Immediate Crash Setup Delayed but Risk High

(Update January 29th 2016 3PM EST)
This will probably be my last post for the weekend. For the next 2 weeks, I think the crash setup has been delayed and I'll be out of capacity quite a few days, so my posts will be more sporadic. My System remains bullish from SPX 1880, but it would reduce position size by 25% under the current overbought hourly score (-70%) near SPX 1929. It would take a drop below SPX 1894 on Monday without exceeding today's high to go bearish at the close. That seems highly unlikely. The daily 20SMA and hourly upper 20SMA Bollinger Band can serve as resistance or support after downtrends, so a large Monday rally could see SPX retest this 1920-1930 area or we could get a pullback to 1900ish first. Not sure. If oil and HYG (which might have broken out of its downtrend) rally, so will SPX. First day of the month can be volatile. I recently discussed many indices like HYG, Wilshire etc that were on the edge of trend lines or kisses of death etc, so I feel like this rally could surprise on the upside if it is not reversed near current levels back below 1900ish. Good fortune.
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I was wrong about a crash starting this week. The immediate Crash Setup as I defined it based on historical charts is delayed barring a huge bearish reversal today. If one entered short at 1890-1908/1917 after the crash projection, there is an opportunity to exit with a small loss as SPX currently resides at 1911 as I type.


The 5 typical Crash Steps in my estimation are:
1. a sizable uptrend often but not always at all-time or long-term highs
2. a ~10%+ correction
3. a 38-100%+ retracement rally that usually lasts weeks
4. another 5-10%+ drop usually but not always near the previous correction lows
5. a 1-5 day rally usually only retracing 25-50% of step 4 with this step usually being complete once a large down day was seen
Then a crash. 20-44%+ drop in 12-18+ trading days with the larger and longer crashes in older charts


There are also typical technical indicator setups for crashes including (1) VIX breaking and staying above its 20SMA, (2) MACD breaking below 0 or forming a kiss of death and not crossing over its trigger line bullishly, (3) RSI14 usually failing around 50-60, (4) 10-50SMA moving averages aligning bearishly and the 20SMA usually not being surpassed in Step 5 etc.


All 5 crash steps and all indicators were potentially in place on Friday or Wednesday. Technically, all these steps and indicators except the 1-5 day rally could still be in place if SPX were to close lower today (or perhaps even flattish), but I mentioned the candlestick action has not matched well and now SPX has surpassed 1917. I gave it more leeway due to the FOMC/month-end timing. Even if SPX closes below 1909 which was one of my levels for delaying the crash call, VIX and MACD will likely not fit previous crashes very well for Step 5 unless the day's gains are wiped out.


It is possible that we are actually in Step 3 of a Crash. That was an alternate I charted in previous posts and below. If so, we should expect a multi-week 38-100%+ retracement of SPX 2116/2104 which is SPX 1924-2000+. Or should we? Well, for the 6 crashes I charted, Step 3 took 11,7,18, 2, 8 and 15 trading days. Interestingly, the 15 and 18 day rallies each rallied 4-5 days, then fell hard to form slightly higher lows (double bottoms) and then rallied to slightly higher highs. The 7-day case (COMPQ CY2000) also double-bottomed but quicker on the 4th day and the 8-day case (SPX CY2001) actually double-bottomed with a slightly lower low or else its 3rd step would have been counted as a 17-day rally with retest mixed in. The only 2 that did not double bottom included SPX CY2008 which was a fast-and-furious 2-day rally and SSEC CY2015 which did retrace more than 50% of the bottom on the 5th of 11 days in the rally. I took a peek at CY1929 again and its 3rd step rally was 6 days long.


SPX is currently on Day 8 of the rally off the bottom using price high (not price close) which is how I measured all the other crashes. That actually places it smack in the middle of crash Step 3 scenarios, and it has now passed the interim 4-5 day rally top seen in the 4 double-bottom scenarios and 1 50%+ retracement scenario, so any large drop lower is not likely to be part of a double-bottom that sticks.


So.......I can no longer say with high confidence that a crash is setting up. However, I can say SPX is "potentially" completing Step 3 of a "potential" Crash Setup. If at any point starting in the next couple days or weeks you see a 5-10%+ drop over 4-6 trading days, SPX could be completing Step 4 of  a Crash Setup rather than a double bottom. If a Step 3 rally high were to end at SPX 1918-1950s, the target would be SPX ~1750-1850 with a final weak 1-5 day Step 5 high.


Yes, this sounds like I am just extending my crash call. But, here is the difference. I am now much less confident that we are even in a Crash Setup. There are still many ingredients but I was really trying to catch Step 5 which is the last real time to get out of longs before the market cascades 20%+ lower.. We are no longer in that position and, although it could setup again, it has a ways to go. I did state previously that a crash delay now would push it to at least March, but given the re-study of Step 3 above, it does appear like SPX could setup another Step 5 in as little as 1 week but as long as 2-4 weeks which makes mid-to-late February a stronger possibility than March...assuming it even materializes.


Based on this info, I am still choosing to not trade the System long setups like we are currently in (it outsmarted my crash prognostication for the time being) until the "potential" Crash Setup completely disappears. I risk missing out on big gains since a couple of the Step 3 rallies retraced much more than 50%, but this rally is off to a very slow, weak start with FOMC headwind and bear market conditions. Thus, I think it is more likely for the current rally to remain weak failing anywhere between now and the 1990s. February 19th OPEX +/- is still a potential turning point either way with SPX 1950 currently the magnet peg level.


For now, I will go back to my normal analysis and System references with smaller updates on the potential Crash Setup until more ingredients line up again. Assuming today's gains largely hold, VIX falling below its 20SMA and MACD crossing bullish for more than 1 day is generally a positive sign for days or weeks ahead. Also, I did mention previously that I believe the Crash Setup has probably failed to materialize more than not but that the ingredients made a crash much more likely than normal. Case in point, there was a failed Crash Setup in Sep-Nov 2015, but that one had several arguably non-fitting indicators as compared to the current setup (including MACD and VIX and a smaller Step 4 percentage) and it was obvious when its Step 5 failed as it gapped higher on Day 5 also retracing more than 50% and breaking its 20SMA etc. Stay vigilant. Good fortune.