SPY ETF poised for a huge drop into May 21 2012

The sp500 and the SPY ETF is setting up for a huge drop during the next 4 trading days into May 21, 2012.  It is starting to look like May 21, 2012 is going to be a climax sell off zone for the US markets.

The market as represented by the sp500 and SPY ETF has been in a seemingly endless low volume drifting complacent decline during the last 2 trading weeks.

The state of the market right now is as follows:

  • The sp500 is positioned once again with a lower low and a lower high continuing the current ‘slow’ but still bearish trend.
  • The sp500 is also positioned at a typically oversold level with the RSI (relative strength index) of 30.
  • Breaking under the 30 RSI level would put the market at risk of entering the bearish ‘power zone’.

In bull markets the RSI 30 level is usually a superb buying opportunity, but the tide has changed and the bias is moving more towards bearish.  So there is a risk that the market really begins to fall apart during the next 4 trading days into May 21, 2012.  I hate to say the word crash, but the way the charts are set up shows that we may really get an ugly decline going into massive oversold territory with some type of ‘mini black Monday’.

The alternative is that we have bottomed today, but this probability is not looking so good given:

  • No significant or clear daily candlestick reversal pattern
  • No capitulation volume or wide price bar spread showing selling exhaustion

The bottom line is that by 9:30 AM tomorrow Eastern time the USA markets have the opportunity to save themselves or ‘engage’ into risky deep bearish zones.

It really is starting to look like there will be some type of ‘news’ event or black swan developing over the next 4 trading days that could kick start the market into faster downside running.

In my 18 years experience trading, what I have observed is that usually the worst part of any decline occurs below the 30 RSI zone.  Right now as stated earlier we are right on the 30 level.  So there is still one last chance for this market to save itself, but it needs to do so right at the open tomorrow with a gap up and go type move.  Possible, but in my eyes looking quite remote for now.

The DJIA was not really even able to get a good bounce going from the 12,700 range.

Despite the apparent bearishness I think one still has to be careful of expecting too much too fast because the market decline so far is quite orderly and the 50 day moving average is well above the 200 day moving average.  In other words, the market still has a bid under and may not be finished with distribution.

The next 4 trading day volatility forecast is just a speculative forecast based on how I view the chart setup.

So to conclude, for now, the (bearish) trend is still your friend so to speak…

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