Sun 9/4/11. Math, Price/Vol, ISEE

(Update Mon 9/5/2011 10:15PM EST)
Futures suggest SPX will test the 1140s. Unless things worsen before the open, there is a good chance SPX will bounce from its lower channel line (see my 60min chart) around 1140-1141 tomorrow. Of course, given my previous analyses and a drop below 1152, that bounce will likely only produce wave 4 of 1 of 5 of C/3 from 1371. Assuming that count is correct, wherever that bounce ends (probably 1150-1155) will be about as high as SPX gets for the next week or three with wave 2 of 5 of C/3 probably approaching it after SPX breaks 1140 and ends at 1120 +/-. If things do worsen overnight breaking the channel, SPX should backtest the lower channel line after falling to 1120-1130.

I just saw a post on ZeroHedge about Bloomberg largely ignoring the 4-5% drops in Europe. I was already thinking it was odd that a few weeks ago when SPX was at 1000-1100, CNBC was running nightly specials called something like "Markets in Crisis" with their top commentators, and now the widespread panic seems to have subsided despite SPX falling back to the same price levels with large overnight downdrafts. It will probably require a strong break of 1100 to instill another round of panic selling and differentiate this downtrend from those in summer 2009 and 2010, and, if we don't see massively bearish sentiment below 1100, SPX may need to flush below 1000. Wherever this Sep/Oct 2011 downtrend ends, I think you'll see a big whoosh when it's broken 3-6 months later (and possibly before as it's approached), because there will be nobody left believing in the bull market or dip buying at that point. And, that's how humongo wave 3s are formed.

If futures stay similar to the way they are now, my most bearish price path looks likely. Hence, I am unlikely to start a long position at 1070-1100 unless I see bottoming indicators AND a bounce with deep retracement offering a low risk entry. 1000-1020 is beginning to seem much more likely setting up a 2-year H&S top. I will likely sell 25% of the System short position tomorrow shortly after the open and reload at 1150+. Personally, I am still 100% short but will probably close 25-50% of my position after the open and then reload at either 1150+ or upon a backtest of the channel line in the lower 1140s. More tomorrow. Good luck.

(Update Mon 9/5/2011 10AM EST)
I added letters I and J to my projection math below, and I corrected a couple minor typos (I wrote 1120 in a couple place where I meant 1020).  Also, I temporarily added a cross-market chart to my public chart list on the right. I tried to pick a nice cross-section of indexes (banks, energy, Germany, China, US, tech). On the SPX part of that chart, I circled the 2008-2009 and 2010 bottoms which were 3-legged. 2002-2003 was the same. That type of bottom fits my worst-case bearish count which targets 1000-1020 or even sub-956. I am just pointing out a common bottoming pattern. I expect Sep/Oct 2011 to be an intermediate-term bottom, not a long-term bottom. On the new cross-market chart, you can also see the SPX price-volume gap below 1050 (it's actually more like 1070 if you zoom in to lower time frames).

And, most importantly on that chart, I've drawn rectangles where I think all 6 markets could enter freefalls, because there is very little candle overlap and price-volume support. DAX has entered its freefall area today, so it could fall 5% more pretty quickly. Shanghai does not have much of a freefall zone and is currently about 4-5% above it even after a 2% drop today, so it should not fall more than about 6-7% before finding support. Banks also do not have much of a freefall zone and are currently 11% above it with decent support likely about 14% lower. The energy sector is about 8% above freefall with 13% to better support. Nasdaq is about 11% above the 2010 lows and 17% above its freefall zone. SPX has a 6% freefall zone that starts about 12% lower. I don't know how it will all play out, but I'll be watching this chart. As multiple indexes reach support, all indexes could bounce even if some don't reach free fall like DAX appears to be. If I were to attempt to paint a picture based on these 6 indexes, I'd say banks, tech, energy and financials favor support about 10-15% lower, while China and Germany got a headstart today but could fall 5-7% more. For SPX, 10-15% lower from 1174 equates to 1000-1050. So, our most conservative target of 1080-1100 might not hold and 1000-1020 has cross-market significance, but we'll have to see how and when the various markets hold just above or below freefall support levels. If banks/financials deteriorate fastest of all markets, it is possible SPX could break 1000 and quickly fall to 900-950. Scary.

