Monthly Chart Review - May 2009

It was an uptrending month as we continued the rally from the March low of 666.79. Note that there was a “perfected” TD Setup on the February 2009 price bar. Does this formation mark the completion of the bear market? I don’t think so as there was no technical “buy” signal in my key indicators – the RSI and Composite Indices. There is neither a divergence between price and the RSI (top pane) or between the RSI and the Composite (middle pane).

Without a supporting signal in my key indicators I am forced to interpret the action since the March bottom as a bear market rally. The question then becomes “how high will we bounce before the down trend resumes?” To answer this question I like to calculate targets using Fibonacci, Gann, TD Lines and TD Trend Factor; looking for areas where the techniques overlap. Note on the chart that we have pushed through the 23.6% retracement but it was not “qualified” in the DeMark sense. This makes me first focus on targets below the 38.2% retracement level.

That leads me to look at my Gann moving averages (red, blue and green lines). I then note that the short moving average (red) is sloping down to intersect the TD Trend Factor target of 973.83 (purple line) over the next month or so. It also must be noted that we are currently “stuck” at resistance provided by the TD Trend Factor of 922.54 and the TD Supply line projection of 925.99. This is the area that has led to a sideways moving market since May 8. Lastly I want to note targets from the Square of Nine: 1012 is conjunct the March low (and aligns with the higher 38.2% Fib level as well as the TD Trend Factor target of 1027.98). 971 and 930 are both Trine and align with the two previously discussed targets. I therefore feel comfortable with 930, 971 and 1012 as targets.

Once we get to a target it is time to check the next lower time frame for evidence of a reversal. We are at the first target now. I will review the latest weekly chart tomorrow.

Hmmmm.... Looking More and More Bullish

Although the cash S&P500 formed a downtrending price bar on Thursday it can not be counted as a bearish session. In fact, the failure to move below 879.61 indicates that the Z pulse has already completed; and this has bullish implications for the immediate future. A break to the upside might well be in the offing from the triangle pattern shown in today’s chart.

The boundary lines on the triangle are similar to the current TD Lines that price action continues to be squeezed between. The Demand line sits at 883.31 along with the intermediate moving average (see yesterday’s chart). The Supply line has become steeper after yesterday and now lies at 909.54. We must open above the supply line to qualify it while to qualify the demand line only requires a break below it. A “breakout” to the upside from this triangle formation would most likely run until 8 or 9 June.

The experimental trade position remains short from 897.34 (5/12). Due to the failure of the z pulse the stop & reverse should be lowered to 924.61.

Tricky Thursday

After making a slightly higher high (to meet the positive reversal target in the RSI that projected to just below 914) the cash S&P500 turned lower on Wednesday. Although we ended up with an uptrending price bar the session was decidedly bearish. If Wednesday’s high was the end of the Y pulse then it can only mean that Z is underway and we should see 879.61 taken out in short order. A failure to do so has bullish implications.

Will the price action finally break through one of the TD lines? The Demand line sits at 882.69 along with the intermediate moving average is (solid blue line on the chart). However; if we do break that line today (which is what I suspect) it will not be qualified and so would not trigger the trend continuation trade. The Supply line lies at 920.42.

I have a sneaking suspicion that this market wants to continue to burn both the longs and shorts. I can see a scenario where we decline early today (to just below 879.61?) but then begin a vigorous snap back rally that keeps the overall consolidation going.

The experimental trade position remains short from 897.34 (5/12); stop & reverse at 930.17. Lower the stop & reverse to 924.61 on a move below 879.61 Tuesday.

Turn Around Tuesday Time?

We began the trading week with an “Outside” day on the cash S&P500. It was a bullish session in the spirit of making a triple top with the Y pulse (developing now) as described in my last posting.

