Friday ended the S&P 500's worst weekly decline since the week of August 17, closing with 92% of total volume occurring on the down side. At the same time, the advance-decline ratio closed at breadth extreme of 7.3-to-1 negative (7.3 stocks closing down for every stock closing up on the day). As if these aren't demonstrative enough, the McClellan Oscillator reached -294 at Monday's close, the most extreme oversold condition in the past year, except the August 24 low of -331.
Our decision support engine (DSE) allowed us to warn the day prior to that day of market infamy that going home short on Friday, August 21st was not a good idea. Further, that doing so would likely result in being trapped at a potentially sharp down opening, without the ability to take advantage of much further decline. As you can see in this article, published about 10 minutes before the open on August 24 (just before the Dow fell 1,089 points to its low of the day), the DSE was amazingly accurate in many of its forecasts.
This chart shows the final expectation of the forecast from the Jaws of Death pattern that we observed only last week. It's the intra-day (478 minute) bar chart of the Emini futures (March continuation contract), since the November 3 high. The pattern since that peak is highlighted in the yellow box, a corrective pattern. Here, the down-up-down progression likely matured at yesterday's low, allowing the completion of wave red 4, or at least the lowest price extreme within wave red 4. If a triangle is still in progress, the blue arrows to the next lower high, labeled (D), followed by the next higher low, labeled (E), will complete wave red 4. Then, wave red 5 will stretch into the 2145 +/-30 zone in the coming 15 +/-5 days. As you can see, red 5 has several measurements: 2,115, 2,145, 2,165, and 2,185.
The purple, vertical column is the FOMC interest rate hike window, which is expected after the meeting ends at 2 p.m. Eastern time today. There was massive Plunge Protection Team (PPT) buying around mid-day Monday, which allowed the stock indices to rally into the close, trapping the bears, yet again, at the edge of the cliff, as they prepared to pounce on the selling tsunami that could have occurred (if not for the stealthy buy programs). Once the shorts got nervous, their covering fed on itself, and a mini short squeeze was in play, which is likely to get more dynamic after the FOMC announcement Wednesday.
While not currently favored, there is an alternate count where the entire rise off the August 24 low is complete at the November 3 high, and the down-up-down sequence since then is very early stages of a bear market in its infancy. For this to move to pattern primacy, a close below 1,950 is required, confirmed by a close below 1,870 shortly thereafter. Again, DSE strongly probability-ranks the outcome described above far higher than this alternate outcome. However, it's unable to be ruled out until 2,093 is exceeded.
This second chart is the daily bar chart of the S&P 500 cash index. The same yellow box puts the view from chart one into perspective. We have highlighted, with green ovals, the prior warning from August 21st (in both the price and stochastic panes), as well as the current conditions, which are strikingly similar. While the first chart shows the expected stair-step path to the pink box, this chart shows the direction and measured-move expectation only. Nevertheless, the bullseyes are 2145 +/-30.
If you click on chart two, you can see Monday's close, which was back above the lower Bollinger Band (BB, purple dashed line at 2,021). Friday's close below the BB, and Monday's close back above it triggered a short term buy signal, too. So, unless the red line, labeled the "line in the sand for bears" is broken (1958 +/-8), the near term (15 +/-5 days) path of least resistance is higher, into the target zone above, and into the time window just stated.
Therefore, DSE is indicating that unless selling actions are not optimal here, as they will be once those parameters are met. Buying actions are indicated, though, if short; buying actions to cover short positions and/or profits. If flat, light buying is acceptable, provided sell stops are placed on closes below 1964, where adopting short exposure will again be justified. If already long (and wrong since November 3), holding and/or adding to that long exposure is suggested, unless 1,964 is broken. Then, again, moving to short is ideal. While 1,964 might seem like a long way down, which it is for most of us, the decline that is forecast by the research pieces (links to previous articles) above makes the current 60 points of S&P risk look like a hiccup, as the "Jaws of Death" forecast is dramatically lower.
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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.