Sun 12/4/11. Amazing Stats.

(Update Tues 12/6/11 8:30AM EST)
Lesson learned. On Friday, I placed the System in neutral mode which led to a 2-candle support break and short trade at 1246. Leaving the System in long mode from 1170 would have been more profitable, because 4-candle support was not broken and SPX rallied to 1267, but I had reasonable arguments for neutral mode with the most significant System reason being the 200dSMA resistance. However, when SPX dropped from 1260 to 1246, that was slightly more than 1% which then requires a 30% retracement before entering the next trade. I have fudged 1-2pts before when those percentages come into play like I did in this case, but I've typically done that when I expected a potentially huge reward/risk trade and the cycle was not in such a favorable bullish state, and I openly stated the downside was limited with upside most likely into mid-December. The lesson is for me to only give 1-2pts leeway to my 1% and 30% criteria in more favorable circumstances going forward, and I will also be less quick to go to neutral mode. Maybe the better thing to do would have been to stay at 50% long if I had technical reasons for caution. As it turns out, that late Friday short trade had to withstand a large gap up to 1260ish. When gap ups break/approach s/r as that one did, my practice has been to raise the stop to the next pivot or a rounded .5% if the next pivot is too far away. SPX 1260.08 + 0.5% rounded is 1267, and SPX made it to 1266.73 yesterday, so I am considering the System to still be short right now with stop at 1267. Even if I had stopped out at 1260, the System would have re-entered short on the 2-candle support break at 1262.5. My other non-System analyses stand although DRSI now suggests the rise from 1159 to 1267 is not the ideal 5-waver it was on Friday unless it ended in an expanded EDT. Good luck.
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I signed up for a free 14-day trial over at SentimenTrader. I often see its charts referenced on other blogs, and I vaguely remember trying the service 4 or 5 years ago with little benefit. However, I am really impressed by the current content and summaries. I will likely pay for a few months to see if it helps my trading. I'll keep you posted.

On the SentimenTrader home page (http://www.sentimentrader.com), there are a couple very interesting free stats. The massive breadth thrusts on Monday and Wednesday of this past week were truly rare until the last few years, and they typically lead to sideways action for days and weeks afterward. Can you say triangle? The 17 unfilled 1%+ gaps in the 3 months up to 11/15 tied a record. If my count is correct, I think we're still up at 17-18 as of today. ALL similar situations in the past marked significant bottoms. Can you say upside?

Now, the problem I once had with the megaload of stats that SentimenTrader provides is that you can find a stat to suggest about anything you want and they weren't very well organized. That is why I like their new summaries and priorities where they apply their valuable experience to the stats as a filter. Currently, the intermediate-term indicators are very mixed. They don't preclude strong downside. However, it's difficult to find stats that support a "crash" or mini-crash from here. You can point to some similarities to 2008 or 1987, but those crashes largely occurred because they caught most people off guard and the totality of stats were setup much better for crashes then. Since 2007, people have experienced the fat finger warning, the Lehman collapse, the flash crash and the downgrade/debt-ceiling freefall not to mention the Japan earthquake scare and others. Not many people are going to get caught unaware, and that is reflected in the totality of sentiment stats. And, any panic from a Lehman-like event is likely to engender a quicker coordinated response from central banks and governments to temporarily juice things.

In the short-term, there are several Nasdaq/tech indicators as well as the Smart Money Index favoring a pullback. But, most other short-term indicators favor that being a dip-buying opportunity. When you combine that with intermediate-term indicators and my cycle/spending analyses, SPX should hold up well into mid-December and probably end of year. SPX 1200ish would keep Dow positive for the year and SPX 1256 would keep the S&P positive for the year, so call me skeptical for thinking SPX will end the year at 1200-1260. The question is whether that action takes the shape of a triangle with 1260-1270 max upside or a zigzag to 1290-1320. Furthermore, the following drop is unlikely to be a "crash" although it should be sharp if the totality of sentiment indicators can creep a little more to the bullish side.

You'll notice that my chart projections have been targeting 1075 +/- (let's say 1050-1100) for the next sizable drop into mid-to-late January, and it may even turn out that the momentum low occurs in January at 1100+ with a price low in Feb/March. So, if SPX triangulates around 1230 for the next 2-4 weeks, you could surmise that SPX will experience a 2-4 week 8-12% drop starting in late December or early January followed by a possible lower low in Feb/Mar. I wouldn't exactly call that a crash although it's a big profitable move to catch. If SPX can retest 1050-1100, many people will buy that level calling the end of an ABC bear market especially if the Fed starts QE3 on Jan 25 or Mar 15 (doubtful on Dec 13), so I think the thing that would catch people off-guard would be a 3rd test of the 1050-1100 level in spring/summer 2012 and that's when I think we'd see panic down to 850-900 due to the price-volume vacuum at 930-1000. I do not expect a test of 667 until later...possibly not until 2014/2016. Of course, in my larger triangle count from the year 2009, the current consolidation from 1075 to 1293+ is wave BofB with the anticipated January drop being 1ofCofB and the summer/fall 2012 panic lows completing wave B of a triangle from SPX 667. Good luck.

I'll add one more thought. If my alternate zigzag scenario unfolds to 1293+ in December, I'd be less inclined to think SPX will reach 1075 +/- in January and more inclined to forecast a test of 1159 +/- with a possible lower low in Feb/Mar. That's largely because I'm just not convinced that SPX is setup to fall more than 10-12%. But, also, it would setup the possibility for an expanded triangle from 1075 with 1075-->1293-->1159-->1293+ completing a 3-month ABC leg 60-80% retracement with several other 1-3 month legs lasting into mid-2012 before the final attack on sub-1000 in fall 2012. And, it shouldn't be forgotten that a final higher high has occurred 7of7 times since 2007 for spending-induced tops (the triangle scenario would break the streak), and it shouldn't be forgotten that SPX is only 1 week into a 7-8 week cycle. So, combining that with the SentimenTrader intermediate-term stats, the zigzag scenario to 1293+ could certainly be argued in favor of my triangle scenario, but the economic backdrop and my skeptical side in terms of OPEX, year-end window dressing and screwing the most traders has me liking the triangle scenario equally well. Let's call the triangle scenario 1A and the zigzag scenario 1B. We may not be able to pick a winner for a week or more and I personally don't care. As I mentioned earlier, I will begin looking for topping signs around Dec 8-13 to take the System short, but, if there are Fed/ECB surprises to the upside during that time period to fulfill the zigzag scenario, I'll patiently wait another week or so if necessary to start building my short position. Since people already expect an ECB rate cut and I doubt the Fed can do QE3 if SPX and Europe holds up into Dec 13, I'm not expecting anything more than short-lived SPX spikes, but I am hopeful that the wave layout will give us an obvious triangle breaking point to trade against the zigzag scenario.