Headline Humor for the Dedicated Reader: Caveat Shemptor! ~ The Risk Averse Alert

Monday, August 08, 2011

Headline Humor for the Dedicated Reader: Caveat Shemptor!

(Humorous, yes; yet the intended message is quite seriously meant, as will be clear shortly...)

Absolutely love days like today! No, I'm not a sadist! Rather, it's for the clarity a throttling like today's brings. More often than not evidence supporting some anticipated "you are here" perspective comes together on days like today with extraordinary technical convergence to a degree unlike moments prior. It was one of those days.


Let's work from top to bottom and save the Elliott Wave count for last.

Never during the market's decline from October 2007 to March 2009 bottom did the S&P 500's relative strength (top panel) fall to such oversold depths. Not even in October 2008! This speaks volumes and is a common theme throughout the domain of technical evidence I regularly assess in these parts, as you will see shortly.

Simply put, this is indication that, the worst of the market's decline from October 2007 top is yet in store. And wouldn't you know it! That's been my outlook for many, many moons now. Thus is a forecast anticipating the throttling of major indexes back to levels last seen in the 1987-1994 period confirmed both reasonable and justified by this incredible weakness presently demonstrated by the S&P 500's relative strength.

What's more, this shocking demise of relative strength speaks volumes about weak hands dominating the long side of equities. Again perspective developed here in the lead up to the market's recent top finds but confirmation in the S&P 500's extraordinarily weak relative strength.

Moving along, we turn to the volume of shares exchanged. Long-time readers will recall my noting in May 2010 how volume then rivaled levels last seen during 2008 when the lug nuts were falling off the market. This was contrasted to a similar circumstance during the market's decline in July 2008 when volume then rivaled that during a preceding decline in January 2008. Knowing that July 2008 paved the way for the market's undoing in September-October 2008, the thinking last May (2010) was that, the larger decline I had been anticipating (even back then!) might have commenced.

Well, things did not work out as anticipated in that instance. Yet here we are again. Volume once again is rivaling its peaks during 2008's worst moments. They say that, to every rule is an exception. With that in mind, then, I believe "this time is different" (i.e. compared to May 2010).

(Generally speaking, claims suggesting "this time is different" fail to materialize. But I'm sticking to my guns. This time is different than May 2010.)

In other words, that like-from-like volume comparison, July 2008 versus January 2008 leading to the market's September-October 2008 bloodbath, finds similarity in volume now during the market's initial move lower (much as July 2008 was) rivaling peak volume levels back in the dark days of 2008. A like-from-like perspective covering the duration since October 2007 peak (when began what an Elliot Wave analyst calls a "corrective wave") finds volume raising prospect that the market's decline since October 2007 has yet to see its bottom. Much as the same conclusion was born out in the September-October 2007 period following July 2008's volume challenge of its peak levels reached during the market's January 2008 decline, likewise confirmed by volume presently is prospect for lower lows still to come, and this sometime in the not-too-distant future. Thus, an outlook projecting major indexes reaching levels last seen in the 1987-1994 period finds evidence in volume further confirming the prospect.

Finally, as you can see, the S&P 500's momentum (bottom panel) is right on course to reaching a projected range whose rationale was revisited on Friday. Again, it was another like-from-like comparison to similar circumstance back in 2008 leading to this present momentum projection. So, this measure appears right on course to reaching its projected objective.

Now, this leads to observation on where are we, exactly, in the market's anticipated decline to levels last seen in the 1987-1994 period. As I just said, unfolding is but the initial move lower to that target range. Similarity to that previous, initial move lower (July 2008) in a larger decline culminating in the market's September-October 2008 collapse, again, confirms the market's present decline but an initial move lower.

As you might discern from the Elliott Wave count above (whose clarity a day like today affords), five waves forming this initial move lower are well along in their development. Plainly since July 22nd's peak, unfolding has been the third wave of these five waves lower. Again, these five waves down are seen forming but the market's initial move lower since July 7th top. So, although this initial decline should end sometime over the next couple weeks, eventually much worse selling is in store and, indeed, is likely to bear down on the market sometime before the end of the year. Could yet another in the market's long and storied history of October crashes be shaping up?

At the conclusion of tonight's comments I'll show you where we probably are in the course of forming the present third wave of five waves down from July 7th top. First, though, let's look at additional technical evidence supporting the view that, likely upcoming (before the end of the year) is a throttling taking major indexes back to levels last seen in the 1987-1994 period, and that presently unfolding is but the initial move lower...


The differential of NYSE-listed issues hitting new 52-week highs versus new 52-week lows just blew out in a way confirming that, an initial move lower in a larger decline has commenced.

First, we find the differential much lower than May 2010, and this despite the fact that, the NYSE Composite Index trades higher than it did then. No doubt minimally confirmed, then, is that full measure of underlying weakness I had been documenting here for months on end. Sweet justice.

Then, there's the sinking of the NYSE New 52-week High-Low differential's relative strength (top panel). Again, there was nothing like this in 2008. Add more evidence, then, suggesting the market's decline presently unfolding (and in but its initial phase) appears slated to be worse than that frightful annihilation unleashed in 2008.

