Its classroom time folks, using the $SPX as the major object for discussion. If you don’t like a lot of words in a post, today, you just might have to get over it. This would have been a video, and next time, likely will be. I have a boom mike whose software driver does not like my network. I will be on the phone with the manufacturer in the morning. At any rate, I am going to help you to understand what is coming next for the $SPX, the QQQ, and other markets in the midst of all the panic, fear, loathing, financial show horse manure, and other miscellaneous bovine scat you hear or read in the media. What I want you to understand is what previous price action tells us about what is about to happen and WHY. I will use word economy to do this, but presenting a series of charts for the $SPX. I will not do so for QQQ or CL #F, but you will get the gist of it if you follow the example of the $SPX. I have read everything this weekend from the $SPX trading at 500 to the $INDU begin in a holding pattern before collapsing to 5000. What I am going to show you is that from a weekly persective, it IS LIKELY that we could have entered a short-term bear market (down trend) phase. What has yet to be seen is how far it will go. I will try to add some perspective to that. John Murphy, one of the fathers of modern technical analysis, said that one of the key goals of technical analysis was to be able to set accurate price objectives. That is what I intend to do. So take Mr. Leghorn’s advice.
Basic Structure Analysis:
Let’s start with a simple chart of the $SPX (Standard and Poor’s 500 Stock Index). The dashed light black lines are higher lows from each successive upswing in the rally from early 2009, and the orange lines are higher highs from that same rally period. The blue line is the first lower low we have seen on a weekly basis, as we closed below a previous higher low in the upswing. We have, for all intents and purposes, BROKEN the nearly uninterrupted uptrend line that has existed from the momentum lows of the last large scale correction in 2011. Its not a huge piercing of that low, but that low WAS broken.
Let’s add a slight increase in the complexity level on the chart. I added the Pesavento Patterns chart which shows the higher highs and lower lows as well as completed Fibonacci retracements to the minimum of 4 retracement confluence points per low or high. What you can see from that last 0.5 figure is that as of Friday we retraced 50% of that last swing from lowest low to the most recent high. What is most interesting though is that we closed AT the lows on Friday. A close look at the daily chart will also show a gap DOWN open and a close at the low. That is a five alarm fire sort of bearish bar. When you see things like that happen, you should expect further selling on the next trading day. If that is the case, which, based on my neural net analysis over many years (and what history basically dictates, we should see a correction all the way down to at least the 61.8% retracement of that least swing to roughly 1947, shown at the light black line . If the selling continues, odds are better than 50/50 (based on numerous neural net model tests) that it will attempt to retest support (actual PRICE SUPPORT) very near the 78.6% retracement of that same up move at roughly 1893. If you get a retracement very cloes to REAL price support (0.382, 0.500,0.618, 0.786, and even 0.886), you will likely find the terminus point of any rally or correction. If the selling continues (for reasons stated above), I think the odds are pretty good (70-75%) that we will see the 1947 low, and a coin flip as to whether we see the 1893 low.
Given that analysis, however, 2 things are known. They are 1) We have not YET firmly established what the momentum low is. We do have a decent idea about where it will stop at least in the short to intermediate term.
For that reason, anywhere from here on, I am estimating what the low would be and where the ultimate target low will be. I am going to do that, though, so that when we see the turn, you will understand the means by which I make such an estimate.
Assumptions regarding counter-trend rallies:
Take a look at this weekly chart using the following set up. I am for purposes of instruction going to ASSUME that the low will be 1947 (the 61.8% retracement of the last low to high rally). IF that is true, the first very key form of price resistance is just above the previous lowest lows in that 2000 to 2016 area. If we cannot get above those levels, it would trigger the possibility for a second leg down of roughly equal magnitude. That condition would end up providing an approximate 1820 low in the $SPX. Note, I could put pen and pencil together and calculate precise values, but for now, I want to demonstrate the BASIC principle of the price objective. If we drop to 1893, the objective would be a bit lower, but for now, we have NOT confirmed the new low, so we will have to wait to see that low put in.
Meltdowns and REAL Meltdowns:
What about a real meltdown? Well, I would prefer at this point to go to the monthly charts for that analysis, so I will. The monthly chart shows that a major support level matches up with the 1820 low, so if we do get flushed out on Monday and the 1893 level is hit, I think that 1820 low could indeed be the extent of this move. However, as I stated before from above, one must be somewhat concerned that the major retracement zones are a lot lower (roughly 1580 in one case, and as low as approximately 1270 in another one. 2008 gave us all pause that such levels could be reached in a short period of time if a financial crisis unfolds. We already know that commodity prices have collapsed, and that China is worried about its own economic growth (which is the front end of our own consumer economy). It is not exactly news that the Eurozone is not exactly in fine shape either. We have wars in the Middle East, crises in Russia, the North Koreans complaining about loud propaganda behind hurled at their southern border. None of this exactly speaks to “peace in our time”. The Fed is out of bullets on interest rates too, and we now know that another contender for special drawing rights (China) is willing to play the currency manipulation game that we mastered (if you really want to call it that) since FDR really weakened the backing of the U.S. Dollar and Nixon finished the job. The USA is no longer the economic sheriff of the Deadwood planet Earth any more. For that reason alone, the US Federal Reserve will have to tread lightly before raising rates. It has no way to ease now short of taking money out of bank accounts. It could do some sort of magic with Federal debt paper, but in the end, it has no room to ease. It has to find a way to manage debt before the imputed rate of interest to make them palatable would also make them worthless. China has made the first of several tiny moves to help insure that, whether willful or not.
All that I said above was again, SPECULATION. The only thing we have solid evidence of is price action, and until we can confirm a bottom, I think the best assumption is that a low somewhere between 1947 to 1820 will be the extent of this first down move. After that, we will have to MONITOR THE NEXT RALLY CLOSELY.
For the last two items, here are charts with forecasts for CL #F (Crude Oil) at a 33.78 first target low. QQQ could hit 99.84 before bouncing, assuming it breaks any current support which I think it might early in the week, depending upon the strength of selling.
Once again all. Thanks for supporting my blog!