Another rather sharp daily decline for the US indexes, yet the current action is still relatively minor. We will likely see much more severe falls of 3-5% when the market breaks the key floor of sp'1538, the only issue is whether the important 1480/70 zone will hold as support.
sp'daily5a - H/S idea
sp'daily3 - fib levels
sp'weekly2, rainbow
Summary
So, a big down Monday, a ramp/bounce Tuesday, and now we've had another big drop. These type of swings are clearly going to be causing a lot of confusion for many out there, but I think the count I have suggested, has a fairly high chance of broadly being correct.
The daily5a chart is one scenario I am keeping in mind. Certainly, a break <1538 opens up an arguably 'easy' move to the 1480/70s. I'd have to expect major support there. However, if the market is really rattled, with the bears having the bulls on the run, then there is the chance for something much more exciting.
Consideration of a possible 'flash-crash' scenario
First, take a look at the following...
sp'weekly - historical, May 2010
Now, the point I want to highlight is the issue of what level the bears should be seeking if the market falls off a mini-cliff. In my view, a look back at the 2010 flash-crash low is very appropriate. At that time we saw a drop to the 50 MA - which was also at the bollinger/Keltner lower band.
Where is the 50MA on the weekly right now? Its @ 1434, which is clearly a rather large drop from where we currently are.
As I've been highlighting for many months, the importance of the lower bollinger on the weekly charts can't be over stated. That lower band (still rising) is currently now 1396...so, a hit of the 50MA IS viable, without needing to break under the weekly bollinger.
Keeping scenarios in mind
Let me be clear, I am NOT currently expecting a drop <1470 next week, but it IS a valid scenario to keep in mind.
The price action in the past few days reeks of market instability, and I have to wonder, what happens when we break under sp'1538 - as I am now 95% certain of occurring.
If sp'1480/70 equates to VIX 25s - and that's a conservative outlook, then what would sp'1430s equate to? I'd have to guess a brief 'spike' into the low 30s. It would be the sort of action we've not seen since Oct'2011 - see the following...
VIX'weekly, 2yr
As noted on the chart, I think the 200MA on the weekly is very important. A weekly close above VIX 21 next week..would open the door to the 30/40s. It certainly doesn't guarantee it, but I'd give a high probability on it.
Dr Copper - the big deflationary warning
At the start of the year, it seemed Copper might make a break into the low $4s, but no, it failed. Copper now looks set to instead break into the $2s within months..if not weeks.
For those bears seeking a broad deflationary scenario into 2014-16, Copper is sounding the strongest warning. All that's left to breach is the $3.00 psy' level. A weekly/monthly close under $3, and frankly, I'll start to get back on board the 'sp'500 doomer train'.
I'm sure the above chart is giving the Bernanke nightmares
*In early overnight futures trading, Copper was trading @ $3.06
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*Bonus chart
Okay, this is something I have updated this evening. It is just one of a number of scenarios, but its a particularly attractive one...
sp'daily5b - best guess + count
If wave'1 (black) was indeed completed today, I'd like a 2-3 day bounce - (black) wave'2, before a rather impressive wave'3 next week. I suppose we might hit 1500 and bounce a few days, or just go straight through it.
As for the large red down wave in mid/late May, well, thats just an idea, but its based on the notion that Copper, Oil, and even the precious metals, are warning of deflation and general future market weakness/instability, with a return back to the low 1400s possible.
This scenario is largely based on the idea that we'll set up a large H/S formation, but that is arguably all mere 'wishful' thinking right now.
Looking ahead...
Thursday we have the usual jobs data, but we also have the Phil' Fed survey and 'leading indicators - both at 10am.
Interestingly, if the market manages to gap higher by 0.75/1.0%, don't be surprised if either of those two data points give the market an excuse to see some weakness, before renewed upside into the Friday opex.
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*I hold long Oil (via USO) overnight, seeking the low 32s.
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Goodnight from London
