Trend is Down but Price Looks Exhausted

Last week ended with a volatile day but when it was all said and done we had another downtrending day. The unrelenting downtrend continued as the ADX value nudged higher yet again and the practical result was a whipsawed long position in the still under development “Supply & Demand System”. From a long position at (theoretically) 1245.25 on Thursday’s open to a “Stop and Reverse (SAR)” point being hit on Friday at 1240.80, it was an unsuccessful trade against the trend.

I will implement the idea of trading only in concert with the higher level trend by instituting the following advice from Thomas DeMark who recommends strongly: “ … that a longer-term wave perspective of price activity be followed as well, in order to serve as an overlay defining the market’s direction. In other words, once the environment is identified, only accept trades that are in concert with the trend.”

This morning’s chart shows the D-Wave installed on the weekly chart of the cash S&P500. There are eleven waves up from the 2002 low; that is, the trend is clearly up until the October 2007 high. When the August 2007 low was broken the trend changed to down and we are in the third wave down now. This definition of trend is objectively derived and would have allowed only long trades until August 2007 and only short trades from that time until now.

At the present time I would keep a very close stop on short positions as price may well be exhausted (at least temporarily) on the downside here. That is, a bear market rally may be imminent. The 2-day high of 1257.65 is an objective choice although money management rules should govern the ultimate choice.