(Update Thu 9/29/11 10:20AM EST)
I hope everyone is well today. This market is extremely difficult to trade. I often think it's best for most traders to stay in cash when VIX is at 32-35+ on a weekly basis or at least use less leverage and more conservative style. In the last 10 years, you would have reduced risk in Jul-Oct02, Feb-Mar03, Sep08-Apr09, May10 and Aug11 plus a few other weeks. Often times, VIX reaches 30+ at the same time SPX reaches a key level so there is often forewarning of trouble. I suppose I'm talking to myself as much as I'm talking to you.
I try not to get caught up in 1min charts but I'm mentally prepared for a retest of today's high at 1176ish even though I'm ultimately expecting more downside. The opening rally looks impulsive which would generally suggest it is a wave A even in the bearish counts with a wave C still needed, but opening gaps are a different animal and ES futures would allow a completed ABC, so I think all paths are still possible at this moment.
On one hand, it makes sense that all this price-volume consolidation at 1120-1220 would lead to a freakout panic washout below 1100-1120. That is still possible and numerous stats support the possibility of 1010s, but, like I said, I studied tons of 7+ week consolidations over the last 12 years and most breakdowns did not collapse or meet their typical targets with many of them just piercing and then going higher. So, the counter-logic for a panic that I can come up with is that...
(1) some panic may begin at 1114 thus lessening the blow at sub-1102 and making the 1090s or 1050s more likely as a bottom versus 1010s
(2) most people that wanted to hedge or buy protection have done so because they've had plenty of opportunity and VIX/TRIN/CPC/ISEE suggest that is true, so that means a huge chunk of the investment universe will not need to panic at sub-1102 and may in fact sell their puts at the 1090s and 1050s which would cause a short covering rally
(3) In line with #2, max pain for October OPEX is falling but up around 1200-1220, so I have a feeling that price level will be a magnet once Mr. Market has cleared out as many stops as it can and forced short covering rally on a reversal bottom. From the 1050s or 1090s, that would be a 10-17% rally in only 2-3 weeks.
(4) The real SPX price-volume air pocket starts below 1050 and is very evident at 930-1000, so the real panic would not occur until sub-1010. There is actually still a ton of previous price-volume support at 1080-1120 and some down to 1050 from the last 2 years. That was not the case when SPX broke its multi-month 1250-1350 consolidation. There was an air pocket of price-volume at 1200-1250 AND people were not well-hedged.
Believe me, options play a large role in market behavior. I know from years of experience. That is the best logic I can come up with as to why any lower low will likely stop at the 1090s or 1050s. I think many traders will use the logic that sub-1102 should cause a panic, and they will probably become 2nd-stage fuel for short covering once the 1st stage of short covering occurs from those removing their hedges at the 1090s to 1050s. Of course, with all the wild gyrations over the last month, I have fluctuated between whether I think 1010s is likely or not, but each day adds new information to use for decision making. And, at this point, USD, VIX, Copper, Gold, SPX, Shanghai, Nikkei etc are all pointing me to 1-2 more SPX lower lows at the 1090s and/or 1050s. Unless the evidence changes in the next few days, I will personally be selling most or all of my shorts in the 1090s possibly looking for a final partial short reload at 1110-1130 depending on the technicals and I'll be looking at entering long positions at 1050-1060 or on the first System long signal once it favors a bottom and gets a 2-candle resistance break. The discretionary spending lag fully supports such a rally price and time-wise. However, keep in mind, the real stock market damage all occurred in Q3, so hedge fund redemptions will not allow Q4 to continue the bull market but instead will put a cap on any rallies in the 1200-1300 range. There will continue to be at least one or two 8-12% trends every month for a while. Good luck.
(Update Thu 9/29/11 8:40AM EST)
Good economic data and the German vote are providing a strong boost this morning. ES futures indicate that SPX will pierce the 1168 area where an OEW pivot lives, the previous large gap down occurred and yesterday's last hour pivot high occurred. There was a potential EDT/LDT into the close even though SPX narrowly did not have overlap while Dow did. There is further resistance at the 89hEMA/SMA, 20dSMA, 1176 OEW pivot and 50-62% retracement of 1196 at 1173-1178. If bulls can bust through that area, we may have to look back and interpret 1196-->1150 as an ABC with EDT but today's rally could just as easily be the final mini wave 2. Cobra talked about ISEE last night and showed stats that favored today as green and the coming days as red. The rubber is about to meet the road for bulls or bears. SPX 1196 and 1150 are probably the ultimate lines in the sand to determine if sub-1102 will be reached in the next week. Good luck.
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I'd like to enlist your response to my previous hedge fund redemption post, but I thought ISEE deserved a separate post. ISEE=53 at http://www.ise.com/WebForm/viewPage.aspx?categoryId=126 was the lowest in its published history (since March 2006).
The normal logic is that a low number is imminently bullish for SPX. However, there are mixed signals. Some signals indicate an imminent top. In fact, the 2 previous lowest values of 2011 were near SPX tops!?! 8/30/11=SPX1213 occurred the day before the 1231 top. 6/30/11=SPX1321 happened just 4 days before the 1356 top. Both of those were multi-week tops.
