Slide Setup

Following two strong back-to-back breadth days on Monday and Tuesday, yesterday the SPX pulled back turning its dailies down.

The pullback to 3722 was just shy of the initial support tweeted yesterday morning—turning the dailies down and peeking into the open gap from Tuesday.

Predictably, the first turndown of the dailies following the sharp upthrust of Monday and Tuesday perpetuated a rally that turned the index green.

It looked like the SPX would satisfy a push to 3727 which is 360 degrees up from the low of the year-- but it was just shy of doing so striking a high on the session of 3807 before reversing sharply on the runoff to close at 3783.

In sum, the dailies turned down in the early going and turned back up late in the session leaving an outside-up day.

This morning we’re getting downside follow-through.

Here are the downside parameters for the potential slide setup:

If yesterday’s outside up day is taken out to the downside it triggers a Keyser Soze sell signal-- a Reversal of a Reversal.

Offsetting Tuesday’s gap in the low 3700s triggers a Jump the Creek sell signal.

So we have a Rule of Multiples on the downside should the SPX drop to the low 3700s, that opens the door lower.

As well, 3705 is 180 degrees up from the low of the year.

In essence, we have a technical trigectal near the 3700 region.

A failure below 3700 should get our attention.

Offsetting Monday and Tuesday’s solid back-to-back strong breadth days flags trouble.

Yesterday we tweeted that the relative strength in UVXY signaled a last-hour sell-off and that played out.

Markets were higher overnight but futes are down 28 points as I write Thursday morning.

We’ve seen many Intermediate Term declines into October over past decades.

Markets produced steep declines that carved out October lows in 1929, 1962, 1976, 1077, 1987, 2001, 2002, and 2008, to name the ones we’ve analyzed extensively over the past decades.

IF markets fail here as we expect, the slide into an October bottom here COULD be one for the record books.

The setup for a slide is compelling. We must take the setup. We’ve been doing this too long not to.

As such, we bought out of the money UVXY calls.

The risk/reward comparison for taking the short side here is favorable as the potential profit is a substantial multiple of the risk being taken.

And that’s what this game is all about:

Identifying a setup that has a favorable risk-to-reward profile.

If nothing happens we’ll take the small hit.

In sum, on the lightest volume in two weeks, and more than twice as many declines as advancing issues, major averages rallied back from steep losses to basically unched on the day.

That said the rally back turned the SPX 3 Day Chart up and if the market is as heavy as the Slide Setup presents, yesterday’s high should define a high…albeit another fake-out that fully satisfies the 3827 region could play out.

Be that as it may, this rally should mirror the last turn-up of the 3-Day Chart into September 9 which perpetuated a sharp slide.