(Update Fri 9/23/11 4:15PM EST)
VIX managed to stay above its upper BB20. That's bearish. ISEE Equities ("dumb" money) closed at their highest level since 4/6/11 at SPX 1139 and 1/6/11 at SPX 1178. Those readings led to a 1-week 3% drop and a 1+ day 1.5% drop respectively and those were during the last bull market. The only other such readings since 2006 occurred in December 2010 (bullish during QE2) and April 15th 2010 just before the huge 1220 top. That's bearish. Many daily oversold readings were relieved today without much bullish price action especially relative to the swift kick in the pants. That's bearish. All the price/time arguments I made in my recent "Just the fax, ma'am" post are still alive, and, in fact, the more bearish price targets look likely due to the depth and speed of the fall to 1114. That's bearish. USD is hanging in there and looks poised for 1-2 more rallies to complete its first large impulse off its 3-year low. That's bearish. The Fed is on hold with a negative outlook, our Congress looks impotent, the EU looks impotent and nothing has been solved for the last 10 years yet is coming to a head. That's bearish. To be honest, I can't find anything to be bullish about other than knowing that a sizable capitulation bottom is likely in the next 1-2 weeks. The System is still short, although I took 25% off at 1134 near the close just to reduce weekend risk given the volatility. Having said that, I ended up only going 30% short personally at 1137, because typical Fib/multiples/patterns/TRIN slightly favor a brief breakout to 1147-1167+ and I feel comfortable even if I have to average in short on a large gap down to 1110 or gap up to 1160. I went 60-80% short into the weekend twice recently as part of swing trades and I ended up narrowly surviving 2-4% drawdowns which were not fun despite my conviction. I don't expect the market is in a spot where it will rally 4%, but 1-2% or so is possible so I'm just reducing that risk by reducing my position size. I hope I get the chance to average in higher on my shorts, but I'll take what I get. Good luck and good weekend!
(Update Fri 9/23/11 3:15AM EST)
The System has been mopping up today trading in and out of 25% of its short position at 1130 and 1140. Basically, the 25-50% position-trading has allowed it to make up for the fact it was only 75% short when SPX collapsed from 1167 to 1128 before the System reloaded 100% at 1140.
It's difficult to say what the intraday squiggles mean other than looking corrective. Although the correction could be done, it hasn't reached typical retracement targets other than the previous wave 4 at 1142 and I can make the case for 1114-->1141=ABC, 1141-->1129-->1142-->1130=X and 1130-->????=ABC. So, I kinda expect the System to get stopped out at 1142.56 late today or Monday but you never know. I'd hate for it to get stopped out right before a huge Monday gap down, but a gap up is also possible and rules are rules. You could personally choose to stay partially short over the weekend like I am even if the System does not and that way you can average back in either way the market goes, but I am taking a bigger risk with my swing position given the magnitude of the potential drop. I didn't mention it earlier, but the weak rally today leaves open the bearish possibility that 1220-->1188/1183-->1114-->1142+ = 1-2-1-2 in which case SPX might only retrace 1200 (Fib 38%=1147, 50%=1157, 62%=1167). So, assuming SPX chooses to break 1142.55, it sure seems like it would jump 10-15pts pretty quickly due to an inverse H&S, short-covering and a consolidation breakout, but, once SPX reaches 1147-1157, all bets should be off on the long side. On both a fundamental and technical basis, negative outcomes are more likely than positive ones for the next few days or longer even though you know some government shenanigans are likely in the coming weeks. Good luck.
(Update Fri 9/23/11 11:45AM EST)
Dow has gone negative again after the European market close. My educated guess was right about SPX rallying to 1140-1143 but SPX has now pulled back far enough that I need to adjust the likely pattern. SPX likely either completed an ABC or 121 at 1114-->1141. It is possible that the rally from 1114 is done, but there are many reasons I favor an ABCXABC higher. If a rally above 1141 looks impulsive and 3-like, I'd give more consideration to the 1-2-1 pattern which would easily project to 1160-1170+. I still feel confident that further downside is coming over the next week or so, but I'm less confident about the intraday squiggles and whether this rally will end today or Monday.
So, my personal strategy will be to reload about 75% short if (1) I see SPX 1123 turn into resistance or (2) I see a SPY 5min volume surge or failed intraday double/triple top after the next move above 1141 which might be at 1145, 1155 or 1165. In the latter case, I will likely sell 25% of my short position on the first couple 5-10pt drops with expectation for a couple shakeouts and a couple opportunities to get 75-100% short at a better price average.
The System has now reloaded from 50% to 100% short at 1140, will sell 25% at 1130 again and will stop out at 1142.56. If the System gets stopped out, it will look for a 2-candle reentry point in the next day or two. Good luck.
(Update Fri 9/23/11 10:15AM EST)
SPX filled its gap and appears to be stabilizing temporarily. DRSI moved above the probable margin for error on the 5-15min charts suggesting that 1220-->1114 completed wave [2] of 5 from 1371/1356. I would expect SPX to reach 1140ish at a minimum and probably 1160-1170. Given yesterday's 1142 pivot and my intraday wave analysis, I will make a guess that SPX will rally to 1140-1143, pullback a few points, then break through that to 1145-1150 to complete wave A from 1114, then pullback further in a wave B and then rally in wave C. That might finish by end of day or into early Monday. That's just an educated guess but I recommend staying partially short or neutral.
