View: Things Are About to Get Ugly

Things Are About to Get Ugly

May 22, 2012 9:10 pm EDT

By Abigail F. Doolittle

Last night after writing about what looked like a Dead Cat Bounce, it made sense to go through all of the risk asset charts to mark the Bear Pennant in each to set visual parameters as to why Monday’s move was unlikely to turn into a real bounce.  Interestingly, some of the top trendlines of those pattern markings held perfectly, or close to perfectly, along with the top trendlines of Descending Trend Channels and this suggests the next move will be down.

“Down” as in the down? No just the day or two of down before a day or two of up and then the real down will begin as in the fulfillment of those Bear Pennants and Descending Triangles for 10%+ declines and a good reason to not play the couple of days of up.   Should this occur, conditions are going to become even more oversold than was the case Monday morning and not a good reason to think there will be a legitimate bounce in the face of horribly bearish charts that are showing reversing intermediate-term uptrends on severe near-term downtrends at the top of the long-term sideways trend. 

All in all that is a recipe for something bad, really had, to happen as stands out in the S&P’s long-term weekly chart shown below.

When looking at this broad view of the S&P, it is pretty clear that a 1-3% move up in the context of what it is battling – two bearish Rising Wedges and a fierce Double Top – means little to nothing  and this would be true of a 5-10% move up too as occurred twice last summer. What moved the S&P up twice last year for two legitimate but ultimately dangerous and failed bounces were bullish Falling Wedges and a pattern, interestingly, that is really not showing in the S&P’s chart this time around the déjà vu merry go round.

Rather what’s showing right about now is a horrible looking Bear Pennant that confirms at 1292 for a target of 1162 and below important support at 1186 suggesting that the next level of decent long-term support near 1087 might be searched out to take the S&P close to the bottom of that sideways trend.  From there if “there” should come, it will be interesting to see whether the larger Rising Wedge might pull the index down toward its sub-700 target with the help of the Double Top and its just-above-700 target.

Let’s look at the S&P’s Bear Pennant in purple, then, with its top trendline not the one marked in on the sly in grey last night but the Descending Trend Channel held well and so this chart remains bearish on its fulfilling Rising Wedge shown in the weekly chart with the severity of the near-term downtrend shown by the slope of the Channel.

However, maybe a Falling Wedge is lurking somewhere in the background, and an extended version of the Bull Wedge discussed a week or two, and if so, it begins to confirm at 1342 with safe confirmation at 1374 for a target of 1415/1422 and a pattern that is unlikely to be successful with the S&P’s reversing uptrend in effect so long as the index is below 1450 at the end of the month.

It remains my opinion, then, that yesterday and the bulk of today are not about a bounce, probably even for the exceptional trader, but about “consolidation that is warning of the likely continuation of the newly violent downtrend.”  This warning, of course, is the Bear Pennant and there’s the driving pattern in EURUSD that is so perfect, so deadly, it will hit its target of 1.1997 on confirmation of 1.2640 and probably pretty soon.

It will be the cold precision of that pattern in EURUSD, then, on an unraveling in Europe that will surprise even those who do not surprise with real life always stranger than fiction that will unfurl the risk asset Bear Pennants wide, far and down with the commodities probably first to go judging just by the charts of copper and crude below.
Copper’s chart has some level between $3.00 and $3.25/lb written all over it before its real decline might begin while crude’s Falling Wedge appears set to fail on its Bear Pennant that shares a $75/barrel target with copper.And despite the fact that these are just a few of the Bear Pennants standing out in the charts of equities and commodities,  this small array strongly suggests things are about to get ugly and possibly very ugly before yet another sideways spring is out.

As always, thank you for taking the time to catch up on my thinking.


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