Possible Important Low on Tuesday August 9 2011

I was out most of the afternoon and evening and was not able to write up another posting for tonight.  It is the midnight hour now and I am updating my charts as I write.

I can see from an early scanning of the sp500 that we once again closed with a MARIBUZU candlestick that is even larger than the previous maribuzu candlesticks.  This is the most bearish action I have ever traded, witnessed and lived through in my entire lifetime !!!

The only way to describe this trading action is simply that the market is dropping like a rock and is fully affected by the forces of gravity.

The psychology of this drop is quite simple actually.  What we have is a lot of traders trying to buy the dips thinking we are oversold and at a low and want to trade the bounce.  But then the market sucks those new longs with each day into more downside.  Those trapped longs end up panicking along with all the other original sellers and it creates an even more powerful down move.

I do believe after my quick scan of the charts that we are CLOSE to the washout level.  Daily RSI hit a level of 16.6 on the sp500.  I notice that the futures are already down again big and so this sets up what could be some type of capitulation tomorrow on the Fed meeting day which makes sense anyway.

I strongly believe at this point that the 1050 level will serve as an area around which the market can stage a HUGE bounce.  The 1050 level is supported by many swing lows of the April 2010 to August 2010 range.  It is a strong support area.

The market at 1050 would put RSI even deeper into oversold and should mark a turn juncture.

Having said that I will also say that because of the current speed of the market drop, there is a possibility that the 1050 level will be exceeded, perhaps by 50 points or more, but only on an intra day basis.  So we could see the sp500 trade at 1000 tomorrow, but then I would expect it to zone back up near 1050 for a close.

The determination of the final bottom will come from a double bottom retest of both price and RSI.  The only problem is that we are in unchartered waters, and if we follow the 1987 pattern then the market will have a huge spike higher, but then retrace back to the 1050 range, but NOT EXCEED it.  And then tread higher afterwards.

But if we follow the 1940 pattern, then we will bounce near 1050 for a day or two and then collapse even more for another several day down leg.

At this point, I think the 87 type action will prove the correct one as I have a hard time believing we are just going to slice through 1050 in a few days.  It is too strong of support.

At this point I still think it is too dangerous to try to play the long side.  I expect a bounce from 1050 but it may only be a 2 day bounce and then quickly retrace down for a retest.

And to be honest I really do not think trying to play the long side at all is worth it, not yet anyway.  If you look at the bounce after both the 1987 crash and the 1940 plunge the market simply went into a trading rectangle that simply bounced up and down like a basketball in a tight range.  Eventually both did tread higher but only after about a month of them gathering their footing again.

I think closing all shorts at near 1050 is prudent and then just sitting patiently to see if the market can calm down a bit.

A better trade may be to buy some weekly PUTS on the VXX (after it peaks into a spike) which should eventually drop like a rock.  It is skyrocketing now, but it will eventually peak out and then drop like you have never seen before after volatility calms down.

Posted in SP500

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