There is no doubt some bulls are getting margin calls today and others are trapped between 1150 and 1350. Today's rally is having trouble gaining traction because of that. Some of those longs are holding out thin hope that a larger rally saves them. However, people are steadily realizing that stocks are in the beginning of a real bear market. So, unless there is some really good weekend news to save the day and rally SPX back above 1180, I think margin calls and thin hope will lead to a capitulation next week. It might happen on a large gap down or a small failed Monday morning rally. I personally sold most of my short position at 1130 yesterday but plan to be 50-80% short going into the weekend if SPX rallies above 1140 (higher = more short) and then 100% short on Monday. Be careful. Good luck.
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The System is 50% short and has had a great August and September since I started charting the trades. It entered 100% short at 1198. It sold 25% at 1185 and 1130. It reloaded 100% at 1140 and sold 25% more at 1130 and 1120. It will sell 25% more if SPX reaches 1110 and it will reload 100% at 1135-1142 since System resistance is currently 1142.55. I will not place the stop .5% higher in this situation since the downtrend has already been severe and a wave 2 rally could go much higher and there is no sensible MA or pivot just above 1142. If SPX makes an hourly close below 1119.84, System resistance will fall to 1134.
IMHO, yesterday's SPX last hour rally was either wave (iv) of [1] of 5 from 1371/1356 or wave (a) of [2] of 5 from 1371/1356. At the close yesterday, 5-15min DRSI exceeded the RSI seen at 1200 post-FOMC, but RSI was only surpassed by a point or two which is within the margin of error especially at the lower time frames. A gap higher today would have likely confirmed SPX is in [2], but futures suggest that SPX could challenge the 1114 low this morning. If 1114 is broken, SPX is highly likely completing wave (v) of [1] down from 1220. Wave (i) was 1220-->1188/1183, so (v)=(i) at 1097-1102 and (v)=(i)*.62 at 1111-1114. Although Dow has already broken its equivalent of the SPX 1102 level, if SPX does the same today, there is a chance that the entire downtrend is complete. If 1114 is not broken and 1134 is surpassed, then we'd have to watch DRSI to determine if the correction (ABC/WXY) up from 1114 confirms [2].
For mental preparation, let's assume SPX bottoms at 1110-1115 today. If so, I would label that as the completion of [1] of 5 from 1371/1356. Wave [2] would likely retrace 38-62% of 1220 thus targeting 1152-1180. Although wave 2s have almost always been deep in this downtrend from 1371, at some point weakness should set in and time/price is running out of room for our bearish scenario. So, I'd draw a line in the sand at the OEW 1187 pivot, but my suspicion is that SPX would rally to 1160-1170ish in this scenario. Why? The Thursday gap down occurred from 1167. The 89hEMA/SMA are likely to fall near 1170 in the next day or so. The broken parallel channel (1208-->1231 upper and 1102-->1121-->1140 lower) crosses 1170ish at end of Friday. It would be an approximate 50% retrace which fits a wave 2 but is weaker than most wave 2s in this downtrend, and that would be similar to the November 7th 2008 analogy I gave. Then, SPX would likely commence wave [3] of 5 from 1371/1356 with [3]=[1] at 1050ish and we know it would likely be longer, so 1000-1020 would certainly be in play.
For mental preparation, let's assume SPX does not break 1114 this morning and then rallies above 1134. If so, there is a good chance that SPX is finishing wave [2] of 5 from 1371/1356 with almost the exact same targets mentioned in the previous paragraph...1160-1170ish likely with the 1187 OEW pivot as max upside.
For mental preparation, let's assume SPX bottoms at 1097-1102 today. That looks less likely as the Euro rallies and the futures recover as I type, but if it occurs, I'd say it's possible for the entire downtrend from 1371/1356 to be complete. I totally do not expect this scenario, but if it occurs, we will have to be very cautious shorting any rally and I've got reversal indicators good for such a situation.
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Since Dow made a new downtrend low on Thursday, it is now out of sync with SPX and Nasdaq. I espoused my theory over the weekend that the Nasdaq higher high last week may have actually brought the SPX/Dow/Nasdaq counts back into better sync long-term. I don't think that happened just so Dow could throw them all out of sync a few days later. I think the Dow is a leading indicator in this case. People are shedding big caps and companies exposed to a strengthening US Dollar. That's not likely to change until we get some real European resolution OR a stock market capitulation to draw in institutional value buyers. We have neither so far. So, SPX is likely setting up the most bearish scenario possible by rallying from above 1102. Wave [3] of 5 from 1371/1356 is highly likely to exceed wave [1]'s 106+pts. My price analysis suggested 1100, 1080, 1040-1050 and 1000-1020 were the likely targets, but the current wave action makes the lower levels much more likely unless we get a wedge. My time analysis suggested 1 low next week (probably [3]) and another low the following week (possibly [5]). If this plays out, next week should be a doozy! However, due to potential window dressing for the last couple days, it wouldn't surprise me to see the market down 100-150pts in 2-3 days followed by a nice 2-day rally and then a slightly lower low with posd during the first week of October possibly ending at the jobs report. Good luck.
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