Weekend Report for November 17-18, 2007

The weekly chart of the cash S&P500 index formed a downtrending price bar this week. Based on volume (lower) and price facilitation (lower) it was a week that indicated a fading of interest in the short side. This is interesting since the previous two weeks showed an increase in both volume and price facilitation; which indicated increased bearishness. Has sentiment changed? The candlesticks are supporting that notion as we had a “gravestone” form this week. This pattern is indicative of a possible bottom but it is prudent to wait and see how the price action behaves early in the next candlestick. The downward price pulse from the recent 1552.76 high continues.

Of note technically this week is the fact that the RSI turned up, which has produced two “positive reversal” signals. Price targets (minimum) are 1569.56 and 1561.95.

The Elliott pattern that best fits this technical evidence is a Contracting Triangle corrective pattern from the July high. We may just have ended the “c” wave of that correction. My roadmap for the final two waves of the triangle can be seen in this weekend’s chart. If wave “c” is not over I have left my two lower target zones on the displayed chart.

Bottom Line: The weekly chart does not conflict with the daily chart’s suggestion of a bottom being made. I feel comfortable looking for a long position in the SPY at this point.

Still Looking to Buy

We had a downtrending day in the cash s&P500 on Thursday. The downward price pulse from the high of 1492.14 continues as we retest the low set Monday at 1438.53. Volume continued to shrink yesterday but is now giving a different message than it has for the past few days. We now have the same price/volume relationship we had on Tuesday. Price is moving easily but the volume has decreased. Wednesday morning I wrote that “It is a warning sign that the prior trend will resume unless volume comes into the market”. This is what happened as we reversed to the downside Wednesday. Now, if volume doesn’t come in to the market we may reverse to the upside.

Since I continue to believe the retest will be successful and that the low is in, I will be going long the SPY on any move above yesterday’s high unless we get a new low first. I think we have an excellent risk/reward situation here. My initial stop will be right beneath Monday’s low.

If we do get a new low it will most likely be associated with the wave count presented in today’s chart. It shows that one more push lower is due in a fifth wave. Note that in this count waves iv” and i” do not overlap and that waves ii” (expanded flat) and iv” (zigzag) alternate.

Positioning to go Long

One need not look for a Reversal Day price bar any longer. We had one yesterday. Although an uptrending bar, price made a new high but closed below the prior day’s close and the current day’s open. The upward price pulse from the low of 1438.53 (which is now classified as a price fractal low) completed at yesterday’s high. Volume continued to shrink which continues to be bearish at this point.

Although we poked above it, the 1490 level proved to be good resistance yesterday. Previously that level had been support and so; particularly after yesterday's reversal bar, a retest of the most recent low appears to be in the cards.

Since I believe the retest will be successful and that the low is in, I will be going long the SPY on any move above yesterday’s high. Actually I don’t expect to be filled today, but I am willing to position my long based on the belief that we are due a short-term low by this coming Monday. My entry point will follow the price bars down as long as we don’t get a new low. My initial stop will be right beneath Monday’s low. For my blog related trading account at Investopedia (the No End competition) under the name of SaxbyFox, I will be putting in a buy stop for SPY shares at a price of 149.41. My initial stop (when filled) will be just under Monday’s low of 143.69 so that I am risking 5.72 points.

Buy Signal!

It was an exciting day to be a bull yesterday as the daily cash S&P500 formed an uptrending price bar. The downward price pulse from 1520.77 is over at Monday’s low and a new upward pulse is underway from that point. However, there were some small items of concern. We did not have a clear reversal bar (Reversal Day; Signal Day; or Snap-Back Day) and it was what Bill Williams calls a “Fake” bar. This describes a situation where even though price is moving easily the volume has actually decreased. It is a warning sign that the prior trend will resume unless volume comes into the market.

On the other hand (we always have two hands don’t we?) I finally got a technical “buy” signal! Both the Composite Index and Derivative Oscillator (shown on today’s chart under the RSI) turned up after making higher lows than the RSI (top indicator). This would seem to confirm the Elliott wave count presented yesterday that Monday’s low marked wave v” of c’, which implies that the entire decline from October 11th is over. Note that I have been saying v” of c’ instead of v” of 3’. The wave count v” of c’ implies that we will see new highs before we ever break Monday’s low. If Monday’s low were v” of 3’ we would break to a new low before we even broke above 1490.40.

Therefore, the first test of the current wave count will be previous support; which is now resistance, at that 1490 level. If our count is correct we should break this level without going to a new low.

Since I believe the hand that says the low is in, my problem is the mechanical one of where to enter a long position. For me, I am most comfortable waiting for the first pullback. This is defined by my timing work and should occur before the end of next week. More on that whole mess later.

Speculation Concerning a Low

Another day, another downtrending price bar on the daily cash S&P500 chart. The downward price pulse from 1520.77 continues.

Boring? Hardly. We have now reached the 1432-1438 support level laid out in my post of November 9th. Yesterday’s low was actually at 1438.53 (a half point is close enough for me). When one considers that the brief consolidation that started with the strong rally from the low on November 8 may mark Elliott wave iv’ of c’, then yesterday’s low may be v” of c’. That would imply that the entire decline from October 11th may be over. This wave count is labeled on today’s chart.

Even if we are at bottom I will not be going long; as I don’t have a technical “buy” signal yet. If the wave count presented today is correct I should have such a signal soon.

RSI Developments to Take Note Of

The daily cash S&P500 chart formed another downtrending bar on Friday and so the downward price pulse from 1520.77 continues.

Perhaps one of the most significant technical signals on the daily chart of late was Friday’s move in the RSI (Welles Wilder’s Relative Strength Index) below the level of support in bull markets. This came after the index failed to move above the level of resistance typically found in bear markets (see chart). It is this action that leads me to my Elliott wave count is that we are in a “c” wave which is part of either an Expanded Flat or Triangle that began at the July high. If “c” is part of a Triangle it will itself be an “a-b-c” pattern. If part of a Flat it will be a “1-2-3-4-5”. In both of these options the “c” or “3” waves will themselves be five waves. Therefore, we may have just completed, or are very close to completing, iii” of c’ or iii” of 3’.

Bottom Line: My thinking is that we will see wave iv” and v” of c’ (or 3') play out this week; perhaps very quickly. As that happens I will be watching for a technical “buy” signal and then decide whether to come off the sidelines.

Weekly Chart Review for November 11, 2007

The weekly chart of the cash S&P500 index formed a downtrending price bar this week. As shown in the chart we were not able to hold support at the confluence of the short (red) and medium (blue) moving averages. The downward price pulse from the recent 1552.76 high continues.

On October 19th the weekly chart produced a technical “sell” signal when the RSI failed to confirm the price high. At this time we still don’t have a “buy” signal. My current Elliott count is that we are forming a corrective pattern from the July high. Furthermore, I believe that we are in wave “c” of that correction now.

What else do I believe about the S&P500?

1) We will hold the August low during the current correction.

2) That the correction will terminate by the end of the calendar year.

I have added two likely target zones to the chart for the end of the correction. The higher aligns with the 1413-1417 zone previously discussed.

Bottom Line. All of the above work helps to “frame” the price action but here is the true bottom line: With the weekly and daily charts on a “sell” signal I will remain on the equity sidelines.