We’re All Set to Test or Break the November Lows

Jan 14, 2009: 10:56 AM CST

From a technical analysis standpoint, we’re officially on course today to test or break beneath the November 2008 lows in the US Equity Indexes – it’s now the highest probability play.  Let’s see that development on the Weekly and Daily charts:

Weekly S&P 500:

First, is it a certainty?  No, but I’ll make the case that it’s the most likely outcome of today’s early morning downside break.

On the weekly chart, we see a significant new momentum low in October which tends to precede price lows – we did get the price lows in November, but one cannot discount the strength of that momentum low to lead to continuation.

We got two retracements since October, and it would appear the current retracement up that fell just shy of resistance via the falling 20 week EMA at 975 and now it ‘looks like’ we’re entering the next down-swing expansion move.

If you look at the retracement from November, it looks like a rising trend channel or more specifically some sort of bear flag pattern (perhaps a wedge).  There are bearish implications for such patterns.

The larger structure is clearly in a downtrend, price continues to make lower lows and lower highs, and the orientation of the moving averages is as bearish as it gets.

Daily S&P 500:

Let’s focus our attention now on the daily chart.  Again, as in last night’s post on the S&P 500, the analysis still stands.  In sum, moving averages in the most bearish orientation, trend still confirmed as down, price forming a consolidation pattern.

What could make this move quicker and more painful for the bulls is the Bull Trap that lured them in once price broke above EMA resistance for the first time in months and formed a ‘confluence buy’ trade… before reversing.  The move down is likely to be even swifter as their stops are taken out one by one on the way down.

Also, we’ve now officially broken downwards out of either a rectangle pattern or an ascending triangle (also which trapped the bulls – we did have a breakout of an ascending triangle which lured more bulls in – they will be stopped out on the way down).  Patterns with false breaks tend to have stronger moves in the *opposite* direction.

This is something I haven’t heard anyone else mention, but that we’re in the midst of a “Bollinger Band Squeeze” where the volatility bands have compressed into a narrow range – often we get powerful moves that come out of such patterns which are based on the principle “Markets Alternate Between Range Contraction and Expansion.”  I’ve been warning to expect a price expansion move – one just can’t be certain in which direction the move will expand.  That direction seems clearer now.

Finally, there just isn’t any logical technical support, like a Fibonacci retracement (they’re all *above* price) or key Moving Average.  There’s not even a meaningful swing high or low to halt price until it touches the November lows, which is the whole point behind the notion of a “test” in the market.

Without going into detail here, if you employ Elliott Wave Theory, then you’ll know we’re in some sort of Wave 4 corrective phase and have now most likely opened up into either the large-scale Wave 5 down or the smaller fractal Wave 5 of the larger Wave 3 – either interpretation would have us testing or more-than-likely breaking the prior lows as most Wave 5’s do (see my post “Two Competing Elliott Wave Counts” to see these possibilities).

In sum, nothing is guaranteed in the market, but it appears to me at least that the odds have now shifted solidly in favor of price making an expansion move that takes us down to ‘test’ the November lows of 750, and I would further assume that buyers would fail and that price would be taken out – but we’ll cross that bridge once we get there.

Corey Rosenbloom
Afraid to Trade.com

18 Comments

18 Responses to “We’re All Set to Test or Break the November Lows”

  1. Anon Says:

    Corey,

    I see a inverted H&S on S&P.

  2. dacian Says:

    “Finally, there just isn’t any logical technical support, like a Fibonacci retracement (they’re all *above* price) or key Moving Average. There’s not even a meaningful swing high or low to halt price until it touches the November lows, which is the whole point behind the notion of a test in the market.”

    I have a suggestion: let’s open tomorrow at November lows, just to finish this damn story 🙂

  3. Corey Rosenbloom Says:

    I see that too, but remember, H&S patterns can also be continuation patterns – contrary to popular belief. Plus, a singular pattern does not invalidate the larger currents – though that being said, I think one of my readers commented that the market will break in a way to inflict the most pain.

    I think the most pain would be caused from the Bull Trap we just had and now bears are being aggressive, but if we found ‘random’ support and broke higher here, it would truly hurt both sides of the market the worst (as long-stops are being hit here and a reversal now and upside break would trigger short-stops).

    That would be hideously painful.

  4. Corey Rosenbloom Says:

    Well, no! I make the best profits in my accounts by having a bias off the daily chart and then aggressively trading swings in that direction on the intraday charts until we reach the target!

    That’d be no fun!

  5. Anon Says:

    dacian, If we go to November lows this time, we won’t bounce back for a long time. Buyers won’t have the conviction, to be honest, how many times can they buy to see it go lower again?

    The markets are at the mercy of Citigroup once again, like in November. I am skeptical this time, can’t escape again and again.

  6. Anon Says:

    “I think the most pain would be caused from the Bull Trap we just had and now bears are being aggressive, but if we found ‘random’ support and broke higher here, it would truly hurt both sides of the market the worst .”

    I think Obama starting is a bull trap. We will go lower after that.

  7. Corey Rosenbloom Says:

    Anon,

    Remember that a market bottoms when everyone gives up hope – you really can’t have a bottom with the TV saying “It’s a bottom!” every time we make a new low. We have to come to a point where everyone is disgusted with the stock market and has sold out in despair.

    Only then will we have a bottom.

