(ES) S&P, Russell Reaffirm Major Bear Threats, Define New Risk Parameters

Technicals, October 4, 2011; 7:40am

Yesterday's Dec E-Mini S&P close below 08-Aug's 1111 low shown in the daily close-only chart confirms our longer-term suspicions of the past six weeks that the labored, 3-wave recovery attempt from that Aug low was merely corrective/consolidative within a broader developing bearish count. Perhaps this portion of the decline from 31-Aug's 1218 high is the sequence-completing 5^th-Wave and a major buying opportunity. But until or unless this market provides evidence to stem the clear and present downtrend, there is no objective way whatsoever to know that this market hasn't reinstated an extended 3^rd-Wave down that exposes grave, relentless downside in the period immediately ahead. And such "non-bearish" evidence can start with the market's failure to sustain these losses below an obvious range of former support between 1111 and 1123 that now is considered new resistance per any broader bearish count.

Additionally and from a long-term perspective, we believe the past week's resumed weakness defines 27-Sep's 1170 corrective high close and its 1190 intra-day high as perhaps this market's single most important technical level and condition as these are the thresholds this market is now required to recoup to confirm a bullish divergence in momentum of a scale sufficient to buck the major developing downtrend and expose a reversal higher that may be major in scope.

The monthly log chart below should be a source of grave concern for stock bulls. While the past five months' erosion has been harrowing, on the heels of the preceding 26-month bull in which this index doubled, this year's setback thus far is relatively minor, having yet to retrace even a Fibonacci minimum 38.2% (at 1041) of Mar'09 - May'11's 666 - 1373 rally. Given the magnitude of the 2009-11 rally and the fact that this rally is a subset of a 1587 - 666-RANGE that has spanned more than 11 years, the market's downside potential within this major range is wide open. And by virtue of yesterday's confirmation of this year's decline, virtually all levels of any technical merit currently lie above the market in the form of recent corrective highs like 1170. And again, until or unless such recent corrective highs are recouped, the market's downside potential is indeterminable.

The 240-min chart below details the past week's breakdown and a smaller-degree corrective high at 1134. this is the minimum level we believe this market is now required to recover above to even defer the broader developing bear trend, let alone threaten it. And per this developing bear trend, yesterday we once again recommended a bearish play at-the-market as the market was breaking yesterday's early-morning low of 1111 (by the time we got the blog posted, the market was trading 1108, which is where we have marked the short). But because the market has continued lower in an impulsive manner that we believe reinforces this count and because we do not wish to assume risk to that 1133 corrective high, traders are advised to trail protective buy-stops to a tighter, more conservative level at that 1111 breakdown point.

In sum, a bearish policy and exposure remain advised with strength above 1134 the minimum required to even defer this bearish count and strength above 1170 required to threaten it sufficiently to warrant moving to a neutral/sideline policy. In lieu of such strength, further and possibly accelerated losses are expected straight away. Protective buy-stops are advised to be trailed to 1111 on yesterday's recommended short position at 1108.

The technical condition in the Mini-Russell 2000 market is virtually identical to that described above for the S&P, not surprisingly. The market's continued weakness and vulnerability are clear in the daily close-only chart above where the past week's losses confirm our bearish suspicions that Aug-Sep's labored recovery attempt on the heels of Jul-Aug's steep, impulsive decline was merely corrective within a broader move south. Former 6417 - 6454-area support is considered new resistance ahead of continued losses and 27-sep's 6767 high is considered THE corrective high and risk parameter we believe this market now must recover above to challenge this broader bearish count.

The weekly log scale chart below shows the scope of this year's decline that has just eclipsed the (6096) 38.2% retrace of Mar'09 - May'11's 3416 - 8720 rally. We list the (5458) 50% retrace of that advance, not as a prospective support condition (as such merely derived technical levels are NEVER considered support or resistance), but as a general reference point around which to gauge this year's developing downtrend. Yes, this bear can get a whole lot nastier than its already been.

On a minor scale, the 240-min chart below details the past weeks' resumption of this year's broader developing bear trend and shows former 6548-area support as new resistance and yesterday's 6472 high as the latest corrective high and absolutely the tightest risk parameter this market is now obligated to recoup to even defer the bear, let alone threaten it.

In sum, a full bearish policy is advised with strength above 6472 the minimum required to even defer the decline in favor of another interim correction, and strength above 27-Sep's 6767 corrective high close required to threaten a bearish count enough to warrant moving to a neutral/sideline position. In lieu of such strength, further and possibly accelerated losses straight away should not surprise.