While there is plenty of speculation that this will be the week we experience a flash crash, I don’t think it’s likely.  And, if it should happen, it won’t be the market disaster that many expect — for the simple reason that such severe drops almost always retrace significantly in a relatively short amount of time.

This time could be different, but as a technician I keep my distance from such thinking.  As regular readers of this blog know, I’ve been banging the “all market tops are alike” drum for a while (previous posts here and here.)

As I posted on June 22, I view the current market as particularly similar to 2007 both in terms of the run-up to the top…

2007 vs 2011

…as well as the price action within the top itself:

Date:  6/22/11

In my opinion, we’ve completed wave 1 of (1) of P[3] down and are in the process of tracing out corrective wave 2, which should take us back to the midline of the channel created over the past four months.  This is a count similar to 2007’s, in which there was also dissension over the initial impulse wave count.

2010 – 2011

Since Feb 18 High

That midline currently stands around 1324 or so.   The simple average of the most recent high (1370) and low (1258) is 1314; but, I’ve been more focused on a broadening channel running roughly parallel to a simple regression channel with boundaries of +/- 2 standard deviations.  My channel is drawn off significant highs leading up to the current pattern and is explained here.

After the 10/11/2007 peak, that market dropped 10.8% in 31 days.  It then recovered to its channel midline in just 11 days.  This represented a price retracement of 68.8% in 35.5% of the time it took to reach its low.

These numbers are very consistent with other significant declines.  I looked at market drops since 1987.  I started with the crash of August 1987 and worked my way forward, setting a threshold of a minimum 7% drop within 35 trading days or so.  I chose the time periods in a rather unscientific way — I eyeballed them.  It’s quite possible I missed some or included some that shouldn’t have been, but the results were fairly consistent.

Some of the declines were significant in the short run, then extended on for a longer period.  August 1987 was one such decline, as were March 2002 and April 2010 (I show both short and long periods for comparison purposes.)

As can be clearly seen, the minimum retracement of one of these significant declines was 35%.  The average was 56% — which supports my assertion that markets tend to retrace to their midline before leaving the topping pattern.  Viewed from a Fibonacci standpoint, the most common retracements were 50% (12), 61.8% (11), 78.6% (3) and 38.2% (2).

The average retracement time was 38% of the time it took to decline in the first place.  The frequency of common Fib’s was 50% (9), 38.2% (7) and 61.8% (4).  Like the price retracements, this jibes with common perceptions about market moves in general.

If 1258 was indeed the low, the decline we’ve seen since May 2 took 32 days — very much in keeping with the study averages.  In those 32 days, this market lost 8.2% — a little on the low side, but within the study range.  If we perform per the historical averages, the market will retrace to its midline of 1322 within 12 days — or, July 5.

My own charting — based on comparisons to 2007 — indicates Friday the 1st, which would be 11 days.  Pretty close.  My price target of 1324 is also pretty close to the 1322 the study indicates.  A move to 1322 would also be a 78.6% retrace of the 6/1 1345 high and a 50% retrace of the 5/2 1370 high.

If it plays out as I expect, we’ll have also completed a bearish bat pattern (since 6/1).  The initial price target would be the .618 retracement, or 1297.  And, a continued decline would complete a huge H&S; pattern indicating downside below 1200.  But, we’ll deal with that in the coming days if the pattern develops as I suspect.

The one thing this study doesn’t spell out is whether 1258 was the low.  This could be one of those 35-day patterns that loses 20%.  But, I don’t think so, but we’ll know in the next few days.  Just know that, if it is, we’ll bounce back accordingly before diving straight for 666.

Can we retrace 54 points in 5 days?  Sure.  We’ve had two 20-point days in the past 9 trading sessions.  And, most technical indicators indicate we’re somewhat oversold (more on that later.)  The market seems very news-focused lately, so I suspect a positive trigger relating to Greece, the Fed, the debt ceiling or economic indicators expected out this week.  Also, Friday is options expiration for the quarterlies, so keep an eye on OPEX related anomalies.

I’ll try to update the technical picture before the opening tomorrow.  In the meantime, plenty to think about.

As regular readers of this blog know, I’ve been banging the ‘market tops are alike’ drum for a while  (previous posts here and here.)

I view 2007 as particularly similar to the current market.  In my opinion, we’ve completed wave 1 of (1) down and are in the process of tracing out corrective wave 2, which should take us back to the midline of the channel created over the past four months.

