I had to close out my shorts very early this morning near the open.  I thought for sure that the nasty intraday bearish reversal we saw yesterday on the Fed decision would set us up for a really hard down into Friday.  But now it is looking constructive again and I gotta tell you in the back of my mind I cannot rid myself of the thought that ‘they’ may try to rally this market hard right into Thanksgiving week again.  The rally may be labored and the upside limited. But a rally is a rally is a rally.  I don’t want to stand in front of that.

So I am going to have to stand aside for a bit and see how this all shakes out.  If you look at the chart above on the SPY it is undeniable that we continue to show higher highs and higher lows.  The freaking bears could not even take out the 3rd underlined low yet after all this technical damage.  They may still do it, but they had better hurry up. Yesterdays action was the perfect setup to take a shot at the 3rd higher underlined low but they did not take charge and get the job done (the bears that is). 

So it would seem the bear case is somewhat delayed.  It remains to be seen how high this bounce can carry and if it can carry to new 52 week highs.  If it does that then it is going to flip the weekly macd into a failure pattern where price just keeps pushing higher and higher and higher and just has the weekly macd bouncing all over the place similar to what happened in the 2004 to 2006 recovery period.  It is too early to make that call.

But one has to give the bulls credit for not giving up yet at this point and that has to be respected in my opinion.

The daily stochastics are in up turn mode and I am going to let them run it for a while.  When and if we get some sort of negative setup again then I may reconsider the short side again.

Maybe the market wants to run up right into the combust date of November 9th (also a bradley model date) before turning down again ?  We shall see.

Today was yet another interesting day in the market.  I went short the XLF near the close with a bunch of put options and also went long the TZA again.  The bears in my opinion won the day.  We continue to see a market that keeps doling out positive news and yet the market continues to sell the news.  The more you watch the tape action, the more you can see how the picture is building more and more bearish. 

I was at the tipping point today.  Had the market been able to get a solid daily close today perhaps mid price bar range or higher, then I would have held off and given the bulls the benefit of the doubt.  I then would have had to be open to some more upside into the end of this week.  But honestly the bulls should have been able to close us 150 Dow points higher today or even more.  They just cannot get the job done despite all this good news.

So now we have bearish looking reversal candles all over the place.  But they are not just bearish reversal candlesticks, they are bearish reversal candlesticks that are sitting right at the LAST edge of necessary support that the market needs to hold.  If it does not hold then it could lead to acceleration down.

So I am still bearish, but I have somewhat moved away from the camp of a crash or extremely fast and violent one day huge moves.  Instead, at least for now, I have to stick with the sloppy grind downward in price similar to the 1975 corrective period.

The chart above shows the updated WEEKLY price charts of the SP500 for the current period and the 1975 period.  You can see that on the left side of the chart, the 2009 period we are just inches away from a confirmed bearish weekly MACD cross.  I realize that the MACD can sometimes be somewhat of a lagging indicator, however once a negative crossover occurs there is usually at least some type of price weakness at best and at worst severe downside price action.

It is on the verge of crossing and the opening weekly price on Monday November 9th should move the solid signal line deep under the dotted moving average line.  I say ‘it should’.  It will as long as price does not rally 100 to 150 S&P points higher early next week.  Rallying 100 to 150 S&P points is certainly possible, it is also highly unlikely from all the signals I am seeing now.

Note also on the 2009 portion of the S&P 500 that the red solid line is the support line that was recently broken with high volume and now price on a WEEKLY basis has rallied back up to KISS this red trendline.  The red trendline now acts as resistance and we can see the weekly SP500 has bumped its head on it.

That is ominous and implies that next week will be down hard.

The right portion of the chart is the 1975 period.  Note where the weekly MACD had its downside crossover and note afterwards we saw 5 FULL weeks of fairly persistent downward price action.

So everything is lining up for next week to be quite a bad down week.  The hard part is determining if it will be a deflationary crash type price action with a one day –5% to –10% down day, OR something more orderly.  No way I can predict that, all I can say is with a reasonable degree of confidence is that we are hard down next week.