There was a positive reversal signal in the RSI yesterday that projects to just under 914 and so a few more points of upside action are required to fulfill that target. Beyond that, it is now just a matter of seeing which way we break out of the lateral range that has developed. My vote is for a downside break but I am not sure the market cares what I think! Price continues to bounce between the two TD lines. The Demand line sits at 880.28, and that is where the intermediate moving average is (solid blue line on the chart). The Supply line lies at 921.12. As the price pulse model doesn’t allow for the current Y pulse to last much longer in time I expect to see one of these lines hit within the next two sessions.

The experimental trade position remains short from 897.34 (5/12); stop & reverse at 930.17. Lower the stop & reverse to 924.61 on a move below 879.61 Tuesday.

A trend-continuation short trade would be taken Wednesday ONLY on a break of 880.28. If taken the initial stop would be placed at 911.77 or Wednesday high (whichever is higher). Calculated price objective: 834.96.

Price Pulse Update

On the Friday before the long Memorial Day Weekend the cash S&P500 formed an “inside” day. We have bounced off the 878.45 TD Trend Factor level twice and also failed to move back below the current TD Demand line (now at 879.95). Is the decline from the May 8 high over? Is a retest of that high in the cards or are we going to continue on our way down? To help answer that question I present the latest Price Pulse chart today as the picture is becoming clearer using that methodology.

The current configuration of the BLUE level pulses from the 5/5 low is along the lines shown in Figure 13.14 (Example iii) of Tony Plummer’s book, Forecasting Financial Markets, Technical Analysis and the Dynamics of Price (1990 edition). This is a “multiple top” formation and “… involves the market bouncing away from a particular price level at least twice.” In our case this is the 925-930 area where the Alpha and Delta pulses peaked. Mr. Plummer then writes “Sometimes, a reversal in the Beta-wave may be so slow in developing that the y-wave helps to create a ‘triple top” …” Therefore I think we may still bounce a bit higher in the y-wave now underway from last Thursday’s low but then we will continue the decline in the subsequent Z pulse. I think the May 8 high will wind up being the top of the rally from the March low.

The higher levels of the price pulse support this view. On the GREEN level we have now broken below the Beta – Z trendline drawn across the 3/30 and 5/15 lows. The break of that line is bearish and lets us know that the larger, upward moving RED level Alpha pulse has completed on 5/8. This is the price pulse that aligns with the rally from March. We are now in the larger downward moving RED Beta pulse.

The experimental trade position remains short from 897.34 (5/12); stop & reverse at 930.17. Lower the stop & reverse to 924.61 on a move below 879.61 Tuesday.

A trend-continuation short trade would be taken Tuesday ONLY if the open is less than 879.95. If taken the initial stop would be placed at 896.66. Calculated price objective: 834.79.

Doji Week

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Although technically an uptrending price bar we really didn’t go much of anywhere this past week in the cash S&P500. In fact, the weekly candlestick ended as a Doji (opening and closing prices essentially the same). With prices now moving laterally for a couple of weeks we were also not able to follow through on last week’s break of the TD Demand line (dashed green line on today’s posted chart). Although the price projection of 837.81 still stands, our failure to break below 878.94 this week makes me wonder whether the bears can push this this market lower immediately.

One piece of evidence to support another bullish foray to the upside was presented by an astute reader of this blog last week. The idea is that although we have now reached a TD sell Setup (nine consecutive upward moving bars) on the chart the arrangement has not yet been “perfected”. Perfection requires that the high of setup bar eight or nine (or a subsequent bar) be greater than, or equal to, the highs of setup bars six and seven. As Jason Perl writes in his (excellent!) book on DeMark Indicators, “… as long as that situation exists, the risk is for a retest of the price high …”

Of course the bears have arguments on their side as well. Last week I wrote “The weekly TD REI … has also signaled a “sell” by dropping through 879.21.” That signal is still active. The 930 price high reached is also noted to be trine the 667 March low and now stands as a price fractal high.

Bottom Line: Is a retest of the high in the cards or are have we already started on our way down? I favor the latter interpretation based on my latest price pulse work, which I will discuss in my next post. I remain convinced that a deep retracement of the rally from March 6 has begun, but also believe that the lows for the year (though perhaps not the bear market) are in.

Enjoy your weekend!