Klaatu Barada Nikto

I don’t want to put too much emphasis on a pre-holiday session but today’s tape left us with some evidence of a possible bounce. Let’s start by taking a look at the TRAN fractal I posted a few days ago as a map of what ‘should be happening’.

This excerpt taken from the ‘Book Of The Dead Market’ shows us on the brink of a market about to fall off the plate. I am sure that back in 1987 the tape was pretty oversold as well and that many momentum indicators available at the time were pointing towards a correction. However, Mrs. Market was not in the mood and decided to continue downward in post haste. It was almost impossible to predict back then and it is equally impossible today.

Why would the fractal break right here where it matters the most? Who knows – because Mrs. Market is a cruel and sadistic bitch? Or maybe Stainless Steel Hamster didn’t remember the password – or even worse – faked it?

Thanks a lot Hamster Boy! Next time – remember – Klaatu Barada Nikto!

Problem is of course – having a road map can be very helpful, but it can also be dangerous if you’re looking for a road in the wrong county. In any case – a significant deviation from our current road map will tell us that we need to accommodate a correction of some sort. Of course what brings all this up in the first place is that today’s daily candle looked and smelled like a reversal and didn’t exactly fit into the picture. But it’s not just the candle – it’s also where it happened. Let me show you what I mean:

Basic stuff – simple 2.0 Bollinger on the SPX. We breached the lower line and bounced right back. Now in some way this is of course a bullish signal but then it’s also a long term bearish signal. I know that sounds nuts – but would you rather see us close outside once or twice during a holiday weekend and then have to worry about a monster snapback relief rally?

Same story on the VIX – as you can see we touched that upper boundary and snapped back. Yes, that’s bullish for equities in the short term but medium term it also allows the current upper line to stabilize and possibly push higher. What we want is for Mr. VIX to remain inside and to continue upward – if you are put holder that is of course. What we don’t want is a close deep outside and to possibly face an equities buy signal that leads to a massive reversal and more theta burn for the bears.

A bounce here would actually be quite helpful. My NYSE Adv/Decl Volume chart is pretty shot to hell right now. As a matter of fact it hasn’t been that low since the March 2008 low. I can imagine that this may freak you out – and does it for me – which is why my diagnosis is as follows:

Based on the fractal above and the situation we are now facing I believe that we need to proceed downward almost immediately. Since tomorrow is a pre-holiday trading day I am wiling to give this thing until Tuesday (NYSE is closed on Monday), but if there is any significant sign of strength tomorrow or Tuesday then we probably have to sit through a counter rally of yet unknown degree. My best guesses based on my fibs and the wave rules are threesome:

Clockwork Orange: Down down down – Minor 3 of Intermediate (1) will get us below 1000 on the SPX and then some. Again, this has to happen rather fast as we are running out of time before buying interest will step in with strength.

Soylent Blue (and it’s slightly more bullish clone): We either are painting a Minuette (ii) or today was the low of Minute {i} which would be followed by Minute {ii}. The latter is the more bullish scenario – the former is basically a more pronounced sub-division. Pretty much academic as all of them point lower.

There is also miscellaneous evidence in form of the Dollar (DXY) which is pushing down, a Euro (AUD/JPY and EUR/JPY) which is pushing up (although equities have been lagging thus far), Gold which was dropping hard today, etc.. All that can be overwhelmed by a good old fashioned banana slip as evidenced by the 1987 fractal – but the prior example shows that there was not much lingering around. Neither should that be the case this time, otherwise the fractal either breaks or at minimum we need to consider a slightly modified scenario. Which would be reasonable – as one can’t expect a fractal pattern to be accurate down to the last candle. Nevertheless, Clockwork Orange does not have a week or more to sort itself out – it needs to happen soon – and by that I mean next Tuesday or Wednesday at the very latest.

In anticipation of a short session for everyone I would like to take this opportunity to wish all of you intrepid stainless steel rats a most excellent and relaxing Independence Day. I only wish our country would be in so much better shape – but maybe the looming depression will be an opportunity for all of us to put our iPhones and Crackberries down, pull together as a people, throw out all the bums, and to again revert our great nation back to the place I decided to immigrate to twenty years ago. A lot has changed since then and unfortunately very little has been for the better – our civil rights have been significantly curtailed and our economic future squandered by short term thinking and rampant corruption in the private and public sector. Much effort will be needed to once again return our nation to the values it once stood, fought, and sacrificed so much for. Start locally – talk to your neighbors – educate them – and help each other to prepare for what’s coming. Hot dogs and red/white/blue flags do not represent the spirit of what our nation stands for – it’s up to us – every single individual to make this nation a better place. Remember the enormous sacrifice the founders of this country had to bear in order to escape tyranny – and then try to live up to it. Our motto and message to Washington should again be the one we started with:

No taxation without representation!

Cheers,

Mole