2014.04.04 Friday Update

The technical indicators swung bearish again on the latest rally despite the 20dSMA and 1876 being reclaimed and SPX rising by 2% in the last few days. Today appears to be a multi-day top, but I contend it could still turn into an 8%+ drop into mid-April. If SPX pulls back for a couple days and then recovers to new highs yet again, my scenario is probably put in the coffin barring a quick EDT but all the conditions I mentioned before are still there and worse albeit in a different pattern than I projected and I trust their historical success. I'll explain more later today or this weekend and may just add to this post.

Update 1:30PM EST:
SPX is now testing the 1866-1877 key moving average zone for my System. Once again, closing and holding below that is dangerous for SPX. It managed to close just below last week's range (which has risen) and then gapped up above it breaking System 4-candle resistance at 1864 and my high stop area at 1876. That story of playing with fire has repeated several times but dip buyers have continued to save the day. All my experience for good and bad and the history of my most successful indicators suggests the market is imminently going to get burned. Let me review and explain why the scenario has probably not played out like I projected.

First of all, let me say I have short-term trading indicators and then I have market (or longer-term) indicators. All of them have aligned for a significant top. Yes, they were aligned last week too, but they convey a closing time window, not an exact dooms-day. Let's recap.
1. System/Score (short-term): the System would be short again with a neutral Score as of the breakdown of 4hr support at 1882.65. The Score has turned  bearish since then and will get further bearish if the 1866-1877 is clearly broken. Yes, another rally could save the day to new highs. And, yes, another rally could retest that zone before the real dive occurred. But, even whipsaws in my System only last so long until a sizable direction is chosen.
2. T-Theory Confidence Indicator (intermediate-to-long term): I wrote a detailed post about this recently. The current negative divergence across months has only been seen at 20%+ breakdowns and it has occurred at 2000, 2004, 2007, 2011 and 2014? Yes, the divergence can be erased but it is a bad one that would take a massive rally . Yes, the correction could be more sideways in a 5-10% range for a few months as happened with this signal a couple times in the 1990s. Yes, it could just be wrong but it signals risk aversion in the marketplace. The big dogs are likely cashing out and trying to leave everybody else holding the bag. And, the current multi-month divergence is also a multi-year divergence against 2000/2007. That also happened in 2007 and it led to the biggest correction but 2011 did not suffer that severe a fate.
3. Bull market stats (long-term): Most people count the current bull market rally as being in its 6th year which is rarified air and due for a 20%ish (or more) correction.
4. Shanghai Midnight indicator (intermediate-term): This is a custom indicator I came up which I wrote about a couple times in the last 2 years and it involves the Shanghai index breaking below its 20dSMA and some other conditions. That happened in December and a large drop ensued later followed by the 7% SPX drop in January. Overall, SPX has lagged key Shanghai drops but obviously suffers less and recovers better. However, the interesting part of this indicator is that the last 3 Shanghai Midnight occurrences from 2011 since I started talking about it have actually had their worst drops after the initial drop bounces to backtest its breakdown near the 20dSMA. That backtest has now happened in February with a smaller failed backtest last week. Watch out Shanghai! And watchout SPX as its lag should be coming to an end imminently.
5. Chart divergences (long-term): Weekly SPX divergences are bad. Daily not so good. Monthly mixed. Divergences can be cleared but when they align at multiple levels including hourly as they did today, they become more significant.
6. Seasonality (intermediate-to-long-term): March/April have almost always led to huge turning points since 2000. It's pretty good even before that over the decades but recency is more important.
7. Discretionary Consumer Spending indicator: I gave 2 scenarios based on back-to-back signals I received 1 month apart. Those exact scenarios did not play out at least in terms of 5-8% drops, but it could easily just be my interpretation or perhaps the magnitude was muted by the overlapping signals...we'll know for sure with hindsight in a month. The other problem is that there was only 1 other case where I had back-to-back monthly signals to use as a guide and they were the opposite, calling for a bottom and then a top 4 weeks later and it worked perfectly. It's tough to say what happens when the signal whipsaws. However, the indicator gives an historical window (with a couple exceptions) for a top or bottom. The bottom window was mid-March to mid-April. The top window was early March to early April. I projected based on past behavior when the preceding pivots would be once again using time windows. The accuracy is reduced with each projection, but the confluence was for a top in mid-March and bottom in mid-April. I'm not trying to be a Monday morning quarterback, but my key point is that the 2 basic indicator time windows can still be hit (top early March to early April, bottom mid-March to mid-April). I did not think the scenario of new all-time highs at the end of the top window in early April followed by a 2-week-ish correction to a mid-April bottom was likely, since all the previous drops had covered 5 calendar weeks. That was a condition I included in my 2 scenarios. But, perhaps the back-to-back signals are negating that 5+ week condition. So, an 8%+ drop into the week of April 14 or April 21 must still be considered a serious possibility at this point.

Now, given the potential irregular flat 3-3-5 scenario, given Caldaro's bullish EW count, given a potential bottom in 2-ish weeks, given the continued Fed pumping, given the reasonable economic data with potentially low-balled earnings season getting ready to start and given the unknown involved with my back-to-back spending signals, I cannot rule out a smaller 5% drop which would be 1800ish assuming today marked a top. However, there is another consumer spending indication for a significant bottom in June or August and most of the points above are intermediate-to-long term indicators for a significant top potentially 20%+ in size. So, if we do get a significant downtrend now, possibly 1800ish will hold initially but it could easily fall to 1740ish or 1680ish support areas and ultimately the odds are HIGH that SPX will retest the 1576 breakout this year. Good fortune.