NOTE: The following post has been updated with a new and expanded table of data.  Please see the 6/8/11 update for additional details and analysis.

First, the ointment…

As discussed many times already, we took out the important 1294 level on SPX — establishing a significant new lower low at 1284.72.  Significant damage has been done to the bullish case, and I think this significantly curtails the upside potential.  We’ve fallen out of the rising wedge, and our downside target is now 1010.

Of course, there’s a fly…

SPX is tracing out a descending broadening wedge that should take prices back up tomorrow for at least a partial retrace of the past 4 trading days decline. 

I did a quick study…   In the past 900 or so trading days since the Oct ’07 top, we’ve only had 16 instances of 4 or more down days in a row.  Put another way, the odds of having 4 down days in a row have been less than 2%.  Of those 16, only 5 (about .6% of the total) lasted longer than 4 days. 

On average, the days after the decline ended retraced 33% of the decline.  Expanding the period to the next 3 trading days, the average retrace was 57%.   Wouldn’t bet the farm on this, but combined with the descending wedge, it’s a pretty good argument for a rebound.

The study also shows that of those 5 times the signal failed (without a rebound on the 5th day), the 5th day declines were 2, 5, 5, 8 and 63 points (Oct. 7 ’08.)  So, it succeeded 2/3 of the time — pretty decent odds for a short-term trade, particularly if one uses stops to protect the downside (remember, 63 points) if the signal fails.

If we retrace 33% of the past 4 days, that would take us back up to 1305.   A 57% retrace would result in 1319.  I believe 1319 to be very heavy resistance anyway, as that marks the current level of the bottom of the rising wedge (since Mar ’09) and the trendline off the Oct ’07 high.  As the chart above indicates, they actually intersect here — and I think we will backtest one or the other for at least a few days (as was done in Oct ’07).

If the signal fails, I see the next probable downside target as only 1278.  There’s an important trendline there, and it marks the 1.21 extension off the 1370 high.  After that…1250 and then on to 1228.  Again, our ultimate target is the base of the rising wedge: 1010 or 666, depending on whom you ask.

We’re also nearly finished forming a bullish butterfly pattern, which in itself indicates a decent rebound.  And last, but not least, the bearish H&S; has just about played itself out.  My original target was 1287 — about our current level.

Looking out any further, lots more flies…

Are we in P[3] or not?  I’ve seen pretty good arguments on both sides.   It occurs to me that if we did bounce back up to the 1319 level, things might get even more confusing.  Why? 

If the downturn’s confined to current levels, things begin to look a lot like a channel — as shown by the dashed lines above.  Talk about frustrating the bears…  Might even get a few bulls excited (do ya’ think?)

This is where things get fun (or like water torture, depending on your POV.)  P[3]?  Minor 5?  Who knows.  But, I favor this outlook if for no other reason than it would produce the greatest number of arguments amongst Elliott Wavers.

Where do we go from there?  IF the market plays out as expected, it’ll produce an outside shoulder to complete a complex H&S; pattern.  The price target would be around 1228 (also the .618 fib level off the Oct ’07 highs.) 

If you’ve been following my 87-day pattern at all [Sure, it Works in Practice], you know that the 1370 peak on May 2 came two weeks early (allowed under the rules.)  Since then, we’ve declined 6.26%.  If this is the cycle low, it would be within the range of past results.

Regardless, there’s another 87-day target date coming up.  The original target date is August 11, but an early arrival (as happened in May) could bump it to as early as July 14.  If the market does an about face here, I would expect any advance to be completed by one of those two dates.

I’m no longer focused on the rising wedge’s apex (September 12th), as we’ve officially fallen out of it.  But, I fully expect the ultimate outcome (a strong retrace back to its origin, or 1010) to commence within the same time frame — if it hasn’t already.

Stay tuned.

http://www.zerohedge.com/article/housing-prices-have-already-fallen-more-during-great-depression-how-much-lower-will-they-go

With this morning’s announcement acknowledgment of a dismal jobs picture, the market has cracked badly.  Even the cheerleaders will now publicly admit that the economy is mired in a double dip.  But, the realists will point to a more ominous outcome.

To figure out what lies ahead, I spent some time looking back.  When the market finally cracked it’s support line in 2007, it looked like this (in the futures):

Big Picture

Close Up

 As seen on the close up, the initial crack was far from the only opportunity to play the downside.  The SPX spent 5 days backtesting the support trendline, with daily ranges of “only” 25-40 points.  After that week, though, it tumbled an additional 170 points, with daily drops of up to 70 points.

