I seem to have hit one of those ocassional moments of clarity with regard to market action. Anyone who followed the projected market path drawn on the 60-minute SPX chart in Thurday's Triangulation post pretty much had a road map to Friday's action. It was fun, and reminded me of that moment in They Live when Piper first put on the special sunglasses, and the old hag in the grocery store whispered into her watch, "We've got one that can see!"
Here is an updated view of the road map:
By classic technical analysis measurements, a break lower out of this consolidation projects the S&P 500 to 450. However, I do not think this outcome will occur (at least not this year). One of the primary challenges a trader faces is to step back from the charts and ponder how the market could fool the most number of people. Currently, I see two major groups: those who are viewing this triangle consolidation as a projection of much lower prices and those who believe... or at least are hoping and praying... that the October 10 low will hold. The market can fool the most people by making the bears believe they are right and showing the bulls they are wrong... and then whipsawing both groups. I'm suggesting that the market will presently break sharply lower, perhaps marginally taking out the 2002 low, and then end-run the triangle to start the multi-month rally discussed earlier in the week.
There is a precedent for such action, which was also revealed in the Triangulation post. Let's have another look:
The similarity is spooky. The last three candlesticks are nearly identical, and the current triangle formation supports such a breakdown. If stocks do start to break hard in the coming 2-3 days, we traders are going to have to be mentally prepared for a potential low right when it seems the whole world is about to unravel. Personally, I will cover half of any shorts I'm holding as the SPX breaks the 2002 low. When to go long? That's an even harder question. Perhaps when some of the pusillanimous hosts on CNBC start crying. I don't know. I'm not sure trying to catch a bottom would be wise. If a multi-month rally is, indeed, on the horizon, missing the first 10% of the move will not hurt you. The '29 market rallied 50% into 1930 before rolling over into its death spiral.
On the flip side, should prices reverse higher and break the triangle to the upside, you won't find me chasing it. At that point, the bears would be despondent and the bulls, celebratory. I would then be quite concerned of an end-run the other way. We'll just have to step back and regroup in that scenario.