Under the scenario where SPX falls to 1020 or lower, it makes sense that the drop from 1231 would form 5 waves totaling 210+ pts with the first wave likely to be 100+/-pts to 1130 +/-. That first wave would likely complete Tues/Wed with a Wed/Thu bounce and a wave 3 starting between late Wednesday and early Friday. It looks like Obama's speech will either launch or accelerate wave 3of5 from 1356 unless it's REALLY good and can truncate the count. If Obama doesn't satisfy the markets, the FOMC is probably the last line of defense to prevent a drop to 900-950 assuming that doesn't happen before September 21st. That is not a prediction, just a serious possibility that cannot be ignored based on the technicals. If you don't see extremely bearish sentiment as SPX reaches 1080-1100 and the other markets have not yet reached freefall support, the 2 lower target zones will move from possible to probable.

Futures currently suggest SPX will break the 1152 level which separates path #2 from path #3 and fits the scenario I just painted, but we all know things can change drastically in 24hrs for better or worse, so I'll check back in later. The 2008 analogy is alive and well for the time being. Good luck.
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In May, I proposed the possibility that Shanghai Midnight (my own custom indicator) was upon us. That projected a likely 7%+ SPX drop, which we got, but also portended a possible crash like we got in 2001 and 2008 when Shanghai Midnight was triggered.
http://s2trading.blogspot.com/2011/05/fri-52711-is-shanghai-midnight-upon-us.html

In mid-June, my "crash" analysis warned of a strong SPX crash possibility. The break below 1258 triggered the setup that has worked 12 times since 1980. SPX has since confirmed crash #13.
http://s2trading.blogspot.com/2011/06/mon-61311-when-will-crash-occur.html

A week later in June, my "bear market" analysis warned that a break below SPX 1220 would signal a new bear market. The next minor "bear market" marker was 1130-1150 which was also broken, and next up is 956 but that will probably have to wait a a few months.
http://s2trading.blogspot.com/2011/06/mon-62011-secret-weapon-12201345.html

3 weeks ago, I described the conditions for a double crash. 2 of the 12 crashes since 1980 produced a double crash. 10 of 12 made at least a lower low. The odds are high SPX 1102 will be broken and the odds are not trivial (17%) that SPX will visit sub-1020.
http://s2trading.blogspot.com/2011/08/fri-8122011-double-crash-alert.html

Last Thursday, I followed up on the continuing striking similarity between Aug/Sep 2011 and Oct/Nov 2008. That analogy favors a sub-1102 low with a probable 2-4% bounce from 1100-1120 before the final lower low.
http://s2trading.blogspot.com/2011/09/thu-912011-octnov-2008-vs-augsep-2011.html

Last Friday, I analyzed the last leg of all 11 downtrends since 2007 that exceeded 8%. Some were C-waves, while others were wave 5s. The average of those cases leads to a projection of SPX 1086 on September 13th with an outside chance for 990ish by the FOMC announcement on September 21st or a rapid 1090-1110 low on September 7/8. The worst-case applied to today (the Sep 2008 sample) would allow for sub-900 by September 21st but the odds tell us that scenario is unlikely at the moment.
http://s2trading.blogspot.com/2011/09/fri-922011-low-when-and-where.html

Today, the "crash", Shanghai Midnight and bear market projections have all been minimally fulfilled. However, 10 of 12 crashes and the "last leg" analyses favor a sub-1102 low in September. 2 of 12 crashes since 1980 and at least 2 of 11 "last legs" since 2007 favor sub-1020. DRSI as seen on my 60min chart currently favors only 3 waves down from 1356 meaning a sub-1102 low would complete either an ABC, 123 or 121 from 1371. Although the daily indicators suggest the probability for an imminent short-term bottom, they can get very oversold during crash periods and SPX has not yet broken 1102 or quite reached the middle of the cycle low window on Sep 7 +/-.

