The downside action right now in the SPY ETF is orderly and measured however I believe we are about to enter a cascade decline situation. The speed of the decline is impossible to predict, but I would not be surprised to see a 'flash crash' type move maybe similar to the May 2010 decline. The vast majority right now are not of the mind to just sell everything and get out, but I think we are getting close.
I drew up a chart of the SPY and my current thinking is that the SPY decline will be significant but the max downside will be contained and sustained by the relentless bid we have seen for months and years of the bull run. My point is that I am expecting the SPY near term to take a serious hit, but there will be very strong reaction rallies and bounces that will make it imperative for any short positions to be closed decisively and promptly.
See the chart below of the SPY for my current thinking on the next SPY moves. I think the SPY will zoom down to near 174 perhaps even by the end of this week or sooner. 174 is clearly a key low and I think it will be defended again one more time. Exactly how it will be defended I do not know, but the tape action that reveals itself after that low is tested will be worth gold in my opinion. It is important to keep an open mind as to how we will move into the April 21st, 2014 cycle date. I have been saying for many days that it will be a low, but in fact a much more bearish interpretation would be if we swing down very early this week and then bounce up into that date as a high. I will speculate more on this later as we get more price bars, but for now I suggest keeping an open mind and to consider the scenario drawn up in the chart below.
Breaking UNDER 174 in the SPY is extremely bearish on the longer term time frames. But I just do not see it happening in one slice move. Remember, market action is a process.
2014 SPY Mini Crash Scenario Trading into the 174 Low
P.S. There is an alternative scenario to the one depicted in the chart above, but for now I will hold off on it. It is much more bearish but at the moment not very probable. I may post a second chart that describes this scenario today or tomorrow.