After the 10/11/2007 peak, that market dropped 10.8% in 31 days.  It then recoverd to its channel midline in just 11 days.

This market took 32 days to drop 8.2% to its recent low.  It had retraced 35% of its total decline in 4 days before plunging back near its lows late last week.  A return to its midline of about 1326 would mean a 61% retracement of the total drop.  It has 5 days to complete the climb if it’s to match the 2007 pattern.  52 points in 5 days.

At 21 days down from the May 2 top, this market retraced 58% of it’s then 4.3% drop.  It went on to drop another 87 points, or 6.5% over the next 11 days.  Total drop: 8.2% in 32 days.

Fourteen days after the 10/11/2007 high, that market retraced 72% of its then 7.2% drop.   It went on to drop another 117 points, or 8.3% over the next 17 days.  Total drop: 10.8% over 31 days.

UPDATE:  7:25 AM PDT

SPX just completed a little Gartley pattern on the 5 minute chart.  Didn’t think it would fly, as the B didn’t quite make it to .618.  It might take us down to the .382 line at 1272 before we start up.

I’ve been watching the 5 minute chart intra-day, as it has an uncanny ability to forecast short-term turns on its RSI.  A touch near 20 almost always marks a bottom, and 80 or above a top — though it can and does “overshoot” when the momentum is strong.

 ORIGINAL POST: 6:50 AM PDT

The market nearly succumed today following a dramatic test of the All One Market hypothesis.

In a lame attempt to curry favor with voters, the administration waged war on high oil prices.  They brought a peashooter to the front lines, but their first shot hit the market right between the eyes.  In a move as carefully orchestrated as the silver take-down in May, oil fell a swift 5%. 

Ah, but the law of unintended consequences.  Stocks fell in lock step, matching oil’s decline to the minute [see: Not Terribly Slick].  And, the $800 million which might be saved over the next week or so of lower crude prices was quickly dwarfed by $50-100 billion in market losses.  Oops.

Luckily, Benny and the Jets came to our rescue (was there ever any doubt?)  The Plunge Protection Team dispatched trucks of cash to every street corner in Manhattan, free samples for anyone promising to buy a share or two of stock.

The DJIA, which was down 234 at one point, closed down a relatively tame 60.  SPX closed down 3 instead of 25.  And King Dollar, up almost 1.5% since yesterday’s close, fell back to a more princely .6% gain.  Almost every index I watch left either a bullish hammer or a shooting star on its daily chart.

For the faithful who read and believed Deja Vu All Over Again and Deja Vu All Over Again, Again, this was an enormous buying opportunity.  Consider the June 132 SPY calls, which traded as low as .02 and subsequently rose to .12.   I hope at least a few of my brothers in arms felt as I did and added to their longs at 1265.

Although the politicos threw us a curve, the topping pattern is still intact.  There was some question as to when the B in the A-B-C corrective wave would make its appearance.  The trend line off the 4/21 gap was doing a great job yesterday and up until just after I posted about it last night, but obviously got clobbered by today’s action.

The pattern found a substitute support trend line — the latest fan line from 10/31/10 that was formed when we put in the 6/16 low.  It’s seen in the above chart, running from (1) to (4).  If history repeats, and it always does, this line will come into play again in the next week or two — probably as support at Point B and resistance as we’re backtesting from Point D.

Also, note how the various numbered points generate meaningful fan lines.  Point (1) is the intersection of an important low with the trend line from the Mar ’09 lows.  Its top line provided primary support from 3/16 to 5/16.  Once the market dropped through it on 5/23, it acted as resistance for the backtest — determining the 6/1 interim high of 1345.   The middle fan line from Point (1), also our Mar ’09 trend line, will define Point A.  And, the bottom fan line has, as already stated, saved the market’s bacon on two occasions: 6/16 and today.

Examine the other fan line points of origin.  Point (2)’s top line determined the 4/8 and 5/2 highs.  Its middle line, the 3/16 low and future Point A.  And, its bottom line coincided with the 6/16 low. Note that each subsequent origin point has its own sphere of influence, but they often intersect. 

These points of confluence are especially important to market action.  Examples include Point (4) and future Point A.  I’m expecting another near the backtest of the channel bottom and will probably move Point D to reflect that once it’s revealed.  My best guess is that the 4/18 low will act as a point of origin, possibly determining Point B and the backtest intersection point.

