Waiting For Confirmation of a Significant Top

An “outside” reversal day top was made in the cash S&P500 on Thursday. Is the high finally in? I vote “yes” but will let the price action confirm before I take any action.

The answer lies with another question: “Is the Level 1 Alpha Pulse complete?” The fact that a reversal day was made increases the odds that Alpha is indeed complete. At this point we will have “proof” of that fact if we break below Tuesday’s 897.34 low without first exceeding yesterday’s high.

I also note that we seem to be reacting bearishly after the TD Combo Sell Setup mentioned in yesterday’s post and the trigger of a TD REI “sell” signal when 903.95 was broken. Furthermore, the fact that the TD Supply line target of 943.17 has not been reached and the Composite Index / RSI non-confirmation are also bearish developments.

The only way the market can qualify the current TD Demand Line (at 891.41) would be to open above that level (quite doubtful). This piece of information suggests a bounce may be at hand.

Also of interest: 929 is trine the March 6 low in price. In time, 930.5 is square May 7. Yesterday’s high was 929.6.

Yesterday I put out a twitter tweet during the day announcing that the long trade had been validated per the draft trading plan and to raise stops to the trade entry level. Our first foray under the plan has ended up as a “draw” (of course there would have been commission charges).

A short position (not to exceed 3% of the account balance) would be taken on a move below 897.34 today. All such trades are hypothetical (based on the cash S&P 500; not a tradable contract) and do not constitute advice to buy or sell any instrument. Initial stop would be placed at the most recent high.

The Bulls are Back in Town

After a brief hiatus on Tuesday the bulls were back and rallied the cash S&P500. Wednesday’s uptrending price bar broke through and qualified the TD Supply line and targets 943.17. We closed at 919.53. I must also highlight the fact that the RSI succeeded in pushing above the key 67 level. RSI range rules now show the cash S&P500 to be in bull mode – if you needed convincing.

Price action now supports the idea that the Level 1 Y pulse completed at Monday’s high and was quickly followed by the Z pulse low at Tuesday’s low (see chart). We are now in a new Alpha pulse. Since both the Level 2 Y pulse and the Level 3 Alpha pulse *must* end coincident with the completion of the Level 1 Alpha pulse we want to go short on the next confirmed change of trend. This would happen on a break below Tuesday’s 897.34 low.

When will the Level 1 Alpha pulse end? My timing work says we should top by next Tuesday. So we need to be looking for a top here. Today was the ninth TD Combo Sell Setup day (see yesterday’s post for the chart). With that setup “perfected” experience tells us that we can expect at least a short-term reversal of the up trend (or at least a consolidation) lasting from one to four sessions. The market also has a TD Demand Line at 891.41 that would be qualified today on a break below that level. A move below 903.95 would trigger a TD REI “sell” signal. All of these situations should be monitored for signs that a reversal has begun.

A long position (not to exceed 3% of the account balance) was indicated Wednesday when we moved above 907.75. The initial stop-loss on this Trend-Continuation trade was placed at 897.34 and expired at the close. This trade will be “validated” only if we open above the entry level and exceed Wednesday’s high. If we can’t validate we will exit the position.

Trading Rules (draft):

Trend-Continuation Validation

Trend-continuation trades are “validated” on the day after a qualified breakout. Stop-loss levels are identified as part of the validation process. For long trades:

1) If the open is below the TD Supply Line breakout level, exit at the open.

2) If the open is below the TD Supply Line and the bar closes below the TD Supply Line breakout level, exit at the close.

3) If the high fails to exceed the breakout day high then exit at the close.

A short position (not to exceed 3% of the account balance) would be taken on a move below 897.34 today. All such trades are hypothetical (based on the cash S&P 500; not a tradable contract) and do not constitute advice to buy or sell any instrument.

Trading Rules (draft):

Trend-Reversal Trade-Entry

Only initiate a trend-reversal trade-entry when the market has signaled that the current Level 3 Price Pulse has completed and that a new Pulse (in the opposite direction) has begun. Trend-reversal positions will always be thought of as being three units. There can only be one trend-reversal position held at any given time. Trend-reversal units will be treated as short-term units for stop-loss and profit taking considerations. Even if an initial trend-reversal trade is topped out, new trend reversal trades will be made as long as the time and price zones anticipated for the reversal have not been exceeded.

Profit Taking and the Short-Term Unit

The protective stop-loss on the short term units will be brought to no further than one tick beyond the three-day high or low once the new trade has been entered. Profits will be taken or a unit closed out when a Level 2 price pulse is confirmed complete.

Trading Plan Thoughts

The bulls took a coffee break yesterday and price hesitated with an “inside” day on the daily chart of the cash S&P500. This price action indicates that Monday’s high was most likely a PRP: the end of the Level 1 Y pulse. It is also of note that the RSI failed (at least for one day) to push above the key 67 level.

I now believe the odds very low that the Level 1 Y pulse could have ended at last Thursday’s high. This means that we should still not take a countertrend (trend-reversal) position until price breaks below 847.12; the previous Level 1 X pulse low. An early warning that this will happen *may* be given by the break of the Level 2 Beta – X trendline which stands at 859.16 today.

The market has created a new TD Supply line (see chart) at 907.75. A break above this line during the session today will qualify it and point to 943.17. The current TD Demand Line now sits at about 885.08 and also would be qualified today on a drop below it. A move below 879.21 would still trigger an REI “sell” signal.

Trading Plan (draft): The trading plan provides more specific trading parameters than the trading philosophy.

