Fri 10/7/11. Bottom confirmation?

(Update Mon 10/10/11 4:30PM EST)
Long weekend for me...just getting caught up. I'll try to post something meaningful by mid-day tomorrow, but for now I can say we have a DRSI favored 5-wave structure up from 1075 to 1195 pushing the System into bullish configuration but with a high TICK reading and a bearish NYAD scissor formation (the bearish formation on Thursday night only produced a 1%+ drop) and still no DRSI confirmation yet that 1371-->1075 completed a structure. Bears still have a slim shot if they can inflict serious damage in the next 2-3 days possibly led by a Slovakia EFSF rejection (they could just be playing their leverage to get what they want before ultimately approving it...who knows). I was planning to shift into long mode this week whether SPX made a new low or found support at 1100-1120, but now things have gotten crazy bullish too fast (already meeting our 10%+ discretionary spending target) with tomorrow possibly confirming or rejecting the System bullish configuration and a DRSI completion of 1371-->1075 at the possible odd conclusion of a 3-3-5 flat or the initiation of a 2-3 month rally, so I really think the next 2-4 days will provide valuable information for the direction of the next 2-4 months. Good luck.

(Update Fri 10/7/11 3:30PM EST)
SPX has rallied back up near the highs, but there was just a 2nd SPY 5min volume surge, so the odds favor a slow grind or pullback into the close. Financials, small caps and tech have all been relatively weak and USD has rebounded nearly 1%, so the evidence points to this rally being a fakeout. And, we now have a better 5-wave structure from 1075 according to DRSI (although a final push above 1171 would look nicer) and a piercing of the 1231/1136 channel. So, that helps solidify the bullish interpretation. Anything goes Monday morning after the weekend news, but I still expect a 2-4 day pullback...targeting 1100-1120 if SPX cannot break the 1170s. It was a nice reversal week for bulls that must be respected, but we're still in the 1100-1200 tug-of-war zone with overbought indicators and high VIX. Did you notice that SPX bounced exactly off of its 89hEMA at 1150.24? Good luck and good weekend.

P.S. Good call on the fakeout rally. In my old System, today was a Marker Day after yesterday pierced the 20dSMA. SPX needs to close above today's high or below today's low without triggering top/bottom indicators to set the next trend...according to my Old System. It worked more than not but not enough for me to keep it, and the 20dSMA often sees a lot of whipsaw and I'd have to wait too many days to enter a trade. My hourly candles have performed better, and they have turned the System short from 1156. So, I kinda expect SPX to close below 1150 (the Marker Day low) which would be a close not only below the 20/50dSMA like we got today but below the 89hEMA/SMA. That would be further confirmation of a new short-term downtrend. To put things in perspective, if you take away a handful of hours on Tuesday, SPX has basically closed the week 3% above the 1120ish area that has defined the bottom of the trading range for months. That could be erased pretty quickly but I will still give the benefit of the doubt to a bullish outcome until we see 1100-1120 broken again.

(Update Fri 10/7/11 1:30PM EST)
We have a new battleground in the US Dollar: $78. USD/UUP surged from $78ish near its 20dSMA and tons of previous pivots. The Euro conversely dropped hard. Although the USD wedge count was eliminated overnight, there is a chance for an expanding diagonal triangle to a new high near $80 OR a nested 1-2 count with a blastoff wave 3. The latter scenario seems unlikely given all the arguments I made below, but it's something to be cognizant of if SPX trades below 1100 and USD trades above 80 with European disunity unresolved. The expanding diagonal triangle scenario to finish wave 5/C depending on how you count the USD rally seems a lot more plausible. That might coincide with the same type of triangle in SPX to sub-1075 or possibly just a drop to 1100ish as I projected below. IF IF IF we see SPX drop to 1100-1120, we should remember to look at USD and see how it handles 79.8-80 to determine how likely an SPX rally is.

