Please click on the chart above. This is the Year 2012 Market Crash that all the bears are wishing for. A nested Head & Shoulder top stretching back to April 2010 suggests a 40% drop for the SP500 to the 750 to 800 region if this pattern unfolds. I am NOT saying this will happen, but I want you to be aware of what is possible. In fact, short term I believe the negative price action this week represents phase-2 of the 3-phase move higher from the early October low. The sp500 has now retraced about 1/3 of the move up since Oct 4th which qualifies it to be phase-2 but the duration of this correction is too short. Hence I think we will see prices consolidate in the 1185 to 1220 region with 1212 being the key pivot to allow for a time correction before prices are ready to resume the move higher for phase-3 that will target north of 1300. Phase-3 higher should begin on or before Friday of next week.
What will negate the year 2012 crash pattern illustrated above? A price rally that not only takes out the year 2011 neckline at 1275 ish but also breaks out higher through the trendline connecting the May 2011 top and July 2011 top.
Also on my radar: Euro Stoxx support at 2150. FX implied volatilities have jumped higher since Friday and are now about "fair". As mentioned previously, cratering implied volatilities usually suggests a risk top is at hand and that does seem to be the case.
2 comments:
Another great post, MK. Good that you pointed out that this H&S pattern is only a possibility at this point. Once price breaks the neckline, the pattern is very reliable--93 percent of the patterns that break the neckline send prices much lower. And more than 60 percent hit the measure-move target. But, as you've mentioned, it is NOT a H&S pattern until that neckline is broken. Until then, it's only a possibility.
Your last paragraph re implied volatitilies--you state that they have jumped higher and are now about "fair". Then you state that cratering volatilities usually suggest a risk top is at hand "and that does seem to be the case".
Are you saying that you believe a risk top is indeed at hand (even though volatilities are no longer cratering)? Or just that when they do crater (like they did recently), it does seem to be the case that a risk top is at hand?
By Friday last week, Oct 28th, implied vols had sold off low enough to reach mean reversion levels suggesting a tradable low (in implied vols) were imminent. Typically, implied vols bottom out when risk tops out (high in SP500, high in AUDUSD, etc.). This is precisely what happened. I shorted the SP500 futures Sunday night and covered yesterday based on this implied vol signal and the hourly patterns in sp500 futures that unfolded Sunday night. Currently implied vols are fair, not low enough to buy nor high enough to sell. No signal.
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