Trend-Continuation Trade-Entry

Only initiate a trend-continuation trade-entry when the market has qualified a TD Line in the direction of the current Level 3 Price Pulse. Trend-continuation positions will always be thought of as one unit. The maximum number of trend-continuation positions that may be held at any given time is two. Trend-continuation units will be treated as intermediate term units for stop-loss and profit taking considerations.

Every open trade must have an open protective stop-loss order

Never add to a losing position

Profit Taking and the Intermediate-Term Unit

The protective stop-loss on the intermediate term units will be brought to no further than one tick beyond the three-day high or low once the new trade has been validated. The protective stop-loss will be trailed at the one-day high or low if the market reaches the price objective whether the trade has been validated or not. The intermediate-term unit is never exited on a price objective.

Trading Rules (draft):

Trend-Continuation Trade-Entry

Trend-continuation trades are only made on those days that a TD Line in the direction of the current Level 3 Price Pulse are broken and qualified. The initial protective stop-loss for this trade will be the previous day’s high or low. This stop-loss expires at the close of the qualified break-out day.

Based on the draft trading philosophy, plan and rules:

A long position (not to exceed 3% of the account balance) would be taken on a move above 907.75 today. The initial stop-loss would be placed at 897.34.

A short position (not to exceed 3% of the account balance) would be taken on a move below 847.12 today. All such trades are hypothetical (based on the cash S&P 500; not a tradable contract) and do not constitute advice to buy or sell any instrument.

Still Waiting on the Level 3 Alpha Pulse to End

Another day, another uptrending bar in the cash S&P500! The stampede continues! We have now fulfilled the 892.64 price target of the previous TD Supply line. A new TD Demand Line sits at about 879 which would be qualified on a drop below it today. 879.21 is yesterday’s low and a move below there would also trigger an REI “sell” signal.

The analytical challenge with the price pulse right now is determining whether the Level 1 Y pulse has completed or not. If so it ended at last Thursday’s high; Z ended at last Friday’s low and we are now in Alpha. In this scenario both the Level 2 Y pulse and the Level 3 Alpha pulse *must* end coincident with the Level 1 Alpha pulse. Since we want to go short when the Level 3 Alpha pulse is complete we would take a position on a break below 866.10. The other possibility is that our Level 1 Y pulse is not yet finished. In this case we would not take a countertrend position until a break below 847.12. An earlier warning *may* be given by the break of the Level 2 Beta – X trendline which stands at 856.22 today. Which way should we go for today? Use the 847.12 level. A quick break below 866.10 today would almost certainly mean that the Level 1 Y pulse concluded yesterday and not last Thursday.

One last point. The RSI has not been above the 67 level on the daily chart since this bear market began in October of 2007. It is close to doing so now. I continue to believe that the lows for the year are in but we will see a deep retracement (a retest of the March low) over the coming months. In fact, I would not be surprised that we remain in a range (oh, say 666-1100 or so) for another 18 months! An RSI value above 67 would strengthen the case that the low for the year is in.

Based on the draft trading philosophy a short position (not to exceed 3% of the account balance) would be taken on a move below 847.12 today. All such trades are hypothetical and do not constitute advice to buy or sell any instrument.

Monday Morning Musings

The cash S&P500 formed a downtrending price bar on Friday but there is nothing new to report. We are looking at a countertrend position on a break below 847.12. An earlier warning *may* be given by the break of the Level 2 Beta – X trendline which stands at 853.28 today.

The price target on the qualified break of the latest TD Supply line stands at 892.64. Yet another Supply line sits at 888.11 today but would not be qualified if broken. Meanwhile the TD Demand line sits at 862.68 and would be qualified if broken. Finally, the DeMark REI oscillator would signal a “sell” on a move below 866.10 today.

Trading Philosophy (draft): The objective is to identify the trading condition set-ups for swing trades (about a dozen trades per year held for varying times up to 2 months maximum).

** Countertrend trades will be taken when a new Level 3 Price Pulse begins. Each of these trades will be broken into three equal “positions” when executed with the goal of taking profits at each of three price objectives.

** Trend continuation trades will be taken on qualified breaks of TD Supply and Demand Lines. Each of these trades will be thought of as one unit with the goal of taking profits at the single calculated price objective.

** The capital exposure for any one position will not exceed 3% of the account balance. All trades will be held with a protective stop-loss.

Based on the draft trading philosophy a short position (not to exceed 3% of the account balance) would be taken on a move below 847.12 today. All such trades are hypothetical and do not constitute advice to buy or sell any instrument.

Weekly Chart Update

The rally from the March low has now reached Fibonacci 8 weeks. The first event in this uptrending week was bullish: We broke and qualified the TD Supply line at 875.23 (we made high at 888.70). That supply line has a price projection to 1085.29! However; all is not completely bullish here. There are many events that would lead to the weekly chart pointing to a pullback. The first of which would be the failure to see follow through (making a new high next week) which would negate the just mentioned TD Supply line break. There is also a TD Demand Line looming close by (872.55). Since we closed at 877.52 we are close to breaking and qualifying this line --which would also negate the Supply line break and usher in a pullback.

It should also be noted that we ran into resistance this week: 890 (Gann wheel 2 x 360 from 666 low); 890.4 TDST Resistance, 123.6% of TD Wave 2 @ 893.30 and the medium moving average (882.94).

Also of note is the fact that we failed to close above the 23.6% retracement level (of the decline from the all time high) after breaking it during the week. This sets up the possibility of a pullback if we open below 881.38.

Bottom Line: There just seems to be too many events that could trigger a pullback here; but a nice decline may lead to a good buying opportunity! However …. The trend up must be respected until concrete evidence appears. I will be watching the market for the events listed above to signal such a turn.