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SEASONALITY: WEEK AFTER JULY EXPIRATION, DOW DOWN 7 OF LAST 11
- According to the Stock Trader’s Almanac: Week after July expiration, Dow down 7 of last 11, 2007 –4.2%, 2008 –4.3%.
- According to Sentimentrader: The S&P has dropped 20 of the past 28 years the day after expiry (however, the last four have been positive).
- According to seasonality chart from Sentimentrader, the next week is the most bearish week of July.
INTERMEDIATE-TERM: THE 2ND LEG DOWN COULD HAVE STARTED
The Friday’s drop was exactly what the time, price and pattern mentioned in the 07/14 Market Recap had expected. Especially the time target, exactly on 07/16, therefore, for now (pay attention to “for now” as it subjects to change at any time), it looks a lot like the 2nd leg down has started that I mentioned in the 07/02 Market Recap.
4.0.1 SPX Long-term Trading Signals, because clearly the weekly EMA(13) and EMA(34) had a bearish crossover, so today I officially downgrade the long-term trend to down from up. Does this mean a bear market? As usual, let’s check the historical winning rate of this weekly EMA(13) and EMA(34) bearish crossover. See chart below, the winning rate is very low but once a bearish crossover occurred, see red vertical lines, most likely there’d be a much lower close ahead, right? So although 4.0.1 SPX Long-term Trading Signals doesn’t necessarily mean a long-term bear, but at least the 2nd leg down can be expected, right?
If indeed the 2nd leg down has started (pay attention to “if indeed” because I’m not very sure yet. I’ll discuss this in the short-term session later), the chart below shows the estimated time and price target. For rough idea only, you don’t have to understand how I get those time and price target.
For the time target, besides the 07/27 and 07/29 mentioned in the chart above, also see the table above, 07/24 and 07/27 are Gann Day, 07/26 is Full Moon, 07/23 is Solar Term Date and see chart below, 07/31 is an important date too. So combining them all together, 07/27 to 07/31 are the most likely pullback time target. By the way, I’ve mentioned the 10/02 in the chart below in the 06/30 Market Recap. Even you expect the 3 of primary wave 3 bull, normally, the Fib 38.2% time retracement to the 1 of primary wave 3 bull (from 03/06/2009 to 04/26/2010) is needed. In another word, it should be very common for the correction we’re having now to last to 10/02. Even uses the mini mini time retracement Fib 23.6%, the retracement date is 08/02. So far, neither of those 2 dates are met, therefore, I think it’s still too early to speak about the 3 of primary wave 3 bull, agree?
Why mentioning the 3 of primary wave 3 bull? In the 07/09 Market Recap, I said because the retailers’ sentiment was way too bearish, so the rebound starting from 07/03 should be beyond normal expectation. Unfortunately, the retailers’ sentiment changed too fast, as this week’s AAII made one of the largest bull jumps in history, while in my forum some people even yell for the 3 of primary wave 3 bull coming.
I have no intension to argue whether there’ll be a 3 of primary wave 3 bull. At least the time, as mentioned above, for the current correction is not enough – 10/02 is still far, while 08/02 is weeks away, therefore the chances are not good that the 3 of primary wave 3 bull has started.
Besides the time, let’s see some other evidences:
Weak Michigan Confidence Reports from Bespoke, see red lines, even in a bull market, the next month wouldn’t be pleasant.
The latest Mutual Fund Cash Level from sentimentrader. In another word, Mutual Fund managers don’t have extra cash to make the 3 of primary wave 3 bull yet.
The Liquidity Injections flowing into the market from M3 and Foreign sources (courtesy of stocktiming). So far the liquidity inflow is no compare with the March 2009 liquidity inflow. To me, it does not look like a new bull has kicked in.
So to summarize, chances for a 2nd leg down is pretty high. Because of the liquidity inflow wasn’t enough, so it doesn’t look like that 3 of primary wave 3 bull has started, at least the current correction time isn’t enough. Instead, if we see violent sell off the next week, be careful of a possible 3 of minor wave 3 of 1 of primary wave 3 bear, although I have no intension to argue whether it’s a primary wave 3 bear now or not.
SHORT-TERM: CPCE ARGUES FOR A TOP BUT VIX DISAGREES, SO BULL STILL HAS HOPE
Although theoretically, one day doesn’t make a trend, so the Friday’s sell off may mean nothing. But as mentioned in the intermediate-term session above, the time, price and pattern are all fit, so for now (again, pay attention to “for now”), it does look like the 2nd leg down has started. In addition chart 0.0.2 Combined Intermediate-term Trading Signals, is arguing for a top now. The signal was quite reliable.
Why I said again and again “for now”? Because I’m not very sure if indeed the 2nd leg down has started as there’re 2 charts giving bulls some hopes:
VIX Leads SPX. I’ve mentioned this chart recently several times, so far it worked pretty well. Looks like VIX didn’t conform the SPX’s sell off this Friday.
Phantom bar is a mystery. How it appears and why it works, I have no idea. However it does work most of the time if not all, so this chart also argues for a rebound, big big rebound.
If indeed we see big big rebound the next week, be sure to check chart 6.2.3 VIX:VXV Trading Signals. As VIX to VXV ratio is way too low now so I don’t think the rebound could go too far, eventually, there’ll be a 2nd leg down. The only question to me is just WHEN.
HIGHLIGHTS OF THE OTHER ETFS IN MY PUBLIC CHART LIST
