Last week, I remarked to a few other traders that the
"buy-the-dip" crowd seems to have been out in force lately, and
that if and when support broke down, those buyers should provide
heavy resistance to any rallies. When observing a price charts, it
appears every dip has been bought quickly. This is leading to a
halting decline that doesn't seem to want to get rolling. From this
behavior, we can extrapolate that almost everyone is anticipating a
positive resolution to not only the government shutdown, but also
to the approaching debt ceiling deadline (October 17).

This psychology of positive expectation is consistent with the
latter stages of a bull run. Contrast the current psychology with
the last debt ceiling crisis, at the end of 2012. The markets were
fearful and panicky then, and lots of folks were convinced we were
about to crash. Of course, the ultimately positive resolution then
kicked off a massive rally that has continued largely unabated
through the present. That psychology of fear was consistent with
the
early

stages of a bull run.

I've talked about this many times, but in order to grow legs, bull
runs need sellers just before the move starts. Those sellers then
become buyers on the way up, and actually fuel the move.
Conversely, bear runs need buyers positioning themselves wrong
ahead of time, so those buyers can become sellers on the way down.
The majority simply has to be on the wrong side of the trade for
any extended move to occur -- and that's where the psychology comes
in. Expectations have to be the
inverse

of the ultimate reality, in order for traders to position
themselves incorrectly in the first place.

So sentiment has to be bullish for a bear move to start, and it has
to be bearish for a bull move to start. Just as we watched sellers
position for the negative outcome back in December, we may now be
witnessing buyers getting positioned for a positive outcome that
never materializes.

Obviously, I can't tell the future -- but what I can tell is that
if things go south, they're going to go south quickly, because the
charts are showing us this. Frequent readers have heard me use the
term "nest of first and second waves." That's Elliott Wave
terminology -- in simple terms, (in a decline) a nested series of
waves shows us buyers jumping in at each new low, which prevents
the move from gaining steam early on. This has a coiling effect on
the market, and the price charts show us how the majority of
traders are positioning themselves. Since they're on the wrong
side, when the move finally breaks and kicks off the third wave, it
runs hard and fast as those early buyers suddenly exit en masse.

On

Friday

, I noted that it's difficult to find a pattern that doesn't
require new lows, and mentioned that we may see a big gap down come
Monday. Right now, futures are suggesting a double-digit gap lower
for the
SP 500

(INDEXSP:.INX) -- and Friday's action has allowed me to narrow down
the potentials further, and also to provide some qualifiers to help
sort one from the next. The chart below outlines the details.

Click to enlarge

It's worth noting that the
NYSE Composite

(INDEXDJX:NYA) has dipped below the first key pivot, and if
Monday's gap down sticks, will have been firmly rejected on the
back-test.

Click to enlarge

The first blue-box target zone on the legacy SPX chart has come
within a few points of capture, and presently looks likely to be
captured in the upcoming sessions. If the nest of first and second
waves is unfolding, the market will ultimately blow through that
target.

Click to enlarge

In conclusion, I still feel it's unlikely the market will escape
new lows. To the contrary, the pattern continues to appear to be a
bearish coiling pattern, and trade below 1665 is likely to lead to
an extended sell-off. Presently, the most bullish pattern I can
find (of good probability) is simply an ending diagonal c-wave that
grinds a bit higher to start off the week. Trade safe.