Reasons to be Cautious

Since we have finished up a week it is time to look at the weekly chart. Today I want to talk about the RSI as compared to price.

Note the points where the RSI lows are marked with “bulls”. These points signify positive divergence between price and the RSI indicator. The first such point is on the week of 10/24/2008. The cash S&P500 rallied for two weeks to a high of 1007.51 but fell short of the previous swing high of 1044.31 on 10/17/2008.

The next RSI positive divergence occurred on the week of 11/21/2008. It was followed by a seven week rally to 943.85; but this was still short of the previous swing high of 1007.51. The key point: Positive divergences fail during bear markets.

Now let’s take a look at the RSI high on 1/2/2009. This point is marked with a bear because it denotes a negative reversal. The RSI is higher on 1/2/2009 than 10/31/2008 although prices are lower. The calculated minimum target for this reversal is 800.03 -(968.75 - 931.8) = 763.08. This price was hit the week of 2/20/2009 on our way to the 666.79 low of March 6, 2009. The key point: Negative reversals succeed during bear markets.

Now then. The March 6 low marks another positive divergence; and what a rally we have had! But look at the previous swing high: 943.85. We are still nowhere near that level. Lastly, look what happens if this rally fails and the RSI dare turn down from here. We will get another negative reversal. There are three, in fact, as shown by the dashed blue lines. The three calculated *minimum* targets work out as: 630.72, 567.52 and 244.24. These are not pretty.

Since I believe that a high was just made on the daily chart I would have very tight stops here if I were a bull. If one had a bearish view (which I do) then I would look to take action on a move below the last swing low of 791.37.

Time and Price Resistance?

From the closing low on March 9 the cash S&P500 has now rallied for a Fibonacci 13 trading days. We are also right in the midst of a band of resistance (825-837) with a bearish divergence present between the RSI and Composite indicators.

From a time perspective I still feel it most likely (68% chance) that the wave up from the March 6 low of 666 will end by today. The low at 791.37 is the point that would mark a trend reversal. Under our current roadmap a move below that level would trigger a bearish stance.

Still Running up Against Resistance

It was a more volatile day in the equity markets yesterday but not much has changed from my point of view. The cash S&P500 remains just below a band of resistance (825-837) with a bearish divergence present between the RSI and Composite indicators (chart shown yesterday).

From a time perspective I still feel it most likely (68% chance) that the wave up from the March 6 low of 666 will end by tomorrow (Friday). The move lower during the day yesterday (down to 791.37) now becomes the point that would mark a trend reversal. Under our current roadmap a move below that level would trigger a bearish stance.

Indicator Divergence Appearing

Looking at this morning’s chart we find the cash S&P500 just below a band of resistance from 825-845. Resistance is being provided via a confluence of Fibonacci levels (dashed horizontal lines), the 180 degree Gann target (solid horizontal line), and a favorite (the ‘long’) moving average (dark green). Is wave “c” ending at this resistance? Well ….

Yesterday’s lower close also points out the developing bearish divergence between the RSI (upper) and Composite (lower) indicators. I think that I would be tightening stops if I were a bull here.

From a time perspective; the current swing up from the March 6 low of 666 will most likely (68% chance) end by this Friday. A completion before Thursday (meaning either yesterday or today) would imply a quick move down below the March 20 low 766.20. Under our current roadmap a move below that level would trigger a bearish stance. What price action today would signal such an event? I think that either an inside price bar or a downtrending bar with a lower close would do it.

New Roadmap Still Points to Move Below 666

What a bullish day! With 804.3 broken we must conclude that the move down from Jan. 6, 2009 to the low on March 6, 2009 was a complete zigzag pattern. This triggers our alternate Elliott roadmap while keeping the view that we get a new low (below 666) before a potentially large multi-month rally can unfold in equities. Today’s chart shows that a large Expanded Flat pattern may be unfolding from the November 2008 low.

Under this scenario the cash S&P500 can’t move above 877.86. If it does it will imply that the low of the year is in and that the market has started a large fourth wave rally that will last into early 2010.

Next resistance can be found at 826-839 where both Fibonacci confluence and a Gann 180 degree up target exist. Two technical items to watch over the next few sessions: 1) The volume yesterday was lower than it has been in a few days and 2) The composite indicator fell while the RSI rose; setting up a possible negative divergence. Both of these developments indicate forthcoming weakness.

Gold Update!

Today I present an update of my Elliott Wave count on the World Gold Index last presented way back on December 14, 2007 (in the archives). At that time I had gold just finishing wave iv of 3 of (5) of III.

Today’s chart shows that I believe wave 3 completed in early 2008 and the larger wave 5 in March of 2008. This also ended the larger wave III rally from early 2001. Since March of 2008 we have traced out A and B of wave IV. As I believe that the large corrective wave IV has not yet completed I can’t be a gold bull here like so many others.

Short term I think we will retest the recent B-wave high near 1,000 dollars but will fail. Then gold starts dropping over the coming months with a minimum of target of $700! What do you think about that?