Crash or Bounce on Monday August 8 2011

My mind has been contemplating a few possibilities for this upcoming week.  Certainly it is probably one of the most anticipated weeks of trading ever in the USA stock market.

The world world knows about the downgrade of the USA credit rating by now, but what does this mean for the markets on Monday?

A case can be made that the markets will do a very large bounce higher because A. The markets are in extreme oversold territory and B. Because the debt downgrade news was already price into the market (and that's why we declined into the news).

I think the downgrade news was already priced into a lot of the market decline so far. But I do not think the market is just discounting the USA down grade news.  It is discounting a scenario where USA stocks could be setting up for survival in a zero growth environment.  It is also discounting possible huge dislocations in Europe and Italy which could cause contagion in various markets and instruments world wide.

I could go on and on trying to second guess the market about what it has already discounted or what it has not discounted so far.

From a technical analysis standpoint, I can say that the markets are currently in an extreme oversold state when we look at such indicators such as RSI.   The problem is that occasionally and very rarely when the market is in such an extreme oversold state it can go to a hyper extreme state of oversold.  This is exactly what occurred in 1987 crash.

It has been a long time since we have had a 1987 style crash in the markets.  1987 was the most unique type of crash in that prices went down very fast but then also STAYED down.  Most other panic declines I have seen over the years have been fast and sharp declines, but they have been roller coaster type declines that are somewhat slow and orderly.

But the 87 style crash was fast and relentless and almost literally dropped like a rock and stayed down.  

I have been thinking that if this Monday August 8, 2011 is going to be a down day, it may be a 20%er.  I say this because RSI is already into the bearish powerzone under the 30 range.  The time to bounce is NOW.  If we do not bounce then it risks a market slide perhaps somewhat similar to the 1987 style.

Other clues that this may be the case come from the current speed of the decline and the nature of the price candlesticks which are closing with big red full bodied 20/20 bars and closing at the lows of the day.  That was the nature of the candlestick pattern during the 1987 crash.

The market has presently shown us that is is not respecting bounces.  It is not allowing longs to get out.  This is a worrying sign for the week ahead.

I certainly do not want to see an 87 style drop this week, but if we see Monday looking like it will be a down day that possibility could come into a high probability.

In my previous post I did a 2011 2008 pattern comparison that makes the argument that we could see a huge several day bounce in the markets... that would be scenario B and could possibly make this decline more of characteristic of the 2008 style decline that is more waterfall type action instead of 'drop like a rock' type action (1987).

Posted in Online Trading
17 comments on “Crash or Bounce on Monday August 8 2011
  1. steve says:

    Normally I would say buy at the extreme oversold levels and put a stop just below yesterday’s low for protection.

    But at this point, I don’t know. There seems to be a longer term fundamental reason for the downdraft, not a simple technical issue.

    Hard one to trade.

  2. Geoff says:

    i sold some TZA late on Friday and wish i had not. i think i was “too cute” by half. even if the market bounces, it is going down hard later. or it is continuing to go down hard. i definitely do NOT think the market is currently excessively oversold.

  3. Tom says:

    I forgot to look into the 1940 time period where there was a similar market drop in month of May where market dropped almost literally like a rock with almost no upside bounce in between.

    The worst of the entire drop lasted about 12 trading days.

    The drop in May 1940 was truly a vertical drop just relentless with no upside reaction bounce whatsoever. Unbelievable!!!

    See this chart.

    Note that there are some channeling support lines from the May 2010 period.

  4. Neal says:

    Tom & Geoff:
    “Group of Seven officials will discuss how to coordinate action among their central banks after this week’s stock market rout and the U.S. debt downgrade,” (Saturday Aug 6th, Bloomberg).
    “As for market action Mr. Dales (of Capital Economics) predicted that the S & P 500 will stay close to its current level of 1200.” “For Markets ‘Lehman Effect isn’t Likely.” (Wall St Journal 6PM Aug 6)
    Gentlemen, isn’t it obvious what all the kings horses & all the king’s men are doing this weekend? Don’t you see that the Working Group on Financial Markets (aka Plunge Protection Team in the US) will be coordinating a massive counter attack against scared long sellers and especially against speculative short sellers? A favorite and time-tested technique being used this weekend has been to telegraph calming messages in all media outlets around the world, telegraphing the big boys’ market rescue intentions in advance. Whether the markets “should” fall or not isn’t the question here– the fact is the banksters of the world will always have far more firepower than the sellers. And they always have a vested interest from having the financial system survive. Laissez faire is a thing of the past. They do not hesitate to use their virtually unlimited buying power to jackass up failing markets, the inflationary effects of the buying be damned.
    As for short term charts, how about looking back to June-July 2010 at a quick 17% drop, then a huge snapback to S & P 1350. This rout looks like a mirror image to me, not the beginning of the end of the Western financial system.
    On the other hand if this becomes say a 25% drop into S & P 1000 land, so what if you’re earning 10-12% on your investments if you’re in a five-year frame of mind rather than in a day traders manic search to game the next market lurch? I do know trying to “game” the politics of these markets will most certainly eat the little traders alive. A sucker’s game.

