2008 v 2011

I continue to be fascinated with the comparison between the 2008 and 2011 crash. Tonight I decided to compare the indicators for the two markets at the same point using my software www.thetradingrange.com.

2008

This is 2008 2 days before the 1st of the month. The green arrow indicates where this market went (just filling that gap before falling into a mega crash). The first thing that is evident is the incredible amount of pressure in the RSI. First there were several long term negative reversals which correctly predicted a re-test bottom (and look at the purple line that dips down below the chart. That negative reversal was a hint of what was to come). Then after the negative reversals played out we got several layers of bullish divergence. That was a lot of pressure pushing down and then suddenly released.

We did get one more negative reversal which did not play out. The fact that it did not play out was a critical piece of information.

Stochastics were the real sucker punch. That chart appears to be curling over and stochastics have crossed at the 80 mark. That to me looks like a market that is running down but it was a fake out. We got a stop the next day and then it gapped up on April 1st.

2011

Our current market looks similar on the chart but there are some striking differences in the indicators. The first is the relative lack of information in the RSI. There is not a lot of pressure in the RSI. It is "loose". The one bullish divergence was fulfilled. The one negative reversal was also fulfilled.

Stochastics are what I think of as "coiling". They are butting up against resistance. When they do finally reach the support level I think we will have a rocket on our hands. That said, they are crossing over now so perhaps like 2008 we get a fakeout?

If we zoom in on 2008 though we see something very interesting that is missing today:

In 2008 we had a "golf club" characterized by a rounding bottom and several repulsed attempts to break a horizontal resistance line. We even got a higher low and higher high - very different from today. (I probably would have shorted the golf club at 138 and gotten creamed!)

Zooming in on the futures I might have an Elliott explanation:

This is the 5 minute futures for this week's action. The run-up does not look like a motive wave. It is impossible to make a "5 count" out of it. Generally this is a tip off that it is a corrective wave although I will say that I have seen some large motive waves begin like this.

On yesterday's descent we have two clearly motive waves (green) and again a clearly corrective wave (red). Notice how the small corrective wave looks a lot like our larger (presumably) corrective wave.

Now let's attempt to assign some wave counts:

This looks suspiciously to me like the beginnings of a large 3rd wave. It is extending right from the get go. What I like about this interpretation is that the "a" and "b" waves are crystal clear 3 wave patterns. The "c" wave is what confused me this afternoon, which is what "c" waves do. They are WTF waves.

Let's zoom out and take a look at the implication:

This continues to fit with yesterday's interpretation.

I see two ways that this current C wave can play out.

Scenario 1

In this scenario, today's late market action was the 1st wave in the C wave. This would imply a pretty serious rally tomorrow. Since the B wave is unorthodox (below the end of the prior motive wave) it does imply that the C wave would be equally extended in the other direction (Constance Brown's "springboard" metaphor). The yellow line of course marks where this interpretation is wrong and needs to go back to the drawing board.

Scenario 2

Scenario 2 is pretty straightforward. Basically we ain't heading back. There is room for a very small 5th wave of the "C" wave (the dashed line) but anything more than that and it's either scenario 1 or else a confounding corrective wave that requires new interpretation with more mental muscle. Note how the dashed line ends at what would be a technical resistance point.

Finally, I think the recent gold top serves as something of an analog to what is happening here:

We often see this same descending motive wave pattern preceding steep drops (we also saw it on the S&P in July at the 30 minute level). Gold and the S&P here are not perfect analogs. Gold would require a wonky Elliott explanation however the pattern is extremely similar.


What if I'm wrong

If the market goes higher then a wonky Elliott Wave count like the following would be necessary:

One can make Elliott bend to your will if need be and as I mentioned, I have seen this kind of weird pattern turn into a motive wave, or at least become the first motive part of a 5/3/5 corrective pattern.

Trading this one is tough as it requires a momentum trade that might easily be stopped out on a retracement.