At 7:30 pm PDT, the futures look to erase all traces of today’s debacle.  Tomorrow should continue what would/should have happened today.  I fully expect to reach Point A in the next several trading days.  We have a bullish hammer candle and very positive technical indicators that should see us to at least 1300 tomorrow. 

At that point, we will have completed a (somewhat lopsided) Inverse H&S; pattern that has upside potential to 1328.  The rising wedge I was following obviously paid off with today’s plunge, but we may have established a new one with a wider base.  I’ll be watching it, as a similar pattern played out at the equivalent point in 2007.

A strong opening tomorrow should also complete the H&S; pattern I’ve expected in the VIX.  Believe it or not, the potential target here is 11 — a number we haven’t seen since 2006.  We looked at this pattern here and here.  While I don’t believe we’ll actually reach 11, the mere completion of the H&S; will generate a lot of bullish enthusiasm.

I expect it to drive the market to Point A with enormous enthusiasm.  Even after we pull back, most will expect it to be a corrective wave on the way to a new high.  It will be the last and bloodiest time anyone’s tempted to BTFD for a very long time.

Stay tuned.

The White House’s brain trust thought this would help?

US Plans to Release 30 Million Barrels of Oil From Strategic Reserves

http://www.cnbc.com/id/43508255

Come on, guys; everyone knows that markets are very much in sync these days.  This little stink bomb took crude down $4 and an already fragile market down another 20 points.

While lower gas prices will please the guy filling up his Suburban this morning, his joy will be somewhat tempered by the margin call he’ll get from his broker this afternoon.

Let’s suppose the market does rebound as I expect it to.  There’s still the issue of the Strategic Petroleum Reserve being, well… strategic.  While not a very good defense against crazy things happening in the Middle East, at least it was a defense.  Sort of.

And, then there’s the arbitrage — in this case, a negative one.  This is oil we bought for a lot less money when the dollar was stronger.  When and if we replace it, it’ll be at a much higher price with a much weaker dollar.

If lower prices stuck around for awhile, I’d say it’s worth it.  But, 30 million barrels, even though it sounds like a lot, isn’t.  It’s about one day’s supply.  If the effects last for a week (unlikely) the $4 per barrel savings translates into $840 million theoretically saved (30MM x 7 days x $4).  The bad news is that the DJIA alone lost $50 billion in value (1.5% of $3 trillion) since news of this stunt leaked out around midnight.

This is a political gimmick that’s been tried before and always, always fails.  Always.

Once again, the financial establishment must be wondering how to cancel the Bernanke Show.  Though, that’s not the real reason the market is down 21 points to 1265.  It’s the economy, of course.  With a little help from a bone-headed move to tap the strategic oil reserve.  And, this morning, we get a little taste of what things will be like in the coming weeks.

The pony in this pile of crap is that if SPX holds at these levels, we will have established a new higher low.  Technical indicators are all through the floor, indicating a short-term oversold situation.  Even the daily MACD is threatening to hook back down and the histogram is hinting at a return to negative territory.

I’m adding to long positions here, as the upside case is still intact.  The Inverse H&S; on the SPX and the H&S; on the VIX that I talked about last night are simply that much closer to completion now.

Interestingly, both will feature a spike in their right shoulders, just like we saw in the smaller patterns completed on the 20th. 

To recap, the SPX IHS indicates an upside to 1328, and the VIX H&S; indicates a target of 11.  Yes, 11.  Not saying it’ll happen, but just the prospect of it might take bullishness to a new extreme (provided we survive the bearish mauling this morning.) 

If this rebounds in the next few hours, it’ll make for a heck of a bullish hammer on the day.

Stay tuned.

I’ve been posting for the past month about the similarities between this topping pattern and those of 2000 and 2007.  [see Deja Vu, Channel Surfing, You’ve Got a Fan, etc.]

Here are the charts I’ve developed that show just how similar they are, and what I think they tell us about the next month or so.

In 2007, the market tagged the lower bound of its channel, then rose in a rising wedge to Point A, which happened to be the intersection of:

(1) the midline of the entire pattern
(2) the support trend line from Mar ’03
(3) a trend line off the most recent highs
(4) a fan line from the next most recent high

That’s a whole lotta intersecting going on.  It fell back to B, which marked the same trend line that paused the market on its way to A, then rebounded.  It stopped at C, also along the same trend line mentioned above (4).

