Current SPX Position: Long at 1614.65
Next Action: Stop and go short at 1632.97
System Score: 7.5=Bullish=Trend Score + Turn Score=6+1.5
Proposed New Score: 62%=Bullish=Trend Score + Turn Score=24+38
The System is long and the Score is slightly bullish. However, I took a detailed look at my technical indicators and it is extremely likely that the Score would drop to 5.5 (neutral) if 4hr support is reached at 1632.98. So would the Proposed New Score. And, unless SPX nosedives in the first hour or two Monday, which I do not expect, the Score may actually drop lower than that. So, the System is expected to go short at 1632.97 unless I tell you otherwise. And, the Score is susceptible to staying neutral or getting more bearish through Wednesday unless SPX drops really hard and fast Mon/Tues. The bears have a chance to take charge again this week. The Proposed New Score would have profited 21pts (1636-->1615) while the current Score never triggered a short setup for the System. From memory, the only other 2 trades that would have differed between the current and proposed scores were both shorts and totaled about an 8-12pt loss. So, after about 6 months, the Proposed New Score, which I mentioned at inception is designed to be just slightly more sensitive at turns and to be 0-100, appears to be slightly ahead but not meaningfully considering 3 extra trades. I'll try to have a detailed evaluation in the next couple months to make a decision about using it or not.
If you look back over the last 6 years on a weekly chart, you will find that it is the exception, not the rule, for the stock market to directly rally to new highs after having 2 down weeks in a row. We just finished 2.5 weeks down. My crude count shows that 5 of 18 2-week downtrends led to new highs before new lows. However, the last 3 times SPX made new highs after 2 weeks down (Aug 2012, April 2011 and Jan 2011) were after 2-3% downtrends and 2 of those 3 either fell short of a new low or barely made a new low in the 2nd down week. The downtrend that ended last week fell 5%+ and made a much lower low last week. The 2 previous cases (Sep/Oct 2009) were during the nascent bull market and more comparable in size at 5%, but even though the Sep 2009 downdraft was followed by new highs, Oct 2009 nearly double bottomed at the Sep 2009 lows. So, the bottom line is that the odds are probably 70-80%+ from a weekly price perspective that SPX will retest 1600ish and likely fall much below it (I estimate strong support at 1530-1550) before making new highs.
There are countless additional technical reasons to expect a larger downtrend in the coming days or weeks.
1. Discretionary spending: I've mentioned that the odds are 80%+ for an 8-10% drop in 4-9 weeks based on my discretionary spending analysis. Basically, the discretionary spending downtrend (see link on right and go to the monthly chart) was confirmed to be over about 19 weeks ago and I've found there to be a 15-17 week delay between that and a significant market top since 2007 during or just before a bear market. Hence May 22nd was nearly perfect. The delay is longer (21-23 weeks) in the middle of a bull market which is possible. There is a 67% chance the bear market has started if we get an 8-10%+ downtrend.
2. Hindenberg Omen: You've all probably heard about the recently confirmed Hindenberg Omen which gives nearly 50/50 odds for a larger downtrend than we've had. That doesn't sound helpful, but the odds for that occurring under average circumstances are less than 10%.
3. Bull market length and size: SPX has exceeded the average bull market length of 48-49 months and is in the 3rd largest bull market since 1956.
4. Seasonality: May to Labor Day and the summer swoon have a reputation for a reason.
5. Presidential cycle: 1st and 2nd years are the worst.
6. Oil: If you take a look at the $WTIC chart (light crude oil), you could argue that, after oil hit rock bottom in February 2009, it rebounded in an ABC into May 2011 and has since fallen in a series of up to 7 nested 1-2 waves. That is setting up for a potentially epic wave 3 down. A strange triangle count is also possible, but, in any case, 2+ years of sideways consolidation is likely to explode one way or the other with the apex within months or weeks of being reached and triangles rarely make it this far to their apex. Assuming sluggish growth and/or stagflation is not going to continue for another year or two, you tell me which way the world markets and US economy is likelier to explode
7. 10 yr Treasury Yield: Since April 29th, rates moved from 1.6% to 2.2% in about 5 weeks ending the week before last. They rebounded near the highs to end last week in opposition to the SPX move which I think was mostly short-covering of protective puts after a never-ending rally. That move is about 36%. That degree of rally in less than 2 months has occurred 4 times in the last 3 years. All 4 preceded a larger drop than SPX just had by 1-2 weeks. However, the 1st one in Oct/Nov 2010 had 2 surges and SPX did not respond until just after the 2nd one. It just so happens that rates moved up more than 33% from November to March during the recent SPX rally but obviously that occurred over 5 months which helps and did not quite reach 36% but has since dropped and had an even larger surge similar to 2010. One way to look at this is higher interest rates are not necessarily bad when they rise in controlled fashion and/or when more economic boom is expected. Neither appears to be the case now.
8. Copper: Copper may be slightly ahead of oil since it similarly peaked in early 2011 then fell in an apparent ABC then formed a 17-month triangle and then broke down near the ABC low before bouncing weakly in the last 2 months. The triangle breakdown may have been backtested enough by the bounce and projects much lower as would a double bottom breakdown.
9. China: In 2011, I made projections about the Shanghai stock market which were quite prescient. I get lucky every once in a while. I charted wave A down from late 2007 to late 2008 followed by a 2+ year sideways B-wave triangle ending Q2 2011 around 3000. The C-wave down reached 1950 in December 2012 and should reach 700-1300 by late 2014 at the latest using Fib multiples. The A-wave reached 1665, so I'd expect the Shanghai C-wave to drop at least 25% to 1665ish from 2211 today in the year and possibly months ahead. Shanghai has little correlation with US markets, but I invented a Shanghai midnight signal (basically a certain technical breakdown in the Shanghai market that portends a very large drop in SPX within days or weeks) and one could occur if Shanghai drops below 2161 (just 2.5% lower than today's price).
10. OEW: Tony Caldaro has recently called for a likely 4+ week downtrend near 1550. He uses his own proprietary technical analyses and EW counts which have been very successful in the big picture especially during the last 2 bull markets.
I'll stop there. You now have 10 reasons to believe SPX will at least revisit 1600ish in the next few days or weeks and probably drop to 1550ish or below. Supporting much lower levels would be a break of the uptrend line from November which has now been bounced 4 times...the last being 1598. I recently determined a confluence of events around June 19-21 and the 1st week of July. Assuming we get a low in the 1500s in the coming weeks, I then expect a 70%+ retracement as is typical to start a bear market. Maybe the Fed will throw the markets a bone if they correct enough to aid the retracement. Of course, new SPX highs are also possible, but we're riding the uptrend now and will be riding any large uptrend off on oversold bottom, and we won't hop off until the System gives confirmation. The System is likely to confirm the next downleg this coming week. Until then, stay long. Based on my study of the 2-week downtrends since 2007 and the 1643-1653 Fib targets as well as a 1655-1657 target (76% retracement of OEW's 1674 failed 5th high and C=A*.5 from 1598), it is likelier than not that SPX will rally a little higher on Monday or Tuesday, but it's not necessary. Buckle up for another 90-100pt drop that could happen faster than the first one with a break of 1600 probably witnessing one tiny last-gasp head fake and then a rapid swoon. Good fortune.
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