stock market crash - tag category postings

I have identified what may be a potential deflationary crash window developing in the SP500.  The ‘window’ for this to occur is during the next 15 to 20 trading days.  It is unlikely we will get an exact repeat in terms of price action, but I am just drawing on potential possibilities here.  The comparison I have drawn just shows the pattern similarity and thus the potential ‘window’ for a semi repeat scenario.

The behavior of the market since the January 19th, 2010 high to February 5th, 2010 was a ‘sign of weakness’ on much heavier than relative volumes we have seen during the entire rally since March.  Then, the current reaction rally from February 5th, 2010 to present day is once again on lackluster volume.  That volume characteristic, combined with the oscillator pattern analysis in the chart above creates a potentially compelling crash window scenario.  But once again, 9.9 times out of 10 the market usually chooses a more orderly slow type decline.   We simply will not know with any degree of certainty what window the market will choose until it actually does.  See the bullet points below for more.

But briefly, before you do that, a few words about the chart at top.  The similarities I am seeing in the two time frames show that we had a decline under the 50 day moving average for a total decline in magnitude of about 9.2%.  That first leg decline in 1987 was about 8.7%.  In both cases each decline created a double bottom in the 14 day Relative Strength Index as shown in the chart.  Thereafter a rally developed that took RSI near the 60 range and also moved price into the zone of a fibonacci 61.8 retracement from the highs. After that point is when the real price destruction took hold and price raced right through and below the 200 day moving average.

In order for the scenario to occur without fail the following must occur:

1. The daily MACD on the current sp500 must begin to start curling over into a daily bearish crossover soon(within 5 or so trading days).  It would be ok for the daily MACD to extend slightly higher and even slightly break above the zero line, however the less it tends to do so the better in terms of this scenario being correct.
2. The market must not trade any higher than 1116.56 within the next 5 to 10 trading days.  It is imperative that this be the case.  If we do trade above that level then the exact opposite of this proposed scenario may occur.
3. Ideally, within the next 10 trading days the SP500 should trade at or below the 1084 sp500 level.  This level would break the current minor uptrend since February 5, 2010 and also take us below that key supporting shelf of the November-December 2009 time frame.
4. Assuming the market is able to trade below the required 1084 level, then we would want to see relatively FAST and WIDE price destruction (sign of weakness candlestick bars) combined with very heavy volume that is bold and dramatic.
5. Any rallies once under 1084 should really only be intra-day rallies, but there should be a very clear persistent down trend easily drawn with a trendline.
6. The market drifting around at these levels for too long a period would make this scenario fail.  Assuming a bearish daily MACD cross occurs, one would want to see immediately from that point onwards, fast bold price destruction combined with robust volume!  If not then once again, the window will likely turn invalid.

After looking at all Dow Industrial Average 30 stocks, it certainly does not seem like such a thing could occur at this time.  The structure of many stocks in that index still looks constructive.  On the other hand I can probably make almost as many cases for stocks that are in dire need of more correction (ie. Apple Computer AAPL, and Amazon.com AMZN – needs to fill that large gap!).

In addition the XLF financials ETF Index looks like an almost perfect large scalloping or rounding top formation.  The problem with that conclusion is that scalloping and rounding tops of that nature can evolve into very cumbersome price declines that are very choppy.  That does not seem to support the case of a severe down market shock.

What About the Euro and the Dollar?

If there is one thing that would cause this market to engage into a panic mode it would be the very rapid movement of either the Euro or the Dollar Index.  So far the dollar still looks strong and appears to be ready for yet another up leg.  On the contrary the bounce in the Euro so far has been very disappointing and could imply more near term weakness, if not climax selling into a new low.

Right now the market just feels like it is holding on for dear life and still has yet to reveal what the real trading pattern will be for the rest of 2010.  I feel as though this crash window is maybe the last real chance for the ‘heavy bears’ to get the real outcome they want.

The alternative?

The alternative is the complex swing trading range that I have been talking about in recent posts.  The one that frustrates bears and bulls alike into total confusion waiting for a real final outcome months down the road.

Action Plan ?

