Weekly Chart Update - October 20-21

The cash S&P500 formed a downtrending price bar on the weekly chart and the price pulse upwards from the September 14th low ended at the 1576.09 all-time high. A new downward pulse began at that point.

We now have three distinct price pulses up from the August low. At one time I was viewing this action as an “A-B-C” Zigzag pattern. I have recently changed that view to a “1-2-3” of an Impulse pattern. The intensity of the sell-off this week has me wondering if my change of heart was correct. But who knows, after a “1-2” from the August low to the September 14 price bar low, the recent price pulse up may even be wave 1 of 3! The fact is that it is extremely hard to count Elliott waves real-time and that is why I don’t trade/invest solely on it. What it does do is help quantify the magnitude of potential moves.

Getting back to the weekly chart my biggest concern (besides the depth/intensity of the current move down) is the bearish divergence between price and all the momentum indicators I follow. While price closed at an all-time high last week the RSI (top panel of today’s chart) and Derivative Oscillator (bottom panel) failed to confirm and have now themselves turned down.

As pointed out before, the derivative oscillator made a nine year low with the August price low. Such an extreme warns that after a consolidation a new closing price low will occur with bullish divergence in the indicator. This would mean an “A-B-C” correction from the July 2007 high where the recent rally from August to October was the “B” wave consolidation. We would now be doing the final move, wave “C” which would go to a point where we would see a close on the cash S&P500 below 1433. We may be smack in the middle of wave 3 of C now.

Also note that the oscillator has formed the third descending divergence peak (they are labeled on today’s chart). Connie Brown states on page 300 of “Technical Analysis for the Trading Professional” that “The market usually breaks down before the market is able to form a fourth oscillator peak. Or a peak will occur as a failure at the zero line.” What does this mean? We need to be very cautious here as this confirms the warning in the paragraph above.

With momentum indicator warnings we now look at the moving averages on the chart. Major support is indicated at the 1490 level. This is just below the Fib/Gann cluster I noted in my October 15th post. If we can’t hold in this area next week (and it is not very far below) we may see a much deeper move down.

Bottom line for me: I am happy with the current trade I have on in SH in my investopedia game account.