Note also that we have the big currency meeting this Friday and Saturday and we have this astro COMBUST (combustion) date that falls either on this Friday or Monday the 9th.  Monday the 9th is a bradley model date.

So those important dates are likely either going to be acceleration dates that really kick start the decline in high gear, OR they may serve as selling climax dates.  That is my take anyway.  The part that does not make sense is the selling climax date since we are only talking the next 3 trading days.  For them to be selling climax dates, it would suggest we get very severe panic type move down into those dates.

But based on the chart structure and the fact that we are just now doing a bearish weekly crossover, I have to conclude that they will serve as acceleration dates that kick start this decline into high gear. 

We will just have to wait and see!

On the 60 minute charts there are small falling wedge formations which shows a slowing of bearishness.  But clearly what ever comes out of the Fed tomorrow is going to move the markets big time regardless of what the technicals are saying right now.  I just have this feeling they are not going to take the punch bowl away yet tomorrow and just give the normal standard ‘we won’t raise rates any time soon’ sort of message which could send the market higher in a huge short covering rally.  Whether that short covering rally holds by end of day is another story.

The gold price is sort of telegraphing that right now blasting higher to new all time highs.  It is saying to me that the Fed tomorrow is going to pamper the markets again.

I can tell you plenty of reasons why the US Dollar should get a huge upside pop tomorrow, because it is sitting right near the apex of this huge falling wedge.  But falling wedges can fail too even though most of the time they are reliable.

Pretty much everything seems hinged on tomorrows tape action and it is probably prudent to be on the sidelines until a couple minutes before the close of market tomorrow because I think things will be very wild and up and down all over the place.  But a couple minutes before the close tomorrow should give the real indication of where we go near term and into next week.

The US Dollar UUP ETF may be forming a small head and shoulders bottom formation that is almost near completion.  At previous points in the chart one could have said the same thing but then the dollar just kept breaking down again and again.

The only thing different about this formation now is that the right side of the head formation was formed on all time record UUP volume and the weekly MACD appears close to an upside crossover.

If we do get a valid upside breakout in the UUP it could intensify a possible short covering rally and put some pressure on the broad market.

The SP500 today did not follow through as many expected on the downside and there exists the possibility that the bulls may make the bears sweat for a day or two going into the Fed decision on Wednesday.  I continue to believe that any rallies to the upside in the next day or two will eventually resolve in heavier selling thereafter going into the end of the week.

It could be that the correction we are going through now will be more complex and laborious type correction instead of a quick spike down as initially thought.  It is still too early to tell.

Today was also the first day of the creation of the November monthly price bar and it is not at all unusual to at least see a little upside price action play before creating the real meat of the November monthly price bar.  It is quite rare to see a monthly price bar just open and then immediately go down without creating at least some upside price action.  We still do have the nasty looking October monthly reversal bar which is signaling how November’s monthly bar will resolve in the weeks ahead.

The problem is that the price action that has developed over the last few months on most major indices resembles that of a broadening top pattern which has the potential for very bearish downside resolutions that can resemble near vertical price action.  It is important to note that the tops in 1929 and the top in 1987 were also broadening top patterns.

I feel as though the stock price action over the course of the next few months is perhaps the most important price action I will witness in my entire life.  I say this because the nature of the price action is going to determine with a good degree of certainty whether we are in a long term 1929 ‘total meltdown’ scenario where we continue to decline with relative persistence into the 2011 2012 time frame, OR whether we are in a reflationary mid 1975 scenario where we work on the correction for several months, find support and buyers and then eventually get another big rally going that lasts a year or more.

Is the Stock Market Going to Crash This Week?

I have drawn up a chart similarity between 1987 and the present time frame at the bottom of this post.  I was able to extrapolate possible future price action based on RSI values.  I really do not want to see a stock market crash this week.  It would not be a good thing for the world or anyone’s well being unless they are positioned for it.  It would be a sad day for many people and quite a helpless feeling to be quite honest.   I can only hope that people try to protect themselves and manage risk prudently so that they come out ok in the end.

