Tighten Your Seatbelts

Not sure how many of you have ever been to Six Flags and pretended to have a fun filled afternoon getting flung around at nearly 5 Gs while you’re trying not to throw up that disgusting burger you ate just before and finally pass out until it’s all over. Strangely enough, the most scary part for me was never the ride – it’s that minute while you’re slowly climbing up before that first plunge. Let me illustrate:

Now, to continue with this somewhat graphic analogy – take the past year which we have (for now) labeled Primary {2} and you have a pretty good representation of that first climb up on big Titan. What follows, once gravity finally takes over, is not pretty and will at times be quite violent and jarring. Even if you came mentally prepared you still will feel a bit wobbly on your legs afterward.

We are now nearing a point where this market may fall off the plate at any moment and not recover for years – this may happen to tomorrow, a week from now, a month now. When exactly I am not sure and given the constant gaps and overnight tape banging is difficult to predict, but it will happen this year – that much I know. Why? Because the writing, my dear stainless steel rats, the writing is on the wall. Which is why I am now completely focused on the long term – and I have been pretty prolific about fading most of the short term and to focus on getting positioned to the short side on a long term basis. The charts I am looking at are crystal clear – let me show you:

Many of you seem to have confused my statement on the daily TRIN – and it’s a vivid example of how bar or candle charts can sometimes be deceptive. Which is why I make it a point to always look at line charts as well. The chart above is one for posterity – this is the 3rd highest closing reading in over 20 years.

Even my 10-day MA chart is now completely hosed. But what’s even more interesting here is that this reading far exceeds anything we saw during the 2008 crash. If this is what we see this far up still, then I wonder the readings we’ll get once Primary {3} is in full blast.

Same story on the daily Zero – that spike down was beyond belief. This is an extremely bearish signal and not something we would see inside a bull market correction.

My CPCE 10-day MA chart is not as exciting as the prior two but it shines in subtlety. What’s interesting is that the MA is still dropping despite the fact that seven trading days worth of upside progress was wiped out in merely a week. There is a possibility that we will see a similar scenario as the one highlighted in yellow which shows comparable conditions right before the final drop into Intermediate (5).

Copper futures also continue to point down – notice that nice little divergence just as we made a new weekly high.

On the VIX chart access to a reading below the BB center line has yet again been denied. If the bulls want to experience even a temporary relief they must breach this mark and hold it. However, the 2.0 BB bubble will soon start to go sideways – and that may mean that 30+ readings on the VIX may be here to stay for a while.

I have been split on whether the recent A/D ratio pattern mostly resembles the 2008 drop or the ramp up in March 2009. Unfortunately the beginning of the pattern looks similar but it seems to be swinging towards the 2008 example.

Here is where we are today. On the prior chart I have highlighted our current approximate location in yellow. Frankly, any input on this would be appreciated – it’s easy to get seduced by wishful thinking. Even if you dismiss my fractal theories what’s quite apparent is the volatile pattern on both the A/D and the D/A ratio panel – it’s quite apparent how the bears and bulls are exchanging punches. The question I propose is simple: Is this really the type of volatility one would expect after an a-b-c correction (i.e. if the pattern from the annual high was a zig-zag down)?

On the wave count chart I have three possible scenarios – this time with a 2:1 bearish ratio. You can ignore the difference between blue and green right now, the end result is nearly the same. Which is stampede of biblical proportions.

The ‘money shot’ for all pundits right now apparently is to predict whether or not we are pushing back up or finally fall off the plate on Monday. Well, I for one don’t give a rat’s rectum what the tape does tomorrow – I can accommodate various scenarios which are shown above and should be fairly clear. What really matters right now are the charts shown above, and in particular the two I posted on my prior post on Friday. If you missed it, please make sure to go and check them out as they will mostly will induce an instant Viagra moment in any self respecting grizzly (or lead to a long term bout of ED for any hard core bull).

If we push higher I would now consider the 1130 line pretty tough to breach. The bulls lost a lot of momentum last Friday and this is something the would have to recover and then some. However, it’s not impossible and despite my comment on the chart please bear in mind that ‘technically’ we can push well into SPX 1200 readings without disqualifying the P3 scenario – only a breach of the prior high at 1219.54 can.

Bottom Line:

Admittedly we are pretty oversold on a short term basis. I would not be surprised if we make an other final rally attempt here next week. I cannot dismiss this possibility and despite all the long term bearish signs we need to give this thing the time it requires. But there is a clear possibility that equities will simply fall off the plate any day now, the conditions I have described would absolutely support this scenario, despite oversold readings on a medium/short term basis. Unfortunately crashes are but impossible to time/predict, so I suggest you continue sitting on your long term puts and do what bears should be good at doing: do nothing and wait patiently.

That’s all I have for you guys. No matter what happens tomorrow – stay frosty – stick with the program – fade the news – ignore the gyrations – think long term.

Cheers,

Mole