Remember Price Pulse Theory?

The cash S&P500 formed an outside price bar (with a higher close) on its daily chart yesterday. After testing, and holding, the 1211-1225 area one more time I think we are continuing to build a base here from which a rally will spring. Before Christmas I think we will have an important top; above 1313.15 (the August high) but below the May high of 1440.

I believe I have made some progress in my understanding of price pulse theory. Some readers may remember posts about this subject and they can be found in the archive. Today’s chart shows that yesterday’s low was assumed to be the end of a “z-pulse”. This assumption was made because we have just had a technical “buy” signal. However, price pulse theory tells us that when we went below the x-pulse low of 1217.23 yesterday the downtrend was “regenerated”. Being in a downtrend with a technical “buy” signal is a contradiction. The way to resolve this is to have the next price pulse high (the alpha pulse) complete below the Y-pulse high of 1274.42. Where would that high be?

Our chart also contains a Fibonacci ratio analysis. Resistance levels are at yesterday’s high and then at 1260 and 1271. Intraday traders should watch those levels.

Important to Watch the Early Trading Today

The cash S&P500 formed a downtrending price bar on its daily chart yesterday. However; the closing price was up, and so we formed bullish divergence between price and the RSI and a technical “buy” signal is now in place.

That being said I certainly wouldn’t act upon that signal first thing this morning! This is indeed an interesting technical “buy” signal as the futures are down over fifteen points this morning (8:00 EDT). It looks like we may need to test the 1211-1225 area one more time – or it may be a bear trap going into the open. Let’s watch and see.

An Immediate Retest

To continue the thread started yesterday, the question now revolves around “follow through” to Monday’s huge rally. After ending that explosive up move right at the short and medium term moving averages, it became evident early Tuesday morning that the cash S&P rise was “too much too fast” and that an immediate re-test of last Thursday’s low was underway. Yesterday I stated that "Such an occurrence would be a good event for the bulls because not only do I think we would hold but it would strengthen the technicals on the daily chart." Let me explain that further.

Today’s chart not only shows the RSI (top pane) but the Composite Index (middle pane) as well. Note that the RSI is back down into the 40 area. Twice before (marked One and Two on the chart) within the consolidation since the July low has the RSI held 40. Holding 40 in this indicator is the first step in establishing a bull swing.

But holding 40 with technical strength is even better. Although it is hard to see, yesterday’s RSI value is actually a bit higher than at point #2 -- and this with price lower (remember that we use closing prices with these indicators). If price and the indicator were to close up today we would have bullish divergence between price and the RSI and a technical “buy” signal would be put into place.

Furthermore, the composite index is also higher than at point #2 two days ago. This indicates the same type of “potential” bullishness.

As usual the key word here is “potential”. We have to see the bulls hold today and close this market higher. I think they will do it. Let’s see if we can have a successful retest.

Rally Ho! At Least It is a Start.

As expected the cash S&P500 rallied strongly on the Treasury “bailout” of the GSE’s. The question now will revolve around “follow through”.

Note on today’s daily chart that yesterday’s high was right at the short and medium term moving averages. That high was also right at the short term weekly moving average and was a “natural” stopping point. If yesterday’s explosive move was “too much too fast” then we should get an immediate re-test of last Thursday’s low. Such an occurrence would be a good event for the bulls because not only do I think we would hold but it would strengthen the technicals on the daily chart.

I also want to note that during the base building that has been going on since the July 15 low the RSI has tested and held the 40 area twice (marked One and Two on the chart) with yesterday being the second time. Holding 40 in this indicator is the first step in establishing a bull swing.

Before Christmas I think we will have an important top; above 1313.15 (the August high) but below the May high of 1440.

A News Driven Market

After declining sharply on Thursday and early Friday the cash S&P500 then rallied to close higher on Friday’s close. This price action caused a downtrending day on both days. I have been expecting a retest of 1234 and have gotten it. Expectations were for a successful retest. Have we gotten that? Well the futures are saying so. They are literally surging at 5:30 am Eastern Time; up 36 points. Players obviously believe that the U.S. Government’s bailout of mortgage market GSE’s Fannie and Freddie is a “great” thing. Maybe in the short run.

I am getting off topic here but when events of this magnitude occur I like to see what the bond market participants think as their view often has a longer horizon. Bonds are selling off anticipating huge U.S. borrowing needs. This is raising interest rates which are usually negative for stocks. I have to conclude that the equity markets are too enthusiastic on this news and that later on this year we will likely see new lows.

As has been stated recently; “In any event, I do expect the next intermediate move in the cash S&P500 to be bullish. But it won’t break 1440 and will likely be over in about a month. A target? Let’s go with the converging medium and short moving averages on the monthly chart at about 1380.” My only modification to that statement due to the GSE news is that the rally might possibly have longer to run in time; but certainly will be over by Christmas.