Here’s our road-map for what we imagine will be the next quarter:
Let’s start out with the most basic line, A, which was as we called it this summer, the Big Kahuna, the March 2009 trend-line (we posted around a dozen posts on this) . Once we broke that line sentiment changed and traders like us who had confidently bought the dip for 2 years now ceased to do the same.
B represents the current $ES_F low of 1077 and the bear flag we find ourselves in — too early to see how this resolves. A break-down to the next big level of $SPY 102-104 is of course one possibility (lower blue box at C) but so is the idea that we will create a new trading range (upper blue box at B). Note that on the $QQQ the recent rally went all the way to test the underside of the 2009 trend-line — one that was immediately sold by traders fading resistance.
D represents the hope of the bulls which is the possibility of the creation of a new range and eventually a break of the recent trend-line down.
Click to enlarge.