Santa Rally Gone in Three Days UPDATED

The drop this week has completely retraced the Santa Rally, and the Dow is back to levels of mid-November. This is the fastest large drop since before the Hope Rally started. Here is the Dow chart from tonight's STU, where you can see the retrace way back to before the Nov "square waves" put us sideways for a month:

  

The drop has broken below all the trendlines up (see chart courtesy Walter Murphy). If it doesn't rapidly retrace back above the lower trendlines and stay above, it confirms a change of trend of the whole Hope Rally. The top would be in. This is what Chaos Theory says a "Bifurcation Point" looks like. 

This is also what Wave Theory says is a confirmation of a trend change. The drop is in five waves, with the first retrace a sharp one, and the second a sideways one - the rule of alternation in impulses. There was also a "recognition gap" today in the middle of wave 3 down, a typical occurrence: the "Oh Shucks" moment. This is clearest in the March e-mini chart (courtesy Kenny):

 

Normally I would say, since this is a wave 1 down at some degree, expect a wave 2 bounce Monday (which could be from the pattern of a Monday Pump in stocks) of 38-62%, with 38% more likely than the usual 50% due to the speed and severity of the move. That would suggest a 215 pt move Monday up to just under 10400, or 22 pts in the S&P to just under Sp1115. 

Yet, the wave pattern under that count has a relatively short wave 4. This raises the odds that we are still tumbling down. We would be in wave 3 down still (or some form of an extended wave 5 - Daneric shows an extended 5 count in the Wilshire 5000). If so, Monday could gap down. Fun! Or, it might enter wave 4 and go sideways for a couple of days, perhaps with violent swings up and down. Even more fun! Here is a more bearish count, of a nested 1-2 structure in wave 3 down (courtesy EW Trends):

My best guess is a 38% bounce Monday and Tuesday, which could either be minor wave 4 of the impulse down (most likely), or the wave 2 retrace of the whole impulse. Futures are fairly quiet in the after market, which somewhat supports the wave 4 count. The STU thinks we need one more "downward subdivision" to compete the move (which would be waves 4 and 5), or "possibly more" (which would be that scary nested 1-2 pattern). They point out some other factors, which I will leave for subscribers, except to mention that the type of breadth or distribution (churning) at a bottom has not been seen, which also suggests we will go below the intra-day lows today of Dow 10158 and Sp1090. That agina supports the wave 4 view

In a broadening top pattern, we often see an attempt to get back to the final high after the break down, but it fails below the high. Under wave theory, this is easily understood as the wave 2 retrace of the wave 1 impulse down. If we have a final 4 and 5 to go to lower levels, then a bounce, that bounce would be that wave 2, and would likely retrace 50-62% of the whole drop. (Reason for the different prediction than above - of an immediate 38% wave 2 - is the additional waves 4-5 down will slow the rate of descent.) 

As long as the overall drop is faster down than the rise, we confirm a trend break. Since this seems to be the end of the whole Hope Rally, it means the drop should be faster down than the 10 month rise off last March. This puts a "box" around the drop, that it should retest the lows within 10 months, if it is going to do so; a slowing of the descent means it won't in this wave.  Ominously, this places yet another Oct/Nov low on the horizon, and one coming right in the mid-term elections. If instead we slow the rate of decline, perhaps by having a roller-coaster year (down/up/down), this suggests the Mar lows will not be broken during this wave. Not an immediate issue, but something to watch to give guidance towards where this drop ends. 

Comments

[Diamond Jim]

Wednesday is the State of the Union Address. The last thing Obama wants is a crash as a backdrop to his talk. I have to believe the government will do everything possible to support the market until then.

[Canadian Money]

SP500 ET Bear Fund now up 11 % from Prechter's recommendation to go 200 % short. Volume is climbing on the breakout as well.

Nice call Bob!

