When do we worry?

People have terrible memory and are easily swayed by the latest headline. It never ceases to amaze me how in one day we can go from "a 10%-20% correction is a good thing and overdue" to "global economic growth is fueling a rally". This is why I try not to listen to headlines - rather, I will read economic reports and listen to a conference call or two to get my economic bearings.

Anyway, today's action was again pretty predictable. Yes, I would have prefered a closing below 1052 - or even 1048, but I'll take what the market has offered. Though I have been focused on the hourly for my trading, I do want to look at the Daily price line chart. This chart uses the CLOSING price of the S&P and is in line format rather than bar format. Open it up in a new window.



Some basics - the green line is the closing price of the S&P on a daily basis. The pink line is the 20p MA, the baby blue is the 50p MA, and the white line is the 200p MA. Some day price action is going to cross down through both the 50p MA and the 200p MA. (I can say this with certainty, though I can not predict when!).

I have added two trend lines on the daily. One runs across the descending tops we are seeing lately. The other runs across the descending bottoms. These trend lines are getting WIDER as time progresses. This is a sign of EXTREME VOLATILITY. Normally, we see parallel lines (as can be seen on the intraday hourly chart) or lines that are converging. Converging lines tell us that the market is calming down to contemplate the next move. Diverging lines that get wider tell us that the market is reaching a very unstable state and is about to blow - one way or the other. Note how the bottom trend line is dropping steeper than the rise of the upper trend line? This should clue you in to what may happen.

Not to long ago, maybe 3-4 sessions ago, I said that volatility was about to get very serious and if you are not careful you will get bucked off your positions. We are seeing that now and I suspect that a big down leg is on the horizon.

I circled the last correction attempt and the current attempt. Note how the down thrusts occured in three waves (labeled 1,2,3) with the third wave being the most significant. I am not saying that this is what will happen in the current correction. I merely point out that this is how it happened then - and the market (and it's participants) have memory. Also, note how the correction did not end until the price action crossed the 50p and 200p MA's.

If we are to see a third wave down in the current correction attempt, and if it is going to be worse than the first two, we should look for the following:

1. a break of the 50p MA near 1025
2. a break of the down trend line near 1013
3. a break of the lower BB at around 1005
4. a break of the psychological support of 1000
5. a complete retrace of the last rally leg at around 993

These 5 things I predict will come to pass. The real question is "Do we head down to the 200p MA near 900?"

Only time will tell, however if we break resistance at 1060 and 1070 - we could see another rally leg - believe it or not.

I sold my insurance today at a very nice premium, looking for price action to head downward. I guess that is putting your money where your TA is!

Good luck out there.