Set to Test or Break Lows?

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