The Big Question Is The Big Crash About To Happen?

Let me make the case for the Markets moving sideways for the next few weeks as this is how past major changes have been handled for the past several months and that a waterfall crash is not likely. (A caveat to that statement is that all bets are off if there is a war with Iran.) The past has shown that after a major move it is then followed by a sideways consolidation forming a channel until the next breakout.

Why the making of a channel is important reasoning is to have a look at the volume since January this year, which has been low to outright dismal. Low volume trading sessions are not likely to be the straw that breaks the camels back and create panicky market swings. In fact markets are more likely to be manipulated, controlled and traded in narrow ranges in low volume environments but that is another story line.

The market volume has been increasing since January, 2012 but at a snails pace and remains at 25% plus BELOW YoY numbers. This is an important notion when considering what the past several sessions of doom and gloom really mean for the trader and investor alike. The indexes and equities alike have recently fallen close to major supports formed months ago that also coincide with the all important 200 day moving averages. Both of these milestones are still slightly in the future in which I have no doubt will be tested. Count on it, they will be tested meaning more down!

The markets, in their new formation of a channel, could very well move up or down for the next several sessions but with a negative bias until the floor of the channel is stabilized. That floor will be the supports mentioned earlier and the coinciding, all important, 200 day MA. The top of the channel will be the resistance that was recently formed when most indexes fell through the ‘support’, very clearly identifiable (12740) in the DOW chart from Wednesday.

The channel of sideways movement is fundamentally necessary at this time because there isn’t enough influence (low volume) to move markets through supports / resistances that were formed by a large number of participants earlier. Think of it as stored energy that has to be dissipated before moving on. Just like the space shuttle reentering the atmosphere, it has to release all the energy used to get it into space. The market are absolutely no different and why folks pay attention to supports and resistance areas in making financial decisions. Just a reminder that the volume was also at these anemic levels prior to 2008 too.

Unfortunately, not all indexes and equities are created equal with some racing around like sports cars and can zoom to the finish line (support) and wait for the others to catch up. The Russell 2000 is like a little racing machine in that it has already reached that “major support” and its 200 day MA but has hesitated in going further. The lumbering large caps buses, like the DOW, are much slower to react and currently remain above these landmarks of decision, but need to be watched as they show signs of descending further. In the meantime, watching $RUT is important because it is already there and could be a VERY important precursor of investor sentiment in any movements it makes. If the Russell 2000 and other small cap indexes continue to fall below their individual, but major supports, it would be telling of further market declines as they race beyond the ‘finish line’.

There are other important signals to look at for the ‘where are we going next’ while we wait for the lumbering ‘buses’ to catch up. One is the OEXA200R indicator I watch carefully has now signaled that jumping ship is now in order. This is what I have been saying for the past month or so in Why Wait For May, Sell In April And Avoid The Rush and Today May Be The Last Day To Sell Your Portfolio For A profit.

Best Stock Market Indicator Flash Update: OEXA200R is now at 65%

John F. Carlucci

The OEXA200R closed out the day at the critical 65% level, the point at which it is advisable to sell all long positions in anticipation of a major market decline.

Not in my book, it has been an accident waiting to happen.

“And, though it’s probably fair to say that almost everyone was surprised with how quickly the European situation unraveled again, the notion that the crisis was probably not over was a reasonably widely-held belief.”

Other indicators like TLT and gold, sometimes referred to as ‘safe havens’, have been climbing nicely into areas that haven’t been visited since October, 2011and December, 2008. You remember what happened then don’t you? Also, the ECRI’s weekly index, looking 6 months ahead, has slipped from last week’s -0.1 to -0.4 today. Dr. Copper has been declining and certain analyst’s are predicting further weakness that essentially spells deflation something the FED’s are really scared of and would implement QE3 at a drop of a hat.

The 50 day MA’s have rolled over for most indexes and are headed towards the 100 day MA’s. Should they cross that will be a black cross signaling more bad news is coming and that a bear trend is now fully developed. This isn’t exactly good news for investors considering anything but shorting. The good news is that they haven’t crossed and the 50 day MA may just bounce off the 100 and head back up. It has happened before. The indexes approaching their 200 day MA’s HAVE to do the same thing and bounce off.

So what should you do, well while I can’t tell you what is good for your individual portfolios but I can tell you that if you haven’t unloaded your dogs by now you are in it for the ride. Which for the long term investors that will probably mean a wash in 5 years.

My thoughts are not to panic, just yet, and wait for the channel top to form by June or July coinciding with a summer rally. Then you can make some new evaluations and decide if it isn’t too late to jump ship. For me, I am looking for September to consider the World financial situation possibility considering any long positions at that time.

@leavitt:

. . . I felt some panic in the air yesterday. It’s the first time this month I sensed the bulls throwing in the towel. I could feel the frustration. I could feel the disbelief. Those who held looking for one last bounce to exit positions are flat out furious. But now that some panic has begun, we’re likely close to a tradeable bottom. Many breadth indicators I follow are at very low levels – levels that produced bottoms in the past. The bulls are dead, but soon the sellers will run out of ammo, and we’ll get a bounce. Have a plan, be ready.

In conclusion, my fellow traders and investors, some financial analyst’s recently have recently penned that ‘the bulls have had it’, ‘the market is now on a trip to hell’ and ‘hold on to your hats as the ride down isn’t going to be pretty’. Maybe true, but we still have to wait and see even with today’s minor drop in the books. The bottom hasn’t completely formed with a sizable blast of red volume to signal the end of any decline; that has to happen. The supports mentioned above haven’t been reached along with the 200 day MA’s so there is time to contemplate consequences of a further declining market.

Without a doubt the Eurozone’s financial issues are receiving a lot of attention, as they should be, and will probably be a catalyst in the US markets movements, but it isn’t over until the ‘fat lady’ sings. The supports have to be broken for the markets to proceed further down and that hasn’t occurred with the large caps – yet. However, I think I can hear her clearing her throat just off stage.

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Written by Gary