At the end of a band ride the targets for any move away from that band are firstly the middle band, but also any important MAs that lie between the two. The middle band is at 1983, in my ideal target zone for this rally, but between the bands are the 100 DMA at 1960, and the 50 DMA at 1974. The high so far is a fail at the 50 DMA and it's possible that was the rally high. If so we will most likely find out today. SPX daily chart:

The Clock Is Ticking

On the 60min chart the IHS target at 1980 was almost made at the high yesterday. I'm favoring at least a retest of the highs today or tomorrow morning, but that could be close enough. SPX 60min chart:


It has been a great run long and short over the last few weeks, and within reasonable tolerances, I've called every turn on SPX since I went on holiday in mid-June. Does this mean that what I am expecting to happen here must happen? No, it doesn't work like that. As I was saying on Friday, the downside scenario is the higher probability path here, and I'm giving 75% odds of a bearish resolution here. That means that I am giving the bulls 25% odds of breaking up to new highs on SPX, and of collapsing the bear scenario that I have been following as it has formed over the last few months. 25% is not a small percentage and it could very much happen. No-one should mortgage the family farm to go short here.

I call the market very well, but no-one can know the future. Anyone who says they do is either deluding themselves, or trying to delude others, or both. Always consider the possibility that any trade can go the other way, and have a plan for that too:

So Here We Are Then

On the daily chart Friday was the ninth day of the lower band ride and, assuming that we don't see a very strong reversal today, the last day of that lower band ride. Overhead resistance is at the 50 DMA at 1974, and the middle band at 1985. My ideal high here, obviously on the bear scenario, would be for a high to be made today or tomorrow, with SPX opening and closing the day at or under the 50 DMA, with an intraday test of middle band resistance at 1985. SPX daily chart:


I posted the chart below on twitter last night, and that shows SPX making the double-top target at 1937.70, then underthrowing falling megaphone support before rallying hard to form a nice looking IHS targeting the 1980 area.

I have to say I wasn't wild about the low, which was in the right area but unusually didn't show positive RSI divergence on any timeframe, but as long as the IHS breaks up today I'll be taking that 1980 target seriously, and would note that the 50 DMA is now at 1975, and the 61.8% fib retrace and the daily middle band are both currently at 1985. This target would be a reasonable rally target and this would clear the pattern setup nicely for the next and likely much larger move down. SPX 5min chart:

Show Us The Money

Before SPX can test the middle band however, it must first recover over the lower band, and even after a 21 handle rally off the low yesterday, SPX closed five points under the lower band yesterday for the eighth day of this lower band ride. If SPX can break over the lower band and the IHS neckline today then the levels to watch are falling megaphone resistance in the 1970 area, then the 50% fib and 50 DMA at 1973-5, the IHS target at 1980, and the 61.8% fib and middle band at 1985. 1985 would be my preferred target, with a very serious possibility that the rally high would open and close the day under the 50-DMA at 1975. SPX daily chart:


I was saying on my daily SPX chart yesterday that if we were going to see a move directly to the double top target at 1937.70, then I was expecting that move to start yesterday, and obviously that's what we saw. The low yesterday was at 1941.7, and we may well make that full double top target today.

This move was an important point of recognition and I think it is likely now that the market is starting a 10% or more correction, though we haven't yet had the full confirmation of that move that would come with a conviction break below the 1904 low on SPX. That 1904 level is the support level on a large double top that would target the 1789 area on a break below 1904, and that 1789 level is very close to both the 23.6% retracement level for the move up from October 2011, and rising support from that same low.
If I'm right about where we are now then that is my minimum (and likely) target area. The move to that level could be very fast, and leveraged longs continuing to buy every dip will be roadkill. My strong recommend is not to play chicken with this train.

I'll be calling the targets, changes and reversal prospects every day as equities progress down this road, and when this correction bottoms out I hope you will join me in what should be a really very nice dip buying opportunity.