Assuming we do get a daily bearish MACD cross in the days ahead on the SP500 I may once again try the TYP triple bear nasdaq ETF or the TZA triple bear Russell 2000 ETF.  But the market is really going to have to show me lots of weakness for me to step up to the short side again.  Weakness in terms of price and in terms of heavy downside volume.

I have been studying the stock price charts of the period 1987 and the current time frame on the S&P500 the last couple of days and also 1929 and I cannot help but think we have the potential for some sort of repeat this week.  For a while now I have been running with the theory that this correction will be similar to the 1975 correction and be somewhat mild and orderly perhaps on the order of 15%.

The problem is that the price action that has developed over the last few months on most major indices resembles that of a broadening top pattern which has the potential for very bearish downside resolutions that can resemble near vertical price action.  It is important to note that the tops in 1929 and the top in 1987 were also broadening top patterns.

I feel as though the stock price action over the course of the next few months is perhaps the most important price action I will witness in my entire life.  I say this because the nature of the price action is going to determine with a good degree of certainty whether we are in a long term 1929 ‘total meltdown’ scenario where we continue to decline with relative persistence into the 2011 2012 time frame, OR whether we are in a reflationary mid 1975 scenario where we work on the correction for several months, find support and buyers and then eventually get another big rally going that lasts a year or more.

Is the Stock Market Going to Crash This Week?

I have drawn up a chart similarity between 1987 and the present time frame at the bottom of this post.  I was able to extrapolate possible future price action based on RSI values.  I really do not want to see a stock market crash this week.  It would not be a good thing for the world or anyone’s well being unless they are positioned for it.  It would be a sad day for many people and quite a helpless feeling to be quite honest.   I can only hope that people try to protect themselves and manage risk prudently so that they come out ok in the end.

Predicting a stock market crash is not a high probability business.  It is an extremely rare event and in most cases will not happen.

However we do need to understand that despite the powerful rally we have had since the March 2009 lows, we are still in a very severe and dangerous long term bear market.  The bear market decline that took us into the March lows was marked by very persistent price action and price action in certain companies (investment banks such as Lehman Brothers for example) almost overnight went from high double digits to low single digits in an eye blink.

Also I believe it is not that uncommon to see 100% retracements of big rallies in major bear markets.  So we hit the low in March 2009, but it would not be out of the ordinary in this type of bear market to see a 100% retracement of the entire rally that has occurred since then.  I have seen that type of price action in many individual stocks as they have hit bear market lows and then rallied off those lows, only to retrace 100% of the gains a bit later.  In addition this type of 100% retracement would also be consistent with the price correction that occurs AFTER a strong ‘automatic rally’ which is what I believe occurred from the March 2009 lows to present.

Another aspect that I think is important to be aware of is that fund managers do not get fired for showing negative returns in a down market, but they do get fired for showing negative returns in a huge up market such as the one which we have had since the March 2009 lows.  So that type of mentality is one which could potentially spark very quick panic selling as they unload shares to lock in gains.

A couple other minor points I want to make which I noticed in the last week is that I have been seeing an unusual number of bad ticks in my real time charts.  I typically only see that many bad ticks on highly volatile and emotional penny stocks, but recently I have been seeing it in quite a few ETFS and the major averages as well.  There was a brief article in the New York Times on Friday that talked about some errors generated on the NYSE Friday but it was only brief.  Strangely enough that reminds me of all that talk in 1987 of ‘computer problems’.

The other problem with the rally from the March lows is the argument that it has been ‘artificial’ since it was essentially government manipulation to pump up the economy and the market.  The size of the market is much larger than any one individual force.  Manipulating and pumping up the market may work for a short period of time, but eventually the market is too powerful and will eventually return to the mean level where it was before the manipulation.  In some cases this return to the mean can occur very fast.

Also. Volume.  The volume on Friday was very heavy on the SPY ETF, one of the heaviest selling days I can remember and relative to any of the previous up volume days was huge.  Once again not a good sign at all not too far from the market highs.

Ok now onto the chart.  The chart comparison between 1987 is quite compelling.  The MOST compelling part of the comparison is how price in both 1987 and 2009 broke under the key supporting uptrendline and then rallied back up to the underside of the trendline and then the NEXT day closed down very hard near the lows.  By the way, this type of price structure setup is also very similar to what occurred on 9/29/08 to 10/3/2008 right before the worst part of the multi day plunge in October 2008.

