Crash Day 1 on January 25th 2016...System Suspended Until Crash Setup Resolved

Since I haven't published all the System rules or made the System's first official trade, I am suspending the System temporarily until the crash setups pass by...likely for a few weeks and possibly even into March/April/May. Sorry, but I think it's the right thing to do under the circumstances. I plan to mention when the System would have triggered a new uptrend or downtrend, but I am going to devote most of my time to studying and trading the crash setup. Some swing candle systems would have gone bearish today. Mine would not have because the gap was not filled, and, in fact, it would have gone long near the close at 1880 due to the uptrend (which it traded last week: entry 1969, exit 1993) and neutral hourly indicators. I'm not very optimistic about its profitability given the crash setup, and it would immediately exit with a loss if there is a gap below 1869. Personally, for full disclosure, I am now 95% short and plan to fluctuate 80-100% short until a new swing candle uptrend is confirmed for more than 1 day or until the crash setup is eliminated as discussed below.


Crash setup Final Step 5 is DONE so we will know over the next couple days if this is a crash or not. Today's action matches the 1st day of the 4 primary crashes I charted yesterday. I re-posted that image below. I had mentioned that SPX 1909 might have been good enough for the top since the best fitting crashes only rallied 1-3 days with a 25-50% retracement like we'd already done, but I did think the typical rally/consolidation into the FOMC announcement might occur up to the SPX 1920s. Obviously, that's another behavior change supporting bear market conditions. The other 2 lesser crashes (CY2001 and CY2011) seen at the bottom of the image only produced a small down day to start the crash, but even when I include those 2 charts and the CY1929 crash, a sizable down day like today always meant the crash was in progress and the previous rally high was never surpassed. Only 1 crash came close to revisiting the rally high the 2nd day. That means SPX 1909 should not be surpassed if the crash is in progress. However, to allow for a slight outlier, I'll apply my rounded 0.2% leeway and definitively say that the crash setup is eliminated temporarily if 1913 is surpassed and Dow also surpasses its rally high. That also means SPX 1909 should not be approached on the 3rd day of the crash which would be Wednesday. Now, it just so happens Wednesday is the FOMC announcement, so hopefully there won't be any temporary volatile spikes near 1909 that leave us wondering one way or the other.

About half of my crash samples never really traded much if any above the 1st day's close once the crash started and there were some gap downs, but some crashes did backfill a bit. I believe the market intends to leave everybody behind, so any rallies are likely to end quickly and badly and probably well short of SPX 1909.


At this point, we now have well-defined parameters for the current crash setup.
Crash elimination criteria
1. SPX rallies above 1914
2. Dow rallies above Friday's high
3. A bullish swing candle identifies another uptrend that lasts more than 1 day


Crash targets
projected 34-36% crash: SPX 1909 - (34-36%) = 1222-1260
a smaller 20% crash like CY2001 and CY2011: SPX 1909 - (20%) = 1527
a larger 44% crash like some during CY1929-1932: SPX 1909 - (44%) = 1069


overall target range = SPX 1069-1527
target bullseye = SPX 1222-1260
interim Fib/trendline/pitchfork/pivot targets SPX 1700-1750, SPX 1600ish and SPX 1150ish


I have also been studying how to trade a crash. The easiest way to do it is to go short after 1-3 days of rally in Step 5 or on the 1st or 2nd day of the crash and stay in for the entire ride down until a bullish swing candle is confirmed for more than 1 day. That should catch 75-85% of the crash based on historical charts.


However, based on my study of CY2008/2011/2015 hourly charts, I have determined a way to mitigate a little risk while approaching similar or perhaps even more profits. When hourly VIX spikes above its upper 20SMA Bollinger Band on a closing hourly basis or makes an obvious spike from lower levels, the next 1-3 hours are likely to see a near-term multiple-hour bottom. The same applies for obvious hourly TRIN spikes, particularly those near or above 2. When these readings occur at the closing hour, the next day often gaps down hard and finds a bottom soon after. The common exception I found was when the gap down occurred below a downtrend pivot established in the days beforehand. Those tend to run much lower. If you see both VIX and TRIN spike as described on an hourly basis, the bottom usually lasts a little longer or bounces a little higher. We are typically talking mere 3-10 hour bounces in most cases, because these are 20-40% drops in a matter of weeks. So, one approach to mitigate risk that I plan to use is to reduce one's position by 10-20% (no lower than 80% position size) when SPX spikes lower within 1-3 hours after such TRIN/VIX signals and then immediately re-enter 10-20 points higher or after a few hours of sideways action. If SPX immediately rallies on one of these signals without falling lower or rallies without these signals, I plan to stay 100% short (until the crash has concluded of course), because my study shows you only want to lighten up at true hourly extremes and you want to stay 80-100% invested to avoid missing downside surprises. Obviously, that strategy requires more time, effort and complexity and I cannot guarantee it will do any better, but I feel better mitigating my risk at bearish hourly extremes and mitigating my option time loss which is why I tend to scale in and out of trades (less so in this case to avoid missing crash gains).


Oil dropped below $30 at the close. Target $22-26. The Apple chart actually looks like a better fit for my crash setup than even SPX does, and we know Apple is a large chunk of the market with an earnings report at the Tuesday close. However, I never studied how the crash setup applies to individual stocks so that's just an interesting observation.


Another thing you can look for to signal the end of a crash is when daily VIX trades back below its 20SMA and then falls again. And, the crash may be over when daily MACD crosses over bullish for more than 1 day. A series of TRIN>3 readings can also signal a significant bottom...normal bottoms often only need 1. So, you have daily MACD, VIX, TRIN and swing candles to help identify a crash bottom and any signals should last for more than just 1 day to be valid. Of course, they are no guarantee, but they do seem to help in retrospect for other crashes. There are probably other forms of crash capitulation you could share.


Having said all of the above, I am fully aware the crash setup could be eliminated tomorrow or Wednesday. Amazingly, even from the SPX close at 1877, the risk is only 37 points (1914-1877) while the reward is 666 points almost a 20:1 ratio. I might be crazy but hopefully I'm crazy smart whether this crash setup materializes or not. Good fortune.