Needless to say, there were still plenty of additional entry points on the way from 1586 to 666.  There were also plenty of traps.  The rebounds were mostly easy to see for anyone watching the harmonics.  The biggest ones flashed Gartley’s and Bat’s that were pretty obvious.  And, in general, the moves followed the obvious fib levels up and down.

Just remember, nothing moves in a straight line.  While the trend should continue to be down, we still haven’t established a lower low.  Until we break 1294, there’s always the possibility of a significant rebound.  If things play out like in 2007, that would indicate a trading range of 1295 – 1313 for a week or so before any really big drops.

Since the Bottom

We have a much more interventionist Fed now, and they can be expected to dip into their bag of tricks now that their backs are up against the wall.  It won’t change the long term outlook, but it may very well disrupt an otherwise inevitable decline.

Medium Close Up

The bottom of the rising wedge, our support since Mar 09, will now act as our resistance.  So, we could see bounces back as high as 1313 or so in the next few trading days, but should stay below that level.  Downside targets are 1295, 1287, 1249 and 1220.   I’ll post more later.

A quick look at the VIX, at only 18.22 after spiking to nearly 20, tells me there’s also potential for a more significant bounce back.  It has completed a bearish Bat pattern that promises imminent declines in volatility.  I discount it somewhat, as C is a bit below A.  But, lately, these messy patterns have been playing out as well as those better formed. 

It might not mean anything, but I take it as a sign.  Combined with the probability of backtesting the rising wedge resistance line and the Fed/Gov’t pulling out all the stops, it’s possible we’ll rebound above 1313.  Bottom line, short term trades on the downside should be accompanied by stops. 

Yeah, it’s appropriate here.

At 11:00 am yesterday [Shoulda, Coulda, Woulda], in a shameless attempt to save face after my first gutless post of the day, I stated:

We’re taking a breather, as expected.  Interesting that the pullback occurred right at a trendline (the dashed line below) drawn off the 3/16 and 4/18 lows.  We could look at the action since the recent lows as a backtest of that line.

Quite often, these backtests (off trendlines established by important pivot points) are the last up move before a substantial drop.  If we bounce hard and head back down, we will at least test the Oct ’07 trendline, as noted above, and possibly even the rising wedge at 1316.

A likely scenario at that juncture would be an broadening wedge, governed by the dashed trendline above and either the Oct ’07 trendline or rising wedge below.   Again, failure to hold the wedge would be disastrous for the bulls.

What do we get today?  A huge red candle that ranges from the dashed trendline to the rising wedge.  Almost like the market gods were listening, or something.

What I was watching, but didn’t feel confident enough to share, was a bearish butterfly pattern (5/23-5/31 on hourly).  The bottom of it was kinda squirrely, and the entry wasn’t very clean, but I’ll mention them anyway in the future.

We’re now faced with two big questions:

(1)  did we top at 1370 and this is B of an A-B-C correction after the first wave down over the past few weeks?

(2) if so, will the Fed come to the rescue?


We’ll know tomorrow (or overnight) whether there’s any follow-through potential on the downside.  My expectation is that we’ll bounce back as high as the Oct ’07 trendline at 1330.  It would make a nice C wave for the next move down.  Again, the key is the bottom of the rising wedge — currently around 1311-1312.

If we break down below it, we might backtest a few times, but the game is over for the bulls.  Our next target would likely be 1295, and after that 1280.

If we rebound past 1330 (and I’m not holding my breath), look for the next major resistance at the channel top at 1342.  Any move above here, if it survives backtesting, would target the 1358 level yet again.  I don’t see any harmonics that are screaming for a particular direction, but I’ll look more later.

Again, I don’t see a lot of value in declaring “bull” or “bear” right here.  If the market’s heading down, there will be plenty of downside left in which to score some major profits.  Just check the 2007 “top.”  LOTS of entry points.  Calling a top is good for the ego, but I intend to let the market tell us which way it’s going, then invest accordingly.

Re question 2, heck if I know.  It’s obvious that another round of QE would just make things worse in the medium and long term.  It might even make things worse in the short run, if they run that up the flagpole but no one salutes.  Kiss whatever shreds of confidence the market has left good-bye.

On the other hand, I can’t imagine they’ve no further tricks up their sleeves.  Who among us would be surprised to see additional bogus “announcements” or some other more tangible manipulation now that backs are up against the wall.  And, I don’t trust Congress to argue for the greater good here.  IMHO, these are desperate times that will likely produce desperate measures.    Stay groovy.