Wednesday, February 23, 2011

Follow thru!

Today SPX had a nice follow thru to the decline we had yesterday.  SPX was +3 by 6.45 and that was the high of the day.  A steady decline took it to  low of the day at  1299.5 around 10.20.  SPX almost captured 75% of day's range by 12.30 but went on to close at 44% from the bottom.  RUT did worse it only got up to 50% on the counter rally and closed at 25% from the bottom.  Not a healthy sign.  Several long and mid term trend lines were broken today.   I am a little worried about the severity of the decline.  SPX has lost 44 points in two days.  The most in a while.   It seems rallies are just an excuse for the floor to sell than a genuine buy from others.  Because the pounding has been continuous RSI indicator is all hosed.  RS is essentially average of positive gain in 14 periods divided by average loss in 14 periods.  To make it into an indicator and create an RSI indicator use the formula  100 - 100/(1+RS).  If the declines are consecutive then the RSI is extremely low like now.  The theory is nothing lasts for ever so too many periods of decline should be followed by a rubber band rally.  But I remember the worst declines come when conditions are extreme already.  

This is my hourly SPX.  The top half of the channel in grey is where SPX has been trading.  Today it hit the bottom of the top channel and bounced back..  If SPX doesn't get a rally going from here and I don't think it will there is very good probability that it will go to the bottom of the bottom yellow channel and that is at 1180.   I have also included 2 tables.  The first  one if average points per hour in waves 1,3 and 5.  I only noticed it now and it has been steadily declining from 0.63 to 0.55 to 0.38 points per hour.  That also confirms too many candles and too few a points rally always cause huge red candles.  The bottom table is for wave 2 and 4 and they are 0.96 points per hour in both cases.  That was quite odd.
I believe the first phase of the decline is about to end and we should get a small rally after this decline is over near today's lows.  May be slightly lower.  I count that we have only done 1 2 3 and 4 and started 5.  At the end of 5 the rally we get would be an abc rally for big 2 followed by a big 3 drop.  
I am still bearish but will play the abc 2. They can be very deep and rewarding.  
and then I will short.  This may not be the mother of all drops but surely doesn't look like any small correction to me. 
Thanks for reading my blog.

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