At this point, the market falls sharply back to the bottom of the channel, hangs around and backtests for a few days before dropping nearly 200 points in 5 days.  It immediately tries (in vain) to recover and backtest the channel bottom, spending months before finally giving up and heading south for good.

Now, let’s look at the current market.

Pay particular attention to the intersection of all those trend lines at Point A.  They’re all there: the long term support from March ’09, the medium term support from Nov ’10, the trend line from the recent highs, the fan line from the next most recent high, the midline of the channel.

While there’s no guarantee the rest of the pattern will play out as it did in 2007, I think it’s highly likely.  My charting program isn’t precise enough to pinpoint an exact top, but I’m thinking anywhere from 1320 to 1330 — which just so happens to match the harmonics indicators.

It’s worth noting that if the pattern unfolds as I expect, we’ll have formed a massive H&S; pattern dating back to last December.  While a little lopsided, it would indicate a drop to 1130 or so.  There are numerous, other harmonic patterns that would come into play, but those can be dealt with in future posts.

BTW, if the entire move down from 1370 to 1258 were counted as [i], this corrective wave would be [ii].  I favor that count over [iv] since, as I understand it, a rise beyond 1311 would violate EW rules of [i] and [iv] overlapping.  I’m no EW expert, but I believe the 2007 count unfolded similarly.  

I’m looking for a very sharp move up — possibly even by Friday.  VIX should plunge to 15 or less as investors incorrectly assume that the bull is back.  Optimism should be at a fever pitch and bears thoroughly demoralized before we commence wave [iii] of P[3], which should see prices below 1100 by year end.

 June 8, Deja Vu:  Comparisons of this pattern to the 2007 top; expected rebound to 1320 –  intersection of rising wedge, fan line from 2007 top, trend line from May 2 top; target date June 29.

June 10, Channel Surfing:   Should bounce off 2-std dev channel being established (not the 1249 horizontal support or the 200 SMA), then return to channel midline at 1328-1330.

June 13, Matryoshkas: Butterfly inside a Butterfly inside a Crab inside another Crab Pattern — indicated 1329; should return to channel midline of 1329.

June 15, Still Playing Bounce:  Called 1261.90 the bottom; target of 1328 on June 21-23.

June 16, You’ve Got a Fan:  Compared and contrasted 2011 top to previous (2007, 2000, 1938); constructed the fan lines and trendlines guiding the pattern, replaced the concept of 2-std dev channel.

June 16, Intra-day:  VIX Butterfly pattern indicated 19.12 first stop, ultimate target below 15.

June 17, Intra-day:  Inverse H&S; developing on SPX indicated 1300+; H&S; developing on VIX indicated 17.30.

June 21, Different Perspective:  Expect pause at 1295, pullback to 1289-1290 to fan line, possible pullback at 1310 to 1285, on way to 1320.

June 22, Intra-day:  Pullback should be contained at 1287, might take place of pause expected at 1295.

So, how are we doing?

We obviously dropped through the bottom of the rising wedge since Mar 2009 (log scale), signifying the beginning of the end for the bull market.  My 1261.90 bottom call came close; the recent low was 1258.

Since then, we’ve made it just shy of 1299, so the Inverse H&S; worked out nicely.

Yesterday’s pullback to 1286.79 is a tad lower than the 1287 I expected, but close enough for government work.  BTW, I consider this action merely a backtest of an important trendline — more on that below.

VIX beat my 19.12 target, is close to my 17.30 target, touching 17.72 both yesterday and today.  More below on whether 15 is in the cards.

What’s next?

The huge Crab Pattern discussed in Matryoshkas is still unfolding.  It targeted 1329, which is within spitting distance of my target.  The Inverse H&S; pattern I was tracking completed, and in so doing formed the head of another, larger IHS that’s in the works.  This one, also with a rising neckline (white, dashed line) indicates an upside of 1328.  I’m also watching a developing rising wedge, indicated below as the red dashed line. 

 

From a technical standpoint, the daily MACD has turned positive and the histogram is back in the black.  The RSI is around 45, plenty of room for upside to run.  All the other indicators I watch (McClellan, bullish percentage, summation index, etc) are all turning bullish.

I’m still expecting this pullback we saw today (and is continuing overnight) to be contained at 1287, meaning the futures will have to snap back before the open.  The hourly futures MACD looks like it’s bottoming (@ 12 am, PDT) and the histogram bottom is in.  The RSI is back to the mid 30’s.

