Monthly Chart

As stated in previous postings I use price fractals and CIT’s to help define the wave count; key word being “help”. In today’s chart I present the monthly cash S&P500 wave count that makes use of those principles. Careful study will show that the wave positions are a bit different than those shown in the larger time frame Quarterly chart. This is due to the loss of resolution as one adds more data. However; notice that they both show the market being either in intermediate degree (3) of Primary “Five” or minor C of intermediate (B) of Primary “Four”.

Based on the quarterly chart I preferred the former count. The monthly shows a five wave impulse pattern from the 2002 low (which marks primary wave “Four” in the preferred count) up into the March 2005 high. At the same time note that the RSI; which started below 40 indicating a bear market in this time frame, moved up to the 65 area. This is the area where bear market rallies typically end.

We then experienced a very shallow a-b-c flat pattern into the October 2005 low. As we moved into 2006 the market rallied and the RSI moved above bear market resistance confirming that the monthly chart was now in bullish mode. Indeed, it appears that another five wave impulse pattern is forming from the October 2005 low. In my opinion, wave 3 of that impulse completed at the July 2007 high.

The question then revolves around the action since that high. What worries me greatly is that both the August 2007 low and October 2007 high are price fractals. Do they mark waves 4 and 5? If so we have completed intermediate (3) or; having more bearish implications, we have completed a large a-b-c zigzag from the 2002 low. Should we be concerned here?

The RSI indicator says yes. The last signal from this indicator was a “sell” that was generated at the end of November 2007 when the market turned down. October 2007 was at a new closing price high but the RSI failed to confirm. This is bearish divergence.

In my next post I will continue this discussion of the price action since July 2007 by looking at the latest weekly chart.