SPY Bounce Possibly Near an End - Projections for Further Decline - 8-25-17

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Currently the strongest portion of the expected rebound based upon recent studies is completing.  The recent volatility spike showed the strongest closing returns at 5 days after the signal.  The time has passed now over the last session or two.

So it is possible that price continues to advance, but the recent 5 day rebound has been relatively weak.  From both price and breadth measures, my take is that the recent rebound is still a counter trend move that is likely to fail and lead to new lows.

Based upon the price action coming down off the highs in SPY, where the "C" move was larger than the "A" move, it is quite possible that the next move down will be larger again than "C".  That would be an expanding pattern.

I have often found the speed line of the A-C points to be a useful approximation of where the next direction move down will find support.  So in this case if price breaks to new lows, I will keep that in mind if we see volatile action or a sizable gap down in the region of the speed line.

I have a green horizontal support/resistance line on the chart as well which has 3 past touch points on the chart, and so it would again be a target on a decline from current levels.  So basically a decline to 240-241 on SPY would be a very reasonable suggestion for a near term move.

That target would also also fit with the past study on put/call sell signals in July/Aug which showed 8 out of 9 had declines of 3% or more in the next 4 months.  SPY has yet to decline 3% from that signal origination in late July.

Lastly here, the VIX historically has an approximate 19-20 day cycle.  And based upon that it appears that the next VIX high could be roughly expected toward mid September or a little earlier.


Pete

Expanding Pattern Now At An Extreme - Short Term Cover Point

If you followed my posts the last couple weeks or took advantage of an option play to profit on the last several days of decline, then my suggestion at this point is that price has now declined to the declining speed line of the expanding pattern boundary and has occurred with a sizable gap.  There is no bullish divergence present at this point to suggest the decline has bottomed, however, I would suggest that this may be a quality point to cover part of a short position or put option, depending on time to expiration, etc.

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So again, I am not saying that today is a price bottom and I am not suggesting going long here.  I am saying that when the crowd is panicking and prices are making an extreme, those are the most contrarian points at which to act opposite the crowd.  In this case that means to cover or exit as they are capitulating.

In this specific case, I believe any rebound will be another shorting opportunity, but I will obviously be better informed as more price and time action unfold.  If a major decline is infolding, I don't expect any rebound to go back to the "d" wave high.  So if a rebound occurs and gives a sell type signal below that level, then I would suggest to short/sell.

For now a sell and hold strategy may be rewarded, but I have a feeling from years of close market observation that the short term downside is likely mostly done.  I could always be wrong.  and that is why I typically stress using a trailing type stop mechanism on part of positions that have major price potential.  I think that would be advisable here, but for options you may not have that luxury due to time decay.

Let me know if you have any questions regarding how to navigate here.


Pete

Expanding Bias Confirmed in This Decline - Look Out Below?

As of this mornings trade in SPY, it appears that the correction is developing with an expanding bias as suggested in the last post.  The ends of expanding downside patterns can really end with sharp downdrafts.  At this stage I am more or less expecting that.

The break of the August low today is a notable chart occurrence and may lead to some buying and an attempted reversal.  I will post if there are legitimate reversal attempts according to my methods.  At this point hourly time frame momentum and MACD, etc are very oversold, but they are not showing any divergence.  So I would advise against believing that today is a bottom day even if a reversal attempt occurs.  The odds just consistently favor divergence to appear at the significant market turns.

For now if you look at the weekly MACD and stochastics of the SPY and other indexes you can see that the indicator is opened up with a downside configuration.  So this means that the odds are for the larger trend to be down.  From a purely technical standpoint, I would not personally even consider a long trade until there is hourly time frame bullish divergence on the technicals while the weekly is down.  Even better would be for the daily MACD to end up oversold with divergence.

From a multiple time frame stochastics analysis on the weekly chart of SPY, the fast line is just getting to the oversold area.  So we could be alert for this week or next for a daily time frame stochastics divergence to develop while the weekly is near oversold.  We are not there yet since the daily is at a new low in the stochastics for this correction.  So again, waiting for bullish divergence to develop would be advisable here before considering long.

As another guide for the trader here, read this link showing what the last 2 bear markets were like in terms of price and time duration of legs down in a bear market.  The typical bull market correction is about 1-3 months and averages about 10-11% decline.  A bear market leg down is on average larger and longer than that.  So what you want to do is to track the developing price action (and sentiment of course) and constantly compare......"does this look more like a bull market correction, or a bear market decline?"

In my opinion the SET-UP looks complete for a bull market top to be in place, with broad spread weekly time frame divergences, etc.  However, it is early to make comparisons beyond that.