SevenSentinels.com

Primary Trend: Up ~ Intermediate Term ~Seven Sentinels~ BUY MODE, 20% DDM, 30% QLD, 20% SSO, 30% UWM

Following is a somewhat lengthy study. For those who want just the botom line, it's this: The Seven Sentinels indicate that the IT uptrend remains intact and we have no basis to trade against that trend. We will remain long unless or until a Sell Signal is produced or 1135.91 is violated on a closing basis.

On Friday we said:

"10:30... In a perfect world, we'd never get "black swan" news releases and negative events in IT advances. Bad reports would never happen to "good markets". But we live in the real world of course, where they can and do occur, unpredictably, and it is our job to deal with what comes. Today's "zero jobs" report was below even the most negative of the projections and is shocking Wall Street this morning with a broad and devastating sell-off."

One of the most difficult aspects of what we do here at SevenSentinels.com is dealing with what we call a {thankfully rare} "black swan" event and the resultant deep draw-down such as we saw Friday...and now on Sunday night and Monday has accelerated into a "mini-crash" as the liquidity crisis in Europe deepens. But such events DO happen in the real world - within IT up-trends - and *thus far* our research this weekend still confirms what we had said last week, that the current market is still an IT uptrend, and our research further confirms that we can expect the uptrend to resume once this extreme sell-off subsides in coming hours. We cannot know how much longer this "mini-crash" will last, but our work tells us that we can expect markets to be moving towards new highs for this move later this week....unless the new fundamental conditions driving this mini-crash truly are producing a sudden semi-permanent shift that will take the Seven Sentinels to sell mode with it. History suggest that to be a highly unlikely market outcome, yet we cannot completely rule out that possibility. We are on full alert and have been spending and will continue to spend this weekend in research......reporting conclusions with regard to the above all-critical question.

Seven Sentinels Signals since July 1, 2007 {in reverse order}:

SEVEN SENTINELS BUY SIGNAL AUGUST 29, 2011

SEVEN SENTINELS SELL SIGNAL AUGUST 2, 2011

SEVEN SENTINELS BUY SIGNAL JUNE 27, 2011

SEVEN SENTINELS SELL SIGNAL MAY 13, 2011

SEVEN SENTINELS BUY SIGNAL MARCH 25, 2011

SEVEN SENTINELS SELL SIGNAL MARCH 7, 2011

SEVEN SENTINELS BUY SIGNAL FEBRUARY 8, 2011

SEVEN SENTINELS SELL SIGNAL JANUARY 20, 2011

SEVEN SENTINELS BUY SIGNAL DECEMBER 6, 2010

SEVEN SENTINELS SELL SIGNAL NOVEMBER 12, 2010

SEVEN SENTINELS BUY SIGNAL SEPTEMBER 13, 2010

SEVEN SENTINELS SELL SIGNAL AUGUST 11, 2010

SEVEN SENTINELS BUY SIGNAL JUNE 3, 2010

SEVEN SENTINELS SELL SIGNAL MAY 4, 2010  

SEVEN SENTINELS BUY SIGNAL FEBRUARY 16, 2010

SEVEN SENTINELS NEUTRAL SIGNAL JANUARY 21, 2010

SEVEN SENTINELS BUY SIGNAL NOVEMBER 10, 2009     

SEVEN SENTINELS SELL SIGNAL SEPTEMBER 24, 2009

SEVEN SENTINELS BUY SIGNAL SEPTEMBER 10, 2009

SEVEN SENTINELS SELL SIGNAL AUGUST 14, 2009

SEVEN SENTINELS BUY SIGNAL JULY 15, 2009

SEVEN SENTINELS SELL SIGNAL MAY 12, 2009

SEVEN SENTINELS BUY SIGNAL MARCH 9, 2009

SEVEN SENTINELS SELL SIGNAL JANUARY 14, 2009  

SEVEN SENTINELS BUY SIGNAL NOVEMBER 24, 2008

SEVEN SENTINELS SELL SIGNAL NOVEMBER 17, 2008

SEVEN SENTINELS BUY SIGNAL OCTOBER 28, 2008

SEVEN SENTINELS SELL SIGNAL AUGUST 25, 2008

SEVEN SENTINELS BUY SIGNALJULY 17, 2008

SEVEN SENTINELS SELL SIGNAL MAY 21, 2008

SEVEN SENTINELS BUY SIGNAL MARCH 24, 2008

SEVEN SENTINELS SELL SIGNAL MARCH 1, 2008

SEVEN SENTINELS BUY SIGNAL JANUARY 28, 2008

SEVEN SENTINELS SELL SIGNAL DECEMBER 19, 2007

SEVEN SENTINELS BUY SIGNAL NOVEMBER 29, 2007

SEVEN SENTINELS SELL SIGNAL OCTOBER 16, 2007

SEVEN SENTINELS BUY SIGNAL AUGUST 22, 2007

SEVEN SENTINELS SELL SIGNAL JULY 20 2007

By carefully scanning the charts above, the reader can see every one of those periods that we have identified as IT up-trends based on Seven Sentinels Buy Signals from July 1, 2007 to the present day over four years of market history laid out in daily form.

The title question for this article was " Is Current Market Action A Game Changer?" The first question we want to address is:

1. Whether we are correct in classifying the current trend as an IT up-trend.

Then, assuming we have correctly classified the current trend, we will consider the question of:

2. How much draw-down we can expect under extreme conditions within such a period.

And finally we'll consider the question of:

3. What factors would cause us to conclude that the market is no longer in an IT up-trend mode.

These are the three most critical questions we can ask as we consider our trading position and under what conditions we'd make changes...which ultimately, of course, is our purpose.