The System is now short at 1156 as SPX traded below 1153.41 and then retraced nearly 30% of 1171. I didn't want to miss an entry over half a point or so but you may be able to get a better entry at 1157+. Since I'm leaving the System in short mode for at least 1 more trade, I am placing the stop at a 4-candle resistance break + .5% (rounded up) while we are near the top which means the current stop is at 1178 for a potential 2% loss. The System does occasionally get whipsawed once or twice around trend turns, but you can easily see from my public 60min trading chart that it normally does not and it makes plenty of profit even when it does. The System last entered short at 1188, improved its cost basis to 1195 by trading around that position as SPX dropped and then exited at 1118 for a 7% gain. I will be more conservative with the current short position and take 25% profits every 1% lower and reload on every 8-12pt gain with consideration for SPY 5min volume surges, and, once SPX trades down to the 1120s, I will imminently move the System into neutral mode based on conditions at the time. Good luck. 
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SPX has reached the last potential upper wedge channel at 1171. Although DRSI (daily RSI 14-18) has not quite confirmed that 1371-->1075 is a completed structure and SPX has not made a 3-candle daily reversal above 1178 nor decisively broken its 20/50dSMAs, there is enough evidence to trade as if SPX completed a 5th wave EDT at 1075. The US Dollar has officially broken its potential wedge, VIX has traded well below its 20dSMA for 2 days, the cycle windows have (nearly) closed, 7-8 of my 10 bottoming indicators were triggered and 1178 can be achieved later, if not today. Unfortunately, the System is not long on this rally after getting caught off-guard by the historic last-hour Tuesday rally, but it's not short either. Unless 1178 is broken putting SPX in a System bullish configuration, I will maintain the plan I've had for 2 days to enter 1 more System short trade on a 2-candle hourly support break (currently 1153.41) followed by a shift into neutral and long mode over the subsequent few days. Assuming SPX should retrace 50-62%+ of 1371 to 1220-1260+, there is still a lot of time and points to trade on the long side after a pullback. I have no doubts there will be some scary 2-3% downdrafts while the financial system stands on the edge of a cliff, but the cyclical pressure should be up for a couple months and there will likely be some more sugar-coated US/EU plans into year-end.


Time-wise, a 5-month decline should take at least 1-2 months to correct and probably 3-5 months. My discretionary spending analysis suggests likely SPX tops in mid-December and/or late-January. That is 2.5 to 4 months and fits a reasonable time period for a retracement. If we assume the rally is going to last at least until mid-December and reach 1220-1300 and started 3 days ago and will make a cycle and mid-cycle low around November 1st (day 21 of the correction) and November 25th (day 38...Thanksgiving +/-) respectively, then we can come up with a rough road map.

1075-->1170s = wave 1 of A ending today
1170s-->1110 = wave 2 of A ending next week = 50%-70% retrace to 1100-1125 = closure of all 5 cycle windows that I was following meaning all meaningful cyclical downside pressure will be gone after next week
1110-->1225 = wave 3 of A ending just before OPEX at old 1220-1230 resistance
1225-->1170 = wave 4 of A ending just after OPEX to achieve max pain around 1180-1190 on Oct 21
1190-->1260 = wave 5 of A in the last few trading days of October
1260-->1180 = wave B into early November
1180-->1280 = wave C into mid-December with a small dip around Thanksgiving

