Friday, October 10, 2014

Expanding Pattern Off the Highs Suggests a Further Sharp Stock Decline Coming The Next 1-2 Weeks

Click Chart to Enlarge

This chart is a daily chart of SPY, the S&P 500 tracking ETF.  What I am showing here is that the decline thus far off the high appears to be occurring with an expanding bias and we have seen increasing volatility.  Based upon this, if the next move down continues in expanding fashion, and is 1.272-1.618 times the size of what I have labeled as the "c?" move, then that would project down to the little rectangle box around 185-187 on SPY.  Based upon the time of the recent smaller movements in the pattern, I think it would take in the 4-10 day range for that to occur.

This would fit with the idea of the Russell 2000 completing a double top formation and breaking support and dropping sharply as I discussed a couple times over the last week or so.

Now at this point we are obviously seeing some extreme selling and should be alert for a bottom reversal process.  Yesterday the VIX/VXV ratio closed above 1.0 for the first time during this decline.  This occurrence has preceded the significant market lows over the past few years, often preceding the low by a day or 2.  So while I believe both the SPY and the IWM chart patterns have significant bearish implication and could break the character of the recent corrections, I am alert here for more bottom attempts and will do my best to post here in timely fashion when prices do show high quality bottom reversal attempts.

As a side note, if SPY moves below 190.55 by Oct 31st, then it would retrace the last leg up from Aug-Sept, in less time than it took to form, and this would indicate a likely larger shift in market psychology to the downside.

So as the market develops here, especially if volatility continues to expand, if you have any questions on analysis or trade planning, feel free to start a comment dialogue below and I will try to assist you.  I feel that in high volatility times where rebounds can be very sharp, it is wise to exit short positions on breaks of prior key chart support that may lead to rebounds.  Also, as corrections hit new lows with underlying bullish divergence, my trading experience is that exiting portions of the trade into that type of price weakness will often produce the most favorable exit price.

The specifics obviously need to be planned well, but in terms of the general approach, that is what I would suggest in theory here.


  1. Hi Pete, very good reading as usual. My last trade was a week ago on SP500 believing that 1926 level is a reversal bottom for this index but the market gave me an expensive lesson again... :-(
    Do you expect a reversal bottom in the indexes soon or the big correction already started?

  2. Hi Georgi. good to hear from you. As I mentioned on the blog, if the trend was to continue upwards, that initial reversal was likely to hold. since it did not, it appears that a bigger correction is underway with initial targets as shown in this post.

    I have recently shorted BAC, Bank of America and am in some profit but is still at a nice region to short. Also CERN and CTXS have pretty nice patterns to use some of the methods I showed you. As far as the indexes, I am alert for a bottom reversal, but am expecting continue downside here.