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=ca%3Ahsd&sid=0&o_symb=ca%3Ahsd&freq=1&time=4

[Greg]

Canadian Money, I hear you but to be fair, you should mention too that his followers, if operating on a margin account, wouldn't have been left with any money to bet had they followed his advice over the last several months.

[tony]

thanks DG for your reply in the previous post.

[Anon]

We had a close outside the Bollinger Band so there is a reasonable chance for a pop back Monday. We fell right into support at 1087-90 (ES). The length of the break hasn't exceeded that of previous breaks yet. A potential drop to 1070 with a close back above 1090 in the same day on Monday is also possible.

[Hank Wernicki]

Monday:

http://www.elliottfractals.com/SPY_1_23_10.jpg

[upstart]

For a guide, I'm looking at the (larger version) ending diagonal that began late 2006 and ended early 2007. The aftermath quickly retraced to below where the diagonal began, as has already happened here, then rallied sharply, followed by another plunge to a marginal new low. After that the rally resumed to late 2007 - in this case it will end late 2010.

[jeff]

Yelnick and All,

I must "chide" you for the repeated use of the term "Santa Rally" on this blog.

There was no "Santa Rally" this year.

There was, instead, a "Halloween Rally",that stalled out in mid-November. I mean a real, bad stall where it went horizontal for over a MONTH!

Then, in order to "manufacture" a positive market vibe for the Holidays, somebody (Fed?) murdered the USD rally JUST IN TIME FOR CHRISTMAS. This is what allowed for the Halloween Rally to resume up to this week's triple top.

You see, a "Santa Rally" is based on "good feelings" and murdering a dollar rally does not feel good whatsoever.

Now, that the Halloween Rally is done, and I have "unmasked" that bogus Santa Rally, we can look for a nice low just in time for Valentine's Day.

Jeff Clark

[rr]

I covered shorts late Friday at the low. I think a 2 day 38% retrace to 1115 is plausible, which means a wave 3 beginning Wednesday which takes you all the way down to 1018. Gotta be positioned for C's and 3's.

[DG]

thanks DG for your reply in the previous post.

Sure, Tony. FWIW, the new method I mentioned gave a long signal on Friday morning. The way it works, the method can be early, but the trade ends profitably 2 out of 3 times, so I guess the odds are in favor of a high above Friday's high sometime in the next few days.

[robert]

The call for a bounce Monday is too easy. Everyone is expecting it. Longs dying to sell. Shorts dying to enter or re-enter. Worst of all it has become "traditional." I conjecture that any bounce Monday comes in the last half hour (but stalls by noon of the following day or possibly in the overnight futures - a turn around, turn around Tuesday if you will). It will be over in a flash.

I still believe we are in for a multi week decline (I like Valentine's Day too as an interim bottom) before the big bounce so getting short on the stalls or minor rips is still a no brainer for those with patience, confidence, stops and an appetite for calculated risk. If the trend is changing, getting major short on the inevitable sharp w2 abc correction (after a clean 5 down) and brought to you courtesy yesterday's true (bull) believers will be the ticket to bear balance sheet redemption. I am also looking to the behaviour of gold and silver since November 30 as somewhat of a template for the broader market going forward. Beware the Ides of March.

[Mamma Boom Boom]

>My best guess is a 38% bounce Monday and Tuesday<

I agree. I'll add that I have a short term indicator that is the most oversold I've ever seen it.

[Kevin Martin]

I think wave [i] is almost over. VIX is stretched more than three standard deviations (peaked at four!) P/C ratio at a 2-month high. Wicked short-term oversold. You could say there's a breadth divergence. No momentum / strength divergence yet, which lends credence to the idea that we have a small-degree iv-v left. Here's my best guess:

http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3568637

If we get more big down rather than a wave [ii] bounce, then I think we had a very small [i] and [ii] and are already in [iii].

Best of luck all.

KBM

[betterdays]

Fed meeting next week... big traders waiting to buy at wholesale Monday only to sell back for retail Tuesday or Wednesday. 1 week more of decline with largest drop still coming.
I really miss Richard Ney. His commentary from way back still valid in today's markets

[yelnick]

Hank, nice fractal! I guess you are in the 38% bounce camp.