If you look carefully at the RSI (Relative Strength Index 14 day) you can see the similar head and shoulder formation labeled A B and C.  In addition I point an arrow indicating the possible final ‘bear kiss’ in the RSI right before the massive plunge.

In the current time frame I extrapolated the percent moves in 1987 to the current time frame and they show as 3 dots in the right portion of the chart on the SP500.  So if the current market is to decline this week each day of equal price magnitude as that which occurred in 1987, then it would plunge the RSI to about the 14 level and put the price on the SP500 near the 760 level and near the solid blue line channel support.  This blue extension line was similar support in the 1987 period.  In 1987 the RSI hit a low of about 11.5 .  The SP500 moving to an RSI level of 14 would definitely be a black swan type of occurrence, just as it hitting 11.5 was a black swan type occurrence.  It would be in deep oversold territory after having already been in an oversold condition.  It is also important to note that on the long term MONTHLY Price bar chart the market has already shown itself an ability to hit record RSI oversold readings.  These record low readings where achieved during the March 2009 time frame on the monthly scale.  My point in bringing this up is that we have a market here that seems fully capable of ‘pushing the envelope’ in terms of extreme downside price action.

In my opinion if the scenario is to play out exactly or very similar to the 1987 period then what we really need to see is hard down price action almost every single day this week that plunges the RSI level to deep oversold.  A final low could occur either this Thursday, Friday or Monday November 9th which is a bradley model turning point date.

If Monday, Tuesday or Wednesday is a strong up day then something different may be going on and the whole nature of the decline may be entirely different and perhaps much less severe.

I have to admit it seems almost unthinkable to consider that the SP500 could be at 760 by the end of this week or next week.  The window of a panic happening is quite short and to keep it working price has to follow the path in short order in my opinion.

I should add that one other element that could play into the price action this week is the astro stuff per Larry Pesavento.  Larry Pesavento has indicated that there is the ‘combust’ planetary aspect on November the 6th of this week.  I find it noteworthy also that we have an official full moon on this Monday November the 2nd.  I am no astro expert when it comes to the markets, but could it possibly be that the full moon will pull the market right down into the combust aspect by end of week?

So the market has a choice to make this week.  A choice about which correction scenario it wants to take.  The scenario I have covered here happens to be the most severe one.  But there are plenty of other scenarios (much milder) as well which I may highlight as the week rolls on…

I think we need to keep an open mind about at least the possibility of a crash type move coming up the next week or two.  There was an article on the safe haven website talking about a price pattern comparison between the 1987 SP500 and the Current Dow Transports.  I have been studying the two charts and I do see the striking similarity.

But there is more to the story than just the simple comparison.  I see evident ALL OVER THE PLACE broadening topping patterns which is a specific and rare price chart pattern that is highlighted in the technical analysis of stock trends book by Edwards and Magee.  In my opinion the most crucial element of these patterns are the fact that they are very bearish topping patterns and the nature of the price decline down out of these patterns.

There are a few examples in the book that show severe price plunges out of this type of pattern and I think it is important to consider this as a possibility for the current market.  The hard part of any decline is predicting the NATURE of the decline.  How fast will it be, slow and choppy? or vertical spikes with fast consolidations.  Based on everything I am looking at now I can see us at least having a chance of doing near vertical down with a speed which could surprise most people.

There is still too much complacency and everyone is still numb from the Amazon Google and Microsoft Earnings.  And yet some of the economic numbers coming out lately are less than bullish.  If we do enter into crash mode it will likely be almost impossible to position oneself for such an event.  The decline that occurred in October of last year, while severe was still somewhat orderly.  So could it be part II is the more severe type decline that catches people completely off guard?

The nature of the price decline during the next month or two is going to be very key in determining if we are in a super bear 1929 to 1933 scenario OR instead a more lame 1975 normal slow 15% correction scenario and then eventual resumption higher next year.

IF we get a severe shock type price decline now that is rapid and relentless, it will be a big hint that we are going into a scenario of 1929 to 1933 where we keep breaking down below the March lows and continue into a perma bear until mid 2011.

