Weekend Update - Part II: When The Bough Breaks


Kudus to me for stopping Friday's accelerating decline into the close by simply posting a rare late session warning to get fully short. Maybe Monday I'll post, "Get Long On Triple Margin," and we will finally get that elusive Wave 3 of 3 down that triggers circuit breakers (see below) as our puts go ballistic. 

Key Levels

Drawn on each of the S&P charts below is the line in the sand that needs to be closely watched next week. The breach of that line in any meaningful way will precipitate a blistering new leg down. The line has held three times now since late October. When it breaks for good, expect a flood of selling.

 Key Levels (Rounded Down) : Dow = 24,000; S&P = 2,600; Nasdaq = 6,800



Long Term

The bull market channel has been left far behind, or far above to be precise. The first leg down has bounced off of the support line twice and price has fallen to it again as of the close on Friday.  


Intermediate Term

When price breaks down below that support line the next leg of the bear market begins. If you count the legs as waves, Wave 1 was down from the middle of the bull market up channel, followed by Wave 2, the sideways W with the indexes now perched tenuously on the edge of a wobbly branch, waiting for the next leg:  When the bough breaks, down will come prices, Wave 3 and all.

Short-Short Term

This is the S&P 5 minute chart zooming in on the final two tests of the support line. Let there be no mistake about it, that is a critically important line in the sand.


Limit Down

"Limit Down," refers to the circuit breakers, where there are temporary stops in trading at -7%, -13% and at -20% from the previous day's close. At -20%, the market closes for the day.  Before this bear is over, there will be some limit down days. There will probably some days where there is no trading at all, limit down from the open. As a general rule until panic sets in as evidenced by a Limit Down day, there is more downside to come.

In-between scary declines there will be some dramatic rallies, like the one on Thursday when the Dow rose 700 points off of its lows in half a trading day. The best thing to do on days like that: Nothing. By the end of trading Friday prices were back down to Thursday's lows. Sometimes it may be best to just shut off the TV and the market while occasionally checking our website and/or your email for any "need to know" Alerts. I'll be sitting here (with my Alprazolam) watching it all unfold for you. It's what I do. 


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