[Hank Wernicki]

Maybe more, reminds me on March 13th 2009

We'll see Monday or Sunday night

but it may be a good trade for a turn to say the least

this is very unusual

[Highflyer]

Hank, interesting chart! Thanks for sharing it.

Historically, how often have you seen a patterns like this.

What do you think the probability is of the pattern repeating itself in this cycle?

[Marketrend]

My 2 cents. Best for all. Cheers!!
SPX - We're In A Secular Bear Market. 1040 Key Number
We're In A Secular Bear Market Like Japan.
Long term view - TOP 1150 -
If this is the Top and I believe it, when look this chart, we had last year a pullback of a BIG BEAR MARKET SECULAR. why??
Chart we have two indicators - EMA and RTS.
EMA if price close > EMA --> Bull Market
If price close < EMA --> Bearish
RTS give me confirmation Bull Market or Bear Mrket.
Beas until now neutral because price above EMA but RTS below yellow.
If price close montly below EMA change beas neutral long term to >> Bear Market.
If close this month below low of last month (1085.89) win momentum to test EMA 1040.
Chart here: http://3.bp.blogspot.com/_MJqKtyMMr28/S1rtWTHxeJI/AAAAAAAABes/FtzjXWm2Vbw/s1600-h/SPX+monthly+22012010.jpg

VIX - The End of the Beginning. Bears are back!

this is a 52% gain on the VIX (weekly). Wow! Bears are back!
Close this week above EMA200 (red) but below EMA55.
Need two consecutive closes above blue EMA (27.86)
will open door to visited 40 first target, possible extension to 45
Chart here: http://3.bp.blogspot.com/_MJqKtyMMr28/S1pPMimIpCI/AAAAAAAABek/iBqfAr8qE-E/s1600-h/vix+weekly+chart.jpg

DAX - Weekly - Top with two Bearish Signals

Dax have here a big problem. Bearish divergence with a new sell signal MACD. This is bad...very bad...
Can see last update Daily chart http://followmarketrend.blogspot.com/2010/01/dax-like-rocket-targets-around-corner.html
weekly chart here: http://4.bp.blogspot.com/_MJqKtyMMr28/S1o6BVriIxI/AAAAAAAABec/R9nv5tgkr0g/s1600-h/dax+weekly+21012010.png

Big trades for all.

[Mr. Panic]

Friday's action puts the market at pt 26 on the Three Peaks and a Dome House pattern with a bounce to ensue to complete pt 27. The bounce should last a couple of days like it did off the top in August 1987 (actually it was one day up followed by a monster intraday reversal the next day following a 3day decline). The last little rally off the December's low (11th) which completed last week finished off the dome pattern and formed an almost identical top to the August '87 top.
The markets began their freefall last week with the solar eclipse on January 15th. (Lunar eclipse preceded the solar eclipse at the end of Dec. opening a Puetz crash window) South Sea Bubble also put in a final B wave high in the area of Jan 1721 before the final collapse---(1721, 289 years ago or 17squared 0. Eric Hadik originally came up with the idea of 17*17 cycle going back to the South Sea Bubble as one of his reasons calling for an important top in 2007 and Gann seemed to have a preference for squares in his work (numerology)although I can't say I am a Gann expert. (SP also topped near 34squared (1156), 34 also being a Fibonacci number)

[Hockthefarm]

1030 or 870?

http://pragcap.com/technical-outlook-finally-a-breakdown

Hock

[Hank Wernicki]

Highflyer it simply indicates a turn until another fractal appears

Historically, one can find the fractals on any index.

This is one is rather glaring

[Highflyer]

Any thoughts about which index is the most overvalued?

[Highflyer]

Black Monday???

http://www.safehaven.com/article-15594.htm

[yelnick]

Highflyer - Nasdaq