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SPX Update: The Crash: 1; Seasonality: 0

As predicted, Wednesday’s normally seasonally-bullish session turned into a big red candle.  That in itself should tell us something about this market, as that marks only the second time in ten years that the Wednesday before Thanksgiving has been negative.  The only other time that’s happened in the previous nine years was in 2007, during the prior down leg of the Great Bear.

Now, that said, here’s where things start to get interesting.  Despite the fact that price has performed  exactly as I’ve been predicting, my indicators are now giving some conflicting signals.  I’ll come back to that in a moment, but first:  it’s human nature to get complacent when things go perfectly according to plan, as they have for my readers.  However, the stock market is no place for complacency.  Please don’t be tempted to get lazy here; I’d hate to see anyone give up their 100+ points of SPX profit at this point. 

The charts are now in a bit of flux.  One of the things that bothers me at the moment is that the SPX has not shown a clear internal third wave within the indicators.  This means one of two things:

Option 1)  The market has been forming a fifth wave extension, and could see a strong counter-trend bounce soon.

Option 2)  The decline hasn’t yet seen the internal third wave.  This would have immediate and exceptionally high bearish implications.

The challenge I’m running into right now is ambiguity across markets, from currencies to equities.  If I had to make a call, I would continue to lean toward the more bearish short-term outcome, as I have for some time — but the charts are almost a toss-up at the moment, more so than they have been previously.  Friday and Monday should hold the answer.

Long and medium term, I remain bearish.  My short-term stance is described above.  If the market can’t generate a bounce from somewhere near the current levels, it is almost certainly in very deep trouble, and we should see strong acceleration in the decline… or an outright crash.

Incidentally, the Euro is in a similar position.  It needs to get back above 1.33, and then 1.35, pretty quick — or 1.10-1.15 becomes fair game.

Let’s look at the two possibilities for SPX in chart form.  The first chart depicts the fifth wave extension (option 1 above).  This chart suggests a short-term bottom is near, and predicts a decent retracement rally, which would likely carry all the way back up to 1215-1222 before the decline resumes.  This count flies in the face of my belief that we wouldn’t see any significant rallies during this decline, but I have to stay true to the charts.

The second chart (option 2; chart below) depicts an ongoing nest of first and second waves.  This count is downright scary, and would suggest the bomb bay doors are about to open on this market. 

I would suggest paying attention to the black trend-channel for clues.  A clean break up and out of the channel would tend to favor the count shown above; a break below the channel would favor the count shown below (see how easy I made that?).  In either case, until the top trend line is broken, there is really nothing to suggest a trend change over the short term, and the first chart (shown above) remains a hypothetical.

Over the holiday, a number of readers inquired about the VIX, and how it seems to be unresponsive to the decline.  Using history as our guide, and given the market’s position within the big picture waveform, this apprears to have happened the last time as well.  I have created a chart which shows 2008, the last time the market was in a similar position in regards to its wave structure. 

The wave we are currently in is believed to be black Wave 1-down of red Minor (3) down, which should make a new low in the SPX 1000-1050 range before bouncing in black Wave 2-up.  In the chart below, we can see that last time this happened, the VIX failed to make a new high, even as the SPX made a new low.

Of course, it is still not possible to rule out the short-term bullish alternate count, and will remain so until the market completes five waves down at higher degree. (See: SPX and NDX Update: Crash Wave Finally on Deck).  I continue to assign a 15% probability to this bullish count, but again, the market’s in the area where that count could bottom, so I would suggest that some degree of caution is in order, as the bullish count would generate a rally back up over 1300. 

At the moment, we have a market that has left its short-term options open.  Friday is another “seasonally bullish” day, with data going back to 1941 indicating that the post-Thanksgiving Friday is green 70% of the time.  The Crash scored a touchdown on Wednesday, after Seasonality got flagged for too many false starts.  Can it score another tomorrow, or will the bulls regroup?  As Chris Berman would say, “That’s why they play the games, folks!” 

The bottom line is the bulls need to get in the game, and fast, or the bears are going to run the length of the field on this one.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com 

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