What a week we just wound down.  There was contraction in volatility and a possible triangle consolidation formation, but by Friday we had a lock-limit down move on the US Equity Index futures and the NASDAQ making fresh new 2008 closing lows.  Let’s see these up close and personal.

First, the S&P 500 Daily Chart – hovers above fresh 2008 lows:

We actually did make a new closing low (technically) on the S&P 500 for 2008, but not an intraday low.  Look closely to see the volume action on the recent pattern – volume surged as the pattern began (capitulation) and then contracted as the triangle continued (showing lack of confidence from the buyers – a hallmark of a true triangle consolidation/continuation pattern), but volume is again rising to the upside as the pattern completes (possibly breaking out to the downside).

The moving averages are in the most bearish orientation possible (20 beneath the 50 which is beneath the 200) and price is over 100 index points away from the 20 day EMA – signifying a retracement back up is likely but certainly by no means guaranteed – particularly if momentum continues to increase to the downside.

The ‘hammer’ bullish candle-pattern, as well as the test of the rising trendline from the triangle – have both failed on Friday’s action.  Price closed beneath the trendline and beneath the open of the hammer, signaling bearishness and invalidation.

The momentum oscillator is also hooking back down.

Let’s take a quick look at the NASDAQ Index to see a similar pattern, with the only major difference being an obvious fresh 2008 closing and intraday low.

Second, the NASDAQ Daily Chart – making new closing lows.

The analysis above applies to the NASDAQ as well, only we are roughly 250 points away from the 20 day EMA.

For additional insight into the triangle consolidation (which is now appearing to form a possible descending triangle), let’s see the S&P 500 60-minute chart.

Finally, inside the triangle consolidation on the S&P 500:

There’s a little oddity occurring, as price is trending downward but momentum appears to be rising, in fact possibly forming a triple-swing positive momentum divergence.

Price on the hourly chart is also under all key moving averages, and they are also in the most bearish orientation possible.  Price is also ‘nipping’ at fresh lows which would come in beneath the 840 level.

Keep a very close watch on the 860 to 880 level – if we can find some support here, we still could break to the upside but we’d have to clear that 940 to 960 level which is the upper (descending) trendline, which will become a target if we exceed the 900 level (above the 20 period EMA).

Until then, the larger structure remains bearish, and the trend is clearly down.

We’re likely in an Elliott Wave 4 (sub-wave fractal) of a larger impulse down, but keep in mind that corrective patterns tend to be quite difficult to classify and trade by their very nature of the fight or intense struggle of buyers and sellers – of bottom-fishers (and long-term value players) with short to intermediate term sellers of all types.

Hang on to your account – we’re not out of the woods yet.

For four hours this morning, the US Equity Index Futures markets went “lock limit down” after moving a predetermined move that automatically halts trading.  Let’s see that overnight move on the charts and then compare what happened in the Crude Oil and Gold Futures Markets as well.

S&P 500 “e-mini” Futures Contract:  15-minute overnight session:

It’s a stellar development – one that happened so quickly as price cascaded lower – along with overseas markets – after midnight and into the morning.  I circled the “lock-limit” session with an oval.

Unless you were awake at that time (many of us were not) then you may have woken up to a surprise – perhaps panicked surprise.  Nevertheless, at the moment, price is rallying sharply above that level, perhaps indicating an ‘overshoot’ in price ‘panic’ or some other factor.

One thing I wanted to make a special note – if you trade ultra-short time frames such as 5-minute charts – is to be careful in interpreting your classic indicators that hold data during this time period.  For example, if you’re using a 20 period EMA, it will take 20 bars to ’shake off’ this ‘data void’ in your moving average.  Stochastic (14 bars), RSI (14 bars) MACD (default) all will experience some “indicator failure” as a result, so do be very, very careful taking cues or signals from this time.

Just look at the “3/10 Oscillator” (blue) in the chart above – it flatlined during this time and is having to factor out the data for at least 10 periods (it’s the difference in a 3 and 10 period SMA).  In fact, with the volatility so rampant, it’s probably best to focus your skills on the price itself, rather than blind allegiance to any one (or combination of) indicator.

