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An ideal price pattern has developed in the Soybeans which has opened the door to potential short positions.

This pattern is very similar to what took place in the September S&P 500 (Stock Market), prior to last Thursday’s dramatic sell-off.  If the Soybeans follow suit relative to what has taken place in Crude Oil and the September S&P 500, price is very vulnerable at this time.

In this video, I show the factors I believe add up to the likelihood of a sharp sell-off in a short period of time.

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The probability our projection for severe corrections in the S&P 500 and August Crude Oil off the landmark June 11th highs is correct, increased dramatically with Thursday’s dramatic sell-offs.

This is as it should be based upon our 7 historic precedents since 1886.  However, while our current short positions could provide as much as an 8 to 1 risk/reward payoff, the real prize remains the same.

If this turns out to be a secondary correction into a higher bottom in an overall bull market, the low of this correction will provide what is historically, “the lowest risk point at which to make speculative and investment purchases” prior to the resumption of the bull markets.

In this new video I update you on how our market is tracking the “Closest Fit” precedents, the similarity to what took place at the “Great Depression” low, and the target zone for the completion of these projected declines.

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Bear Market Rally or Bull Market Beginnings?

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Our projection for the most recent decline into the March 6th low was one in which we expected that there was going to be greater follow through to the downside than what we experienced.

It was actually abbreviated in terms of overall decline, and this rally has been more significant than we anticipated, if indeed it was a bear market rally. Our work is showing that is probably a 65% probability that this March 6th low is a final bear market low.

In other words, we appear to have started a bull market in stocks. This would be the first leg up in a bull market and our rule in terms of what we do in the markets, market forecasting methods is, it’s much more difficult to call a final low in a market than it is to call a corrective low after the final low is in place.

In other words, the first rally off the March 6th low is going to culminate in the top of the first leg up in an overall bull market, wherever that may be, and then you are going to experience a secondary correction; a correction in an overall bull market, and that is the lowest risk point at which to enter long positions once you have confirmation that the market trend has changed.We’re looking for additional confirmation on that.

Trading the Long Side of the Stock Market?

Our research shows there is a 65% probability right now that we have a final low in place, however, that doesn’t mean that we’re going to be doing anything on the long side of the market.

It has advanced 29% in about one month and six days. That’s incredible. As far as first legs up in terms of velocity of advance, this percentage advance in such a short period of time is one of the greatest legs up in history. This move in the stock market continues to line up with the most volatile, greatest percentage moves since 1886.

These are extreme overbought conditions in the stock market, regardless whether this is a first leg up in a bull market, or a bear market rally. Either way you cut it we have an extremely overbought situation and when we are looking to be a buyer we want to buy on a weakness and corrections.

When we’re looking to get short we do look to short on strength, but since we only have a 35% probability that this is a bear market we don’t want to go counter to the trend.

I’m not saying that we can’t do something on the short side but I don’t anticipate it at this point in time given the information that we have right now.

In looking at the S&P 500, I did want to reiterate something. This rally that we’ve experienced off the March 6th low  (I show the cash chart in the video), has been 30% in one month and seven days into the recent high at 864.31.

Needless to say, that’s about a 330% annualized rate if the market was then going to continue to move up at that kind of velocity. I say that just so you’ll understand how overbought this market is.

In the video I show a table containing all of the bear market percentage rallies during The Great Depression. The greatest percentage advance during the bear market during The Great Depression was the November 1931 advance, and we very nearly met that comparable objective.

It was a 31% advance in 1931 and we hit 30%. On that basis you could say, “Well, why can’t this be a bear market rally like the November 1931 bear market rally?”

Based on this, obviously we have not exceeded it so it could be, but based upon the formation at the lows, the fact that we have retraced so significantly at a more demonstrable way than any bear market rally during The Great Depression, we retraced this decline from January 6th to March 6th, tells us that the geometry of this market has divorced itself from The Great Depression precedents.

There is other evidence as well, particularly looking at overall commodity prices, that it’s very likely that the probabilities are increasing each passing day that the stock market will be confirming a final bear market low.

If that’s the case then we would be looking at the possibility of re-entering investment positions on a correction in a projected overall bull market.

If that correction occurs from recent highs, it’s possible that we could correct. Let’s just say down to the 750 level, something on that order.

It would have to be at least a one-month correction before we could re-enter a long term investment position as investors. We recommended, at approximately the 1250 level, exiting all investment positions in the stock market.

That was an all-out sell signal. We told subscribers, “Get out. This market is in all kinds of trouble.” Now we are looking at the other side of the mountain and the possibility that we could, over the course of time, give a major buy signal in the stock market to subscribers to our market forecasting services.

In light of the implications of the US economy, hopefully the storm, this tsunami, has passed as far as the crisis is concerned, but volatility is going to continue and we’re going to have a lot more to say on this.

I’m pretty excited, needless to say, about the prospect of having sold the S&P 500 at 1250, and be able to buy it at 40% discount, possibly down at the 750 level if that plays out. We’ll have a lot more to say on that.

