I am currently making a bold statement that if the market should find a way to re-approach highs, this will lead to a drop in the SPX to around the mid 1100's. Since I, like everyone else, cannot see the future, let me explain why this can and per my best advice probably will occur.

I prefer to use history to predict the future, along with some friendly TA of course. Let's look at history. Most traders probably remember the debacle in Aug 2011. Unfortunately for me, there were multiple warning signs, but I did not see them then, and lost my rear in process. Here is a weekly view of the market then. Notice we were in the closing gap of a rising wedge then as we are now. If you open this for a closer look, you will see the body of the candlestick finally pierce the top of the BB. 10 weeks earlier a candlestick body came close but not quite, then dipped to the 20 week line. Prices tend to take the path of least resistance and in a healthy market bounce between the top BB and mid BB bands. When the channel no longer allow prices to touch the mid without breaking the long term trend, then a correction is initiated.

SPX Weekly Chart from end of May 2011 (before correction)

The next chart is from Oct 2011, and shows the aftermath. Once the top BB broke a chain reaction occurred, a roughly 10% dive took us to the bottom of the Bollinger band, re-traced and then all hell broke loose. Within a two week time period, we experienced a 23.6% correction, which one week later became a 38.2% correction pretty much to the nose. 

SPX Weekly Chart from end of Oct 2011 (post correction)

The next chart is SPX today. You will see the same set-up, and it is possible that we have only established the left shoulder of a head and shoulders pattern instead of what I suggested which would be a double top, but the price will not be able to flux between the upper and mid BB much longer, so a break must occur. Long term rising wedges are classically bearish patterns just as evidenced in 2011. When they do, they do it with force and catch somewhere around the 200 SMA, which while unpleasant for anyone long at the time, is necessary from time to time, just like with the 200 day line.

Chart 3 - SPX Weekly Nov 2012

Each charting program has it's own mathematics, and for whatever reason bands and moving averages change a little. The last calculation I had, put us around 1150, but this one is closer to 1170 for both 200 SMA weekly, 38.2% fib line retracement since 2008 and about a 23.6% price loss.

A major difference between then and now is weekly MACD. During the Aug correction, the MACD broke zero right as the market pricing started to plummet. I do believe that we should keep an eye on the MACD, which stands at 22.68 and falling per Freestockcharts calculation. Leading up to August's correction, it took the market 6 weeks to drop from this same value, so maybe that could give us a similar time frame. It would also give us plenty of time to re-trace pricing back up towards the top after a bounce on the bottom channel. Like a swimmer testing the water before jumping in, pricing tends to deflect once before ripping through a long term trend line.

While 6 weeks may seem far off and a swing trader worries about 3-5 days, we are entering bear territory and action gets nasty and difficult to guide on a per day basis. That's why a cash position can protect your gains. We made it 23.6% since May's correction. That's not shabby at all. I was Bull up to the peak, but you have to have the patience and restraint to retain your gains when the market wants it back. It will lure and tempt you, but you have to trust history. It's your only road map.

I could probably get more into some of the other specs, but I am tired and we will leave it for another day. I hope this helps some.

***** UPDATE: Here is a look at the trend line break from the flash crash as well. It too broke the rising wedge and fell 23.6% only to complete the distance to 38.2% a couple weeks later.

SPX trendline break at May 2010




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