Since I began this series on Wednesday night, the S&P 500 futures have dropped 36 points. So far, I have the correct analysis, and things still look bearish to me though there are some potentially bullish signs. Here is what SPY looks like now (click to enlarge):

SPY has fallen decisively out of its symmetrical triangle (bounded by the purple lines). SPY also has a new, steeper downtrend line (black) that has been in force for four days now. SPY needs to break above that black line quickly, and fight it’s way at least back up to the upper purple line. Otherwise, the bottom-fishing bulls may sell in a panic.

On the bright side, the SPY candlestick pattern is close to a bullish inverted hammer or possibly a bullish belt hold. It doesn’t quite fit either, so if you have an opinion, please post in the comments.

Previously, I had used the QQQQ’s more bearish descending triangle pattern to predict that SPY would fall out of its triangle, so let’s see what the Q’s are doing:

The Q’s broke way below the lower purple line in the morning, but then fought back above it and held there at the close. Not bad, however the support around 29.40 has been badly eroded, and the Q’s now have the same black downtrend line that SPY does.

Here is the IWM chart:

Like SPY, IWM has decisively fallen out of its symmetrical triangle. More ominous though is that it was not able to even tag its new black downtrend line. The small-cap stocks of the IWM are where traders go when they feel extra bullish, so this is not a good sign.

Here is the XLF chart:

The XLF fell out of its triangle a few days ago, and made a new closing low on Friday. However, it was able to peak above its black downtrend line, and does indeed have a bullish inverted hammer candlestick pattern. So, it does look like it could bounce on Monday.

Friday’s reversal was very impressive. However, SPY has made three impressive intra-day reversals in a row on Wednesday, Thursday, and Friday, and still the feisty bulls have lost ground. Will they keep fighting?

Friday’s reversal reminded me of the action when the initial low was made on Friday, October 10th. There was some selling before the close on the 10th, just like we had on the 24th. However, the selling before the close this Friday was more intense and began earlier. So, that looks more bearish to me, but I will be watching the action of the futures tonight for an indication.

On the Sunday following October 10th, the futures gapped up a little bit and trended higher all night before the giant rally on the 13th. If I see that again tonight, then I will conclude that we have a bullish hammer reversal going and will take profits on my short futures position. I will then look to remount at the peak of that potential rally which may come after the Fed announcement on Wednesday.

Other bullish factors are:

1. The big funds will do their best to prop things up as we approach the end of the month.
2. The market is not overbought even after all the buying on Friday.
3. The Fed will probably cut rates again.

If I had to trade right now, and couldn’t trade again for several days, I would stay short for a test of the 2002 lows.

LATE ADDITION: SPY’s rally on Friday afternoon can be seen as a failed thow-back attempt. Such back-testing of a breakout is common, whether prices break to the upside or the downside of the pattern. Because of this, Monday is a crucial day for SPY. Also, to confirm a breakout, many traders look for a 3% move. To regain its triangle, SPY would have had to close above 91 on Friday, but could only manage 87. So, the breakdown is confirmed by the 3% rule. Traders also like to see prices trade below the pattern for three days for confirmation, and while SPY has not done that yet, XLF has. And since the financial system is at the heart of our problems, XLF’s descent as a very bad sign for the market.

Felix Salmon has a good piece on the stock market’s dividend yield. To Salmon’s points I would add that, according to Yahoo Finance, SPY now has a dividend yield of 2.38%, so SPY would have to fall quite a bit more before it became cheap by historical standards.

If SPY were yielding 5-6%, many investors would load the boat to live off of the dividends and not care what the share price was. And with the historic collapse of the hedge fund industry, that might just be what the future holds. After all, if there are no hedge funds borrowing cheap money to gun stocks to ridiculous P/E’s, then what kind of world are you left with? We may be transitioning into a world where stocks have to “sing for their supper” by delivering attractive dividends.

Giant Rally Any Minute Now…

The “meme of the day” being broadcast from Wall Street now is that a giant rally is right around the corner. Color me skeptical. While it is true that a big panicky plunge such as we have had is usually followed by a substantial snap-back rally, I can’t see any evidence for such a rally on the charts.

