As I write this post, the US Stock futures are down more than 250 points. With Europe declining sharply, tomorrow might be a bad day for the US financial markets. Understand, Survive and Thrive's Trading Algorithm generated a Sell Signal on Friday at 1177. After the Friday's sell-off, today the UST team e-mailed a special market report to its subscribers (In order to get the report, please subscribe to the e-mails)
This market analysis brought forward a uniquely different market outlook. In short, markets have changed their trend from up to down and might decline a lot. In order to better understand these recent developments, we re-ran the Inflection Point Model. Note that IPM has been 95% accurate in predicting market turns. Therefore, we hoped that it would provide a better perspective for the recent market decline.
INFLECTION POINT MODEL
Our trades are governed by the Trading Algorithm, not by opinion. In this regard, we re-ran the proprietary Inflection Point Model to discern the next possible Stock Market Turn date. The program output is given below:
According to the two models, the next turn date is scheduled for September 20, 2011 (+/- 4 days). At the next turn date, both models are showing a potential turn, thus amplifying turn possibility. To our amazement, there are two turn dates very close to one another. This suggests that either we will see a double bottom or we will see a sharp but short rally into the second turn date.
Interestingly, this time frame also coincides with "Options Expiration Week," Federal Reserves' special 2-day meeting where they might announce QE3 and the Fall Solstice (a significant time for market turns). Collectively, these observations suggest that we might witness a significant announcement from the Fed. This announce would mark the bottom of the current decline (If the downtrend remains intact).
Keeping in mind the double bottom scenario, it is possible that Fed might announce an easing program giving way to a 2-3 day rally followed by test of the lows. This test will eliminate any remaining optimism about Fed's intervention and will give way to a more powerful/sustainable rally.
Bottom picking in a downtrend is hard, and can result in significant losses. Hence, we will intently and safely wait on the sidelines for the turn window and trading algorithm signal. In the next few days, Trading Algorithm might generate a Sell Short Signal and therefore, we will trade the signal when it is generated and not our hypothesis for the markets.
Now that we have a turn window - September 20, 2011 (+/- 4 days), we will concentrate on how to evaluate the market going into the turn window. Risk management is the key to success. In the next post, we will evaluate different market structure scenarios which can take place and how to play them for profitable trade in these tumultuous times.
Note: If markets do make a new low then the chart pattern will suggest that we are heading into a prolonged down-turn - possibly a depression.