Beware of Another New Low For This Correction

Interestingly as my last post had mentioned, if we saw a new low for the correction and another buy signal, followed by yet another new low and high VIX spike, I think it would bode poorly for stock prices moving forward.

At this point we did see an initial new low followed by a major reversal higher and a follow through type day yesterday.  Now here we are with immediate reversal in prices back towards the lows of the recent correction.  So, again I suggest here that continued "nudges" lower will likely be indications that force is gathering behind a crack in the dam.  And it could break and lead to flood of selling.  Specifically refer back to my last post on the Russell 2000 support level and double top projection.

I again suggest that a short on a break of yesterday's low with a stop above the intervening high could be a profitable play with significant downside expectation.

Pete

Rebound Likely Complete

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The daily chart on the Russell 2000 shows a possible completed upwards abc pattern that has retraced 50% of the April-June decline.  This looks very nice from a traditional Elliott Wave perspective, and potentially sets up a wave 3 or C down that has just begun.  This would imply a major decline over the coming weeks.  Notice the daily stochastics has crossed down from overbought territory marking a potential short entry signal with a stop above this week's high.  The only problem at this point is that the hourly stochastics is oversold as of the close.  It would be ideal to see it recycle back up to overbought after a mild consolidation into next week before a short entry.  Those ideal set-ups don't always come, and given the wave pattern, the risk to reward is still solid using just the daily chart signal.
 

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This chart shows that break of the rising wedge type formation I had noted.  This is a different system of pattern labeling based off of price logic.  Again this would imply either a large continuation down, or a couple days rebound after last week's lows are taken out, and then a likely major price break down.

In any case, I had expected a 2-4 week rebound and we are on week 3 this week.  The daily chart price touched the upper bollinger band as well.  So this would be a nearly ideal time for a top to occur, though some further upside to next week would be nice as well if it created some stronger technical divergence.

Signs of Price Confirmation of a Trend Reversal in Russel 2000

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The chart above is the Russell 2000 index which is a more small cap growth index. I have put some figures on the chart showing that the recent decline has completely retraced the last leg up in less time than it took to form. Also, it is about 1% away from being larger than the June-July decline of 11.2%. That decline took a month, and so far this decline has only taken 2 weeks. So if prices fall further next week, that will make the decline both larger and faster than any decline since the March low.

The S&P is at 1035 right now and needs to drop to 1020 to completely retrace the corresponding leg up. But it has the entire next week to do so and still take less time than the move up. From a candlestick perspective, there is no sign that the decline has bottomed yet even shorter term. The bears are owning the close, volatility is expanding, minor gap ups have been filled and closed below, and the next support is at the 1020 low on the S&P 500. So I think it is likely that level will be undercut next week. I may consider a bullish short-term trade after that level is undercut, but will require at least a one day reversal candlestick to consider it.

So price action has started to confirm a trend shift to the downside. From my interpretation of the likely pattern and sentiment, I believe the decline is likely to retrace the entire July-Oct advance in less time than it took to form. That is a lot more downside, and justification for holding even the leveraged inverse ETF's for that duration in my mind. Definitely trailing stops will have to be adjusted on the way down. But for the current SPXU trade, the entry was on the day of the high, so if this does end up being a major reversal, all those small stop outs trying to catch the reversal will likely be completely regained and then quite a bit more as well.

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This chart is XHB which is the main homebuilding ETF. It looks like a head and shoulders top with a textbook target around 11.75, though I have put some dashed lines at open gaps near that level as potential chart support. I continue to believe that home building and real estate (probably commercial) will be leaders to the downside as the market turns down and especially if/when credit problems resurface.

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This chart is AIG. There are any number of financials that will look similar to this but I chose this one because of its high profile. One of the most powerful signals using bollinger bands are when price has been range bound but then breaks one direction and closes outside the bands several times in a short period of time. If the bands expand (move in opposite directions) as this occurs, then that is often a great signal of a powerful new trend. In this case I have highlighted past times on the chart where the same thing happened. Charts such as this could be shorted or purchase OTM put options with a couple months till expiration hoping for a major vertical type decline in the stock.

If you wait until major news has come out on the stock, you are probably too late for a great shorting opportunity - take the early hints from the charts like above.

I don't keep track and post results of issues like this, because I give no specific trades on them for the blog, and am usually not even trading them myself. So, do your own due diligence or leave a comment if there is something else you'd like to see on the blog, but anything I post like this, I consider tradable.