Predicting a stock market crash is not a high probability business.  It is an extremely rare event and in most cases will not happen.

However we do need to understand that despite the powerful rally we have had since the March 2009 lows, we are still in a very severe and dangerous long term bear market.  The bear market decline that took us into the March lows was marked by very persistent price action and price action in certain companies (investment banks such as Lehman Brothers for example) almost overnight went from high double digits to low single digits in an eye blink.

Also I believe it is not that uncommon to see 100% retracements of big rallies in major bear markets.  So we hit the low in March 2009, but it would not be out of the ordinary in this type of bear market to see a 100% retracement of the entire rally that has occurred since then.  I have seen that type of price action in many individual stocks as they have hit bear market lows and then rallied off those lows, only to retrace 100% of the gains a bit later.  In addition this type of 100% retracement would also be consistent with the price correction that occurs AFTER a strong ‘automatic rally’ which is what I believe occurred from the March 2009 lows to present.

Another aspect that I think is important to be aware of is that fund managers do not get fired for showing negative returns in a down market, but they do get fired for showing negative returns in a huge up market such as the one which we have had since the March 2009 lows.  So that type of mentality is one which could potentially spark very quick panic selling as they unload shares to lock in gains.

A couple other minor points I want to make which I noticed in the last week is that I have been seeing an unusual number of bad ticks in my real time charts.  I typically only see that many bad ticks on highly volatile and emotional penny stocks, but recently I have been seeing it in quite a few ETFS and the major averages as well.  There was a brief article in the New York Times on Friday that talked about some errors generated on the NYSE Friday but it was only brief.  Strangely enough that reminds me of all that talk in 1987 of ‘computer problems’.

The other problem with the rally from the March lows is the argument that it has been ‘artificial’ since it was essentially government manipulation to pump up the economy and the market.  The size of the market is much larger than any one individual force.  Manipulating and pumping up the market may work for a short period of time, but eventually the market is too powerful and will eventually return to the mean level where it was before the manipulation.  In some cases this return to the mean can occur very fast.

Also. Volume.  The volume on Friday was very heavy on the SPY ETF, one of the heaviest selling days I can remember and relative to any of the previous up volume days was huge.  Once again not a good sign at all not too far from the market highs.

Ok now onto the chart.  The chart comparison between 1987 is quite compelling.  The MOST compelling part of the comparison is how price in both 1987 and 2009 broke under the key supporting uptrendline and then rallied back up to the underside of the trendline and then the NEXT day closed down very hard near the lows.  By the way, this type of price structure setup is also very similar to what occurred on 9/29/08 to 10/3/2008 right before the worst part of the multi day plunge in October 2008.

If you look carefully at the RSI (Relative Strength Index 14 day) you can see the similar head and shoulder formation labeled A B and C.  In addition I point an arrow indicating the possible final ‘bear kiss’ in the RSI right before the massive plunge.

In the current time frame I extrapolated the percent moves in 1987 to the current time frame and they show as 3 dots in the right portion of the chart on the SP500.  So if the current market is to decline this week each day of equal price magnitude as that which occurred in 1987, then it would plunge the RSI to about the 14 level and put the price on the SP500 near the 760 level and near the solid blue line channel support.  This blue extension line was similar support in the 1987 period.  In 1987 the RSI hit a low of about 11.5 .  The SP500 moving to an RSI level of 14 would definitely be a black swan type of occurrence, just as it hitting 11.5 was a black swan type occurrence.  It would be in deep oversold territory after having already been in an oversold condition.  It is also important to note that on the long term MONTHLY Price bar chart the market has already shown itself an ability to hit record RSI oversold readings.  These record low readings where achieved during the March 2009 time frame on the monthly scale.  My point in bringing this up is that we have a market here that seems fully capable of ‘pushing the envelope’ in terms of extreme downside price action.

