“And Lot’s wife, of course, was told not to look back where all those people and their homes had been. But she did look back, and I love her for that, because it was so human. So she was turned into a pillar of salt. So it goes.” Kurt Vonnegut Jr., Slaughterhouse Five
On August 17, IWM plunged below its 200 day moving average testing the lows of the year.
The break proved to be a flush-out. There was no follow through.
The washout saw IWM jackknife to new all-time highs in a runaway move that saw no more than 1 day against the trend.
Since the August 17th low, IWM saw only one day turn downs below a prior day’s low—until Friday/Monday.
Friday saw IWM trade below a prior days low. On Monday it set a new high but reversed to close below the prior day’s session leaving a Key Reversal Day.
Now IWM shows two consecutive lower daily lows for the first time in seven weeks.
Today may be an interesting day because IWM is in the Plus One/Minus Two position for the first time since the rally off the August 18th low commenced.
Given Monday’s key Reversal, the likelihood is the IWM 3 Day Chart will turn down.
If so this will be the first time the 3 Day Chart has turned down since the August 18 ‘circled’ 3 Day Chart low.
If the trend is still as strong is it presents itself, the first turn down in the important 3 Day Chart should define a low soon in terms of both time and price.
If the trend is turning, IWM will not respond to the turndown in the 3 Day Chart in a bullish manner.
That may take a day or so to be revealed.
Additionally, yesterday’s reversal occurred at the culmination of the Gann Panic Window.
As you know this is a 7 to 8 week period (49 to 56 days) that has defined crashes from highs and blow-offs from lows.
So we are at an interesting inflection point both pattern-wise and time-wise.
It will be very important to observe the behavior of the markets this week.
It is possible the push higher to kick off the new quarter is a misdirection move (ala October 2007) just as the kick off to this week may elicit a weekly tail on the popular indices.
As the above daily IWM shows 148ish ties to the lower rail of the runaway channel from mid-August.
Given Monday’s large range reversal, the likelihood is 148 is going to be tested quickly.
The Weekly Swing Chart will turn down on trade below last weeks low of 148.08 by even one tick.
The Weekly Swing Chart has not turned down since the mid-August low.
The normal expectation in a strongly trending market is that a turn down (especially the first turndown) of the weeklies will define a low.
If IWM does turn it’s weeklies down, the ensuing behavior will be important to observe.
Even if the trend has turned down, a turn down in the Weekly Swing Chart could see a knee-jerk bounce/reaction. So this will be something to watch for as well.
That said if a Buying Climax has played out with a blow-off coinciding with the Gann Panic Zone, profit taking could cause a swift and sharp setback—especially as a WEEKLY count of 7 squared weeks or 49 weeks from the major pre-election low is also on the table.
Coincident with IWM’s reversal on Monday, the VIX spiked on a very small decline in the SPX.
This is often (not always) the precursor to a meaningful decline.
Maybe something, maybe nothing but calls made up 8% of the volume in the VIX suggesting smart money is doing the buying.
At the same time, a weekly DJIA shows what looks like the finishing touches of a culminating 5th of a 5th wave up from the 2009 low.
There is a bearish Rising Wedge from the big February 2016 low.
Theoretically, a bullish structure could be maintained on a decline to as low as 18,200.
This ties to the lower rail of a rising channel which ties to the highs from 2015.
That’s a 4,500 point decline in the DJIA or around 20%. A normal affair in normal markets.
Of course, given the recent complacency and lack of volatility, such a decline would feel like a slaughterhouse.
“And I asked myself about the present: how wide it was, how deep it was, how much was mine to keep.” Kurt Vonnegut Jr.