5 Day Forecast

When it comes to my market assessments my forward thinking ends at 5 days. I have no clue where the market will be in 20 and I really can't honestly say where it will be in 5, but I can look at the probabilities and deduce a plan of action for the short term. One of the benefits I've found from keeping the time frame on a weekly basis is that is doesn't commit me to longer term views that may become discordant to the emerging market data while preventing me from getting too caught up in the immediate such as today's gap down.

Last week I viewed the market as having a high probability of a bounce based upon a few characteristics that showed breadth on the short term time frame was stretched to the down side. The bounce did come to fruition and there were enough playable set-ups according my criteria to take action. Now the conditions are a little bit different and my approach much more cautious. The three criteria that I looked at last week were the SPX in relation to the Bollinger Bands, the percentage of stocks above their 40 period moving average (T2108) and the McClellan Oscillator(T2016).

Compared to last week the SPX has not fallen below the lower BB. From a reversion to the mean perspective, this is not yet extended so a snap back here should not be expected. Additionally the SPX has established a new lower low below the much watched 50 period moving average. This is a key moving average to many market participants who view this as a psychological barometer and a queue for long or short bias, so being under it should raise some concern.

SPX

The small caps were skewered today, down nearly 2.5% and have also confirmed a lower low below the 50 MA.

Russell 2000

The T2108 is below 30, but as I mentioned previously, the more enduring and sustainable rallies emerge when this is below 20. At 26% it is definitely coming close and should it my focus will be on alert for a potential turn.

T2108

Lastly, the T2106 which dropped below -200 last week sits at -120 after today's sell off, which is somewhat surprising given that the NASDAQ and Russell were down 2%+ today. What this indicates to me is that there is plenty of room in the next couple of days for continued follow through as this is not even close to being considered extended.

T2106

What this data suggest to me is that there is a higher probability the market continues to erode over the next 5 days. There may be a bounce, but the preponderance of evidence suggest it's best to treat it with suspicion. From a swing trading perspective I don't find the odds stacking in my favor at this juncture so capital preservation takes precedence in my trading plan until things begin to firm up. Ideally I'd like to see a rinse to draw down the mid to longer term breadth data that I look at such as the $BPNYA and $BPSPX which both closed the day at a still extended reading above 70. A drop of these to below 30 coupled with the T2108 below 20 followed by a breadth thrust with 500-600+ stocks breaking out 4% or more would be a scenario that would get me bullish on a longer term time frame.