So, for the next 2-3 days, I expect 1 of 3 different paths.
1. SPX bounces from 1171 (or a few pts lower). 5 waves down from 1231 possibly completed on Friday or could wedge. The bounce would likely conclude wave 2of5 at 1194-1208 (a 38-62% Fib retracement).
2. SPX bounces from 1152-1164. 1171 may have only completed wave 1of5of1 from 1231.
3. SPX drops below 1152. Anything below 1152 would make wave 5 longer than wave 3 in which case we'd need to look at DRSI to determine if the heart of wave 3 from 1231 was still extending.

Monday stock market action in Europe and ES futures might help us narrow down these paths prior to the Tuesday open in the US. Using those 3 paths and other tools in our belt, let's assume the rally from 1102 is over and let's do the math on projections for the SPX sub-1102 target.

A. Using path #1, 1231-->1171=60pts for wave 1of5. FIBBEWIE (see terminology tab) would give us an ultimate 5-wave target of 1095-1120.
B. Using path #2, 1231-->1155-1160?=71-76pts for wave 1of5. FIBBEWIE would target 1065-1100.
C. Using path #3, 1231-->1171=60pts for nested 1-2s of 5. FIBBEWIE would target 1095-1120 just like path #1 except it would happen much more quickly than path #1. And, the drop early next week should break 1152 and likely 1140 followed by weak mini wave 4 rallies on the way down toward 1100. And, if SPX stops above 1102 in this scenario at let's say 1110-1120, I suspect it would merely complete 1of5 down with an ultimate FIBBEWIE target of 990-1010 +/-.
D. The market loves major Fibs as it proved at 1011, 1102 and 1120. Here is a proximate list. 50% retracement of 1576-->667=1121. 38% of 667-->1371=1101. 38% of 216-->1576 from 1987=1057.  50% of 667-->1371=1018. 38% of 1576-->667=1014. 38% of 667-->1220=1009. 38% of 77-->1576 from 1974=1003. 50% of 667-->1220=944. 62% of 667-->1371=935.
E. The market loves testing/piercing pivots. We have a huge cluster of them at 1011-1044 from 2008 to 2010. There are also several at 1130ish. And, the next major bear market confirmation pivot is at 956.
F. The market loves trend lines, and, when broken, the market loves backtesting them. The 1576-->1220 trendline was broken as SPX rallied hard form 1011. That trend line is currently at 1120ish falling almost 1pt per trading day to 1000 by mid-October. So, a backtest of 1000-1020 by mid-October would suffice. The potential triangle that formed between 1102 and 1208 is being backtested now at 1170ish. The 1102-->1121 uptrend line will cross 1141-1149 this coming week. The monthly 1987top-->2002bottom trend line is at 1010ish in September 2011. The 1011-->1040 uptrend line was broken during the 1st week of August and backtested at 1230ish last week.
G. The market loves testing price-volume support/resistance. There is a ton of price-volume support at 1070-1120 which is obvious due to the 14-month consolidation at 1000-1200 in the years 2009&2010. The support below that is almost non-existent until you get to 850-900. There is a ton of resistance at 1275-1325 due to all the H&S action in 2011 plus the action there in 2006 and 2008. There is minimal price-volume between 1120 and 1275, and you saw what happened once a key pivot was broken below price-volume support. Nothin' but air. Free fall to sub-1120. The same thing is likely to happen if a key pivot is broken below 1070-1120 support. Those key pivots lie at 1011-1044. If they are broken for more than a few hours, SPX could visit 900ish in a hurry.
H. The market loves to retest overnight extremes in subsequent days. ES futures actually fell to the equivalent of SPX 1080 before rebounding in time for the SPX day session.
I. 1356-->1296=60pts=i. v=i*2=1111. v=i*(2.38 to 2.62)=1074-1088. v=iii=986. Applies to one of my three counts.
J. 1371-->1258=113pts=w1. w5=w1=1118. w5=w1*(1.23 to 1.5)=1062-1092. w5=w1*2=1005. w5=w3=977. Applies to one of my three counts.