The draw down from Wednesday's peak intra-day price on SPX to Sunday nights low as implied by the SPX futures is about 91.5 points, and the decline is still underway. Do draw-downs of that magnitude occur in IT up trends? Let's look back and see whether there were any 5-10% draw-downs in past SSBS periods in the past four years which left the IT up-trend intact. And if so....what followed each instance? We'll answer these questions Monday, but the reader could get a head start on these questions by simply reviewing the above charts.

-------------------------------------------

We'll tackle first the question of the Seven Sentinels and the IT trend. Here we'll examine each individually on August 29, 2011 and today by extrapolation from Friday using current Futures data:

BPCOMPQ was clearly on buy mode on August 29, and our best attempt to extrapolate Monday's numbers would give us a likely sell signal as of today.

NYMO was clearly on buy mode on August 29, and extrapolating Monday's numbers leave us squarely on buy mode as of today.

NAMO was clearly on buy mode on August 29, and extrapolating Monday's numbers leave us squarely on buy mode as of today.

NYSI was clearly on buy mode on August 29, and extrapolating Monday's numbers would give us a sell signal as of today.

NASI was clearly on buy mode on August 29, and extrapolating Monday's numbers would give us a sell signal as of today.

TRIN was clearly on buy mode on August 29, and extrapolating Monday's numbers would give us a sell signal as of today.

TRINQ was clearly on buy mode on August 29, and extrapolating Monday's numbers would give us a sell signal as of today.

So to sum up part one of today's critical question: The IT uptrend as defined by the Seven Sentinels Buy Signal of August 29, 2011 is absolutely legitimate, and is clearly still in effect.

-----------------------------------------

Part two of the question is "How much draw-down we can expect under extreme conditions within such a period, and is this draw-down within those parameters or does it exceed past such declines?"

The draw down in SPX futures from the August 31 peak of 1229.75 to the Monday {thus far} low of 1138.75 has been 91.5 points, or just under 7.5%. Is this consistent with the worst of the draw-downs within past SSBS period over the last five years? If so, what has followed each of those draw-downs?

Listing all such draw-downs over 5% within SSBS periods that were "contained within that up-trend" we find:

*November 28 to December 1, 2008, dropped 81 points (898 to 817) or 9.02%. Market made new high on Dec 8, 2008.

*March 26 to March 30, 2009, dropped 53 points (832-780) or 6.37%. Made new high on April 2, 2009.

*April 17 to April 21, 2009, dropped 53 points (877-823), or 6.05%. Made new high on April 29, 2009.

*June 3 to June 9, 2010, dropped 64 points (1103-1042), or 5.80%. Made new high on June 14, 2010.

We see, thus, that draw-downs of this magnitude, while extremely rare, are not inconsistent with IT uptrends in progress under extreme externals events. We see above four examples of draw-downs within SSBS periods that did NOT reverse the IT uptrends in progress. Each was followed within a few trading days by a new high above where the draw-down began.

We hasten to point out however, that there were OTHER times during those four years where a sharp draw-down within an IT (SSBS) up-trend period ultimately was NOT contained by the IT up-trend and developed into a Seven Sentinels Sell Signal. Following are all instances we could identify where markets dropped more than 5% before developing an SSSS:

*November 14, 2008, market had dropped 130 points or 13% from it's November 4 peak when an SSSS was produced. November 4th high was not seen again for many months.

*June 29, 2010, market had dropped 90 points or 7.95% from it's peak when a Neutral Signal was produced. Markets made new highs in August.

*August 2, 2011, market had dropped 93 points from the 1347 peak of July 21 peak to 1254 when a Seven Sentinels Sell Signal was then produced. 1347 has not been seen since.

So we conclude that this draw down in and of itself does NOT suggest that the SSBS/IT up-trend has been negated, and, in fact, in four instances in the last four years, draw-downs of this magnitude were followed within days by new highs above the peak before the draw-down. There were, however, three instances where draw-downs of this magnitude developed into Seven Sentinels Sell Signals within the following days, and in two of those cases, the peaks before the draw-downs were NOT seen again afterwards.

Thus whether or not we will immediately overcome this draw-down and resume the up-trend and make new recovery highs is inconclusive from this study of Seven Sentinels history.

-----------------------------------

So now the third and  most important part of the whole question - "What factors would cause us to conclude that the market is no longer in an IT up-trend mode and that thus we need to liquidate our long positions?"

Considering that the market is and remains in a clear Seven Sentinels Buy Signal, and that this draw-down is consistent with four past draw-downs in SSBS periods that were contained and followed by new highs shortly thereafter, BUT that there also were three times in the past where the draw-downs were NOT contained {developed into Sell Signals shortly thereafter), we have determined that we will hold all current positions unless of or until:

1. A Seven Sentinels Sell Signal is produced, or

2. 1135.91 SPX is violated on a closing basis. {1135.91 was the low on the day all Seven Sentinels went to buy mode.}

This decline is scary and "looks" extremely convincing. But we are reminded that ALL deep draw-downs in legitimate IT up-trends appear very compelling at the time they are occurring. It is just NOT possible to conclude whether this draw-down represents a real game changer in terms of the driving forces which will be affecting markets moving forward, or whether it is an understandable temporary reaction to a very negative situation which will, along with dozens of other such scary situations since this Bull Cycle began in March 2009, be absorbed into the Primary Bull Market as have all of the others. Until proven otherwise, we'll give the benefit of the doubt to our Seven Sentinels and that primary cycle, and sit tight.

EOM