will need to be interpreted as a set of nested 1-2s with w3=all the wave 1s at 1035ish meaning a test of my favored support zone at 1011-1019 is almost guaranteed. Others may stubbornly call it an extended wave 5 of 5 but RSI won't support that conclusion and the result will be the same anyway.

If Blastoff Scenario #1 were to occur, it should run into trouble at the various landmines from Friday's Jackson Hole announcement and GDP revision to next week's Chicago PMI and Friday September 2nd nonfarm payrolls which could be nasty if the Philly Index and other indicators continue the correlation with jobs that we've seen before. That would allow a double-crash mid-September straddle low probably around 1011-1019 forming a 5th wave down from 1371. After that, I'd expect another low (higher or lower) around the 1st week of October +/-, because I recently described 3-4 longer-term cycles that bottom in the first half of October and my mid-cycle low (that currently lines up with the 1258 and 1102 lows) projects the next low around the last couple days of September +/-. Then, the market should hold up pretty well into December.

The thing that has me worried in that whole scenario is that it is possible that SPX 1356 could have been a truncated bull market top and that NDX, Trannies etc could be on different counts thus opening up the possibility of a big wave 2 rally in our face to backtest 1258. But, we can worry about that later and watch those other indices as new lows are approached or as 1233 is exceeded.

On the surface, Scenario #1 doesn't seem to fit my discretionary spending analysis very well since it calls for a multi-week 10%+ rally starting around Sep 1st +/- a couple weeks. However, a rally from 1102 to 1208+ a couple times in August actually qualifies, and although every spending-induced rally since 2007 has lasted 5-7+ weeks, there were many occasions that the spending-induced drops only last 3-4 weeks during the bull markets, so the same could very well be true in reverse. And, a rally from 1102 on August 9th to 1200-1208+ in late August would cover 3+ weeks, so it's possible.

Look, I'm putting myself out on a limb here with Scenario #1. It's not one that I've seen mentioned anywhere. That Scenario could be dead and buried as early as the opening bell on Tuesday, and even a Tuesday rally won't exclude many other counts until 1155 is surpassed. However, Scenario #1 goes against the grain of what me and many others have been expecting short-term (both bulls and bears alike), and so I thought it was very important for me to describe it and give you the opportunity to protect yourself and hopefully benefit from it if we see it start to play out. It also seems to fit the lull in news we might get for a few days in addition to the high volatility, the pause that gold probably needs and some of the extreme technical indicators that need to be relieved. Who knows, but be careful. The System will stay idle until we get another large rally and 2-candle support break. I will probably sell my remaining personal 25% short position if SPX rallies above 1130. Good luck.

Ignore the EW counts in the chart below. They are still possibilities, but I described 2 new scenarios above and the focus of this chart is to compare October 2008 versus August 2011.