Today the sp500 made it very clear that it was in no mood to get a real bounce going or a reversal of any kind. Instead the exact opposite occurred. We made a lower low on dramatically heavier volume. That says to me that instead of the market moving into some type of short term high on 3/18/11 or 3/21/11 it looks more likely that it will make some type of spike low into these dates. This could end up being the first tradeable bottom of the current decline.
It just feels like the current decline has not reached an exhaustion point yet. This decline is still too orderly and structured. In addition I do not see any clear or obvious candlestick reversal patterns today to work from. Had we closed today near the opening price then it would have at least opened the door to a big hammer reversal candlestick. But this was not the case.
Everything I am looking at seems to suggest that we should push towards some type of climax bottom, perhaps during the next 2 to 3 trading days. It really does not make much sense that a bottom would be formed on a Thursday or a Friday given everything that is going on right now in the world, so Monday 3/21/11 seems like the obvious choice. But then what would the market do on a Thursday? Perhaps Thursday we get some type of meager bounce which then eventually leads to a roll over on Friday and then capitulation on Monday.
But to help keep a level head, I would say there are two possible key price targets on the sp500 that I am looking at that should be a clear indication that we are at the extreme low point.
The first potential target I am looking at is 1220 on the sp500. This is the more conservative target and represents the level right above the April 2010 highs, a key level.
The second potential level is 1180. This is the more extreme view and supportive of a more severe panic type extreme decline.
But when we look at the chart of the sp500 above we can see how there is a potential large head and shoulders topping pattern forming. This potential large structure could support a much more bearish longer term view of the market as we get further into 2011.
The most ideal way this structure would take shape is for the market to move into a spike/panic low close to 1180 which would create a very clear and almost perfect head formation relative to the left shoulder I have drawn in. Then the neckline of the formation would be at the 1180 level.
However 1180 may be too extreme for the next 3 trading days. The alternative view is that we get a spike low only to 1220 during the next 3 trading days and then the market is able to halt any further decline from that level. This would be the much more moderated view of the current decline as it would then position the market above the key April 2010 highs and hold this important support zone.
To me, the 1220 level is the tipping point between a ‘healthy correction’ and something much more impactful longer term. Breaking and sustaining below 1220 would be quite a bad possible omen for the market longer term.
I suspect that what may happen is that we see the market spike down (very quickly) into a 1180 low, but then end up closing at 1220.
We can already see that RSI is rapidly approaching the 30 range which sometimes offers support for the market on a closing basis. So assuming we see the market start to trade at prices that get RSI under the 30 level, it might be wise to consider these prices as very temporary and likely the prices that will form the spike low.
Perhaps I am a bit too bearish, but the chart structure above seems to be the right way to frame the market right now.
When we look at the May 6, 2010 spike low decline we see that the sp500 attempted to test the January 2010 shelf level and hold it, but then it broke down through it very quickly. A few days later it rose right back up to this shelf level of 1150.
So one could argue that the market may do something similar this time around. Move down to 1220 to see if there is support. But then realize it is not strong enough and break through it leading to a quick move to 1180 and then later trade quickly right back up to 1220 again.
Hard to say if we have enough ingredients to get such a quick panic again. The heavy volume would seem to indicate yes. The up volume on the recent rally was so light in comparison to the current down volume that it does seem to lend credibility to a further swift move down.
But I am quite confident that there will be some type of violent upward bounce either this Friday or Monday 3/21/11.
The most bearish interpretation is the large head and shoulders pattern above. We will just have to see if it is able to obey this potential pattern.
If it does, then an eventual break of 1180 neckline could lead to an eventual test of the August 27, 2010 swing low. Breaking under that point would truly be the end of this market.
But that is getting too far ahead for now. First we need to see how much of the current potential H&S topping pattern plays out. It does not have to play out, and the first sign that it may not play out is if the decline is limited to 1220 with no breach under that point at all…