The Market Could Initiate a Total Collapse at any Time

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The words that make up the title of this post are not mine.  They are Larry Pesavento’s words and I happen to agree with him.  I continue to believe that this is an extremely dangerous market and that it is an environment of a weak and nervous bid.  We literally could start to collapse at any time.  We were able to drop almost 1000 points in a handful of minutes on May 6, 2010.  Dropping 2000 points in double that time does not seem impossible either.  This market is building a catapult or a spring board for the next big move.

I have spent a good amount of time over the weekend contemplating the bearish and bullish sides of the market and so I am just going to write out a potpourri of thoughts in the paragraphs ahead  and also comment on today’s closing price action.

Why Should the sp500 go to 1150?

I think it is an important question.  It seems like every technician in the world expects the market to zoom to 1150 to create a right shoulder of a larger head and shoulders topping pattern.  I admit I have considered this possibility and wrote about how I was expecting that as well after the reversal of a week ago.

But after some contemplation I am starting to think this is much less of a possibility and that the advance that started a week ago may have either topped out today or by the middle of this week. 

Why?

The sp500 going to 1150 or 1170 would make it much too easy for those who are currently trapped to recoup a large portion of their losses.  Since when is the market Mr. Santa Clause giving previously greedy bulls all kinds of second and third chances to bail out break even ?  It does not make any sense for this market to do that if it is in a persistently impulsive bearish trend as I predict it is.

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The Tape action was VERY UGLY today

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This may be the most significant post I have done in a long time here at BestOnlineTrades.  I can smell a big drop coming, I can taste it, see it and feel it in my bones.  This is how the trading dynamic is setup up right now.  Let’s not forget how the first flash crash on May 6, 2010 started.  If you were looking at it real time you could see that it started as a simple calm looking DOJI candlestick but then transformed into a monster in minutes.

This may be what transpires over the next few days.  CALM teasing action to tempt the bottom pickers and the technicians into going long because the market is ‘oversold’, but then the bottom falls out seemingly out of nowhere.

Today’s tape action in the market may have provided the final nail in the coffin of evidence that we are about to plunge badly again, possibly in crash type fashion or just continued waterfall fashion with huge swings in both directions but ultimately a lot lower.

Make no mistake about it, I am extremely bearish on the market right now and today’s tape helped to remove any lingering doubts I may have had.  I see the market at a juncture right now where it must blast higher by several hundred Dow points, otherwise it will totally collapse.  That is how well defined it looks to me right now.  It is either or, and nothing in between.  If I am wrong here then I will be wrong very badly and we will see this market shoot higher very fast and very wide.  If I am wrong, then it may have to do with volume, because the volume was quite light today and makes downside follow through look suspicious.  However the low volume is consistent with the symmetrical triangle pattern and descending triangle patterns I have alluded to before.  So you can see a surge in volume come out of nowhere from these patterns.

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Sp500 seems like it is ready for a New Panic Cycle

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The wild volatility over the last 2 weeks I think had a lot of people probably feeling like they just entered the spin cycle in a washing machine.  The market was showing huge signs of strength and then equally huge signs of weakness back and forth.  In the final analysis I think we can basically say that the last two weeks the market has basically traded flat.

But a market that trades flat still means something.  It means the market has created sideways cause ( or energy) for the next big move.  It looks more and more like that next move is going to be down in a new panic cycle. 

I can give you plenty of reasons why the market could still get a bounce to the 1100 to 1150 range but so far it has already tried to bounce above the 1100 and has failed.  It may try again (especially considering the extremely heavy oversold closing Arms value we has on 6/4/2010) but my instinct tells me it will just engage a new panic cycle starting tomorrow.

If you look at the 2/10/2009 date you will see a similar market basing period that looks quite similar to the period we are in now.  Also notable is that on that 2/10/2009 there was a similar very high closing ARMS value but not nearly as high as 6/4/2010.

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I have a bad feeling that the Gold Price will get hit tomorrow

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The gold price is in a very touchy situation right now based on the weekly chart and I have a bad feeling right now that gold will get clobbered tomorrow badly on the employment report.  The daily chart of the SPDR Gold Trust (ETF) shows a recent up move retracement on very light volume.

The monthly price swings are also showing me that we have a sell signal based on volume on the GLD.

There is also a very ominous looking weekly price divergence that is developing which could turn into a confirmed sell signal in the weeks ahead.  I think people forget that gold can be extremely volatile to the down side.  It has had an superb run since the 2001 lows, but like any market nothing goes up in a straight line.  Markets need to build sideways cause after huge spikes upward as a foundation point for the next leg up.

If in the weeks ahead the SPDR Gold Trust (ETF) breaks below the 98 level then it is going to put a serious 1st nail in the coffin of gold for perhaps 2 to 3 years and we could see a 50% decline in the gold price from the all time highs.

This is exactly what happened in the mid 1970’s.  Gold went from 200 down to 100   but then after 100 it shot up to 850 for the final blow off run.   So if we break down to 650 then it could very well be the stopping point before another huge run to 5,500 gold price.  So the question is how many in the gold crowd want to sit through a 50% 2 year decline in the gold price ?  A 2 year 50% decline can be a very painful and emotional burden and cause one to doubt the entire premise of the bull market in gold. 

But a 50% decline would setup up massive cause and pivot for a blow off run to 5000 5 years from now.

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Is it time to go Long Natural Gas UNG and Hurricanes

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I did a post a while back on the long term Natural Gas Futures chart because I was intrigued by the potential risk reward setup going into second half of 2010.  At the time I was considering the possibility that Natural Gas could continue to break down badly again and do a full retest of the mega bear market lows in the 2.5 to 3 range.

But Natural Gas has managed to hold the 4 level and has in the last two months managed to bounce off of that level with a sign of strength and show some conviction.  It appears to now be creating the right portion of the W bottom I alluded to in previous posts.

My sense now is that both Natural Gas and the United States Natural Gas Fund, LP UNG ETF have bottomed for good in 2010 and that we can expect to see a dramatic rise going into the second half of 2010.

The monthly chart of the the Natural Gas Futures contract shows that the RSI level has broken above and through the midrange 50 level after having touched support.  This was confirmation in previous moves out of these large W patterns and you can see where I reference it in the chart below.

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Here Comes the Bounce

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This morning I was looking at the 60 minute 20 day trading chart of the sp500 on Power Etrade Pro.  The last hours bar of yesterday (6/1/2010) was a big red down candle and it looked ominous.  So when trading started today I began to realize that there was not going to be any downside follow through.  Then I also realized that that big down candle was the right shoulder of a head and shoulders bottoming pattern on the 60 minute chart.

So the rest is history and now the market is in full bounce and short covering mode.

This was my original forecast after I identified the Adam and Eve double bottom.  But the action of 6/1/2010 was a really confusing head fake because that one day’s price action was enough to turn the daily MACD indicator DOWN and had me thinking we were setting up for total collapse without delay similar to the September 2008 period.

But alas, the market rejected that scenario and is now in full bounce mode off of this Adam and Eve double bottom.

I suspect that the employment report this Friday is going to be good enough to send the market higher and then eventually into the 1150 –1170 range.  The key question is how long this will take ?

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