I really think the next few months of price action are going to answer this question and I am just going to have to wait and see to find out!

Below is the chart comparison:

(more…)

The action today in the broad market was a little bit confusing.  It was clear after a few hours of trading that the market already knew what the news was going to be today and that is probably why we did not see 200 or 300 points down on the DJIA.  It was just an all day long battle between the bulls and the bears causing once again pretty high volume and churning.

My bear fur continues to get thicker by the day and if it keeps up I am not going to need to wear a jacket as these days in October get progressively colder.

I was going to close out the TZA long today on a swift move in the sp500 to near the 1010 level but all day long the market near got cleaned out enough for me to take action.  It just did not seem worthwhile to close out the position.  It just seemed like an ‘absorption’ day where any bullish buying action was readily absorbed by heavy bearish selling.  That does not bode well for next week in my opinion.

I think it is important to focus on the rising wedge pattern we have been dealing with since March 2009.  This is an important technical pattern and as far as I am concerned the pattern is quite valid in form and internals.  By internals I am referring to the repeated lower and lower and lower volume that has been persistent throughout the entire structure of the whole wedge.

The dead giveaway in my opinion was that ultimately weak day we had on the Jewish Holiday where we barely saw north of 100 million shares on the SPY, and yet the DJIA was up some 140 points to close the day.  That is a superb example why volume is so important to keep track of because a big price move can make you feel confident, but if there is no meat to back it up then it is likely all smoke and mirrors and manipulation.

Anyway, it is important to realize that break downs from rising wedge patterns can be FAST and relentless until they reach their target. Here is a good article that talks about rising wedges and how price breaks down out of them.  You can see from the examples and especially FIGURE 5, that the price move out of the falling wedge is FAST and relentless.  In fact it somewhat looks like a mini crash.

Therefore I remain open to the possibility that the move we are going to see in October could very well resemble this form of rapid price movement.   The heavy downside volumes in relation to volume on the upswings in the last week seems to confirm this idea.

I think it is prudent to ‘sit tight and be right’  on the short side as Jesse Livermore used to say at least for a good portion of October.  If this rising wedge break down lives up to its expectations then we should be able to get a bulk of the decline sooner rather than later.  I am open to some sort of rally developing, but I think in order for the rising wedge break down to be consistent it would not makes sense to see a really substantial price rally that makes significant headway into mid October.  But of course anything is possible.

I really hate to use the word crash and in my previous post I indicated that I am not calling for a ‘crash’.  But I must admit when I look at the size of this rising wedge and look at what the typical technical expectation of it is, then it would seem we could at the very least get some big and fast price moves that confirm the outlook of the pattern.  So don’t get too hyped up on the ‘C’ word.  Better to just focus on the technicals and the possible outlook of this pattern.

Also, you remember how last year during the epicenter of the bear market in October 2008 we sometimes saw rapid price moves depending on what was going on the passing of certain legislation (ie. TARP). 

Well I must admit that I find it quite interesting that there is a possibility of a vote next week on the health care reform bill.  I am speculating a little bit that maybe the market will turn down hard on a passing of this bill and get this falling wedge breakdown moving.  Why?  Well we already know that the ENTIRE country has very intense emotions about the passing or non passing of this bill.  And certainly some of these people with all these fevered opinions also participate in the market.

If the bill passes, could it be possible that it would serve as a catalyst to cause a panic because of the general discontent about such a bill and what it would mean as far as government control and potential corporate difficulty and uncertainty?

The market is a capitalist enterprise and the passing of this bill MAY be perceived by the market as anti capitalism and you might see not only big funds selling but your average Joe too because of the wide reaching scope of this bill.

It is just a theory, but I can’t help thinking back to that period of 2008 with very heightened emotions.  And let’s face it, the market is an emotional beast.

The SPY slammed down through first trendline support today on substantial volume and once again confirmed the bear case that I have been talking about this week.  It was really bearish action today and the dip buying that used to work so well in recent months clearly failed this time.

