ZigZag Number 2

Here is a slightly more bullish wave count of a zigzag pattern from the August low.

A move to a new high on the cash S&P500 would force a major reanalysis.

Trend

The cash S&P500 reached the Fibonacci cluster described in yesterday's post and then turned down. So there WAS a reaction at that area. The question now becomes "How important is that reaction? Is it just minor, will the uptrend continue through that point now? Or was it a significant reaction that will end up being an important high?"

To help answer that question I watch the RSI for an indicator of the market trend. In a downtrend the market will break the 38 level as it did while falling into the August low. When the downtrend is over the RSI will then move clearly above the 63-67 area. Movements that can not exceed this area are only counter-trend rallies in the continuing downtrend.

Interestingly the RSI is now at the decision point. New uptrend or Bear market rally? Let's watch and see.

Blown Out of the Water

The FED has spoken and the market has reacted. My Contracting Triangle scenario has been proven wrong. No time for crying .... it is back to the drawing board.

My monthly analysis (see earlier monthly charts) shows a price swing (the solid blue line on my price charts) down into the August low and another moving up from there. Keep it simple ... that is a wave down and now we are doing a wave up.

The weekly chart shows three price swings down from the all-time high to the August low. It also shows us in the third swing up from the August low. So, the monthly swing down into August is composed of three swings down and so far looks to be made up of three swings up. Can I find a match in the daily chart? My proposal is displayed above.

I then overlaid some Fibonacci projections based on these swings and found a cluster around the 1540 area. My bias is still to be bearish here .... still looking for that October low.

Resolution Time?

Once again the price action on the daily chart has done nothing to negate our long-standing contracting triangle scenario but I expect that to change over the next couple of sessions. We should get resolution on the question "is the triangle a correct interpretation of price action within the cash S&P500?" thanks to the meeting of the FOMC.

Needless to say everyone is holding their breath on the FED announcement this afternoon. Is the FED’s action today really that important? I suggest taking a look at this week’s market commentary by Mr. John Hussman, President of Hussman Investment Trust, on this subject. http://www.hussmanfunds.com

The Weekly Chart Before the FED Decides

The new weekly bar chart of the cash S&P500 is shown in the middle of today's chart display.

The weekly price swings (shown in blue on the price bars) are showing the possible contracting triangle pattern that we’ve been following on the daily chart. Note that this week’s close is at the short moving average (red line on the price chart) and the 61.8% Fibonacci retracement of the decline from the all-time high. The market is at resistance.

We are meeting this resistance after rebounding from a dramatic Derivative Oscillator (indicator on the bottom panel of the chart) low in mid-August. I say dramatic because this was the lowest weekly value for this indicator since September 1998: 9 years! Whenever an extreme low is formed you can expect a rebound but it is not the end of the decline. This guideline tells us that the bottom is not yet in. Supporting this notion are the momentum indicators.

The top panel of our chart displays the RSI and the second panel the confirming indicator I use. As noted before in this blog the weekly chart remains on a momentum technical “sell” signal. Our momentum indicators did not generate a buy signal at the August low. This also indicates that the 61.8% move up since that point is only a bounce and not the end of the decline. More immediately, the RSI made a new high this week (since the mid-August low) along with price (on a closing basis). It is hard to see, but the confirming indicator did not make a new high. This is a sign of potential weakness dead ahead in the market.

Bottom line: The wave count and technical indicators describe a market that is at a significant decision point. It is a curiosity that this decision point coincides with an extremely important and anticipated meeting of the Federal Open Market Committee. Interestingly, the wave count and technicals also indicate that the next significant move in the cash s&p500 will be down. What does this say about the Fed’s decision? I’ll let the reader ponder that!