Don’t assume that fundamental valuation – pricing – is based solely on fundamentals.  Emotion, program trading (hedging), panic, greed are all playing a major part in today’s – and everyday’s – pricing action.

Let’s compare the S&P 500 contract to that of Crude Oil (and then Gold).

Crude Oil 15-minute overnight session:

Crude Oil dipped $6.00 to trade ever so shortly beneath $63.00 per barrel – ask yourself if you ever thought that was possible after seeing oil near $150 per barrel not that long ago.  Though oil didn’t “lock limit down,” it did experience a sharp decline overnight that likely yanked any overnight long stops (if you were unlucky enough to be long) and gave swift profits to overnight (brave) holders of short positions.

Interestingly enough, notice the clear and present positive “three swing” momentum divergence that set-up as price made new lows into 6:00am.  Odds are crude will close higher than $63 or $64 today as a result.

What’s been strange for me to observe is the close – almost exact – correlation in Crude Oil prices and the S&P 500 (equity market) prices.  That pairing was evident overnight almost tick-by-tick.

Now, onto Gold, which you would think would be doing exceptionally well in potential ‘panic’ environments.

Gold (mini) – 15-minute overnight session:

Though gold bottomed ahead of the S&P and Crude at 4:00am, it still suffered a sharp and stunning $40 decline overnight from peak to bottom, which is now being recovered/retraced.

It’s so difficult an environment out there, but the cynic can say “Gosh, all this stuff is so easy… just sell EVERYTHING.”

If only it were that easy.

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Published by Corey Rosenbloom of Afraid to Trade.  Click to receive the Afraid to Trade Feed.

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Charts courtesy TradeStation.

Ben at The Financial Ninja has kept a running monthly summary of various charts from the Federal Reserve that are absolutely worth viewing in full detail.

His most recent post is entitled, “Really Scary Fed Charts [for] October – Now ‘Crazy’ Scary!“.

Ben plots the Non-Borrowed Assets of Depository Institutions (hint – it’s very negative… as in close to -$200 billion negative) and then compares it to the Total Borrowings of Depository Institutions from the Federal Reserve which shows a spike up to almost $300 billion in new borrowing.

He then shows the Discount Rate of Borrowing as well as the Total Borrowings and the Reserve Balances for the Fed.

Each chart is taken directly from the St. Louis Federal Reserve’s website, which allows you to customize your own views based on the data they’ve made freely public.

Ben then provides some commentary, additional links, and sources for more information.

If you can bring yourself to look at what he’s found, it’s a great read.

We tend to follow our own country’s stock market extremely closely and only give cursory attention to other foreign markets.  Let’s take a moment to look at the Russian Trading System Index and view its stunning fall from 2,500 to 700 in five short months.

RSTI Monthly Chart:

The monthly chart would be particularly devastating to investors were this a single company, but in fact it’s the broader index for the Russian Stock market in general – meaning many individual Russian stocks have suffered worse than this chart shows, devastating investor equity virtually across the board in such a short period of time.

The Russian Index held its own during the 2000-2003 bear market in the US, and then expanded rapidly as commodity prices were in a strong bull market into mid-2008 when the Russian Index collapsed along with the expected global slowdown/recession and demand destruction in commodity prices.

The index is currently down 45% for the month of October alone (compared with the US S&P 500 Index which is down 23% for October).  The Russian Index is down over 70% from its peak roughly in June/July.

Neither the 20 period or 50 period EMAs, nor any of the major Fibonacci levels saved off the decline – not even for a moment.  This is an extremely rare example of five solid red bars in a row – on a monthly basis at that.

Let’s bring it down to the weekly chart to see how quickly things got so bad.

RSTI Weekly Chart:

For quite some time, the 20 and 50 week EMAs provided solid support until early 2008, which was a significant sign of an uptrend (notice the comfortable spacing of the moving averages until they crossed over recently).

