Weekly Update for 13 October 2007

The cash S&P500 formed an uptrending bar on the weekly chart and the price pulse upwards from the September 14th low continues. This price pulse is equivalent to the five waves up we believe just completed on the daily chart.

Unlike the daily chart, there are no definitive indications of a top although there are hints at future weakness, primarily in the RSI. Price is at an all-time closing high on the weekly while the RSI is lower than its highest value. This however; is only a hint at weakness and means nothing unless the RSI were to turn down from here. We’ll have to wait a week to see.

Bottom line: The weekly chart does not suggest anything more than a “routine” sort of correction on the daily chart. I’ll take a look at some price targets to the downside in my next blog entry.

Trading Plan - A Beginning

The cash S&P500 formed an outside reversal day on Thursday. Regardless of the new high, the downward price pulse from Tuesday’s high of 1565.26 continues and has now gone low enough to form a Change-In-Trend (CIT) at that high. With the trendline also broken yesterday’s high could very well end not only wave v” but the larger wave iii’ from September 10th as well. The Fib ratios for the end of wave iii’ mentioned yesterday proved to be resistance. Also of note: The Gann wheel. The 2002 low was at 768. Six turn of the wheel forward is 1577.

Is a tradable high in place? For the purposes of this blog yes; and I have set up a trading account at Investopedia (the No End competition) under the name of SaxbyFox. I will be buying SH (Proshares Short S&P500 on the AMEX). Using yesterday’s close of 57.6 and a stop at 56.81 I am exposing 0.79.

This theoretical account is worth 100k. My Maximum trade share size must allow a risk for the trade, based on the stop loss, of no more than 0.5% of account equity. Therefore, for today’s trade:
100k account x 0.5% maximum loss = $500 maximum loss per trade. $500 / 0.79 stop = 632 share maximum.

Still Climbing

An inside day was formed Wednesday. A new downward price pulse has begun from Tuesday’s high of 1565.26. This high has occurred with bearish divergence on the daily chart in the momentum indicators I follow and is very near the 1563 Gann level. Tuesday’s high might mark the end of five Elliott waves up from September 10th but it looks like we have to go a tad higher. Fib ratios for the end of wave iii’ are just above the market.

Is a tradable high in place? Maybe, but I can’t act on it yet within my trading system. The price action has not formed a reversal pattern. It would do so today if we have a lower low and a close that is below both today’s open and yesterday’s close. All I can do is wait and see … this market keeps clawing its way upwards giving the impression that a fifth wave terminal impulse pattern has been forming over the last week or so. The trendline marked on the chart is also key.

My bottom line: give the bull the benefit of the doubt here and then “trade” the fourth wave correction.

Holiday Hesitation

The Columbus Day action in the cash S&P500 produced an "inside" day. This hesitation could be explained by Holiday non-interest and so we'll have to see some more confirmation to the downside before we can confirm that wave iii' (see previous chart) is complete.

Forced to a New Perspective

Last week I wrote about the positive reversal signal generated in the weekly RSI on August 10 that pointed to a calculated minimum target of 1548.54. This target has now been realized. This event, along with a new all-time high in the cash S&P500, forces me to reassess my market view.

For other than “Elliott” reasons the new high forces a change in my thinking about the price structure since the 2002 low. This latest price bar on the weekly chart is classified as “uptrending”. The chart continues to show three “price pulses” from the mid-August low, which had previously led me to an a-b-c Elliott count. Now, with a new high in place, it is time to consider the idea that the a-b-c is really a 1-2-3. Just as important as new price highs is the fact that the weekly RSI never fell below 38 over the last few months. This indicates that the correction from July to August was within the context of an on-going bull market. This fact again leads to the thinking that another impulse wave began at the August low and not an a-b-c.

Additionally, it would appear that the August low marked a fourth wave low which means that we are in wave 5 up from that point. Wave 5 should itself be divided into an impulse pattern of five waves. Of these five waves I think that we are close to completing the third. Today’s chart shows this updated Elliott view.