  5. RMT says:

    It would be very interesting if you could compare the fundamentals of the market in 2011 with the market crashes of the past. I’m talking P/E, gdp growth, yield curve, Ism numbers, etc…Technical analysis is fine but ultimately markets are dictated by the fundamentals. As much of a bear as I am, I’m must say that this fall feels a bit overdone. We’re not in a recession, at least not yet. GDP growth is pathetic but its still growing, and expected to grow between 2-3%. I just want to know if the fundamentals of this market has any similarities between the past crashes. If you could look at either P/E, forward P/E, PEG, or any combination of the 3, it would be very interesting We know that the market looks about 6 months ahead, so I’m wondering if the market sees something we don’t.If there are real signs of a another recession, then this sell off is justified, and we’ll definitely see a lot more selling. But if this is just fear, then the sell off is not justified and we’re probably get a rally of some sorts. Maybe there’s a major default coming from somewhere. who knows. But it looks like the market has been discounting some news that’s yet to come out. perhaps the downgrade was already baked into last weeks fall?

    On a more technical note, the SPY is nearing the weekly 200 MA, which should provide alot of support. The low of friday actually completed the head and shoulders pattern. ( very surprised that it played out considering that it had been reported all over the news). After the full completion of this major pattern, a conter trend of some kind should be expected. There’s also another trendline support on the 120 level on weekly SPY. Even on the mothly chart, we hit the 20 and 50 MA. The month isn’t over yet, but nonetheless, those two MA averages should act as support. Considering the highly oversold nature of the markets (markets fell about 10% in just 11 days as of the close on Friday), I would actually be surprised if we keep “dropping like a rock” without any kind of bounce. All this really takes me to my question above of whether the markets are discounting some news that we don’t know about. If there is something very serious brewing, then support level mentioned above will be useless, and markets will continue to sell. But if this sell off is just due to unjustified fear, then the markets should stage a relief rally of some kind.

  6. JR says:

    This has been a really fun market. Sold VICL 8/1.Made money. Sold because of a lack of bounce, which as you know I expected, after debit limit debacle. 8/2 Sold Short ITMN what a terrific play. covered. Covered 8/4!!
    Went to cash. Now I am thinking of what to do this coming week. Like K (Kraft) for an upside bounce if down will probably go back to shorting ITMN.
    However, I am really uncertain as to what the market will show us Monday.
    Like you say Tom, it could go either way. Thankfully, I am on the side lines. The pre market and Asia and Europe will give us an indication.
    I think this market shows how, if you have your tactics and strategy planned, a small investor who by definition can move very, very quickly, can make a lot of money in the market. We can dance around the feet of the giants!
    I am really excited on the prospects next week no matter which way it moves.
    Good Trading everyone.

  7. JR says:

    OK, here is our first read.

    “Shares dipped across the Middle East Sunday as the region’s exchanges were among the first global markets to open since the historic downgrade.

    Israel’s stock market fell more than 6%, and the Tel Aviv 25 Index ended the trading day down 6.99%.

    The Dubai Financial Market (DFM) General Index fell 3.7% on Sunday. And the General Index on the Abu Dhabi Securities Exchange lost 2.5%.

    In Saudi Arabia, the Tadawul All-Share Index gained less than 0.1% after dropping nearly 5.5% Saturday.”

  8. JR says:

    For those of you sitting on the edge of their seat, finger on the mouse, here is Greenspans read on Monday.

    “Considering the momentum in which the market went down over the last week, it is very unlikely, if history is any guide, that this isn’t going to take a while to bottom out,” Greenspan said on NBC’s “Meet the Press” program. “So the initial reaction in my judgment is going to be negative.”

  9. ed says:

    I’m getting buy signals on a couple of indicators that have proven very accurate.

