Crash Day 2 Update

Update Tuesday January 26th 2016 1PM EST:
The System appears to have chosen an opportune time to go long at SPX 1880. Me going 95% short yesterday, not looking so good. Unlike SPX and Nasdaq, Dow has actually eclipsed Friday's high, so that does not bode well for the crash setup which is on its last breath. Art Cashin pointed out that there is a study showing 50%+ of all stock market gains could have been achieved by being long the day before a Fed announcement. Having said that, the hourly TRIN is currently at an overbought level typically seen just before 1-3 day tops or worse with the last 4 being: (1) at SPX 2065 on Dec 23rd with the high occurring 5 hours later at 2067 dropping to 2044, (2) at SPX 2070 on Dec 9th with the high occurring 1 hour later at 2080 with a drop to 2036, (3) at SPX 2077 on Nov 18th with a few points higher then 7 hours of sideways action and then a pop to 2097 and drop to 2070 before more sideways action and (4) SPX 1983 with a few more hours higher to 1992 then drop to 1972 and several days sideways.


Given that limited data set, we can probably expect a short-term top within hours and a likely 1-2% sideways range for 2-3 days, but the results varied widely beyond that and other factors must be considered. We also have an FOMC announcement tomorrow, and we have a crash setup that could create volatility whether it fails or confirms. TRIN is also just one indicator albeit important. I am admittedly not optimistic about the crash setup at this point, but a reversal and official swing high from SPX 1900-1914 is still a possibility with good risk/reward, so we'll let it ride out as scripted. The System would be reducing its long position size 25% here at 1904ish waiting to reload on another dip or exit on a reversal below 1877. Good fortune.


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Today's large rally is very disconcerting, but a sizable rally on Crash Day 2 or 3 has been seen before. Any rally above SPX 1909 probably eliminates the crash setup for a while. Since only 1 charted crash had a sizable closing up day in the first 3 days of the crash (although several popped and dropped and I did not chart all crashes), I also think that any day that closes strongly up in the next couple days also puts the crash setup in jeopardy based on historical charts. That's going to take quite a reversal today. We cannot deny the unique weight of the FOMC situation possibly skewing things a bit, but we also cannot throw out history. I do not have a crystal ball and I cannot tell you what percentage of these setups have failed over the last 100 years, but I can say a setup technically similar to the current one appeared before all the crashes I studied from CY1929 and there aren't that many back-to-back quarterly 10%+ drops . In other words, there are certainly no guarantees that a crash will happen over the next 2-4 weeks, but it is much more likely than normal and not worth the risk to be long. If one did not act on my pre-crash warnings at SPX 1900+ Monday or at SPX 1890+ this morning after my overnight crash setup confirmation, one is being given a gift near 1900 again this morning, because any short trade from SPX 1890-1909 has extremely high reward and low risk given the parameters I have setup.


I do need to make a correction to my previous crash projections. I calculated a 34-36% crash from SPX 1909 but I should have used SPX 2082. Although the Crash Step 5 high likely ended at SPX 1909, my crash calculations on historical charts were made from the Step 3 high since Step 5 is typically small and ends up appearing like a blip in the downtrend. So, here are my new SPX targets.


Minimum 1666 = 2082* (small -20% crash)
Projected 1332-1374 = 2082 * (common -34-36% crash)
Maximum 1166 = 2082 * (larger -44% crash size seen in CY1929-1932)
Overall Target Range 1166-1666


Good fortune.