SPX

Excerpts from the Avid’s Live Chat Room…

Friday’s drop satisfied the unfilled 1442.93 target from 8/6. The next lower targets are 1402.96, 1357.91 and 1330.11. There is more than one possible scenario for Monday; therefore there is no official call. However, there are two possibilities which are more likely than others. The first is that we made a double bottom and are going higher. Also, we recovered from a deep pit to close positive. The problem I have with this possibility is that the positive close is an illusion. Other indices besides SPX closed negative. After the close, futures tanked, not only going under fair value but going under cash as well. The second possibility involves a little fundamental analysis (which I rarely use) and Elliott wave theory (which I rarely use).

Friday the Fed poured cash into the system an unprecedented three times. (They bought illiquid mortgages; its cash finds its way into the market and props up prices temporarily.) With just minutes left to trade SPX was safely in the black, the market was rallying and usually no one wants to fade a strong move going into the weekend. Instead of biding its time, the market sold off sharply. In an environment where only professionals were left to trade, people wanted out at any price. The implication is that a huge in pouring of funds was insufficient to keep the market up. If Friday’s rally were due to the Fed pouring in funds, it should be rejected immediately with a strong gap down, ideally undercutting all of Friday’s recovery. In such an event, the market likely would not recover as it did Thursday and Friday; it would drop and keep dropping. And dropping.

Here is where I try my hand at Elliott wave theory on a 5 minute chart. If wave 1 down went from the 8/8 high to the 8/10 low, then wave 1(iii) goes from 1487.06 to 1431.32. Wave 1(i) is 50% of this wave and wave 1(v) just misses being 23.6%. Countertrend wave 2 up has a nice A=C pattern and wave 2 itself is 50% of wave 1(iii). It is easy to count 5 waves down from the top of wave 2; this would be wave 3(i). Countertrend wave 3(ii) has printed and we are about to start wave 3(iii), which can be vicious its rate of descent. If wave 3 is 161.8% of wave 1, then we hit 1371.83. Betting on a crash is a low percentage bet. Just because the conditions for a crash are present does not obligate a crash to occur. But every now and then conditions are right for a crash; and they are right for a crash on Monday. The patterns are projected forward not backward.