Big Wave Riding or How the S&P 500 looks like its about to tank or Monday Night FOMC-Week Rock Blog

With the recent rapid rise in interest rates, a surging yen, plunging global equities, new bear market in gold, and spiking VIX, many investors seems to be scratching their heads at the modest ~5% correction in US stocks ($169 to $160).  If the world is going through a significant deflationary correction (like every index except for US stocks suggests), then why haven't stocks dropped more?  Its anybody's guess and there are many things to point to such as the accommodating FOMC (no tapering!), improving US economy, or possibility of fiscal stimulus.  

Its anybody's guess and there are many things to point to such as the accommodating FOMC (no tapering!), improving US economy, or possibility of fiscal stimulus.  Frankly, I think it could be just a question of leading indicators vs lagging indicators, and the US stock indexes seem to be the latter case these days (a lagging indicator).  US stock investor shave grown complacent due to the Bernanke put, and have absolutely no fear of a meaningful correction.  That could all be changing right under the bull's noses, if you put all of the puzzle pieces together.  Lets keep it simple, based on the above SPY chart I would be looking for shorts anywhere $162 to $165.  If SPY can break ~$166 then the bulls could squeeze us up to new highs.  However, I think a break of $162-ish spells doom for the bulls with ~$153-$156 (5%-7% lower) targeted by the  rising 200 dma and measure rule ($169 - $160 = A, $160- $165 = B).  

Probably what will happen is a huge move one day this week related to the FOMC.  Either the market will go into some sort of panic and tank, or the bears will capitulate and send stocks into an upwards crash/capitulation, such as I've spoken of recently.  I also wouldn't be surprised to see some sort of huge fake out, for example, a spike to new highs followed by a drop below $162 in the same day.  If you start to see the volume spike then you'll know the big wave is upon is.

Disclosure:  I have no SPY position but I have many other shorts, including S&P500-correlated indexes like the Russel 2000 and the Dow Jones Industrials.  I am long the yen and short gold.  So I am short, and I intend to stay short unless we break recent highs.  If we slide through recent lows it'll be time to hang ten.