Last Chance is About Over

The current bounce in equities is about what we should have expected, and should be about over. It has a little more room to go up Monday am, but then should fall below two critical levels: Sp1061, recent support; and Sp1019. After that the character of the fall will inform whether this is but another X wave like we had in June, or a deeper drop.

Thus chart (courtesy Friday’s STU, which you should be able to get for free from this link), shows three keys to this market:

1. the rebound has been slow
2. volume has decreased
3. we have retested the trendline from below

A slow rebound on decreasing volume (and breadth) indicates that this counter trend rally is running out of gas. It is typical that a break of a lower trendline would be retested before it is kissed goodbye. Sometimes a break is a false signal, but typically a false break is retraced decisively back above the trendline. In this case we have been bumping against it indecisively.

A typical bounce should go 50-62%, and this one has not yet gotten to Sp1074, the 61.8% retrace. Also, a common stopping point is to go back into the range of the 4th of the prior 3rd, which in this case would top at Sp1073, basically the same level. The S&P did gap down at Sp1084, so it might fill the gap, but this is not required for it to complete. The STU notes some other levels, including the 2/3 retrace at 1078 and the 78.6% “max” retrace at 1083 in the e-mini (which could happen if the cash S&P fills the 1084 gap). Read the free issue for more specifics.

The guy who has called this best for the past two months, Tony Caldero, says watch for a break of Sp1061. The S&P hit it twice today and bounced. Neely is watching the Sp1012 (Dec)/1019 (cash) level to confirm the break. The STU is watching Sp1041 (Dec)/1045 (cash) which is the bottom of an X wave on this five-day journey upwards and is an “early warning” indicator of a deeper drop to below 1019 since it shows an end to the corrective wave structure.

We are in the Sy Harding ‘seasonal strong period‘, which runs Nov – May. He has not yet called the start of it, as he did last year on Nov20. It seems to be breaking down after being fairly reliable for the 25 years of the Great Moderation (1982-2007).

It is still unclear if the serious drop (if it indeed comes) will be an horrific start of P3 down to new lows, a retest of the March lows, or just another X wave as we had last June. If you look at the chart you can see this wave is breaking so far as a normal ABC zigzag, much like the Jun11-Jul8 X wave. X waves should be simpler, or at least no more complex, than the surrounding corrective waves they connect. A typical zigzag has a B wave which does not go past 61.8%, so this one should end not much higher than Sp1074. Often the C wave = A wave, meaning in this case a bottom around 72 pts lower than the top of the B wave; if it is at Sp1074, we go to Sp1002. The next level below that would be the 1.6x retrace, or around Sp960.

To simplify:

• a break of Sp1061 suggests trouble, and of 1019 confirms it
• a break of Sp1000 is trouble, and a break of Sp960 pretty well confirms a retest lows
• a bounce off Sp1000, or even more bullish off Sp1020, sets us up for a third corrective pattern UP, probably into Feb2010

(A lot of other considerations point to Feb, including the expected peak of unemployment, the beginnings of the Fed thinking of raising rates, and the beginnings of the end of any serious remainder to the Stimulus. More on that in a later post.)

All in all, Mother Market is showing topping behavior – spiky moves, rolling top, divergences in indexes. The Dow is hard to count for example. Gold went up when oil went down. The VIX dropped, suggesting its sharp move a couple of days ago was a false break. If it doesn’t go back up quickly, it is signaling more bullishness.

The USD remains the lynchpin. It went below its trendline in the Dollar Index, but came back up in the past two days – which it had to do so as not to make the initial break above a false break. It is hovering right on the trendline, and its moves are inconclusive. It needs to move north with conviction to confirm the bearish views above, else like the VIX it is signaling that something else is going on.

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