    Would not be surprised though, to see a flush down tomorrow before the market turns up

  10. Geoff says:

    i do not think that the middle east markets are a good “tell” of what will happen on Monday. reason: middle east markets close on Friday, Saturday for wkend – – so the ME markets did not have opportunity to reflect Thursday / Friday day – – i think they are just playing catch up to western markets and NOT anticipating (for the most part)

  11. Tom says:

    Yes we are surely oversold… but I cannot stop looking at that 1940 May decline, just a total drop like a rock type market action with no bounce whatsoever.

    RSI during that time period at the low of the 1940 May drop hit 10.3 !!!

    I dont think anyone can say with confidence that such a thing could happen this week. But one thing I do know for sure, and that is that if we do get to an RSI value of 10 or 11 it can happen very fast!

    Currently prices have fallen in a down sloping arc that trails along an ellipse or circle. If price reaches the circumference of that circle then it could plausibly go into complete vertical mode.

    The bulls have something going for them however. They have the huge blow out volume we saw last week and they have the rickshaw man doji candlestick on the sp500. Theyse could be signs market exhuasted to the downside. It is just too tough to call !

    As far as I know the Fed has not come out so far this Sunday together with European leaders pledging QE3 and 3 trillion in bailout again… or maybe they still will ? if they do not then I am having a hard time seeing a huge rally.

    The market may force the Feds hand going into Tuesday. Market may plunge 20% next two days and force the Fed to announce QE3 on Tuesday since the Fed can use the excuse that it has to use extraordinary measures to prevent the shock of a crash affecting the rest of the economic system. But the fly in the ointment is that the US Government is not exactly in a position now to write more blank checks and maybe keeping Feds easy money hand tied down more than in the past.

    So then after RSI bottoms out we get a multi month rally.

    But I will say that IF we do get to RSI value of 10 or 11 in August there will come a point where maybe it should be bought for a swing trade to the upside for a few months as a counter trend rally.

    But only after RSI delivers the proper signal and buy signal.

    All the above paragraphs are just wild speculation on my part…

    NYSE circuit breakers:

    Some Astro:

    amazing that Larry Pesavento has not even been calling for a crash to happen! He dropped the ball!

    The astro link above says that August 2, to the 19th is the most difficult. Also interesting that he comments about Neptune ‘dissolving everything’

  12. Tom says:

    RMT, I wish I could comply with your request on the fundamentals. I would look at Carl Swenlins work on that topic as I think he has done good fundamental comparisons and analysis as you suggest.

    For me this decline is all technical… and the technical is showing the markets foreward looking desire to discount countires melting down from debt, governments that are clamping down big time on spending… All this government dog and pony shows we are seeing lately in so many countries is essentially the same thing as the Fed Raising the discount rate twice or three times in a matter of a month or two in my opinion!

    So the comparison is that is what the government did in the 30’s, they raised the discount rates twice and it sent the markets imploding into melt down mode.

    The current stuff we are seeing from governments worldwide is deflationary and is like a tax or like a raising of the discount rate and that is why stocks are plunging. It is the same setup as the 30’s historically.

  13. Tom says:

    Gold up 26 dollars right at the open ! 100 dollar up day for gold maybe ?

  14. JR says:

    My finger is getting itchy. Getting ready to short on the open.
    Here is our first read for Asia.

    S&P 500 futures expiring in September declined 2.1 percent to 1,172.3 at 7:03 a.m. in Tokyo. Dow Jones Industrial Average futures lost 253 points, or 2.2 percent, to 11,149.

  15. Neal says:

    The banksters heat their mansions with the corpses of short sellers in their hearths. Sometimes though if they wish to amuse themselves, they take them while still alive to the basement where they use ingenious machines designed to slowly squeeze the life out of them. It’s called short squeezing. Good luck with shorting at the open.

  16. JR says:

    Thanks Neal, BUT. You may be right as far as the unsophisticated investor is concerned.
    I have made a point of indicating my moves in the market. I don’t know if it is possible but if you look at my stock picks you will see an incredible batting average!
    I have been involved in the market for over fifty years. Yes, I am in my seventies.
    I have friends on both the NYSE and Chicago Board of Option. And frequently even they are bemused.
    It does take a steady hand and most importantly do not listen to common knowledge, it is common and usually very wrong.
    Yes I shorted ITMN at the open, at $22.94 and yes I am doing very well.
    Remember, purge your mind of programing. Each situation presents new challenges.
    I am a chess master and perhaps that helps me analyze each situation as if it were unique. Bromides don’t work!
    Think for your self or follow someone who does, avoid the talking heads, who are mostly puppets and you will do fine.

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