NEW YORK (TheStreet) -- The next few days to weeks are lining up for extraordinary volatility in many stock indexes both in the U.S. and abroad.
We warned on July 6th, in an analysis using FXI, that things were about to go from bad to worse in China, and that above $44 was the critical zone for investors to exit by, or the real damage would take them by surprise. Since then, 32 has been seen (a 27% side), with more damage to come directly ahead. This first chart updates the market's behavior since that analysis.
Similarly, the Shanghai Composite has been crashing since peaking in June, when the decision support engine's pattern recognition algorithm warned of the bearish divergence sell signal that occurred when the monthly stochastics made lower highs as prices made higher highs. This is highlighted in the monthly bar chart below, with the bold blue lines that point in opposite directions in the top and bottom panes.
Finally, this monthly chart of the Nikkei is lagging a bit behind the stochastics slide off the highs this year, but is in sync with the first two at larger degrees of trend. While not shown, each has a short term (daily bar) chart that is one lower low away from finding support that should provide multi month rallies. The first two should each bounce along the blue arrow paths, before rolling over again (sometime in the first half of 2016) and falling to lower lows than the 2015 extremes that are about to arrive. The Nikkei should mimic these bounces, with a retest of the 20,000 level, before rolling over and, at least, targeting the 13,000 level in the yellow box, where the next big "Y" in the road exists.
So, after lower lows in the near term, which will trap late-joining bears into short exposure as oversold rallies manifest, all three Asian indexes should rise together. These rallies, into July 2016 +/-3 months, must be used to exit all long (and wrong) exposure in Asia, as the declines that are scheduled to appear in later 2016 and 2017 should be devastating.
It's not only the Asian stock market with this scenario. This Dow chart shows the similar upcoming lower low than seen so far this year. While odds currently favor the blue arrow path, where a test of the higher green box provides sufficient support for a multi month bounce toward 17,100 +/-250, the red arrow path can't be ruled out, especially if the 1987 analogue is playing out.
If the herd decides to manifest the blue path, these four markets will fall in concert in the next few days to weeks, then rise together in the next couple months. On the other hand, if the herd manifests the red path, 15,000 won't hold for more than a day or two, before waterfall selling floods Wall Street, and challenges 13,000 this year, rather than early next year.
The decision support engine warns that this is likely too late for selling actions, so close to lower lows that are likely to spark sharp rallies (to lower lows than 2015's peak levels). Instead, the objective investor would use any new lows to cover profitable short exposure, or protect it with buy stops, use the multi week bounce to exit long exposure to stocks in all of the markets above, then sell into the bounce targets listed herein.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.