Crash possibility - continued .....

Market Commentary for next week:

Fundamental news that supports my drastic analysis is found in headlines; Not much analysis was necessary to prepare for next week, given that all the primary drivers that i listed in last weekend commentary have turned negative now.

• Italian bond yields have gone over the 7% mark for the 3rd time this month. German bonds are also taking a hit.
• It seems certain that there will be a breakup of  EU in coming months.
• Recession that i forecast is arriving probably faster than my initial estimated timeframe of Q1 2012, into europe first, which will spread globally. The manufacturing data out of china, released this week shows the lowest reading in about 3 years. This is the leading indicator.
• The two factors that are capable of stopping the downfall now are fed and ECB  quantitative easing.  In my opinion, fed is unlikely to act this year. Empowering ECB is not in the best interests of germany, and this is the question mark going into the EU leaders meeting on December 9th.

Amid this fundamentals, i keep open the possibility of  a late rally in december, which would give some credibility to the consensus estimates of institutions, that i pointed out in prior posting. GS estimate is looking good now compared to others. :-)

Technical Analysis:

The crash possibility has come true. In prior blog chart, we have gone from one trendline to the next within days. With clear break of another support line, we are in danger zone again, like august. With the break of 1160 support of last weekend forecast, another down week lies ahead. I am forecasting continued selling, with a high probability go to 1100 area, by December 9th. So, the outlook remains negative,  for next  week. With high volatility, i am also expecting some support numbers between 1160 and 1100 area to play out.   So, i will pick couple of numbers in between,   which have acted as support in october, for day/swing trading purposes. As i post this note, ES is at 1157.

Crash possibility

After some rest, i reconsidered the news releases, and macro issues.  Reconsideration of charts, in view of the macro risk analysis outlined in the prior post revealed a new outlook. Given the technical support levels outlined in the prior post,  a breach of critical support level is due this week.  Take a look at the chart below and the highlighted oval areas.  Here are the salient features i notice from this chart.

• Whenever  the support or resistance line in this zone is challenged in 2011, market has reacted very sharply in the days ahead.  The reaction in the days ahead  was strongly positive when it happened on Feb 1st, March 21st and october 14th.  But there are more incidences when the reaction was strongly negative, within days, upon break of the upper end support of this mid zone. 
• This chart creates the possibilty of a drop to 1160 within days, and increases the probabilities given in the prior blog. 
• The chart also tells us NOT to panic in the event of a crash day. Why ?  Because, it also tells us how to react to such a crash.  Controlling  emotions on a crash day is a critical part of trading successfully.
• How can you control your emotions ? By knowing a high probability event that is likely to follow in the event of a crash. Notice that, in each case, highlighted in the chart,  either the midpoint or the upper end of the crash day was tested within days.  So, this gives us a great way to play the volatility of a crash in both directions.
• It also reminds me that as long as i control my risk with moderate position sizing, i can endure the number of days that i need to endure to play the reversal test.
• It also reminds me that if  i am aware of the chart  comparing 2008 to 2011, predicting a turn  around  end of November/start of december,  then big institutions would know this type of analysis too.  So, the major turn around could be initiated with a drop, followed by a subsequence buy reaction in december. 
• The chart  gives us high probability support lines underneath, as i still beleive that we are in a bullish trend since october 4th, going into end of the year, as outlined in the blog with spx targets from institutions.  World leaders could step up anytime, to support markets, and market is not likely to go to 666 within weeks.
• If the scenario is to unfold, then we should see further decline of ES on monday. On the other hand, if there is a rally on monday, in the face of negative news, that would signal that the week is likely to head higher from the support area. So, this chart tells us how to prepare for a move in either direction.