I just closed out the short position I had.  I don’t like the hesitant nature of the market right now and the lack of immediate follow through.  Plus there is a fed gathering the next 2 days and something is going to come out of that meeting that may bounce the market.

Another reason I am closing out shorts is a possible MACD histogram buy signal in the Russell 2000 right now.  It is as of right now unconfirmed, but I would rather not take the late risk of it being confirmed tomorrow in the AM.  This could be some type of short term swing low right now.  There are also lots of hammer reversals in a few other indices that look pretty convincing.

I may reload fully short if we by chance manage to gap down tomorrow or get immediate bearish follow through.  But right now this MACD histogram bullish divergence and also potential confirmed histogram buy signal is scaring me away.

The previous post I did about sentiment and Glenn Beck and others talking about crash and Hindenberg Omen is a very bad contrary sign for the market and is only an anecdotal factor.  Still it could carry some weight.

I will be happy to reload short tomorrow on a nasty gap down opening or immediate follow through but I would rather be cautious right now for a possible bounce.

Glenn Beck on the radio this morning was talking about the Hindenburg Omen and maybe even specifically quoting parts of that article that referred to percentage chances we get a crash.  I briefly turned on CNBC a few times in recent days as well and the crash and depression talk is pretty thick.

It is a concern that mainstream media is talking so bearish and they may help to identify the bottom of this drop, but for now I am shrugging it off. To a certain degree we have a bull market in reverse that makes picking up on sentiment hints from the major media a bit more difficult.

We have been in a long term bear market since 2007 and now appear to be entering the next phase of this long term bear.  The news from major media has been quite persistently negative or bearish about the economy for a long time now.  It seems to be getting worse now.  This is consistent with the idea that sentiment would get more extreme negative at the most bearish phase of a bear market.  During a very long bull market sentiment reaches many levels of bullishness and the market continues to trade higher even during persistent bullish sentiment.  So we may be in that situation now where persistent negative coverage of the market by mainstream media just leads to lower prices.

If this was a ‘shot gun’ type bear market where bearish price trends only last for short periods of time then I think the recent bearish talk would be much more concerning.

I suppose this bear market has become so popular at this point that a lot of people have a vested interest in seeing the market collapse so that they can add a notch on their belt to say they ‘predicted the crash’.   It has me thinking that the market will not get a 1 day 10 or 20% drop to prove them right.  The market can still drop 10 to 20% from here but make it seem like it is an orderly correction down and then get another big 3 to 4 month rally from the lows.  That would still keep people hoping that the bottom is in.

It will be interesting to see if the market gives the mainstream what they want this time . . .

The sp500 today once again briefly pierced the lower Bollinger Band and the Bollinger bands themselves have continued to expand wider.  This is an indication that we are entering early stages of a volatility expansion which is in contrast to the volatility contraction that occurred during the last several months.  The movement higher in the VIX volatility index today is confirming this fact as it broke out today from its large falling wedge formation.

I really have not used Bollinger Bands that much in my analysis but I might start to use them a lot more because they can be a very useful tool for trend direction signals.  They are most useful to me when I see the Bollinger bands move from a state of low volatility (a contraction) to expanding volatility.  The expansion of the bands often signals the start of a new more volatile move.  The piercing of price under either the higher or lower band can be an indication that price now wants to trend or hug closely that particular Bollinger band line.

Sometimes price moves so fast that it can trade almost completely outside one of the lower or upper Bollinger Bands.  This is very rare and is usually a point where the market has climaxed and ready to trade sideways again.

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Today I give the bears 4 out of 5 stars.  I think it can be said with a reasonable degree of confidence that they got the job done and done well.  On the other hand, given the bearish news today, I would have thought a 5% down day would have been more appropriate.

After the gap down and downside follow through into the news the market got an extended typical rally going that probably had a lot of bears feeling disgusted once again.  But despite the attempt to get a strong hammer reversal by end of day the bulls did not accomplish anything significant in my opinion.  The opening gap was not filled and still remains open.  The other day I talked about how the very large WEEKLY opening gap higher in the TLT was a sign of strength and could lead to another few weeks of upside or a parabolic blow off.  Part of the reasoning for that is the view from the Japanese interpretation of gaps is that they can serve as ‘opening windows’ or beginnings of very large moves.  But that interpretation of course depends a lot on the context of where the gaps are.

So in my view, the daily opening gap down in many of the major indices today will serve also as an ‘opening window’ towards more weakness into the end of this week.  Eventually there will be a capitulation, but I think it is way too early to be talking about that yet.

The chart above shows the long sideways channel trading range on the SPY ETF and shows clearly that today’s gap down on high volume broke below the channel trading range.  I see this as initiation of a larger move down.

In order to cancel the bearishness of this gap down today the SPY ETF is going to have to close at 106.88 or higher during the next few days.  That is an extremely unlikely scenario and I do not expect that to occur.   However, it would not be that unusual to see a rally tomorrow right back up to the underside of the channel that ‘kisses’ it briefly (to a maximum of 106.60 on the SPY ETF).  If that happens it would serve in my opinion as an outstanding ‘reload’ shorting opportunity or new shorting opportunity.  I am still heavily biased to more downside price action as the week progresses. . .

Here is the Bollinger Band comparison chart between the time periods 1987 and 2010.  The time similarity does not exist whatsoever.  I am only trying to identify the overall pattern similarity irrespective of time.