(Thus, too, does a long-believed-insolvent trans-Atlantic banking system gain substantiation in technical evidence plainly revealing I am not alone in this reasonable suspicion.)


At last, the S&P 500's volatility index exceeds its peak levels reached during last May's flash crash and aftermath. Lo and behold another relative strength first, too.

If there were any measure suggesting "capitulation" (or probably more accurately, panic) has been registered during the market's present drive lower, then the unmatched relative strength of the volatility index's increase adequately qualifies.

Which is not to say the market's present decline is complete. Not by a long-shot.


Are you kidding me? The worst NYSE Advance-Decline differential since October 2007 top! Talk about confirmation that, something nasty is brewing!

Yet more immediately confirmed is the probability that, a third wave down formed today. Recall, third waves according to the Elliott Wave Principle typically are most dynamic. Well, in today's just awful NYSE Advance-Decline differential is "dynamic" in spades. Thus, today's decline likely formed a third wave.

As was indicated via the Elliott Wave count applied to the daily chart of the S&P 500 above, the third wave of five waves down from July 7th top is thought presently unfolding. So, judging by the NYSE Advance-Decline differential, then, forming today was the third wave of the third wave down from July 7th peak. Being that, this third wave down from July 7th, itself, will consist of five waves, forming today was but the third wave of these.

So, let's conclude with a close up view of these five waves forming the third wave of five waves down from July 7th peak...

SPX 5-min

Last Thursday's break of the lower parallel in the channel containing the S&P 500's decline from July 22nd peak (when began the third wave of five waves down from July 7th top) initially had me thinking the market would crash on Friday.

This, of course, did not happen. Yet following today's just awful performance — this suggesting an Elliott third wave had formed (indeed, a third wave of a third wave) — the indicated price channel gains relevance by way of containing what likely will prove the first wave of five waves forming the third wave down from July 7th top.

Given today's throttling, you have to wonder if selling might imminently intensify. Could today's declining be but the start of the third wave of the third wave of five waves down from July 7th top?

Probably not. Unless, of course, the EMU collapses before the end of the week. But that's probably not going to happen. So, for the time being let's assume the third wave of five waves down from July 22nd for the most part (if not entirely) formed today.

(With the President's scheduled 1:00 p.m. press briefing today not going off until 1:53 p.m. one can speculate on the cause for his delay. Possibly two important tele-conferences likely needed attending before the President was ready to address the nation. First, a short hook up with Hank Paulson looking for tips on how to beg on bended knee to a female leader, and then the crucial call to Angela Merkel begging she not pull the plug on the ill-conceived EMU. He probably promised her Wisconsin in return. Possibly could have offered New Jersey, too, but being a bright, forward-looking man thought Chris Christy's resemblance — physically and politically — to a young Hermann Goering might kill the deal.)

A couple notable technical development worth noting via RSI at 5-minute intervals...

Unlike what happened twice last week during steep sell-offs, coincident RSI during today's decline diverged as the S&P 500 moved lower throughout the day. Contrarily last week — specifically, Tuesday and Thursday — market declines were being confirmed by RSI (thus suggesting the S&P 500 would fall still lower). Today's divergent RSI behavior, then, indicates a measure of underlying strength — a hint of diminishing selling interest, anyway — could be developing. So prospects that, largely forming today was the third wave of five waves down from July 22nd are bolstered by this, RSI's coincident behavior.

Finally, up until this evening I had been anticipating RSI to challenge its deep extremes of Friday, July 28th and Wednesday, July 26th before that. I'm not so sure this is likely now. Not with today's terrible round of selling (itself believed a third wave) finding absent such extreme imbalance between buyers and sellers as would lead RSI to challenge its recent sell-side extremes. If ever there were a day when prior RSI extremes could have and should have been challenged, today was it.

So, what to make of those previous RSI extremes? How about this: just further indication of underlying weakness — longs being dominated by weak hands. Early on in the market's decline from July 22nd peak — during formation of but the first wave of five waves down — this underlying weakness was most pronounced. Yet as the market has moved lower, it stands to reason that, a certain number of undying bulls turned death defying knife catchers would step up. Thus, it's unlikely depths to which RSI reached earlier will again be seen as five waves down from July 22nd peak complete over days ahead.

As I said, it's likely the third wave of these five waves down from July 22nd completed today. This leaves the fourth and fifth waves ahead, and these will likely complete over the remainder of this week's trading. Once they have, but the third wave of five waves down from July 7th will be complete, thus leaving the fourth and fifth waves still to form before the market's initial move down from July 7th top is complete.

Now you see why I suggested "caveat emptor" in this post's title. Sorry for the long-winded commentary. Such is the result of clarity today's steep decline delivered. Funny, too, how recent events giving rise to something called a "Satan Sandwich" would lead to a third wave of a third wave down whose loss burned the S&P 500 for 6.66%. Lord, have mercy!

Fast Money
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