In my opinion if the scenario is to play out exactly or very similar to the 1987 period then what we really need to see is hard down price action almost every single day this week that plunges the RSI level to deep oversold.  A final low could occur either this Thursday, Friday or Monday November 9th which is a bradley model turning point date.

If Monday, Tuesday or Wednesday is a strong up day then something different may be going on and the whole nature of the decline may be entirely different and perhaps much less severe.

I have to admit it seems almost unthinkable to consider that the SP500 could be at 760 by the end of this week or next week.  The window of a panic happening is quite short and to keep it working price has to follow the path in short order in my opinion.

I should add that one other element that could play into the price action this week is the astro stuff per Larry Pesavento.  Larry Pesavento has indicated that there is the ‘combust’ planetary aspect on November the 6th of this week.  I find it noteworthy also that we have an official full moon on this Monday November the 2nd.  I am no astro expert when it comes to the markets, but could it possibly be that the full moon will pull the market right down into the combust aspect by end of week?

So the market has a choice to make this week.  A choice about which correction scenario it wants to take.  The scenario I have covered here happens to be the most severe one.  But there are plenty of other scenarios (much milder) as well which I may highlight as the week rolls on…

Check it out:

Well the Leapard in this video in my opinion is the US Dollar Index and it is ready to hunt.  The Wildebeest in the video represent complacent traders and the unaware public.  So note in the video the Leopard decides to start his hunt and the SECOND the herd is tipped off to its presence they start moving big time in all different directions.  What a superb example of herd mentality.

It would seem we are at that point now in the market or very close to it.  The tape action so far this Friday is HORRIBLE.  I went short again about 10:30 am today and expect NEXT WEEK to be extremely volatile with strong bias to downside price action.

So far mid day the volume on the SPY ETF is coming in very heavy and it is telling me we could maybe get close to 270 million shares today? If we do, it is going to be a big big problem going in to next week in my opinion.

We are set up extremely bearish going into next week!

I am thinking that 1080 could be an almost perfect new shorting level if we are lucky enough to see this level either tomorrow or on Monday.  The volume on the reactionary advance today was in typical weak fashion and if you are a bull, does not inspire much confidence going against the 3 recent down days on a volume SURGE and break of March up trendline support.

The 1080 level is either a .50 or .618 fib retracement from the highs and it is also a resistance point because of that shelf of price lows at that level.

We could very well see 1080 on an intraday basis tomorrow and I will probably re short again at that level.  I closed out the shorts I had from 3 days ago on the open this morning.

For the bulls to be able to get another new up leg, they are going to have to:

• Break back above the March 2009 uptrendline that is now resistance instead of support.
• Break above the down trending force line from the all time highs.
• Do these breakouts on robust volume

I am going to be EXTREMELY surprised if the bulls are able to achieve that by next week.

The US dollar is still in a very bullish configuration for a huge upside bounce. I can see it tick down tomorrow creating the upside pop we need in the sp500 but after that it should resume higher markedly. Larry Pesavento mentioned how next week there is a currency meeting in Russia (I have no clue which meeting this is or exactly what date it is, but supposedly it is next week sometime) that could cause some potentially big swings in the currency markets.

That seems consistent with the chart above.  We also have the fed meeting next week as well.  Next week is shaping up to be extremely volatile!!  The charts are telling me whatever is decided next week will cause the market to go DOWN.  But you see the levels in the chart above and those are the decision points for the tape next week.

One possibility to at least be aware of is that price during any one of the next few trading days could trade on an intra day level close to 1100 or even at a new all time high, but then reverse very hard intra day to create a nasty shooting star candlestick that sets up nasty downside follow through.  That would be the most nerve racking potential price action for anyone trying to get short here.  I don’t expect it to happen but it is something to be aware of.

By the way, the broadening top pattern has a measurement target ( I looked this up last night online) that points to 950 on the SP500.

