S&P500 - Bearish scenario re-awakens,

After the big rally last week, Monday to Thursday, Friday's price action did an awful lot of damage completely eradicating the four previous days gains. In the wake of this, I have decided to dust-off one of my old bearish scenarios, which I had previously suggested were on life-support. - Before that however,  last Friday's posting on 'Risk-off 2' prompted a couple of old friends to call me up, both suggested that whilst I had made a decent observation, the situation is very different this time round. Whereas in spring 09 the market was very oversold, with intense pessimism, and a vast amount of stimulus and fiscal expansion. This time we markets are far less oversold, there is less (but growing) pessimism, and many governments are moving to reverse recent fiscal expansion. This would, they both suggest, tend to favour markets exiting the recent consolidation, which I have termed 'Risk-off 2', opposite to the direction at the end of 'Risk-off 1', essentially suggesting that 'Risk-off 2' continues.

Moving on to my aforementioned 'old bearish scenario', one of my contentions in the past few months, was that the price behaviour of the US equities has been similar in many ways to the price behaviour in 2008, albeit on a smaller timescale (Daily as opposed to Weekly). The bounce however from the July low at 1010 had moved higher than I expected, hence that is why I labeled this scenario as on 'life-support'. Friday's price action, had however re-awakened this comparison. - The chart for this comparison can be seen below. On this comparison, the drop down columns emphasise the key turning points and how they have occurred at similar junctures on both charts during the price progression. The similarity of the price behaviour should be apparent, in order to account for both the 'Flash-Crash' and the stronger bounce last week, I have labeled these as anomalies. - These overlays sometimes work since 'the past has a habit of repeating itself', although it is more appropriate to say it rhymes rather than repeats. -- This week is likely to be crucial in-terms of whether this comparison does continue, or whether it is finally laid to rest. - Looking at, what happened next, in the 2008 chart, suggests that price action should continue to rollover following last week's top and then plummet in a cascading fashion like a stone. If indeed the daily 2010 chart does repeat the 2008 weekly chart, then some extraordinary price action lays ahead this week, more particularly towards the end of this week, with a potential target in the low 800s. - This is a big call I know, hence I will add a caveat, and that is that I think a move of this nature is a long-shot, however in-terms of risk reward, if the SP500 stays shy of last week's highs, it does offer a nice potential risk/reward trade, with a possibility that even should it not follow through, the market could still be lower at the end of this week/early next week.