A Knife That Cuts Both Ways

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The badgers were getting very angry yesterday and we saw wild swings on SPX, though in the end SPX closed at 1862, not far under the daily lower bollinger band at 1867. SPX daily chart:

141016 SPX Daily Trendlines BBs MAs

I finally identified the pattern for this move down from 1970 last night, and it was one of those irritating patterns that only really becomes clear near or at the end. That pattern is a falling megaphone and appeared to be breaking up at the close last night. We may see a strong rally set up at the low on this pattern and I have put the ideal options for that on the chart below. SPX 5min chart:

141016 SPX 5min Falling Megaphone and Poss Low Options

It was suggested last night that I was looking too hard for a rally here, but I am not still in a 2013 bull mindset. In a bear move like this volatility increases a lot, and that is why, counter-intuitively, the fastest moves up tend to be found in bear markets. The increased volatility works both side of the street and face-ripper rallies are a strong feature of powerful bear moves. We may well see one here. I’m not suggesting that a retracement low is made, and I don’t think it is at all likely that such a low is in.

What is supporting a rally here? Well RUT has been outperforming the last two days and has formed a very nice looking double-bottom. There is a similar setup on TRAN here. These could all break up together and deliver a face-ripper rally before the next wave down. You have been warned 🙂 RUT 60min chart:

141016 RUT 60min Double Bottom Setup

TNX made the double-top target at 19 that I gave yesterday morning. The first time I gave that target was on 24th December last year. I remember this prediction of, in effect, a huge rally on bonds this year was heard with polite disbelief, as everybody knew that bonds were doomed to tank hard instead. Unlike most others though, I had actually looked at what happened at the end of previous QE periods and here we are. TNX 60min chart:

141016 TNX 60min Double Top Target Made at 19

Hold the thought of that TNX chart in mind as you read my blue sky post this afternoon about the likely target if SPX loses support at the January low in the 1737 SPX area on this move. Just because it sounds insane does not mean it can’t happen.