Right now I am thinking that we will probably come to a ‘resting point’ at 1010 on the SP500 as soon as tomorrow, or maybe by Monday.  That level should hold for some kind of reactive rally to the upside.  This is what happened on the previous touch of support about 4 trading days ago.  It led to a very low volume bounce that led to the severe decline we are in now.  So my thinking is that I will close out the TZA position at roughly 1010 on the SP500 and then wait for a multi day bounce and get prepared to go long the TZA again and find other ways to short the market at that time.

I am also thinking that I would like to hold a core position of TZA throughout this entire decline because I think we have plenty of room on the downside.

I have already said many times that it is still somewhat of a mystery to me what the speed of this decline will be.  When I first started reading BAMInvestors posts on twitter it opened up my mind to the possibility that this could be a very fast and sharp decline. I hate to use the word crash, but it might resemble that type of pattern at least on the weekly price charts.  Up until this point I have been assuming that this decline will be orderly and somewhat slow as it was during the 1975 period after that similar huge automatic rally that occurred. 

But then I started thinking about market psychology, the nature of rising and falling wedges and I have come around a little bit to the camp that at least considers a rapid down price move as at least a decent possibility.

From a psychological perspective think about the average investor or even the pro investor who has been in the market for the last few years.  They have had to endure a huge severe bear market decline in 2008 that was fast, vicious and relentless in its price decline.  If you look at the 2008 bear market on the monthly or quarterly charts it clearly looks like a crash.  If we start to get rapid price decline peoples memory may trigger and cause them to be a bit faster on the sell button this time as compared to last.

But still, I think 1010 is a possible resting point for this market as soon as tomorrow and then a reversal for several days, maybe a week in the form of a low volume bounce.  The leg down after that should be able to break the long term uptrendline in force since the March time period.

By the way there is a full moon this Sunday, so a bounce occurring either tomorrow or Monday at 1010 on the Sp500 seems quite probable.  The closing arms ( indicator which points out extreme oversold and overbought levels) today hit 3.6 which adds to the idea we are ready for a bounce in the next couple of days.

Today’s action in the SP500 has decisively turned the weekly MACD signal line down and closer to a convergence point.  So the longer term bearish picture remains intact and I suspect we are looking at LEAST 1 to 2 full months of downside price action here.

If we do pull back to near 1010 tomorrow on the SP500 it would possibly set us up for a somewhat small head and shoulders topping pattern with the head portion completed either tomorrow or Monday.

Automatic Rallies

Ever since the BAMInvestors talk about a crash I have become interested in the automatic rally concept.   If the rally from the March lows of this year actually is a true automatic rally then it does not bode well for the follow price action after this automatic rally is over which appears to be the case in the next week or two.

I have seen a few automatic rallies in the past.  Some of them have been in individual stocks and the most famous one was during the 1929 crash period.  Here are a few charts that depict what I believe to be automatic rallies and the end result of them (click on chart for full size):

After you have an extensive price advance that peaks in a significant climax, price moves into a fast price decline move that marks the bear market leg or ‘crash’ if you will.  But price gets so extended to the downside that just the simple forces of physics cause an ‘automatic rally’ to occur.  This automatic rally is an expression of the extreme bullishness that marked the price climax and the automatic rally can be EXTREMELY persistent. 

I think we can say that the rally that has occurred since the March lows has been extremely persistent.  I believe there have only been two other times in market history since the late 1800’s where there existed 7 straight monthly up closings.

And I should add that this automatic rally in the SP500 has been on lighter and lighter volume right into the top of the rising wedge which is not a good sign.  You had a very severe price decline into the March 2009 lows that was on huge huge volume, then this automatic rally on lighter and lighter volume…

The volume that comes in on the down leg in the months ahead is going to be the clue as to whether this is going to be a really severe decline that gets enough momentum to smash us to the March lows.  Or whether it will be a decline that eventually finds support in the 900 to 950 area before eventually resuming higher in a longer term bull run.

By the way I should mention that even if we do get a downward reaction in the current market similar to what happened in 1929, it should be noted that it will probably take plenty of time to unfold.  We are talking many weeks here.  I doubt very much that we are looking at a 1 to 3 week severe plunge.

Stay tuned! The month of October is going to be a potentially wild month in the market!