The initial breaking of those averages was the early warning sign that things might not be right, or that at least the uptrend was coming into a consolidation or reversal phase ahead.  What got traders was the sharp upswing in May that took the index from 2100 to 2500 in roughly two weeks – what looked like a sign of strength at the time was actually a significant ‘trap’ or ‘blow-off’ top of some sorts.

Directly after that swift move, price fell slightly… and then accelerated as it broke the 20 and 50 period EMAs again, which set up a test of the 200 week moving average… which provided absolutely no support as expected.  Failing at the ‘last line in the sand,’ price had no where to go but down… and down it went, exceeding the bearish expectations of most that were analyzing it I would expect.

Finally, let’s translate the index into an ETF for those who wanted to participate in this move… I’m making no recommendations whatsoever on what to do next.

RSX – the Market Vector ETF for Russia:

Volume picked up throughout 2008, surging into the last few months as price plunged from $60 per share down to $15.

Be careful in this environment – it’s unlike what most people have ever seen.

We’re nearing the Apex of the Triangle formation that’s formed on the 30-minute and 60-minute chart of the S&P 500 (and other market indexes) so it’s worth going inside this formation and seeing what might lie ahead.

S&P 500 60-minute chart:

Right now – if you don’t follow Elliott Wave – we’re in a simple triangle consolidation pattern, and are reaching the apex of the formation which will converge about the 930 index level.  Most triangles break-out 66% to 75% of the way to the apex (point where the two trendlines converge).  The pattern will be invalidated should price travel through the apex without a price break-out in either direction.

Notice how price has actually broken slightly beneath the lower trendline in the momentum oscillator – that’s not a necessarily bullish development but – as of this writing – we’re not out of the formation yet.

If you follow Elliott Wave, then we’re completing sub-wave D of the Elliott Triangle pattern which is forming sub-wave 4 (retracement) against the larger trend on the daily and weekly charts.  According to EWT, we have sub-wave E yet to come and then a breakout is more likely to occur to the downside.

Let’s see this structure on the daily chart:

S&P Daily Chart:

The entire structure you see is Wave 3 of the larger impulse on the weekly charts (beginning with the October top).  Wave 3 – the largest and most ‘powerful’ wave – is subdividing down to its own 5-wave impulse… but let’s not get ahead of ourselves.

Wave iv (the current wave) is subdividing into a Triangle pattern (which itself is 5-waves) as a retracement against the prior downthrust.  Notice the new momentum low made on wave iii.

IF this is the dominant structure, then we probably have one more mini-wave up before the triangle breaks to the downside, testing the prior 850 level at a minimum and exceeding it possibly.

I have to share something a little humorous of a political nature.

I was reading a post on a website the other day where the headline read “Stock Market will Fall – McCain is finished before election day” or “Stock Market Move Down will Doom McCain” or something of that nature.  I had to read it.

The premise was that we’re in an Elliott wave 4 triangle (as I displayed above) and that the price will break out to the downside just before the election which will doom John McCain’s chances at the Presidency.  I kept envisioning my own headlines:

“Elliott Wave Triangle Dooms Sen. John McCain” or “Triangle Breakdown Defeats McCain” or something along that nature.

That sentiment is clearly biased and also holds quite a few assumptions.

First and foremost, that the Elliott pattern is valid and that price will break down sharply following sub-wave E.

Second, that – even if that happened (which does seem likely) – then a down market will help Senator Barack Obama and doom Senator John McCain.  Who knows?  Maybe a severe move down in two-weeks time will lead to a sudden call for leadership and experience and shift the dynamic. It’s so hard to tell!

Even if it is the case, it’s still – at least to me – a humorous way to interpret Elliott Wave Counts and then extrapolate them to the real world.

At any rate, I thought it was a an interesting use of Elliott Wave theory that I wanted to share with you all.

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Published by Corey Rosenbloom of Afraid to Trade.   Click to receive the Afraid to Trade Feed.

Also, click to join the Afraid to Trade blog (free) as it continues to expand.