On the daily chart the move yesterday was a strong punch down through the daily lower band that closed 12 points underneath it. The lower band closed at 1959 yesterday and could close as low as 1949 today. Yesterday was day seven of this lower band ride and I would normally expect to see a touch of the lower band at some point during today. We are now far enough below the 50 DMA at 1975 that I would expect that to now be strong resistance for the duration of this correction. SPX daily chart:

Cards on the Table

On the 60min chart SPX is getting close to the double top target at 1937.70, and also to falling megaphone support, now in the 1930-3 area. This is a prime area to look for a decent bounce, though I'm concerned that the bearish overthrow of falling megaphone resistance at Tuesday's high may be telling us that this falling megaphone may break down. There is no positive RSI divergence on either the daily or 60min RSIs as yet, and we would need at least a modest bounce to establish that positive divergence. SPX 60min chart:

SPX put in a sixth day riding the daily lower band yesterday, with a touch of the lower band at the low and a hit of falling megaphone resistance at the high. SPX daily chart: 
Overthrown Falling Megaphones

At the high we saw the test I was expecting of falling megaphone resistance, and that overthrew slightly at the high to test the 50 hour MA. After that the day was mostly downhill. So what does this mean?

Well it means that until we see a break up, we need to assume that the downtrend is ongoing, and that SPX is starting a move towards megaphone support, which is now close to the double-top target in the 1937 area. Furthermore the overthrow means that whichever megaphone trendline we test next, either the upper today, or the lower soon, is likely to break at that test. That's something to bear in mind, as the target for this megaphone on a break down would currently be in the 1860 area, well below main double top support at 1904. SPX 60min chart:


Another whippy day yesterday, but one that, unlike the more superficially bullish Wednesday and Friday rallies last week, leaves the bulls in a very good position for a break up today. The daily lower band was tested in the morning, so that was either day three or day five of this sideways lower band ride, depending on how the second day with tests of both lower and middle bands is counted. The candle was a 60% bullish reversal hammer, and there are now possible bottoming setups across all the main US equity indices as well as some broken declining resistance trendlines. SPX daily chart:

Possible Change of Plan

Now one thing that I dislike seeing when I have open downside targets is a marginal new low that is strongly rejected. There was one yesterday of those on SPX (and NYA and WLSH). That has set up a possible double bottom that would target the 2008.50 area on a sustained break over Friday's high at 1986.27. That level is the centre of a resistance zone that starts with falling megaphone resistance in the 1985 area, continues with double bottom resistance at 1986.27, and ends with the 50 hour MA at 1987.74. if we see a break over the 50 hour MA that will be a break that should be respected, though if bulls want to make the full double bottom target they will also of course need to take out the daily middle band, currently at 1994. SPX 60min chart:


Another whiplash day on Friday with a strong rally to 1986. That looked more bullish than it should have done because, rather than rally in the morning and close weak, the rally was in the afternoon and closed strong. Nonetheless the high was in the 1980-9 target range I gave in the morning, and anyone buying that high on Friday afternoon is very heavily down so far this morning. SPX daily chart:

Whiplash Decline

However the high on Friday afternoon didn't hit the obvious trendline target, which was at falling megaphone resistance. Surprises are likely to be on the downside in a move like this, but we may well see SPX return to test that megaphone resistance trendline today or tomorrow. SPX 60min chart:


There were three significant technical landmarks for me yesterday. The first that double top support on SPX broke down, breaking the third and last support level I gave last Friday morning. The second was that the daily RSI 5 closed under 30, so the daily RSI 5 / NYMO sell signal I've been following has now unambiguously made target, though the historic stats on these nonetheless further support that the SPX double-top that has just broken down should make the pattern target in the 1937.70 area. The third was that a daily lower band ride was confirmed with the strong punch below the daily lower band.

