Chances of a "WipeOut" Move This Week.....

I have scanned current market data from several angles in comparison to the last 22+ years of data in effort to estimate what is likely to occur in the wake of this week's decline and technical set-up.

In short I estimate about 25-50% chance of a wipeout type move occuring by this Wednesday.  By that I am meaning something on the order of 5% loss or more.

Based on the several factors I would estimate that SPY could easily carry down to 247 by April 3-4th. 

Click on Chart to Enlarge

The chart above here shows a typical time and trend channel pattern for a "flat" correction.  This would project a move to the lower trend channel at April 3-4th which would be ~$247 on SPY.
That would be 4-5% below current levels and based on several scans comparing to past similar declines, that would be reasonable in the next 3 days to 2 weeks.

Points of note here are that the hourly chart currently does not have a bullish divergence occurring, so it seems more likely with this intensity of decline, that we will see either a divergence develop or a large capitulation gap down like 2% or more gap down as at least a temporary capitulation/spike low.

Also SPY is perched right at its 200 day moving average as of the close Friday.  As I have noted many times in the past, these key moving average points will typically be met by gap ups with gains after the open shortly after the average is challenged.  We saw a sharp rebound off the average on Feb 9th.  However, the more times price comes down to touch the average, there is implication of weakness and the possibility of a sharp break down in prices.

Part of the idea here is that certain key averages factor into program trading and if the buying thrusts off the average are weak and re-tested, there may be a major break down through the average.  The average and the space below it may be stop loss triggers or even trend following short trigger points and result in a large and sharp price movement.

If we are to see that occur here, the chart concern is that there is not a major chart support region until down at the $240-220 region of SPY which would be a pretty major decline.

From a chart point if prices are to break clearly below the lower channel line of the chart above, it would be indicative of longer term trending action to the downside rather than corrective activity of the bull market.

As a side note but maybe of significance, bond prices have rallied weakly off the recent lows, and as of this coming week, the key time cycles in bonds are peaking and indicate downward pressure into early or mid May.  Given that prices are marginally above MAJOR horizontal support, it seems possible that a major breakdown in prices could occur on a break to new lows for the bear market in bonds.

SPY Bounce at 200 Day Moving Average - Probably Temporary

Click on Chart to Enlarge

Last week the SPY etf rebounded off the 200 day simple MA.  Now today it came back down and touched again.  And buying came in after the open to hold the close above the average.  Also note that the long term bull market trendline (in red) is right in the same area as the 200 day MA.

It has been a while since I discussed this phenomenon extensively so I will link to a post I made in 2011 which showed a very similar chart set-up.  You can go back through your charts and see the resultant action.

Basically what happens at key moving averages in stocks or indexes - I believe - is that there are many trading algorithms that use those averages as data points for initiating trades.  And so in this case you have price moving down, and it touches the average.  But every time it touches, the program trading kicks in and starts to initiate buying.  This is because the market is in an uptrend, and the weight of the automated trading is on the buy side.

And sometimes that buying is very strong and prices bottom right at the average.  But other times, there is no real interest.  It just chops around until the automated trading is spent, then the trend continues ( in this case down).

So one of the keys I have found is to look at the action after the moving average is touched.  If you go back to Feb 1st 2015, you will see the type of action that unfolds with strong buying followed by a gap up, and a formation of a lasting low.  So for a bullish reversal to hold, you will often see a close high in the range, followed by a gap up and a close above the open after the gap up.  Volume often will rise on these days as well.

Contrast this with the moving average tests where the reversals off the averages are weak, and the result is often several touches of the average.  This is what we are seeing here so far.  The gap ups last week were on weak volume, and each day price closed below the open.  Now we have a gap down (indicating still selling interest) and another test.  For a successful test from here, we would see a gap up tomorrow and a close above the open, and higher volume.

Even if price makes a modest rally for a few days, a deep retracement back to the average would seem to me to be a sure sign of a failed rebound attempt off this average.  The result would be a swift break below the 200 day MA.  It may lead to a big sell off in this case.

The yearly low is not too far below price on the SP500.  And given the we are past mid way in the year, a break of the yearly low, could trigger further selling in stocks.

My suggestion here is to short this market on a break of today's low with a stop above the rebound high from last week.  If price make a weak rally back towards last week's gap down, I would suggest a short there.

Now if we see a gap up and close above the open tomorrow with dominant buying interest (increased volume, close in upper portion of range) I will certainly respect the rally attempt until last week's low is broken.

Pete