The chart below pretty much does the talking.  The market in both time frames does a double bottom on the lower Bollinger Band line and then goes up and through the mid line for a final rally attempt which fails at the top Bollinger Band line.  Then a big sign of price weakness breaks the market back through the red dotted mid line again and price finds short term support at the bottom Bollinger band line in the form of reversal hammers.

Then one last very minor rally attempt is done back towards the mid dotted line but that fails and leads to a very sharp decline that is indicated by price hugging the bottom Bollinger Band line.

The expansion (curling outward) of the Bollinger Band lines begins to occur right now in the 2010 time frame and is an indication of a volatility expansion that is about to start.  Of course we already know the volatility expansion that occurred in 1987.  Whether or not we get the same degree of volatility expansion now remains to be seen. . .

Here we are early in the last week of August 2010 and guess what?  My 1987 crash fantasies are creeping in again.  Perhaps I need to dial a 1-800-crash-aholics anonymous support line if there is one?  When the market gets into a stance that I find somewhat similar to the 1987 crash I start to look at the charts and indicators and see if there is any interpretation that could result in a similar occurrence.  Every single time I have done this in the past has failed so far.  But now I am about to do it again…

I am sure you have already read about the double Hindenburg Omen sell signal which I previously never really followed.  It seems to have a very interesting record which I was reading about over the weekend.  It is interesting to me that this signal is now ‘live’ in the context of the overall price action right now.  It is also interesting to me that the expected occurrence of the crash could start as soon as 1 day or several months.

Right now there really does not seem to be any price pattern symmetry between the two periods in terms of time.  The 1987 topping formation formed rather quickly and resolved itself just as fast.  The current topping formation since our April 2010 high has dragged on forever it seems and the price action appears much more complex.

Still, the overall pattern of the 1987 stock market crash was basically an A B C down as well as some other characteristics which I will get into in a minute.  The B to C portion of the 1987 crash was the final upwards retracement rally before the plunge.  In the 1987 period this was a 61.8% fibonacci retracement.

During our 2010 upwards B to C retracement rally we only managed to get to a 50% fibonacci retracment level near the 1030 level (actually it was slightly more than a 50% retracement but not quite 61.8%).

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So far the action to start the very early part of this week looks very bearish to me.  I really think this is the week that we finally start to see some very significant bearish follow through for a change.  The S&P 500 futures were typically trading higher Sunday night and then into Monday morning.  But so far the early morning bounce seems to have faded quite a bit.  There is a steadily climbing mountain of evidence that suggests downward price momentum should increase the next 1 to 3 weeks and in particular this week.

Today I see that AAPL has (so far) bearishly engulfed last Friday’s gravestone doji and may finally get a break down from its large trading range.  GE has also bearishly engulfed last Friday’s candlestick (so far) and is currently trading below the May 6, 2010 flash crash intra day low.

I would really like to see the SPY ETF get down near 106.75 to end the day today as it would strongly confirm the daily MACD histogram sell I was referring to last week.

The one nagging factor that makes me nervous about being ‘all in’ bearish is the lack of heavy volume today.  The week is just starting off and the big money is headed for the beach.  I am going to become a lot less concerned about volume if we can manage a daily MACD histogram sell confirmed signal today and some real weakness into end of day.

I see the 25th to 26th of August this week either serving as a massive acceleration point down for the market or possible low.  It is looking like the 26th will be an acceleration point instead of a low right now.  It is impossible to figure out until we see how the market looks going into the end of the week.  The speed of price action will be the determining factor.

I really do not want to see any price action trading above 108.25 on the SPY ETF this week.  If you look at the chart above you can see why.  I want price to stay ‘broken’ under the up trend line shown by the yellow arrows.  If this week is destined to be a hard down week, then there is absolutely no excuse for prices to be trading above this up trend line again.

Note: The above portion was written near mid day.  The below portion was written at the close.

I am quite pleased with the bearish closing action today.  The risk today was that some of the reversal hammers shown on a few indices would be confirmed as bullish today.  This was not the case.  Instead what I see at the close is bearish continuation and bearish engulfing showing that the bears want to exert some more control as we get into this week.

We could be in for 2 really wild down weeks with a possible massive acceleration or epicenter of the decline either mid week or Thursday of this week.

AAPL looks extremely bearish into the close (with the exception of relatively light volume).  The bulls will say that every time AAPL has traded at the bottom of this very long trading range a strong bid came in and supported it back to the top of range again. This is true, but my current read of both the daily and weekly chart shows that this time we will get a breakdown that lasts.

I also see at the close today that we have a confirmed daily MACD histogram sell in the sp500.  We needed to close under 1070.66 today to get that confirmation and we did get it with a close at 1067.36 today.

I wanted bring up the TLT chart quickly again just to make a quick point.  I mentioned before about how the TLT ETF moved into the power zone above the 70 level last week and that this could correlate with a very hard down move in the stock market.

Anytime any stock or index gets above the 70 powerzone level on the Relative strength Index there is always the risk that it either tops out or extends its breakout into a blow off type run.

The weekly chart of the TLT ETF I think is the most important as it shows a very important chart aspect, a WEEKLY opening gap.  The Japanese candlestick charting techniques view opening gaps as ‘windows’ which can sometimes serve as the start of a big move.

The weekly chart of the TLT above clearly shows that WEEKLY opening gaps are not very common.  We are in the power zone above 70 on the weekly RSI and it would seem that we have another 1 to 3 weeks of higher TLT prices which could correlate with a massive plunge in the stock market . . .