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.

Calm before the storm ....

... or just the calm before triple witching?

The cash S&P500 index traced out a very weak inside (higher low and lower high) bar on Thursday. Movement was not enough to change the current price pulse direction; which is down from Monday’s high. To this point there has not been much of a follow-through off of Wednesday’s low, it is more like hesitation and indecisiveness. Could this little stutter step be all the bounce we get? I believe we are running out of time. Any bounce should complete today. I will keep my stop on the open SH trade at 57.34.

Not much new to add. My look at the new weekly chart will be posted over the weekend. Have a great day.

Fibonacci Target Met

The market (cash S&P500) formed another outside day yesterday. We actually closed higher but the downward price pulse that began from Monday’s high is still in play. The volatility of the day kept the price bar from being a reversal signal – the open being higher than the close creates a bearish real body candle.

The higher open yesterday may mean that the entire move down from the October 11th high is an Elliott “Leading Diagonal” pattern. The pop at the open would have been wave 4 in this pattern and the low later in the day the end of wave 5. The Diagonal would be over now – and if so ended at the Fibonacci cluster I’ve been watching (see chart). But yesterday also shows that we made low on the same Gann angle from September 4th as we did on September 25th.

After the opening move higher fizzled we made a new low for the move and I have moved my stop on the open SH trade up to 57.34. As I mentioned in this blog on Tuesday morning, I have been expecting a short-term low Wednesday or Thursday. I think that low may very well be in. What next? A quick pop higher that ends either today or Friday would not be unexpected. We would then resume this move to the downside with eyes still on that Fib cluster around 1497. What I am worried about is my stop placement. With my luck I will be stopped out and then we resume the decline! We’ll see.

Conflict!

The cash S&P500 formed a downtrending day yesterday, continuing the downward price pulse that began from Monday’s high. As today’s chart shows this downward pulse is now at a 100% relationship with the move down from the high of 1576.09 set on the 11th to the low of that same day. There is also a Gann level here (at 1536).

Another interesting item today is how the price decline compares with the momentum decline. Today I show the Derivative Oscillator but the same thing can be seen in the other momentum indicators I follow. The oscillator is now at its lowest level since the mid-August low while price is much, much higher. Oftentimes when price does not follow the momentum indicator you can expect a counter-trend rally attempt – in this case it would be upwards.

On the other hand, price did not form a reversal bar or pattern yesterday. As usual it is a day of conflicting information. Has an a-b-c corrective pattern played out from the recent high? The Fibonacci ratios point that way and we did do 90 degrees down per Gann. My problem is “time”. My timing work indicates that this correction should run longer.

Therefore I am keeping my stop loss at 56.81 on the SH trade unless we go below 1536.29 today at which point I will raise it to 57.34. Bottom line: A bounce will not surprise me but I don’t think the bottom is in yet.

Strengthening Fib Clusters

We had an outside day (lower low and higher high) with a lower close in the cash S&P500 Monday. The price action confirmed that the previous high of 1576.09 set on the 11th was a fractal high. More evidence that wave iii’ ended there.

We now have another price pulse moving downwards from yesterday’s high. It should be noted that the push up into yesterday’s high from last Thursday’s low retraced a Fibonacci 61.8% of Thursday’s decline. This implies the two swings are related and allows us to add another Fibonacci ratio to our chart (shown in orange). Note how this new projection strengthens the conclusions already arrived at.

Timing. I do expect a short-term low to be made Wednesday or Thursday. Will it be the low that completes Elliott wave iv’? Time will tell. For now I am keeping my stop loss at 56.81 on the SH trade.

A New Week Begins

The cash S&P500 formed an inside day (higher low and lower high) on Friday. A new upward price pulse has begun from the 1546.72 low made on Thursday and we are now short SH in our investopedia trading account.

Since I am thinking that the immediate trend is down it is time to come up with a few price targets – the Fibonacci ratios on the chart (blue and red dashed horizontal lines). The first is at the 1527 level then 1497 and 1472. We then add Gann levels (the solid horizontal green lines) and look for a match. This leaves us with the lower 1497 and 1472 levels. Finally, if the current decline is in fact an Elliott wave iv’, then we can not overlap wave i’ at 1479.40. This leaves us with just one target at the 1497 level.

With a stop loss set at 56.81 we now wait for one of two events – we are stopped out or the market begins to head to our target by breaking below last Thursday’s low.