Obviously, the precise dates and prices will inevitably vary greatly, but this road map gives you a general sense of how an SPX rally could fit within the typical retracement time period and my spending and System cycles. My sense is that we'll get a sizable 6-10% scare in late December and/or early January followed by a lower/higher high in late January +/- before the real damage begins. There is still an air pocket in terms of price volume below SPX 1000-1020 with light support at 1050ish. My study of bear markets suggested SPX entered a bear market when it traded below 1220 in August with marginal confirmation below 1130. Historically, that means SPX will revisit the 1075 lows in the coming months. However, the next bear market marker is 956, so SPX could race to new highs above 1371 if the next low cannot break 956. Due to the air pocket I just mentioned, I expect SPX to drop swiftly from 1000-1020 to 900-940 in 2012 and then further, so 956 should easily be eclipsed thus suggesting yet another test of the lows in the months following that. Now you have my high-level road map for the next 3-6+ months. I've got a busy weekend, so I probably won't update my weekly projection charts until the following weekend which should give me a chance to see the next pullback too. But, you can see my previous untouched multi-month projections on my 2 weekly charts from November 2010 and July 2011 were pretty darn accurate. I hope to repeat that performance while listening to the System along the way. Good luck.


(Addendum 11AM EST)
I just noticed that the 2 most-viewed recent posts on my blog were "Fast money to be made" and "Nasdaq 66.6% drop?". My recent posts warning of an imminent bottom have been less popular. I'm learning a bit more about marketing and sentiment. One more thing...the next big SPX pull back could still be scary, because VIX is still very high in the upper 30s, conditions are very overbought and Mr. Market likes shakeouts. However, if SPX begins its wave 2 down from 1171, I think it's safest to use tried and true pivots and Fibs. The 38%, 50%, 62% and 76% Fibs are 1134, 1123, 1112 and 1098. OEW pivots reside at 1136, 1107 and 1090. Strong recent price pivots occurred at 1140ish, 1120ish and 1102ish. So, we have converging target areas at 1136ish, 1120ish and 1100ish all +/- a few points. I suspect SPX will bounce from each area assuming no gap-thrus, but 1120ish and 1100ish would be more in line with a wave 2 and shakeout, and it would be deep enough to better support the price and time targets I laid out above in my high-level road map. I suspect that SPX will fall to 1120ish, bounce 1-2% in a weak B wave and then fall to 1100ish to complete an ABC, but, at a high level, I'll stick with my 1100-1120 +/- target over the next 2-4 days. Good luck.

(Addendum 11:30AM EST)
Also, remember my post about hedge fund redemptions? I surmised based on historical charts that redemption requests would be high in late September, because the markets had 2 scares in the first 2 quarters of the year which led to many redemption requests prior to the end of Q2 which caused the Q3 plunge which should have caused the last batch of washout redemption requests at the end of Q3. I think some redemptions were fulfilled during the first 2 trading days of October, but the hedge funds have 3 months to redeem funds. Historically, after 3 quarters of growing redemptions and a stock market washout, the stock market should levitate higher but never be able to make a new high, because, as SPX rallies, hedge funds will need to fulfill their previous quarter redemption requests plus there will be a new surge of redemption requests from those that never exited in Q3 (and want to get out while the gettin's good) and from some of those that entered in Q3 near the lows (and want to take profits). On the other hand, as SPX rallies, a few people will be tempted to re-enter the market and better technicals and sentiment will feed on itself for a while. Thus, based on history, there should be a tug of war over the next 1-2 quarters with oversold conditions, cycles, dip-buyers, government marketing and short covering fueling a rally while redemptions and fiscal reality keep the lid on that rally. Then, once we start to see key breakdowns back below 1130 and especially below 1075 and 1000, the floodgates should open in terms of redemptions which will pressure the market for another few months after that. Just my theory and it happens to fit the longer-term cycles and previous bear markets and global economic reality and human emotion.

Based on my first addendum, I am shifting into bullish mode shortly, but I want to mention that a break much below 1100 would put the bullish count in jeopardy especially with an SPX channel from 1231 still in play. We'll worry about that if SPX gets down there, but I just wanted to remind you that I'm putting on a tear-away bull suit because there are plenty of serious market risks that we must be aware of. And, if SPX somehow makes a new low beyond next week when all the cycles should have finished, that could indicate a severely left-translated set of new cycles with crash potential. I don't expect that to happen but feel it wise to mention just in case. Good luck.