Friday, September 2, 2011
Fri 9/2/2011. Low when and where?
SPX has a potential 5 waves down heading into a long weekend with some potential bottoming daily indicators, so I'm taking 25% off the System trade at 1174 (entered short at 1216). System resistance is at 1186 and I'll give a little flexibility above that. With TRIN>3 and NYADV making a small change at a bearish extreme just above the 20dSMA, there is risk for a large bounce and possibly even a cycle bottom. However, I will not make that call until I see some bullish evidence or until SPX drops more severely. Bears did some damage today, but they could not seal the deal. I guess we'll need to wait for Tuesday and possibly Wednesday. Obama offers his stimulus plan Wednesday night.
SPX drifted down along the old upper triangle breakout line and pierced its 20dSMA and 89hEMA/SMA. SPX is on Day 3 of this short-term downtrend. Let's look back at the last leg of 8%+ downtrends (mostly impulses but some ABCs) since 2007 and compare the price and time length.
1. June 2010 = 1131-->1011 = 9 days, 11% = 1.2%/day
2. Feb 2010 = 1105-->1044 = 4 days, 6% = 1.5%/day
3. July 2009 = 932-->869 = 5 days, 7% = 1.4%/day
4. Feb 2009 = 875-->667 = 18 days, 24% = 1.3%/day
5. Nov 2008 = 1008-->741 = 14 days, 27% = 1.9%/day
6. Sep 2008 = 1255-->1133 = 5 days, 10% = 2%/day
7. Jul 2008 = 1277-->1200 = 5 days, 6% = 1.2%/day
8. Feb 2008 = 1388-->1256 = 14 days, 10% = 0.7%/day (the first 9 days were 1.2%/day)
9. Jan 2008 = 1429-->1270 = 8 days, 11% = 1.4%/day
10. Nov 2007 = 1492-->1406 = 8 days, 6% = 0.8%/day
11. Aug 2007 = 1504-->1371 = 7 days, 9% = 1.3%/day
Feb 2007 did not quite qualify since it was a 7% drop but its last leg dropped 3% in 3 days=1%/day. Using the data above since 2007, the average last leg fell 1.34%/day for 8.8 days. When applied to today assuming SPX has started its last down leg, you get a projection of SPX 1086 on September 13th. That's within the time and price target we've been discussing for weeks. The median (not average) is 10% down in 8 days which projects to 1108 by September 12th. Statistically, it seems unlikely that SPX could bottom on Wednesday near 1102 since that would require a 2%/day decline for 5 days. So, assuming SPX breaks below the 20dSMA, Obama's speech is more likely to provide a catalyst for wave 3, 4 or 5 (of 5). And, statistically, it also looks unlikely that SPX will extend its downtrend beyond the FOMC meeting on September 21st which would be 15 trading days from 1231. If SPX did drop an average 1.3%/day for 15 days into the FOMC meeting, SPX would fall to 991. That's about as scary as it could get, because the 2 cases above that dropped around 2%/day were 5 days long in one case and following a rapid 30-40% September 2008 drop in the other case, and neither of those seems applicable now.
All in all, I'd say our 1050-1100 target with momentum low on Sep 1-23 is growing in strength. However, the time window has probably been slightly narrowed to Sep 7-21 with a price/time bullseye at 1086 on September 13th, statistically speaking. Having said all that, my System cycle allows a higher low and we're starting to see indicators bearish enough for a bottom, so the next week or two could be very tricky. Personally, if I am so lucky, I will transition out of shorts as SPX trades below 1102 and look for long setups. Later in September, European parliaments are likely to cave in to more bailouts, the Fed is likely to introduce new stimulus of some sort and the US government is likely to entertain stimulus compromise which would give the market an excuse to rally from oversold levels, so our whole plan is shaping up. I'll likely update my charts and post later this weekend. Enjoy Labor Day weekend and good luck!
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S2, I've been thinking about your cycle analysis work. One thought that I wanted to present to you is the idea that the short term cycles might change with secular bull and bear markets. Basically, my thought is that bigger cycles would stay intact through a whole secular bull/bear market. But shorter term cycles would customize to the current cyclical market. By this reasoning, the 2003 - 2007 bull market would have one set of short term cycles. The 2007 - 2009 bear market would have a different set of short term cycles. Then the 2009 - 2011 bull market would have a third set of cycles. And now, we would have a different, as of yet unknown, set of cycles for the new cyclical bear market. What do you think?
ReplyDeleteit's possible. i have had a similar thought. My System cycle backtest did not work as well in 2000/2001 but has worked very well since 2005. So, for trading through 2012, i think we're OK to use my current cycles, but we should probably be careful after that. at some point, that would be an interesting project. i figure one big influence on the smaller cycles is the larger cycles. i believe in the concept of upside and downside pressure due to cycles, so a shorter term cycle can produce a higher low if the longer term cycles have cumulative upside pressure. it is probably tough to quantify and i know there are many great people that have analyzed the cycles like Armstrong, Woods, Laundry, Kondratieff, Gann etc etc etc. so, it's not unexplored territory, but i do think it's potential has not been fully tapped and could be quantified better. in the end, however, i'm not so sure that has much bearing on my System other than to tweak the cycle slighty, because my System is daily/hourly-based and should catch any trend the cumulative cycles produce. so, my focus on any such study would likely be how the longer cycles can help us improve the shorter cycles which we use to help us determine entries/exits/targets. thx for the comment
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