So what now? Well the odds favor a lower close today, but not another trend day down. We may see a modest rally close or perhaps a flat close as a less likely but possible alternative. SPX should test the lower band at some point today, and that is currently at 1975. Yesterday's low is very unlikely to hold and all longs should be counter-trend now until the double top target is hit. SPX daily chart:

SPX Double Top Breaks Down

Looking closer the decline yesterday was stopped by a declining support trendline that was tested three times without breaking. The chances are that trendline will hold today and a decent bounce should be brewing. Hard to say where that bounce might top out, but if SPX can recover over the daily lower band and 50 DMA at 1975/6, then I have possible targets in the 1980-9 area. Wherever a significant bounce tops out should give us the decline pattern for the current move. I've marked a couple of options on the chart but these are just educated guesses. SPX 60min chart:

That was a strong rally yesterday, and the long bull move over the last few years has left many of us with a very strongly conditioned response to any strong move up, to jump on the long train in the confident expectation that it wouldn't be turning back down anytime soon. Don't get me wrong, that conditioned response has served everyone well in this long long long bull run, but in this particular case it needs to be suppressed until we see some actual evidence of a bullish break, and we haven't seen that yet. 
In terms of the rally yesterday it followed the roadmap I gave in my post yesterday morning almost exactly. There was a lower low in the morning, with a low just 0.15 above 1978.48 support, then a rally to 1999.79, just 0.21 under the top of my 1995-2000 target zone. The close was 0.68 below the 50 hour MA, and 0.35 above the daily middle band, so a close directly on the main resistance levels I gave in the morning. SPX daily chart:  
The Long Shadow of Pavlov

The rally retested broken rising wedge support from the 1904 low as well as testing the 50 hour MA. SPX 60min chart:


Last Wednesday I was warning that the odds were better than two to one that SPX would make a marginal new high and then come back to make a lower low, and SPX came within four points of making that lower low yesterday. SPX hasn't made that new low yet, but the RSI 5 / NYMO signal that I was using to make that prediction has now made target as the daily RSI 5 closed at 30.84 yesterday, and there is a visual hit of the 30 level on the chart, so I'm treating that signal as completed to target.

That isn't quite the end of the story though, as there is still the matter of the lower low outstanding, and also the matter of the double top that has now formed on the SPX chart, targeting the 1938 area on a break below the last low at 1978 48.

Looking at the nine previous examples of this sell signal that made a new high and then reversed back down, it's worth noting that all nine made a lower low, so the odds that SPX breaks 1978.48 here are very high. Of those nine though, three went on to make a marginal new high that was the second high of a clear double top setup, as this one has as well, and all three of those went on to break double top support (at 1978.48 here) and then play out to the double-top target, which in this instance is 1937.70, so history is leaning strongly towards a hit of 1937.70 in the near future, albeit from a sample size of only three for this permutation of this sell signal. For the moment therefore I am assuming that we should at least break lower than 1978.48 (very high probability), and then make the double-top target at 1937.7 (high probability)

Looking at yesterday the close was on the daily lower band, and that is supporting the start of a lower band ride down to the 1937.7 target. There is also an obvious target, and possible support, at the 50 DMA, now at 1976. SPX daily chart:

Flogging a Dead Cat

What are we likely to see today? Well the move down from the high has been very fast so far, and I haven't yet managed to identify a decent decline pattern from the high, as I have a decent support trendline, but a weak resistance trendline. I have a tentative falling wedge, and I think we may see a break up from that wedge soon to establish a decent declining resistance trendline for the next leg down.

If that happens then I'd expect the wedge to break up, then a reversal pattern should establish, either a double bottom or IHS, then a break up to a fibonacci retrace target that in this case should be either the 38.2% or 50% retracement.

The target area for that dead cat bounce would be the 1995-2000 SPX area, with both of those fibs close by, and with a confluence of resistance levels there including:

  • 1998 - hourly 50 MA
  • 1998 - daily middle band
  • 1998 - hourly middle band

If we see this hypothetical bounce then that resistance area should not be broken. I'd be leaning towards seeing a lower low today before such a bounce and that bounce would ideally come from a low within  the 1974-81 area. I'd prefer the 1978.48 level to be unbroken before the bounce as that would improve further the odds that overhead resistance would hold. SPX 60min chart:


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