Gap down on Monday.

The sell off actually did start for the markets last week.  TVIX bottomed on Thursday.  The volatility of the $COMPX into the end of the week, with two days of gap and then crap, was telling.  This rally is tired.  It might not be the end of THE rally yet, but this wave of the ending diagonal is about to roll over according to my models.  I also cannot discount that it could be the end of THE rally.  When I look at the ending diagonals all over the place that are themselves part of 5th wave long term trend line throwovers then it really makes me wonder.  Once the chart throws over a long term trend line, it is committed.  It has crossed the Rubicon.  If it has to retreat back across, that's it, a full tactical retreat is sounded and the direction change is cast in concrete. 

Check out the ending diagonals of the $COMPX and the DJIA shown below (click on image for more detail).  On the left we see an ending diagonal with a tiny throwover,  I expect the throwover for the $COMPX to be small in this case because of the weakness that this leadership index has been showing.  It's weakness relative to the Dow should be a warning to all.  On the right, the 5th wave throwover was clearly evident and then the break back into the channel and the attempt to hold the lower channel line before its break down as well.

In the case of the DJIA, the chart has formed the old 1-2, 1-2 which tells me that the next wave down will be the 3rd of a 3rd.  Do you get it?  The first 1, 2 to happen meant that anything following was working on a 3rd wave.  So the next wave down was 1 of 3 of 1 and then the move back up to retest from below was 2 of 3 of 1.  This is how a stock sets itself up for a rapid move away from the old trend (the kiss good bye) that signals the non-leadership members of the herd about the new direction.

I want to note something here that I think is very important, something that is being missed by many old timers which is that, at least for now, the chart patterns have become hyper-accurate.   Gone are the days of roughly penciling in trend lines and calling it "good".  In fact, the market appears to be using loose accuracy as we weapon.

What I mean here is that if a line is supposed to reach a certain trend line point before the rules say the formation is valid and in fact the line "juuuuuuuust misses" that point, you can count on the fact that it is a set by the market to fool those who are not being hyper careful with their measurements. It has caught me several times this past 6 months and so now I go into 1 minute resolution to check all important lines touch the chart precisely.  I suspect it is just because the use of algorithms makes finer granularity very easy but it certainly favors computers over humans.

In any case, I expect Monday to be a down day and it could well be a gap down right from the start with some big losses for the major indices.  Let me tell you one thing: if you did not heed my warning last week and we get a big gap down, DO NOT BUY INTO IT!!  I could always be wrong but err to the side of caution.  In fact, if I were being paid for gambling advice, I would say emphatically to sell the gap and then see if there is any sign of support.  I suspect the buy the dippers got their asses kicked a few times last week and so they will be more tentative this week.  And if things turn sour as I model them to, they will really sit back on their haunches and begin to wonder, "is the Bernanke Put Ponzi Party really over?".