On the Verge of a Mini-Crash?

In the last few months  there have been several illustrations of Ending Diagonal Triangles (EDT) illustrated on this website.  The main reason is that this structure appears as R.N  Elliott stated, “after the market has moved too far too fast”. What’s happened with the main US stock indices since March 2020 is definitely too far too fast.  The last time something like this happened  in the US stock market was the 1999 to 2000 technology stock mania.  That blow off top came after a multi-year bull market and resulted in a nearly three-year bear market.

The 07/08/21 blog “Explanation of a Micro-Crash” illustrated results of a small-scale EDT.

The five – minute SPX chart courtesy of Trading View shows the small-scale EDT.

After an EDT concludes there’s usually a powerful move back to at least the EDT point of origin. In this case the subsequent move was so strong the SPX went below the point of origin.

EDT action is like a stopped-up water hose, after the pressures released there’s a strong burst.  After a  declining EDT the burst is upwards.  For rising EDT’s, the burst is down.  

Note the bearish divergences on the one-minute RSI + MA.  Also, I’ve changed from using standard RSI to RSI plus a moving average (RSI + MA).  RSI moves above/below the moving average line is an additional aid to discovering potential trend changes.

The daily SPX chart illustrates a potentially larger EDT.

The daily EDT has two possible points of origin, the 06/18/21 bottom or the 05/12/21 bottom.  If the 05/12/21 low is the point of origin it opens the door for a fast move down to the 4050 area or lower.  Also, note the bearish divergences on the daily RSI + MA.

While external momentum indicators such as RSI + MA continue to show bearish divergences, internal momentum is shockingly bearish.  On 08/12/21 and 08/13/21 the SPX traded up and, on each day, made new all-time highs. On both days the NYSE advanced/decline line went down! The Nasdaq Composite (IXIC) was also up both days, with its advance/decline line going down.  Incredible!

My prior blog “Slow Rising Market” noted that using the “Market Profile” methodology the SPX had weak intraday trading on 08/06/21 and 08/09/21.

The same phenomenon happened on 08/13/21 the SPX one minute chart illustrates the action.

When a market fails to break above/below the opening hour range it has weak directional conviction.  For the SPX this type of action is fairly rare and usually only occurs about seven or eight times a year.  Three of these in August after a prolong rally is another sign of weakening upside momentum.  Also, note the rapid rally minutes before the close.  The bears were waiting for a downside break that never occurred and had to get out.

A case could be made that because the SPX subsequently moved above the 08/09/21 high that the signal is invalid.  However, on 08/10/21 the upside breakout happened just after the open of the session.  Subsequently there was a break below the opening hour range, the SPX action on 08/10/21 had no intraday upside follow through.

The  next three days the SPX rallied, with the NYSE advance/decline line falling  two of those three days!  There’s even more bearish momentum evidence –  no need for overkill.

The US stock market could be on the verge of a mini crash taking the SPX down 12 to 13% before the end of August!  

Traders are short 100% non-leveraged SPX related funds as of the opening of the SPX session on 07/12/21 with a stop loss on 50% of the position if the SPX moves above 4470.00

Depending on the next trading day  action, a detailed downside forecast could be posted after the close of SPX trading on 08/16/21.