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Stock Market Diverts from Great Depression Precedents

We need to wait and watch because the stock market is doing something that is contrary to a pattern it had been following relative to the Great Depression.

Recently, the stock market indexes have experienced a very sizable rally. The violence of this rally has been greater in terms of percentage retracement than what would have been expected. These are factors that we are taking into account, and obviously we don’t want to do anything in the stock market until we know that the probabilities are in our favor. At this point, I am viewing it from a neutral standpoint. What I find quite remarkable is the relative strength that we have seen in the NASDAQ, the tech sector, relative to the Dow and the S&P.

The NASDAQ has traded to within a fraction of the January 6th high. This past week we hit 1281.75 having held the November 21st low which was broken by the Dow Jones and the S&P 500. In fact, the November 21st low was broken decisively by both the Dow and the S&P 500.

Our expectation was that the market had the potential to continue to move lower, and that we had hit a trigger point where sell orders could have overwhelmed the market, in our estimation, and resulted in the S&P dropping very quickly to the 600 level. As it turned out, the cash dropped to about the 666 level, immediately reversed to the up side, regained last year’s lows from November of 2008, regained the October of 2002 bear market lows, and simply surged off the lows, very similar to what occurred here in the NASDAQ. That was unexpected from my vantage point.

Surprises like that check me. This stock market moved into new lows, into no-man’s land.  So, someone was buying at those lows. At this point, I have to assume that it was possibly smart money.

NASDAQ Rally

The NASDAQ established a third lower top off this January high. Now this was the bear market rally in the S&P 500, so we will look at the comparable rally. At 934 basis the nearest futures, 943 basis the cash. As of the capture on this chart, we were at $7.99, and I believe we are at $8.08 as we move towards the twelve o’clock hour.

S&P Well Off the January High

So, we decisively broke the November low in the S&P 500 and Dow Jones, but the NASDAQ showed a bullish divergence that would be confirmed by a rally to new highs.

Our “Rule of 4″ is this: when a market moves to an old high or an old low for a fourth time, it generally follows through.  So I we are looking at the NASDAQ right now with the expectation if we push up toward these highs, that we would push through those highs and possibly go to a new high. On that basis there is a very real prospect the NASDAQ established a final low as of November 21st, experienced a first leg up as of January 6th, a bull market correction into a higher bottom on March 9th, and the start of a second leg up in a bull market.

This is not my expectation at this point, but I can say that the technicals are certainly starting to suggest that the bull side of the equation is valid. This is especially going to be true on a rally above this 1287 level, which I would have to expect at this point in time because there are going to be a lot of buy stops building above that level. We have in a sense a two-tiered market. We have the tech market versus the larger equities in the S&P 500, and so it is something of a tug of war, and we will see how this plays out.

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There’s a certain point at which the market defines itself, plays into a particular forecast that you have, and then gives you a trade action based upon our trading rules. At this point in time, we’re in a neutral position in terms of any exposure. We’re not long in terms of being investors. We have no positions. We had short positions and we exited them, so we’re on the sidelines.

If this is a bear market rally, it should not be complete; more time would be required. There is the possibility that the advance off the 665.70 March 6th low is a bear market rally, but we’re only eight days into the rally. If it is a bear market rally, then it would have to be more complex; and if so, then we would look at potentially an opportunity to go short.

On the other side of the equation, if this is a first leg up in an overall bull market, the probabilities would favor the current surge being followed by backing and filling prior to trading the long side of the market with measurable risk.

The bottom line: there’s nothing to do but watch and wait at this juncture. If the S&P works out a more complex rally – there would certainly be some backing and filling working out a more complex rally.  At that point we would look to enter short positions.

If the market experiences a retracement and something that would be more significant in terms of approaching the low, that would be typical of a final low.

I’m in a neutral position as far as how I view the stock market right now. Obviously, though, when I’m neutral, the market is going to do something. It could do something quite remarkable. It’s just that it’s not playing into the criteria that I need in order to do something in the market.

In this table (see the video), I show the historic greatest velocity legs down in the Dow Jones and S&P going back to 1886. I’ve updated this table with the decline we experienced off the August 11th to November 21st low, where we declined 44%. That was the first break of the October 2002 low. We declined to 741.02, a 44% decline and second only to the first leg down during the Great Depression in terms of percentage decline.

These are the elite legs down over the last 120 years. Ours ranked at Number 2 in terms of overall percentage decline and Number 6 in terms of the velocity of decline: 44% in three months and ten days.

In the leg down which we experienced between January 6th and our recent low on March 6th, we declined 29%, significantly less than the 44% of the preceding leg. However, we did so in two months and zero days. In terms of rate of decline, we declined, on average, one-half a percent a day. The velocity of this most recent decline, then, was actually greater than the velocity of the decline into the November 21st low, which was a 0.43 percent per day.