Obviously, if SPX rallies above 1208 this week, we will need to consider the possibility that the rally from 1102 is extending, but, for now, we have plenty of evidence to favor a probable low at 1080-1100, a possible low at 1000-1020 and the remote case of sub-956.

That takes care of price projections. In terms of time, my System cycle is expecting a low between now and September 23rd and my discretionary spending analysis projects a significant low within the next 2 weeks or so. The next FOMC policy action is expected on September 21st. Shorter-term, there is a Germany constitutional vote on Wednesday and Obama's speech on Thursday night (moved from Wednesday night). Numerous longer-term cycles point to the first half of October as a major low while my System's unofficial mid-cycle low is projected to be just before or after Oct 1st. September is well known to be the worst performing month in stock market history, while October is often a reversal month like March.

So, I am expecting SPX to hit 1080-1100, 1000-1020 and/or sub-956 within the next 3 weeks followed by a higher/lower low in early October. I added a 3yr weekly projection chart to my public chart link on the right. I left my projections untouched from around November 2010. I nailed the up/down timing, the approximate top and the crash, but I expected a little more of a correction in late 2010 than we got. If my projection continues to work, SPX will reach 1010ish by early October thus backtesting its 2010 bull market breakout. My other SPX weekly chart shows a projection I made in June 2011 which nailed the crash but underestimated the 1102 low by about 30pts. That projection shows a lower low in late September. Those earlier projections were obviously made with more macro analyses, and now we can refine them further as I've done above. My latest analyses were made independently from those projections, so my macro analysis from November 2010 and June 2011 reinforces the projections we now have for Sep/Oct 2011.

I'd like to add one more piece of evidence and then present my EW scenarios based on all of my analyses. The ISE sentiment index measures calls/puts so a low number typically means traders are too bearish and a stock market rally will occur within days, but such sentiment change is often seen at tops AND bottoms so the rallies are often of the dead-cat variety. In fact, a few days ago, I mentioned that ISEE hit a level (sub-60) only seen 4 other times since 2006. The previous cases led to 1,2,3 and 4 day rallies followed by a lower low. After the latest instance, SPX rallied 1 day to 1231 and then another day to 1229, and it looks like it could be on its way to a new low.

Well, since ISEE has now been low for many days, I decided to look at a 10-day moving average at http://www.ise.com/WebForm/viewPage.aspx?categoryId=126. The 10dSMA is approximately at the extreme lows seen at or near major SPX bottoms. That might seem to put a sub-1102 low in jeopardy. However, ISEE can be broken down into equities and indexes. The index traders are generally considered the smarter money. The average between the two is very low, but it turns out that index traders are VERY bearish and equity traders are NEUTRAL to maybe slightly bearish. I also remember seeing an OEX put/call chart last week that showed the smart traders are VERY bearish. So, this tells me SPX likely has more work to do on the down side to get the dumb money bearish enough for a solid bottom. The ISEE chart can be seen below withe the equity traders not being quite bearish enough yet.

Now, for fun, let's put all that in the context of EW. I charted the 3 likeliest scenarios. OEW's #1 count has been demoted from my #2 count to #3, but it could be resurrected if SPX rallies above 1208 this week. I bumped my #1 count back to #2. You'll need to see the #1 count for yourself. Just click my public chart link on the right. Enjoy the charts and the rest of your weekend! I will likely post an update Monday night or Tuesday morning.