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Bottomless Pit Scenario

S&P downgraded the US Credit Rating to AA+.


At first glance yes. But that is the long-term.  The short-term T&C credit rating is still AAA for the next few years.  At least that is my interpretation of the S&P full text disclosure.

It is the President's and Congress' credibility that had been effectively downgraded. 

How the markets react to this 'downgrade' remains to be seen.  When fear grips the markets, earnings fundamentals goes out of the windows and panic selling will follow that will generate more fear and more panic selling to follow.  A Death Spiral could happen at this very moment and for these medium-term Armageddon Scenarios to make initial headways:



FOMC meeting is Tuesday.  Expect the airwaves to be filled with possible QE3.

There are tools by which chart technicians can assess the short-term situation for a potential bottomless pit on intraday charts. 

One is by using Elliott Wave Method:


This wavecount is based on normal run rates with an extended iii-rd wave and an unusually over-extended 3rd.  It can get less worse or can become worst.  Worst case is that the waves go into double extenders and/or go into sustained over-extended runs.  But then when over-extended runs do happen, 90% probability at least 61.8% of the over-extended run will be retraced and the whole over-extended 3rds or 5ths will be fully retraced on more than 80% of the cases - like what happened in the May 6, 2010 Flash Crash wherein over-extended 3rd got retrace by more than 61.8% but failed to become part of the 80% probability of being fully retraced.  The May 6 Flash Crash has far less subdivisions or sub-waves;  thus it was easier for the over-extended 3rd to be retraced by more than 61.8%.

The intraday wavecount of Armageddon Meltdown Scenario posted in previous Instablog is still valid with the 3rd not going as extremely extended as the one depicted on the chart:

any rate;  if above scenarios don't pan out as illustrated;  then better to assume that the run down is corrective triple combination rather than impulsive complex 1-2-3-4-5 and a possible massive short-squeeze bounce will happen if not a reversal rally.

Conventional Trend Trading;  the Holy Grail Setup is one way to trade the markets for the short-sellers at this moment:



The Holy Grail Method is to keep trend trading the market until it stops working.  Trailing stops are used most of the time since a single trend reversal run can lead to losses far larger than the profits that can be derived from a single setup.  The main benefit of trend trading is that the Holy Grail can work 2, 3 or more times while a reversal can only happen once in any given setup such as the 30min chart setup or the 240min chart setup depending on which one to choose and trade.

For the counter-traders who are trying to gauge the possibility of a trend reversal, monitoring the performance of their opposition can be of considerable help since a reversal will result in the trend traders to cover their shorts and usually will result in short-squeezes for those who stayed too long on their trades.  Most investors will come in later after the rally has already been established.

For buying potential bottoms, I usually employ divergence buys as illustrated on many intraday charts posted in previous Instablogs.  When the price structure becomes too hard to count;  then waiting for a 1-2-3-4-5 rally on the 15min to 30min charts then buying a reluctant and time-consuming A-B-C pullback is the better trading strategy.

*  This is the type of trades where bulls make money on a trend reversal, bears make money on their successful trend trades, and the pigs who stayed too long on their positions will be slaughtered.

Nobody knows what will actually happen in the future.  What we can do as technical analysts is to speculate for possible outcomes rather than hope and pray things will go the way we feel or think about. 

Let the markets decide.  If one of our speculative analysis proved out to be a high probability trade;  then we will have better chances of entering the correct trade at the earliest possible time and possibly maximize our potential profits for the future or to eliminate/reduce potential loses if our analysis proves wrong.

For the medium-term to long-term bulls;  all is not lost:



The SnP monthly 50ma support proved successful in creating a new rally trend after being tested repeatedly in 1978, 1980, 1982, and 1990 then remained unchallenged since then until year 2001.  Since 2001 the 50ma proved to be the Great Whipsawer. 

This is the first opportunity after the March 2009 bottom for the bulls to use the 50ma as a potential trend setter for the upside.  The weekly 200ma is printing at 1057.81. Close but no cigars (yet).  Dow Jones' monthly 50ma support is also worth monitoring.  For now, Dow Jones is testing the 27.2% retrace support for the March 2009 to May 2011 rally.  All those supports will be broken with ease if we go into Armageddon Scenario.


Basically, we are back again into the Twilight Zone with a downward push as indicated on the monthly chart RSI Indicator for the SnP500.  Anything can happen so extreme caution is now the name of the game for long-term traders and investors. 

For those who were able to buy at or near the March 2009 bottom;  there is no cause for panic.  For everybody else;  this most recent sell-off can be considered as another buying opportunity to avail of price discounts.  That is, assuming that no Armageddon Scenario is going to happen right now.

Good Luck.

I'm holding on to my 2/3 SSO Swing Trade and the YM Intrepid Trade of Friday just in case we do have a reversal.  If we break down Monday, then I will unload the swing trade for a loss. 

The YM trade has trailing stops to ensure at least a tiny profits if a meltdown happens during the Asian or European session(s).  Then try again to buy a divergence signal since the FOMC meeting is in Tuesday.