In terms of velocity, this leg down that we experienced ranked at Number 4 out of the greatest velocity legs down in history. The 2000 leg was an aberration. Really, the only two legs that exceeded our leg down in terms of velocity were the crash of 1987 and then the first leg down during the Great Depression.

As we make an assessment of this market, I obviously want to be aware of the different factors. I make the note here that our decline into the November low was the second greatest in history; the decline of March 6th was the fourth greatest velocity decline in history.

The Great Depression was the only other time multiple legs down of this magnitude occurred. Therefore, we have two historic legs down in the same bear market; and that’s only occurred during the Great Depression.

Is there going to be another leg down in this bear market or are we going to divorce ourselves from the Great Depression? That’s the key question. In looking at the S&P monthly, one of the comments that I’d made in advance of the break of the November 21st low – which we expected – was that “no-man’s land represents a potential price vacuum. If we decline into this price area again, the market can decline very quickly.”

We did break that November 21st low, which put us into a second decline beneath the 2002 low. We did see some follow through, but in just this last week-and-a-half an immediate violent rally to the upside. In terms of an ideal for our research and looking at the technical condition of a market, this shouldn’t have happened. It’s not that it can’t, and the market resume a downtrend. It’s just that the probabilities were against it.

On that basis, you can see that on Friday we closed at 768.54 in the cash; just about right at the 2002 low. We regained the November 21st low, and even regained the October 2002 low, rallying to just over 800.

It’s not nearly the kind of selling that I anticipated on the second break into a new low. I had felt that we had a very good chance of dropping down to the 600 level as an ideal objective, and then we would see where we went from there. Then we would expect to see a bear market rally.

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Here’s what I say with regard to what has taken place this last week-and-a-half. In eight trading days, the market has retraced 50% of the decline off the January 5th high.

Due to the abbreviated length of the leg down off the January high and the price point at which this market reversed to the upside breaking to the 665.70, I view the forecast of the near term direction of this market as being problematic.

In other words, I’m having trouble in fitting this situation into the historic precedent of the Great Depression. Additional trade will provide clarity so at this point I have to take a neutral approach in the stock market.

Obviously, there is going to continue to be tremendous volatility but we did expect the ideal that the market would push down to the 600 level. Ideally, into the second week of April, and the market did not accommodate that so now after a 29% decline in a relatively short period of time, we’ve seen the market spike up very significantly.

It’s going to be very interesting to see how this plays out. Additional trade will provide clarity, which is to say that we will get insight into what is taking place in this market, so right now, I would have to say, in terms of a trading type situation, I’m definitely neutral and watching very closely with regard to long-term ramifications that this has for overall forecast as to the length of this bear market.

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We’ve experienced a very sharp decline in terms of velocity, and we’ve had five days where the market has done some backing and filling. That is actually a very healthy thing in that the market was getting a little ahead of itself, so profit taking and backing and filling is a very healthy process. Nothing goes down a straight line even though these are the greatest legs down in history.

These are the greatest legs down in history in the stock market (the red lines and target points on the lower right), and yet you do see that there is backing and filling on the way down, as one would expect. A couple of observations: other than the correction after the first leg decline on the 29th, all five bear market rallies were complete by February 7th.

Here’s our target zone (the red box). This was the last of the bear market rallies to complete (U 1930). You can see that we are well off that February 7th date, so the probabilities are very high, that this is a bear market with extremely high probabilities that the January 5th high is the high for this bear market leg.

The other side of the equation is if this market did continue to go higher and continued higher beyond the February 7th high, then the probabilities would go up that we have an important low in place. That being said, these target zones tell us a great deal about whether the market is conforming to historic norms because as soon as it stops doing that, then we have to say, “Okay, something else is going on here.”

But right now, this market is conforming beautifully to what we would expect for another leg to the downside. Now the other thing is, if the current decline has started another leg down, it is running pretty hot relative to the legs down during the Great Depression. That was what I said at the recent low, but now we’ve had five days of consolidation, so the market is in a healthier position here, healthier in advance of what we would expect to see as a breakdown into new lows below 797 with a break of the 737 low with follow-through to the downside.

At the 797 low, this is what we were telling subscribers. We have a buy pattern. If I was looking to go long, the reversal higher after breaking the 813.50 low by 16.50, which is what we did; we broke this 813.50, dropped down to 797 and ran into a ton of sell stops down there and panic sell orders. But the reversal from there actually issued a buy signal if we were looking to be a buyer, but since we believe we’re in a bear market, in bear markets you don’t take buy signals, and in bull markets you don’t take sell signals. We go with the trend, but we did get a buy signal, and we have to respect that.

A break of 797 would increase the probability we are in the midst of a leg down and an overall bear market. A break of this low would indicate follow-through. This is particularly true in light of the last five days of trade, so if we break this 797 low, we have trade action, trade recommendation for subscribers on what to do in anticipation of follow-through to the downside.

This is the setup in the March S&P. The last was at 839.80 and I believe that we closed a little bit higher today, as I’m coming to you just before the close on Tuesday afternoon.