Not only that, but the futures were locked down Friday morning for one of the few times in history. And they were locked down because of the panic sweeping the globe – not anything that happened in the USA.

In the past, US stock market crashes have been triggered by financial crises in other countries such as Russia and Mexico. The way the world is going today, I wouldn’t be surprised to see half-a-dozen of such crises occurring simultaneously. And that wouldn’t be good for stocks.

If I were inclined to “buy stocks for the long term” as Larry Kudlow shrieked on CNBC like a blithering idiot through the first several months of this bear market, I would wait at least until the world stopped exploding.

Also, one of the ways to play the unpredictable, giant panic-plunges such as we had Friday morning is to always have something short in inventory. When traders start screaming for SDS and SKF, you have to have a few shares to sell to them, right? So, Friday afternoon, I stocked the shelves of my “panic store” with some fresh SDS. If traders stampede into my store in a frenzy on Monday morning demanding: “Inverse! I need inverse!” I will have some to sell to them – at an egregious mark-up, of course.

Bear Market Just Getting Warmed Up?
Stocks are way over-priced. Sound crazy? Read this.

Greenspan’s Bug
Alan Greenspan told Congress today that he had found a bug in his world view. Ostensibly, this bug caused him to do crazy things back in 2003. He didn’t mention exactly what the glitch was. I wonder what it could be?

Market Prefers Its Head in the Sand
Every time CNBC put the congressional hearings on today, the market fell. When they cut away, it bounced back. I don’t believe that the market hates Bernanke, Paulson, or President Bush, but rather, it hates being reminded of reality.

For example, whenever Bernanke speaks, he feels compelled to give an objective assessment of the situation. The assessment is, of course, dire.

The market is trying not to hear that.

The market wants to hear how fabulously cheap stocks are and what a fantastic historical opportunity this is to make the buys of a lifetime. Whether or not that is true, it is all that the market wants to hear. Any content on CNBC that contradicts that is likely to trigger selling.

Momentum?
The market closed Thursday with a dramatic surge of buying, and is still a bit oversold short term. Normally, it would follow through with more buying Friday morning, but these are not normal times. Various things are blowing up around the world again, such as Samsung, so who knows what the market will do Friday?

Note: semiconductor chips, such as Samsung makes, are a good tell on the global economy because they go into just about every consumer product these days.

Watch the comments for updates throughout the day.

Today, the market tested the October 10th low for the second time. I’m not impressed with the performance. Take a look at this SPY chart (click to enlarge):

Notice how SPY bounced to a lower level and with less volume than it did the first time on October 16th (blue arrows). That means that the ranks of bottom-callers have thinned, and there will probably be fewer buyers if SPY goes down to test the low again.

After the bounce on the 16th, SPY had two days of follow-through, but since this bounce was weaker, I’m thinking it may only have one more rally day. The upper purple line looms close over SPY’s head now, so that may be the last good entry point for shorting before the low is taken out.

SPY was the strongest of the big-four ETF’s today thanks to energy stocks, so if you are rooting for SPY, you have to root for oil and the XLE also. So, let’s take a look at the XLE chart:

The XLE also has a symmetrical triangle pattern. Notice how it bounced more strongly today (purple arrow) than it did on the 16th (blue arrow) and with increasing volume (black line). OPEC is threatening to cut supply to raise prices, but they won’t have any more luck than Bernanke has had with Libor. So, I think the XLE’s days are numbered along with SPY’s.

That’s the good news. Now for the bad news: QQQQ, IWM, and XLF all finished in the red during today’s “rally.” Here is the QQQQ chart:

QQQQ’s bounce off if the low today (purple arrow) was much weaker than the bounce on the 16th (blue arrow). Volume was lighter, and there was a price loss instead of a gain. I will be surprised if the Q’s can follow through and hit the upper purple line – especially now that Microsoft has guided down.

Here is the IWM chart:

IWM bounced off of its low, but fell out of its triangle, and sustained a nasty loss. Tarzan no like.

The XLF was the first big-four ETF to fall out of its triangle:

XLF held above its low, made a nice reversal, but still finished with a loss. Any rally up to the purple line will probably be money in the bank for shorts once again. The XLF is our financial system, and if it can’t gain ground, the prospects for the rest of the market are not good.