  8. Corey Rosenbloom Says:

    Anon,

    To be honest, I expected us to go higher into the Inauguration and then maybe bounce a bit after that but then fall once reality set back in that no president is Magic.

    It would be quite bearish if we can’t get an Inauguration bounce.

  9. NotAfraidofTrend Says:

    Corey, you mentioned in another of your blogs that you had some reasons for trading YM instead of ES. I traded YM today. YM does provide finer “resolution” at $5 per point as compared with ES but YM has very low trading volume, hence lower liquidity. If you don’t mind, please let us know your reasons for trading YM instead of ES. Thanks!

  10. dacian Says:

    We had that for the election; it’s too easy to have the same this time. I don’t know, we might, but why exactly will have a bounce for the inauguration? Just to say hello? There are no buyers for that; it might come from a squeeze. We might have a squeeze when the 700$ billion is discussed and voted; by then, 3.5 or 5.1 will play out I suppose (they think now a bill can be passed the soonest in February). So there you have it for the 4-up or 5.2

  11. Dyugle Says:

    I see this a little bit different as I feel that we are in wave 4. We are currently in the b fractal of wave 4. The logic is that the b fractal should probably end on options expiry week on a weird wally Wednesday. That is today so a solid down move to end the fractal was expected. Between now and monday I expect the b fractal to end and the c fractal to begin. Big bailout weekend type of news as these bailouts seem to happen over the weekend. I also feel that the slow stoicastic has yet to flip over to oversold which is a hallmark of a wave down just as an over bought signal is the halmark of an up wave. We have had a very strong overbought signal at the start of wave 4 so it is probably not a fractal and the c wave of wave 4 has not materialized yet. The wave could be truncated or course and that points to your possibilities. Bottom line is trading this wave 4 is very difficult and I am glad that I covered my shorts when wave 3 was ending but getting short again is proving to be difficult. My targets for the end of the b fractal, based on the fractals within the b fractal, are 780, 819, 843, 884 and 903.
    Good trading and love the blog even if my counts are different.

  12. dacian Says:

    “If we go to November lows this time, we won’t bounce back for a long time. Buyers won’t have the conviction, to be honest, how many times can they buy to see it go lower again?”

    Anon, is that the bottom? And btw, the biggest rallies in the bear markets are initiated by the bears themselves. At levels we hear today for the bottom (400-600 range), I think there will be value investor buyers.

    Of course, you have Prechter who sees the end of the bear market at 400 on the Dow (yes, the Dow, not S&P!), but I’m not sure if there will be many survivors on the planet Earth by then.

  13. NotAfraidofTrend Says:

    dacian, as you say, that the rallies in bear markets are caused by bears makes a lot of sense. Please let me know if I got this wrong.

    First, who has control in a bear market? It must be the bears who are downward swings. The bulls are probably on sidelines.

    Then, all bears are not alike. There are some bears who are a lot bigger in size than others. They are the ones who have the resources to cause the rallies after they are flushed with cash, after having covered their shorts. They cause a rally to create another selling opportunity, and hopefully trapping some bulls along the way.

    For the most part, most bulls can’t be very active in a bear market.

  14. Corey Rosenbloom Says:

    NotAfraid,

    I need to write that in a post.

    In sum, I’ve been focused on the 30 Dow Stocks for the life of my career, so I know them more intimately and understand the pricing (for better or worse, I’ve always been used to the Dow Index numbers)

    Trading in $5 per 1 point moves is more intuitive for me than the ES which trades in $12.50 per quarter moves.
    I like to know dollar figures so it’s for me far more intuitive to do so with @YM.

    Liquidity isn’t so much an issue for me as I trade in relatively small size.

    Too many people are focused on the ES which leaves breathing room in the @YM (too many hard-core professionals trading ES and there seem to be more ‘tricks’ played in ES than YM)

    That’s just a few off the top of my head. I’d love to hear others’ thoughts.

  15. Corey Rosenbloom Says:

    Dacian,

    I agree that a squeeze will drive faster upside prices than hopeful bulls – it always seems to in bear markets.

    I don’t know – perhaps it’s a ‘social mood’ thing. Inaugurations aren’t magical but people feel that they are. People feel bad now and see a new guy taking the Oval Office desk will make them feel better so perhaps they buy on that feeling. I don’t know.

  16. Corey Rosenbloom Says:

    Dyugle,

    That’s another alternate count we’re holding as well – that of the “this is B wave down of a larger complex corrective” which ends in a C wave rally (but not beyond 1,000) before plunging into the final 5.

    You’re right about staying out of corrective waves. I posted a while ago that we were in Wave 4 up but it’s been absolutely hideous for bulls & bears. Let’s get back to an impulse wave – which would be down – so that things could go a little smoothly.

  17. Corey Rosenbloom Says:

    Dacian,

    I have things I’d love to say about Prechter’s “Dow 400” projection but I prefer to keep the blog civil 🙂 I’ve read his report.

    I believe the best analysis is done not blinded by bias.

  18. Don-Da-Mon Says:

    Concerning – Dyugle, on January 14th, 2009 at 4:09 pm Said: I see this a little bit different as I feel that we are in wave 4. We are currently in the b fractal of wave 4.

    Did we just start C in wave 4? It feels like we are headed up here, short term. It seems volumes are up confirming this change?

    Corey give us another EW post!! Can’t get enough!!!