Current Action in Market Compares to January 2008

The last 2 trading sessions in SPY were kind of unique in that both saw sizable gap downs of greater than 1% and both rallied to close above the open and above the mid range for the session.  And Wednesday made a 3 month price low.

The only other instance of this I can find going back 10 years is the Jan 22 and Jan 23 of 2008 instance.  That decline really was the kick off of the bear market and made a larger and faster type of decline and undercut existing support from the bull market.  Our market is similar in that regard right now as well.

So based upon that precedent, my last post still is my best projection here.  The specifics of the price action following the Jan 2008 waterfall decline were an initial 7 day rally (after the two gap and reverse days) followed by a month and a half to retest the Jan 22 low.  Then a 2 month rally occurred and gave a great shorting opportunity.

Given our market today has experienced less time since the high and the pattern structure seems different, I think that we are less likely to see a drawn out consolidation at this level and more likely to see a 1-3 week rally followed by substantially lower lows.

I will update as appropriate when action unfolds, but for now it looks like we should be ready to short the market next week for an expected retest of this week's low.

Click on Chart to Enlarge

Here is the chart of the 2007 bull market top and the decline into Jan 2008 and the following retest and rally.