Failure at Resistance - Again

The cash S&P500 formed a downtrending day as it failed at overhead resistance. This is the second time that the average has failed to make it through the 1289-1296 area. At the end of the trading session price was sitting on support (provided by two moving averages and a dynamic Gann line) as seen on the provided chart.

The Directional Movement System remains flat as we failed to push above Wednesday’s high of 1291.67. The Wilder stop (Parabolic SAR) on any open long position is now at 1255.85.

A failure to rally immediately back above 1291.67 today would cause Wednesday’s high to become a price fractal high. Such a development would significantly raise the odds that a swing high has been made. This; in turn, implies that the market will break below 1247.45 and test 1234.37. A break of 1234.37 implies a retest of the July 15 low.

A price drop below 1257.91 today would put my under-development trading system in a short position.

Now the Bulls Must Break Overhead Resistance

The cash S&P500 made an uptrending price bar on the daily chart Wednesday although volume declined. Price is now right up against the resistance band of 1289-1296. The question of the day is “Can the bulls break this barrier?” If the answer is no then the strength of this bear market rally will be called into question and the July 28 low may have to be retested yet again before we can have even a chance to move higher.

As far as the Directional Movement System is concerned, we had a bullish crossing of the DI lines yesterday. Wilder says that the point to go “Long” is yesterdays high of 1291.67. Note that this “system” is currently flat.

The Wilder stop on any open long position (which was not based on the two Wilder systems mentioned in the preceding paragraph) is now at 1251.87. Note that my own under-development trading system is flat here since it will only trade with the weekly trend - which is down.

Bulls Do Hold July 28 Low

It was FED Day yesterday and the market celebrated with a strong advance (uptrending day) on increasing volume. Although the short term moving average (bright red line at 1264) did not contain the market during the recent Fibonacci three day decline, it never rolled over and the last pullback low of July 28 held. Now we need to see follow through to the upside to say that the drop over the past few days was indeed a “head fake”. The bulls need to move this market through the resistance band of 1289-1296.

And I think they will. Yesterday’s strong price action means that the daily RSI held the 40 level and the Composite Index created a positive reversal signal - the technicals on the daily chart are once again bullish. More importantly perhaps is that the cash S&P500 was able to break through its resistance line (bold dark downsloping red line).

In my post of Friday, July 18 I wrote:

“… the ADX line (see chart) has now turned down. Wilder says “There is nothing wrong with exiting the system trade when this occurs and reentering in the direction of the next crossing of the DI lines or reentering if the ADX line again turns up.” That is, exiting shorts for now and waiting for further developments. We’ll keep an eye on it.”

Well, the ADX line (black line on chart in top pane) has continuously declined since then and now we are close to a new, bullish, crossing of the DI lines. A move today above the resistance bands would probably do it. The Wilder stop on any open long position (which would have been taken against the trend) remains at Monday’s low of 1247.45.

Yes, short term the market is looking bullish but I continue to think it is within the context of a bear market rally. I remain rooted to what I wrote on July 21: “As far as a general roadmap goes I am looking for the recently begun rally from July 15 to last at least until Labor Day (early September) but I do not expect 1440 to be broken.”

Bulls Need to Hold the July 28 Low

In a previous post I stated that even though the monthly chart had an underlying bullish “hint” to it we were still operating within a down trend (bearish mode) and the technical “sell” signal that was generated at the close of November 2007 is still active. The bullish “hint” is due to the fact that we are now at chart support while the technicals are firming.

Yesterday I showed that the weekly chart had made low and generated a technical “buy” signal at Monthly chart support. However, since the trend is down I am viewing this event as signaling only a bear market rally at this point and not a new bull market.

Looking at the daily chart of price (bottom pane) along with the RSI (top pane) and Composite Index (middle pane) we can see that the last two technical signals help to flesh out this story. There was a buy signal coincident with the weekly buy signal at the July 15 low. However, on July 30 the new highs in both price and RSI were not confirmed by the Composite Indicator and so a sell signal was created. Since that signal the market has sold off for three days. I have been viewing this sell off as a “fake”, that is; I have been thinking that it is just a pause in the action before we continue to the upside. However, I have also been thinking that the short term moving average (bright red line at 1262) would contain the market. It hasn't.

Now note that the RSI remains above 40. Holding the 40 level is crucial in distinguishing a pullback in the uptrend since July 15 from a dive to new lows. More importantly, the Composite Index is now below its July 28 value while price is not. If the market can hold here and turn up the Composite will issue a positive reversal signal and the technicals on the daily chart will again be bullish. Otherwise we are looking not only at a retest of the July 15 low but perhaps even new lows!

Today’s support levels are: 1241-1243 and then the July 28 low in the 1233-35 area. The Wilder stop on any open long position (which would have been taken against the trend) is now at yesterday’s low of just at 1247.45. Let's see if the bulls can hold the July 28 low!

A Brief Look at the Weekly Chart

In my last I said that even though the monthly chart had an underlying bullish “hint” to it we were still operating within a down trend (bearish mode) and the technical “sell” signal that was generated at the close of November 2007. The bullish “hint” was due to the fact we are now at chart support while the technicals are firming. Today let’s drop down one time frame to the weekly chart.

Price made a price fractal low (blue diamond symbol) and Change in Trend (green ellipse) two weeks ago along with a technical “buy” symbol in the RSI. Note that these events occurred at Monthly chart support. However, we also know that the trend is down as measured by D-Mark Wave Analysis and shown in previous posts. Additionally notice where the RSI sat when it flashed its “buy” signal: below 40; which is bear market territory for this indicator. In fact, all of the indicator bottoms this year have been below 40. This tells us to view the current bounce as only a bear market rally and not to get overly excited about “potential” on the monthly chart.

Making a bottom is a process and making low within a support area is just the first step. Before getting too bullish on a longer term basis I next want to see price (basis the weekly chart) rally the RSI above the 40 area and then hold that level on a pullback. Finally, I then want to see the current resistance line (bold, dark red down sloping line on the price chart) broken.

Now back to the daily chart. The cash S&P500 made a downtrending bar on Friday on lower volume. The closing price was coincident with the short moving average which is trying to “contain” (not necessarily stop on a dime) the pullback. If we can hold here then we have been watching a “head fake” to the downside and will continue the rally from the July 15 low. Failure to find support here could lead to a deeper decline and a retest of the July 28 low.

Today’s support levels are: 1253-57; 1245-46; 1240-41; and 1234-36. Below that and we are looking at a retest of the July 15 low. The Wilder stop on any open long position off of the July low is now at 1244.79 (within the second support level mentioned).