The down fractal I've been anticipating since the spike up to 1061 on November 3rd actually looks to be unfolding now -- although it's been a slow-motion affair up until yesterday. Now the downside pressure is in gear, and chaotic energy could finally be ready to release to the downside.
The big clue that selling pressure is significantly on the rise is how much price damage has occurred in a short amount of time during this latest short-term "decline phase" of sentiment. As I mentioned yesterday, with the jump in the VIX and VXO on Friday afternoon, the path of least resistance became down, and since Friday's opening pop the S&P 500 has cascaded down a quick 28 points.
But it just may have been too easy to get bearish on yesterday's drop. The market doesn't usually like to just barrel on down, but instead likes to stop and shake out all those with little conviction. The late-day bounce yesterday has set the stage for an upside retracement, and a quick "advance phase" for sentiment. In other words, the VIX and VXO got stretched pretty thin to the upside in a hurry, and a either a rest or a drop back down in implied volatility should be on tap.
If the implied volatility indices do follow their usual script and come down, the market has a good chance to retrace some lost ground. However, if the SPX can't recover and get back up and over 1052, then the downtrend -- and my bigger "down fractal" -- will be moving to the forefront, and we can look for stronger, sharper sell-offs in the weeks ahead.
Another thing to consider is the McClellan Oscillator has now broken out of its converging triangle, and the break is to the downside. This is definitely a sign that Monday's breakdown could be an important one.
This idea of a big down fractal forming now also fits in well with the Nikkei analog we've been monitoring closely, and with Tim Wood's observed "3 peaks and a Domed House" pattern. (Tim just gave an update on this pattern on our web site). It's my feeling that such analogs and patterns are valuable road-maps, because they show how investors and traders have reacted in the past to similar circumstances and similar market movements. And if there's one thing about the market we can actually know, it's that the nature and emotions of market participants never really change.
So the strategy here is to see how the next short-term "advance phase" for sentiment plays out. If it's just a tepid bounce, and the SPX can't rise back over 1052, then the market has a developing problem. It looks really ripe for precisely this sort of action right now. The big caveat here is we've seen this movie a bunch of times before over the last few months, and the market has always managed to grind its way back to higher highs.
So we should not assume too much, and not react too emotionally, but instead patiently wait to see the comfortable majority start to sweat a little bit more before betting on a bigger mid-term decline.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled by 6 points to 11% full of negative sentiment.
SHORT-TERM: Having reached an extended level on a short-term decline the hourly gauge drifted higher and is ripe to move into a short-term Advance Phase...or else regress to Neutral.
MID-TERM: Progressed 10 points on the decline side to 28% with Confidence jumping a point in the bearish direction as well.
LONG-TERM: Progressed 9 points from Friday's close to 18% on the decline side with Confidence moving to the bearish side of ZERO.
BOTTOM LINE: Generally just about the time we get a solid mid-term signal the short-term phase has exhausted itself. That appears to be where we stand at the moment. Unless the next short-term advance phase overwhelms the mid-term decline we'd be looking to short the next hourly sell signal.
The tank is filling up as the SPX breaks the yellow wedge as drawn using closing prices. This is precisely what we have discussed in this space. All that's left to confirm the mid-term decline phase is an SPX close below 1042. That is where the lower limit of the wedge is if we use daily lows (rather than closing prices) to define it. A snapback rally up to the broken "demand line" (line of ascending lows) is not out of the question, but failure at that level would be a killer short signal.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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