I am not sure yet whether it is a good idea to get fully short tomorrow.  It may take a few days to get to 1080 anyway in sort of a dribble up fashion.  From watching the market over the years I have noticed that it has a tendency to rally right up into Fed meeting days and then sell off.  So the fed meeting is on next Wednesday.  Perhaps we rally up into that day and then sell off very hard as the US Dollar gets a super spike from whatever the fed does?  Just a little healthy speculation on my part.

As predicted, the SP500 is on track to retrace almost all of the month of October’s price gains and set up a very bearish looking monthly price bar going into this Friday.  I continue to remain short and will look to add new shorts to any type of bounce that arrives either tomorrow or Friday.

The SP500 also did something very important technically today for the first time since the March lows.  It broke below the up trendline in force since March that has defined this bounce and mega rally.  It also broke through this support area on considerable volume.

It sets up a possible ‘bear kiss’ where price moves back up to the underside of the trendline which would once again setup a very attractive shorting point.

There is a bunch of economic data coming out in the morning including the GDP which an economist at Goldman Sachs has estimated will be a few tenth percentage points less of what is expected.  But I suspect the market already knows this and maybe we will get some sort of gap down tomorrow and slight follow through but then intra day reversal to close at the higher end of the range tomorrow, setting up a bear kiss rally into Friday.

This market is set up to get spooked big time and I think no matter what it is not a bad idea to keep a core short position going into 1st or 2nd week of November.

My previous post was a stock crash comparison.  That could be an outside possibility if a combination of factors all come into play at once.  But obviously extremely difficult to predict.  But I would say that I would not at all be surprised to see a one day 5% down day at some point over the next week or two.

Any rallies at this point should be shorted and re shorted in my opinion.  The tide has decisively turned and shorting mentality needs to come into play for now.

I noticed that we are also starting to hear more not so good news from Iraq, Pakistan and Afghanistan recently but it has not really become persistent ‘crisis news coverage’.  Maybe it won’t turn into that at all, but I am just mentioning it because the market is so fragile and nervous right now that any seriously bad war news or other news could really spook the market and end up causing one of those 5% down days in my opinion.

My charts and favorite indicators point to at least the possibility of a historic crash by Monday or Tuesday of next week, or perhaps by the end of next week.  Why? Well it all has to do with psychology.  When people realize that the rally was fake, they are going to go into TILT mode and and hit the sell button FAST and much faster in my opinion than was the case during the previous October.  There was plenty of mental training to get into sell mode during last years mega bear, so it could very well kick into high gear faster this time.

So to conclude, I continue to see broadening topping patterns in many stocks all over the place that point to heavy downside tape action during the next 1 to 2 weeks.  The decline could approach the vertical, or not, but the bottom line for me is that it will be generally down, not up..

But there is more to the story than just the simple comparison.  I see evident ALL OVER THE PLACE broadening topping patterns which is a specific and rare price chart pattern that is highlighted in the technical analysis of stock trends book by Edwards and Magee.  In my opinion the most crucial element of these patterns are the fact that they are very bearish topping patterns and the nature of the price decline down out of these patterns.

There are a few examples in the book that show severe price plunges out of this type of pattern and I think it is important to consider this as a possibility for the current market.  The hard part of any decline is predicting the NATURE of the decline.  How fast will it be, slow and choppy? or vertical spikes with fast consolidations.  Based on everything I am looking at now I can see us at least having a chance of doing near vertical down with a speed which could surprise most people.

There is still too much complacency and everyone is still numb from the Amazon Google and Microsoft Earnings.  And yet some of the economic numbers coming out lately are less than bullish.  If we do enter into crash mode it will likely be almost impossible to position oneself for such an event.  The decline that occurred in October of last year, while severe was still somewhat orderly.  So could it be part II is the more severe type decline that catches people completely off guard?

The nature of the price decline during the next month or two is going to be very key in determining if we are in a super bear 1929 to 1933 scenario OR instead a more lame 1975 normal slow 15% correction scenario and then eventual resumption higher next year.