Some signals indicate an imminent bottom. The previous lowest value on 3/10/11=SPX1295 occurred 4 days before the 1249 bottom. The lowest value in 2010 on 3/17/10=SPX1137 happened 6 days before the 1041 bottom. The 2 lowest values in 2008 (there were none that low in 2009) occurred on 3/10/08=SPX1273 leading to 1257 5 days later and on 1/17/08=SPX1333 leading to 1270 3 days later. The lowest value in 2007 happened on 3/8/07=SPX1401 leading to 1364 4 days later. All 5 of those were multi-week bottoms.
So, what are you going to believe? The last 2 top indications or the previous 5 bottom indications? I looked at ISEE Equities ("dumb" money) values under 100, and today's 72 was also the lowest value in published history while the ISEE Indexes ("smart" money) was not. Unfortunately, many of the same dates above showed up but there were a few unique ones like 11/19/08=SPX807 leading to 741 just 2 days later and 6/18/09=SPX918 leading to 889 just 3 days later and then another dip to 869 more than 2 weeks later and 6/2/10=SPX1098 leading to 1042 just 4 days later.
Anyway, this is only 1 indicator, and I should fairly mention that the lowest value in 2006 occurred in the middle of a rally weeks after a bottom but that value was slightly higher than any of the dates above. Still, I think we can arrive at a couple high-odds conclusions using the 10 cases above.
(1) SPX is 2-6 trading days from a multi-week bottom. SPX was not likely at a significant top today. SPX is closer to 1102/1114 than 1220/1231. And, even the 2 readings above that occurred near the 1356 and 1231 tops led to a huge rally after a 7-day 60pt drop and 3-7 day 95pt drop respectively. The difference is that those 2 readings didn't lead to multi-week bottoms, but all my other techncial evidence favors an imminent bottom over a top. The average drop length was 4 days with the final day usually being a reversal day.
(2) SPX is likely to bottom in the 1090s or 1050s. For weeks, I have discussed target convergence in the 1090s, 1050s and 1010s. Well, the 10 cases above dropped 16, 29, 37, 46, 56, 60, 63, 66, 95 and 96 points. The average is 56pts. The extreme is 95-96pts. I think 56-96pts is a fair assumption given VIX is higher than any of the date examples above. That projects to 1055-1095.
Of course, the risk of a Lehman-type event is much much higher than normal right now, so anything is possible, but, as I suggested the other night based on historical action on 7+ week consolidation breakdowns and based on the fact that time is running out in my cycle and spending work, I think sub-1000 is looking less and less likely in the short-term and even the 1010s is losing probability.
Let's look around for confirmation of that analysis. The TRIN 20dSMA has reached a level only seen at the 1040 bottom in 2010 and just after the 741 bottom in 2007. Both of those cases led to a 1-month rally followed by a lower low. Considering the hedge fund redemption analysis I offered earlier, it makes sense that any rally in October could be vicious due to oversold conditions but is likely to be met by severe redemption selling after 4-6 weeks. All of the 7 previous consumer discretionary spending bottom indications since 2007 led to at least 5 weeks of rally. In the back of my mind, I consider the slight possibility that 1102-->1231=10%+ followed by 1220 5+ weeks after the 1102 low was sufficient for the spending rally I expected starting in September, but I seriously doubt it. Also, consider that VIX has struggled to break 40-48 for the last 10 years with the exception of late 2008 and VIX is currently at 41 with room for maybe 1 or 2 more surges. And, keep in mind that my System mid-cycle low is scheduled for September 29th +/- and the US Dollar appears to need just one more high to complete a 3/C wave up.
All in all, the evidences discussed here over the last few weeks have consistently narrowed in on SPX 1090s or 1050s on or before the jobs report on Friday October 5th. I suppose one could argue that 1231-->1136-->1220-->1114-->1196-->sub-1102 would complete a 5th wave EDT from 1356/1371. However, all the internal wave counts including a very likely 5-wave structure for 1220-->1114 suggest that SPX still needs to complete either 3of5 from 1356/1371 or Cof3of5 from 1356/1371 meaning there are at least 2 more lower lows ahead and probably a severe 40-50pt 1-day drop imminent. Getting 2-3 lower lows with sizable bounces in between within the next 6-7 days is not out of the question given recent volatility, but, to be conservative, I'd take cautious measures once the 1090s are reached and almost certainly get long in the 1050s. Having said that, I think the volatility and imminent low should make one use less leverage and wider time and price windows for trades. The next rally should be a 10-20%+ 4-6 week barn-burner...assuming governments can avoid a Lehman-type event a little longer ;-)...but I can see the 1100-1230 trading range lasting a lot longer and I don't envision SPX getting much above its 200dSMA before forming a humongous H&S which will collapse in 2012. Good luck.
P.S. I just took a peek at the Shanghai Composite and Nikkei daily charts. They both look like they are probably forming ending diagonals. Shanghai looks like a multi-month EDT on its weekly chart. It's much more crisp and clear than the current SPX potential EDT. I'd guess Shanghai and Nikkei only have 1 or maybe 2 lower lows ahead based on the pattern. Likewise, copper and gold look like they want to test their washout low from 3 days ago. And, I mentioned that I thought DAX might outperform other markets for a while. It has the last couple days and probably won't make a new low now that it fell through its freefall zone 2-3 times finally finding support just below it.
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