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Trading Lessons

Unfolding Stock Market Crash Pattern

Stock-Markets / Financial Crash Nov 25, 2012 - 04:31 AM GMT

By: Anthony_Cherniawski

Stock-Markets

-- VIX extended another zigzag into its Master Cycle low on Wednesday and appears ready to advance above its Head & Shoulders neckline near 20.00. The second zigzag confirms this formation as a Cup with Handle pattern with a potential target above 27.00. This, in turn, may set up an even larger Head & Shoulders pattern that could propel Wave III to as high as 48.00, its prior high in 2011. This is setting up well for a crash pattern in stocks in the next couple of weeks.


-- SPX has made a near-perfect 50% retracement as of today’s close, as did the Dow and the Wilshire 5000 Index (an excellent confirmation of completion). It has also nearly completed a 30-hour corrective fractal (minus a half hour) and, by all appearances, the time frame may also be complete, or nearly so. Last Friday’s low is not the Master Cycle low we have been looking for, although it qualifies as a Primary Wave {1}. SPX is still in a crash fractal and a (pop with a) swift reversal or even a gap down on Monday will confirm it.

The Orthodox Broadening Top usually calls for a quick retracement back inside the formation before the panic begins, so that requirement is now met. Several major analysts have turned bullish again, which is also a good sign of a top. Note the decline in trading volume.

The NDX has pulled back to the 38.2% retracement level today. The interesting point is that NDX never made it back to its congestion zone, not even its 200-day moving average. The next visible support is Cycle Bottom support at 2478.66 and it has declined 4 points from last week’s level. The implication is that the Cycle Bottom may offer less support than we might expect at the next attempt to cross it.

ZeroHedge reports on retail investor (out)flows…and the Dow regaining 13000 on the weakest volume of the year.

--The US Dollar fell from its mid-Cycle resistance at 80.90, nearly reaching the ascending Triangle trendline, making a Trading Cycle low. The (calendar) pivot day happened to be on Thanksgiving day, so today it made up for the holiday. The next pivot high in the US Dollar may be as early as next Friday or may extend into the following week. The Cycles Model tells us that this may be one of the most powerful rallies in $USD.

It is easy to see how the above scenario may happen. Just ask yourself, where do you think the stock liquidations will go if stocks, commodities and the bond market crash together?

-- The Euro has made a second, less powerful corrective bounce today and may be ready for the massive decline we have been waiting for. The lingering at point 7 of the Orthodox Broadening Top formation has not changed the bearish outlook in the least. It has only delayed and worsened the outcome. The right shoulder of what may have been a Head & Shoulders pattern has become the handle of a Cup with Handle pattern. All of the downside targets remain viable.

-- USB continues its impulsive-looking decline as it completes the handle of a Cup with Handle formation. It has arrived at a very crucial juncture, since crossing beneath its prior high at 148.98 confirms the decline will continue. It may pause here and take a breather before continuing its decline. This is a powerful setup that may quickly propel USB down well below its Cycle Bottom support at 137.61. The Fed pump at the Head & Shoulders neckline on Sept 13 (at the Wave [1] low) has only delayed the inevitable and made it worse.


-- There are a lot of variations to the Orthodox Broadening Top pattern. A decline through its lower trendline is a must before it travels back up into the formation for its final retracement before crashing. What is called for is a retracement up to 50%. This one is considerably higher, but does not violate the general description of the Orthodox Broadening Top. A reversal from here would activate the Cup with Handle formation with a very deep target of 939.00, augmenting or probably replacing the H&S target. I would interpret the Head & Shoulders target as the wave [3] of I low, while the Cup with Handle target as the Wave [5] of I low.


-- Crude appears to have completed a reversal pattern above the neckline of its small Head & Shoulders formation. Although WTIC has found support at its intermediate-term support, it has not been able to rally above its 50-day resistance. The violation of the Head & Shoulders neckline suggests the Massive Complex Head & Shoulders neckline at the bottom of the chart will be also be breached. I have not seen so many multiple confirmations of the coming decline before this.


Although it is difficult to be entirely accurate, CRB may have completed an Intermediate-Term reversal pattern along with SPX, NDX and other indices. Today’s bounce closed at mid-Cycle resistance, which is common for an Intermediate Wave [2]. The next target appears to be the Head & Shoulders neckline, which may bring about a cascading loss of about 50% to the index.



-- The Shanghai Index has reversed from an Intermediate Wave [B] low that was slightly lower that Cycle Wave I at the trendline of its Bullish Wedge. It appears ready to launch higher as US stocks decline. The Fibonacci retracements are now on the chart for a reference. If it can truly be an inverse index, it may run to its Cycle Top while the SPX is crashing.

-- The CNX Nifty has emerged with a new downside target from a Cup with Handle formation, caused by the elongated and elevated wave II. CNXN has finally made a reversal pattern and broke its 50-day moving average support at 5656.90. I suspect that we may see a flash crash greater than the one in early October as wave III gets underway.

-- BKX has bounced from a new Head & Shoulders neckline and its 200-day moving average at 47.11, and completed nearly a 50% retracement from its high. There may be room for a small attempt at the Broadening Wedge trendline and Intermediate-term resistance at 50.55 on Monday morning, For practical purposes, the retracement is now over.
(ZeroHedge) This past Tuesday all eyes were on Bernanke as he gave his speech at the Economic Club in New York. Initially the markets sold off as no mention of further easing programs were mentioned but rebounded on his closing remarks. Out of the entire speech the media, and the markets, grabbed onto Bernanke's optimism about economic growth in 2013 as shown below.


Ansuya Harjani reported for CNBC: "In a speech delivered at the Economic Club in New York on Tuesday, Bernanke said 2013 could be a very good year for the U.S. economy if politicians reach a deal to avoid the fiscal cliff.”
Joe Weisenthal for Business Insider: "He correctly identified the central story right now: Which is that the economy seems to be on the verge of a breakout, and yet the Fiscal Cliff remains a major threat which he doesn't have the power to counteract."

Have a good holiday weekend!

Regards,

Tony

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As a State Registered Investment Advisor, The Practical Investor (TPI) manages private client investment portfolios using a proprietary investment strategy created by Chief Investment Officer Tony Cherniawski. Throughout 2000-01, when many investors felt the pain of double digit market losses, TPI successfully navigated the choppy investment waters, creating a profit for our private investment clients. With a focus on preserving assets and capitalizing on opportunities, TPI clients benefited greatly from the TPI strategies, allowing them to stay on track with their life goals

Disclaimer: The content in this article is written for educational and informational purposes only.  There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information in this article is the opinion of Anthony M. Cherniawski and subject to change without notice.

Anthony M. Cherniawski Archive

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