IF we get a severe shock type price decline now that is rapid and relentless, it will be a big hint that we are going into a scenario of 1929 to 1933 where we keep breaking down below the March lows and continue into a perma bear until mid 2011.

I really think the next few months of price action are going to answer this question and I am just going to have to wait and see to find out!

Below is the chart comparison:

The UUP US Dollar ETF had close to record volume again today and a nice up close as US Dollar short covering kicks in and the MACD bullish divergence works magic.

The TZA 3X triple bear ETF also advanced today on near record volume again today.

The downside volume in the SPY ETF was pretty heavy relative to advancing volume trends and continues to drive home the point that sellers are stronger than buyers and benefit of the doubt should go to the short side in the month(s) ahead.

The great trader Tim Ord identified a broadening wedge pattern in the SPY ETF which is a tricky pattern but definitely a bearish one according to the CLASSIC book Technical Analysis of Stock Trends by Edwards and Magee.  Edwards and Magee say that it is bearish “9 times out of 10” and that, “they appear most often at or near an important topping out of the trend”.  They have a few chart examples in the book and a few individual stock chart examples.  Apparently many of these broadening topping patterns were being formed

By the way, the book I just mentioned, Technical Analysis of Stock Trends is one of the most important Technical Analysis books I have and I highly recommend any trading newbie or pro keep it in your trading library.  It is a true classic and extremely well written.  I was lucky enough to get my copy in the basement of a library that labeled it “Discarded Library Material” what a big mistake they made there!

Anyway, we have 3 trading days left in October to finish creating the monthly price bar and I have been going back and forth how this is going to play out.  I wish I knew exactly but I can only go by subtle hints.

Today’s action in the SPY ETF suggests to me that we could get another down day tomorrow.  If we had gapped down today and had some sort of mid range or reversal close then I might be inclined to think more bullish for tomorrow.  But the action is telling me we go down again tomorrow.

I think a decline tomorrow could once again be related to the recently strong US Dollar Index (UUP ETF).  If we manage to get another bounce in the UUP to both its 50 day moving average and down trendline resistance level then that could equate to the SPY moving down to either the March uptrendline support line (the solid rising black line) OR the dotted blue line at the bottom of the broadening top formation.

I would MOST prefer to see the SPY ETF BREAK through the black long term uptrendline support level creating damage to it and then see us hit some kind of intra day low near the dotted blue line representing the broadening top formation.

THEN, I on Thursday I would like to see the market bounce UP off of that dotted blue line on some possibly positive GDP report news and then bump its head UNDER the long term black uptrend line (solid black line).

That is what I would like to see!  I would like to close out shorts at the dotted blue line and then re enter on some sort of bounce off of this dotted blue line.  That is my game plan for now but I am drawing a very specific forecast that is unlikely to play out exactly as I am planning it.  But I will cross my fingers and hope for the best.

An alternative scenario is that we head UP tomorrow after an intra day low that touches the black up trendline and then on some possibly bad GDP data on Thursday head down very hard Thursday and Friday.  Gee, the possibilities seem endless!  But no matter what the specific possibilities are, my bias is still bearish.  The question is when the bounce materializes.

Looking at the chart of the UUP ETF (US Dollar Index) above you can see that the downtrendline is almost at the same point as the 50 day moving average.  I would expect the UUP ETF to bump its head right on the down trendline and then get at least one day DOWN after that as a normal reaction of hitting resistance. But then after that a massive move that shoots the UUP well above the 50 day moving average.  That massive move is the one that ought to help the SPY ETF SLAM down into the broadening top target of the 98 area or so as seen in the first chart above.

This is one heck of a specific ‘script’ I have drawn up here and I tell you I will be AMAZED if it plays out EXACTLY as I am forecasting here!  As I said, I would like to close out my short positions on intra day tests of the key levels above and then re short aggressively after a 1 to 3 day upside bounce!

Lets see what happens going into the closing monthly price bar of October (this Friday) !