Hurry Up and Crash?

I'm hearing a lot of frustration coming from traders on social media recently regarding the slow motion churn that is going on near major support levels for the market. Dip buyers are weak but present, short sellers are getting impatient, and sentiment studies say we need more fear.

The trends are pointing lower, yes. But the persistence that we need to just hurry up and crash are growing by the day. Participants say we need capitulation until a meaningful low can be set, they say substantial fear is lacking.

The consensus I am finding is how much in a hurry everyone is for this decline to resolve itself so we can all carry on with our normally scheduled market performance. I'm not a fan of market analogies, but if this decline is to become a substantial decline (which many feel it will) it may take a long time to play out. Take the 2008 Financial Crisis decline for example:

SP500 Top Formation 2007

 Looking at the 2007 market top I see many parallels to out current structure. This doesn't mean our current market has to implode like 2008, but we aren't ruling anything out. The SP500 took the entire year of 2007 to complete its top pattern. The breakdown began to tremor in November and then staged a bounce attempt into its then declining and crossing 20/50 Week MA's. The next leg lower broke the major support lows from August and November, beginning the first leg of the decline.

Our current position I believe resembles the January '08 follow through move. If this is anywhere close to being accurate, the insistence that we "get on with the plunge already" may lead to much more frustration going forward.

Most people's memory of the Financial Crisis was that of a sudden and dramatic event. Movies and financial media basically start with Lehman Brothers' bankruptcy at the end of September 2008, which then was followed by the two large declines the opening week of October and the subsequent week that ended 10/10/08. In reality however the downtrend was 9-10 months in the making by that time.

My point is that the most devastating decline to US stocks churned and gradually rolled lower over the course of a year before the real damage hit. Those expecting the current downtrend to be a one and done type of drop and pop may have a frustrating year ahead of them.

SP500 '08 churn and retest

Following the January breakdown we saw a substantial drop the next week. But for all intents and purposes the market continued to churn between 1300-1400 for 6-months. During this time dip buyers continued to plug away and were able to grind prices back to the January breakdown level, retesting prior support, turned resistance. Once that rally failed the S&P resumed lower but then dug in for another 3-months before the actual bottom dropped out.

If we look at our current market we can theorize a similar scenario. Again 2016 is nothing more than 2016, its not 2008 and no two market events are the same. But human behavior does tend to repeat, so we can work through a potential scenario where we don't just implode but rather grind and churn to most participant's displeasure.

SP500 Current Position with Similar Projection

 Here is our current market and rounded top pattern. Like the 2007 top, it formed over the period of a year +. We have seen the move confirm lower as the recent January/February declines have created a lower low beneath key support. Now everybody's itching for some fantastic implosion lower, but what if we get a rollover like early 2008?

I've drawn (crudely) a similar scenario to the post 2008 support failure. If the analogy plays along we could see prices hanging around current levels well into late summer or longer.

My intention is not to be highly complacent at this point. I'm not complacent, I'm a trend trader and intermediate trends are lower. I'm highly defensive in my posture and intend to stay that way until new setups form and trigger based on my signals. The intent of this post is to point out that every move in the market doesn't have to be some instant, dramatic event that scars us for life.

Sometimes markets decline. Sometimes they decline a little and sometimes they decline a lot. Our job is to focus on what's in front of us and attempt not to develop biases to what we think should or will play out. We need to remain open-minded to a recovery in stocks from here. We need to remain open-minded to an epic crash unfolding next week. And we also need to remain open-minded that maybe we just chop in a relentless, brain battering trading range for years to come. 

The main point is none of us know what's coming next and the market owes us nothing. It will do as it pleases and we need to be prepared for whatever path that may be. 

Thanks for reading 

-ZT