`SPX futures remained beneath its Head & Shoulders neckline overnight, despite ZeroHedge’s report of an equity futures rebound. Since that early report, SPX and Dow futures dumped. “Remember when oil was in the green (because Iran was "priced in") and stocks were in the green (because China was "fixed") this morning? Well, that's over. The dip-buying algo's reflex has run the stops, filled the gaps to unchanged and now stocks and crude are turning lower once again.

Crude back in the red...”

The chart tells us that the neckline is paramount. A a rally above the neckline would put our signal in neutral, while a ramp above the 2-hour Cycle Bottom would be a day-trader’s buy signal for a probable retracement to the top of Wave [iv] at 1950.53.

The Cycles Model calls for a bottom on Tuesday, January 19. However, some third waves decline beyond the due date an average of 4.3 days. Examples are Wave 1 of (3) on September 18, 2008 was 4 days late. Wave 5 of (3) was also 4 days late on November 22, 2008. This suggests that, if we see investor capitulation, we may see the low extend to Friday, January 22.

Bloomberg reports, “The rout that swept through asset classes, taking oil below $30 a barrel and European and Asian stocks into bear markets, is pushing up gauges of investor stress around the world.”

In another article, Bloomberg comments, “In a market bouncing up and down 2 percent a day, investor psychology is taking a beating in U.S. stocks. But nerves may need to fray further before the volatility abates.

For all of last week’s twists, measures of investor anxiety sit well below levels from the last selloff, when shares plunged 11 percent in August. Twice last week the Chicago Board Options Exchange Volatility Index jumped more than 10 percent in a day, yet it ended 34 percent below its summer high.”

This morning’s market shows EuroStoxx 50 currently down another 17 points from Friday’s close after revisiting the daily Cycle Bottom and Head & Shoulders neckline. It’s Master Cycle low is due on Wednesday, January 20, but may also be extended to Friday.

A capitulation here would also reinforce the observation that the neckline may be strong resistance should a later bounce occur.

The Nikkei tested its Island Gap as it declined to 16668.00 in overnight trading, also breaking through its Head & Shoulders neckline. It closed at 16955.57, which appears to be above the neckline.

This puts the Nikkei in a very interesting position. If the Nikkei has truly begun Wave 3, it would be no problem to gap down to the October 31, 2014 close at 16413.76, leaving the Island Gap intact. We may know tomorrow what the outcome may be.

The Nikkei was scheduled for a Master Cycle low on Thursday, January 14. However, today’s behavior already suggests an extension may be underway. Gapping down beneath the October 31, 2014 low would confirm that observation.

Regards,

Tony

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