Elliott Wave Update

The cash S&P500 put in an uptrending bar on the daily chart as the bounce off of Wednesday’s low continued.

Today I would like to update the Elliott wave count presented last Friday. If you recall I was counting the action off of the October 2007 high as an a-b-c Flat pattern where the b wave was itself an Expanded Flat. From the December 11 high the “c” wave has been developing into its own five wave impulse pattern. I now have reason to believe that the “c” wave ended at Wednesday’s low. Not only did we get a buy signal on the technicals at that point (daily chart), but the following relationships exist:

Time (most important): Wave “c” was 31 trading days and wave “b” 22 trading days. 22/31 = .7097. The square root of 2 divided by 2 is .7071. This number is extremely important in sacred geometry and is called “the sacred cut”. It has been used from at least Roman times in the field of architecture.

Price: Wave “c” is 253.52 points long while wave “b” is 85.04. c/b = 298.1%; “c” being less than 2 S&P points from being exactly 3 times the length of “b”.

This weekend I will write about how I see this Flat pattern fitting into the larger picture.

Price Pulses

Another volatile day as the cash S&P500 made a new low before roaring upwards during the afternoon. The daily price bar is classified as “outside” and meets the requirements to be a reversal bar as well.

Technically the daily chart flashed a “buy” signal at the close when the composite index turned up failing to confirm the RSI’s new low. In my developing trading system I can’t go long here since the immediately higher time frame (weekly) is still on a “sell” signal as described in my posting of January 6. Trading rules help to take the emotion out of my decision making and so I want to explore them deeper. The basis for a lot of the following technical work can be found in the excellent book by Tony Plummer entitled “Forecasting Financial Markets – Technical Analysis and the Dynamics of Price”.

If one subscribes to the theory that market price movements unfold in “waves” then there should be an underlying cause as to why they occur. Mr. Plummer suggests that the waves (or pulses as he describes them) are caused by crowd psychology and can be quantified through the mathematics of shock theory. In his system there are six pulses in a complete a market cycle. Pulses A-B-C are the labels for the first three upward-biased pulses and X-Y-Z for the downward biased pulses. Today’s chart of the daily cash S&P500 show these pulses from December 18. They are on what I call the “short” time scale. From the first z pulse low through the possible x-pulse low of yesterday there are just over 1.5 cycles.

Like Elliott waves there are patterns that the pulses make relative to each other. After the upward moving a-pulse to start the chart note the five wave pulse sequence to the downside. After identifying such a downtrend you want to be alert to a possible buying situation. In this scenario we want to see the trendline drawn across the C and Y pulses broken. This occurs on January 10. A good place to buy? Obviously not as that high is quickly followed by a renewed downtrend. We need a filter. I have two.

The first filter is my technical work on the daily chart. There was no “buy” signal on January 10. Hence no long trade would have been taken. The second filter is from higher time dimensions of the price pulse and will be covered in later postings. To bring us up to date we may have just seen an x-pulse bottom yesterday but the chart is still clearly in a down trend. The short term price pulse pattern is warning us to wait for a re-test of yesterday’s low.

Ugly

Welcome back! It has certainly been an interesting couple of days. Regardless of the intraday volatility, if you are a swing trader the daily price bar on the cash S&P500 was downtrending with a lower close. There were no technical “buy” signals and no other reasons within my chart work to contemplate taking a long position here.

I can speculate on whether wave iii’ (see chart from my last post) is done or not but that doesn’t lead to anything practical. I could wish I were short but that doesn’t lead to anything practical either. This blog is a work in progress, my technical musings hopefully leading to the development of a swing trading system. In my next series of postings I will lay out a unique approach built upon some of the work of Tony Plummer. This untested system would even have long-term investors out of equities right now!

A bearish wave count on the daily chat

We saw the cash S&P500 form another downtrending bar last Friday and the parameters for a possible long trade were not met. Although the U.S. market is closed for the Martin Luther King, Jr. holiday, other world markets are open. It is not a pretty picture. Therefore today’s post will focus on a bearish interpretation of the daily chart.

Using price fractals and CITs I previously wrote about how the weekly chart was showing us to be in either wave 3 or c from the October 2007 high. The daily chart shows five waves down using fractals from October 2007 to November 26, 2007. To count these five waves as a complete pattern it must be a Leading Diagonal since waves i’ and iv’ overlap. These five waves therefore make up a larger wave 1 or a.

The rebound from November 26 to December 11 is clearly corrective when using the price fractals. This zigzag move would be either wave 2 or b. When counting the decline from December 11 it is critical to note that the consolidation around January 10 did not contain a fractal high. This would imply that we are in wave iii’ of 3 (or c). Furthermore, it may be that the consolidation around January 10 was a second wave. If that is the case we are now in wave iii” of iii’ of 3 (or c) – typically the most bearish part of a wave pattern.

At this point I won’t even contemplate establishing a long SPY position. Be safe out there!

Bear Market Signal on Weekly Chart

After watching a strong downtrending bar develop, it is again time to explore the weekly chart; which is not a pretty sight (unless you have been short!).

Two weeks ago I wrote “At the July high the RSI (top panel) signaled a “sell” when it formed bearish divergence with price. Of interest is that this signal came at the RSI area which may signal the transition to a bear market – although a bear market would only be confirmed if the RSI can not hold the 40 level on the subsequent fall.” With this week’s decline the RSI has now signaled that a bear market is underway on this time frame. This is the first time that this has happened since the 2002 low.

Confirming this bear market view is the fact that price has now failed to find support at the long term moving average (the green line on the price chart). Previously this moving average had provided support throughout the five year bull market from 2002. Notice how that moving average actually became resistance this week.

Perhaps the final nail in the bull’s coffin was the fact that we also broke the November 2007 low. With this event I continue to maintain that there is little doubt that the market has completed a 1-2-3 (or perhaps more likely an a-b-c) move from the 2002 low.

For me, the weekly chart’s bear market signal plus the fact that both the monthly and weekly charts are on technical “sell” signals is of extreme importance. All of my long term investments will remain out of equities here.

Back to the daily chart tomorrow morning.