We reacted off the 20 SMA, but more importantly, we hit an important resistance line that I’ll discuss below.  The more important 50 SMA will be more problematic.  It currently stands around 1320, but should increase a few points over the next few days.

Volume has been light, which indicates to me that the masses aren’t fully on board the rally just yet.  A strong push tomorrow should take care of that.

If VIX bumps up at bit in the morning (possible given the futures’ action tonight), then a drop back to around 18 would complete another, larger H&S; (since 6/10) with an indicated downside of 11.  Not terribly likely, as we haven’t seen those prices since 2006; but, it’d sure get folks’ attention…

From a fundamental standpoint, nothing in the FOMC announcement or BB’s press conference changed the expectations picture.  My biggest takeaway is that BB seemed particularly nervous.  His voice quavered like that of a child telling a whopper of a lie.  Makes sense, since he no doubt knows that things are much, much worse than anyone’s letting on.

CBO, for instance, announced that our national debt will reach 101% of GDP in just ten years.  To put that in perspective: without any improvements, in 2021 we will be where Greece is today.  Scary thought, indeed.

Tomorrow morning, we get initial claims and new home sales numbers.  I think they’ll either look good, or be spun as looking good.  Either way, expect happy, smiling faces on CNBC.

Okay, this post is officially getting too long.  I’ll put up some interesting charts in the 2nd installment.

The Bernanke managed to not send the markets down this time.  He struck as neutral a tone as possible, giving both the bulls and the bears something to hang their hats on.  Bottom line: no impact.  The climb to 1320+ should continue as planned.

The current retreat, as discussed yesterday, should be contained at 1287-ish, the trend line that marked resistance on 6/7, 6/9 and 6/14.  That resistance is now support and should limit any further sell-off on the day.  That TL also coincides with a longer TL connecting the 4/8 high to the 4/20 gap and the 5/23-5/25 and 6/2 bottoms.  It runs parallel to the major fan lines of its big brothers from the 5/2 and 2/18 tops.

These prices probably mark the last best chance for bulls to play this bounce to 1320 or so.  The short term technical indicators are all oversold, while the 1 hour and 30 minute now have sufficient room to make another run to the upside.

We should see another pause around 1310, but there’s also a small chance that this .50 retracement of the 6/1 highs counts as the equivalent 10/31/2007 .618 retracement before that market’s final push to 1523.

UPDATE: 11:25 AM PDT

The market is currently around 1295, up big on the day as expected.  I’m expecting a brief pause here at the 20 SMA, with a possible pullback to the fan line at 1289 or 1290.  But, the trend is still up.

There is a more significant correction coming, probably around 1311.  It should take us back to the fan line at 1287 before the final push up to 1320-1325.  There is still the possibility that we’ll continue beyond this range, but that’s in the hands of Bernanke and the sales job he’s able to do on Wednesday. I’ll be looking to snug up those stops as we approach 1320.

I’ve updated the second chart below with expectations for the next couple of months.  Anyone who wants to throw an EW count against the wall based on these charts, have at it.

ORIGINAL POST:  6:30 AM PDT

There’s nothing about the economy, the employment picture, the global credit market, military conflicts breaking out everywhere,  etc. that I find promising.  Long term, we’re no doubt screwed.

But, in looking at market tops all weekend long, I still can’t find a single instance of a market falling off a cliff without, first, some kind of retracement to the midline of its recent price action.   I’m staying with my June 16 call for a strong rebound this week.

The target of 1320 looks good, depending on timing.  We just need to break through the fanline that’s been limiting us, currently around 1290.

Next, we’ll pause around 1310, maybe retrace 5-10 points on our way to the trendline (A) off the 1370 top — the limiting factor to this whole rally.  It’s at 1327 today, but the target gets a little lower every day.   So, our upside is strictly a factor of how quickly we get there.

I’ll put a prettier chart when I get the chance, but this is roughly what I have in mind.

It’ll be important to keep some perspective.  As the rally unfolds, it’ll start to feel very bullish.  Many will call it the next Minor 5 up.  I don’t think it is.  I think we’ll be contained by that trendline and work our way down from there.  My plan is tight stops all along the way, taking into account the pause at 1305-1310.

I imagine the massive head and shoulders pattern will be obvious by time we make our lower high around July 4th, and aside from some backtesting of the lower end of our channel, the market should plunge around mid-August to it’s first stop around 1200.

Here’s the updated chart as of 11:25 AM PDT.  

More later.