What Will the End of the Week Bring?

Although we closed back within the range of the past week the cash S&P500 did spike to a new high during the day and formed an uptrending price bar. The tug of war between the bulls and bears continues to be well depicted by the TD Supply and Demand Lines (the red and green dashed lines on today’s chart). The Supply line was broken yesterday but that event might not be confirmed today. The most immediate way for non-confirmation is for today’s opening price to be less than 950.59. The Demand line is now at 929.50.

As posted last weekend, the final say as to the longevity of this rally is the weekly chart, which was only showing *potential* bearish divergence on the technical indicators as of last Friday. Until there is an actual signal the trend is up. If the week had ended yesterday there still would be no signal. Let’s see what today brings.

Both the cash S&P500 and the CRB Index made major lows about the same time in March so I am monitoring the commodities closely. We have had a TD Combo "sell" (now awaiting a bearish flip) on that index and the TD Sequential is on day 11 (of 13) towards a "sell". I suspect that the CRB and equities will reverse together.

Standoff!

Even with futures prices soaring before the open yesterday the bulls could not push cash S&P500 prices to a new high yesterday. The tug of war between the bulls and bears has now gone on for seven sessions. The boundaries of the fight are well depicted by the TD Supply and Demand Lines (the red and green dashed lines on today’s chart). The Supply line was at 950.59 yesterday and our high was 949.77. The Demand line was at 928.17 and our low at 927.97. However, because today’s open will undoubtedly be above 928.17 we will not confirm yesterday’s qualified Demand Line break and the standoff continues.

The bond market is certainly of interest lately. Analyzing the 10 year yield I have a Qualified TD Sequential 9-13-9 Buy on the Quarterly chart as of March 31. Of course rates (yield) have surged since then. On the monthly chart the yield low of 2.038% in December 2008 was followed by a technical “buy” signal in February 2009. There is a fair possibility that interest rates have made a secular low, which would provide a drag on equities over the coming months. On the weekly chart the yield is challenging TDST resistance now.

Verdict? Bullish Until Proven Otherwise

After the bears failed to move price below the 923.85 level on Monday it allowed the bulls to “hang on” to the idea that the rally from the March low can extend even further. Yesterday the bullish camp built on this idea by keeping prices slowly inching higher and we ended with an uptrending day. It seems the bears just can’t get a “paw” into the game.

A break to new highs today (above 951.69 set last Thursday) would mean that I have misidentified the price pulses. As with Elliott Wave, it is beginning to seem as though the price pulse analysis is most useful in confirming the price action rather than guiding expectations. As posted last weekend, the bottom line is that the weekly chart was only showing *potential* bearish divergence on the technical indicators. Until there is an actual signal the trend is up. Oftentimes I get too wrapped up in the nuances of every little move and trying to divine each coming price squiggle. I over analyze.

On the daily chart the fact remains that a technical “sell” signal was generated on June 3. However, this signal was not aligned with the weekly chart and was not accompanied (within four price bars) by a DeMark exhaustion signal (TD Sell Setup, TD sequential or TD Combo sell).

As the orange lines on todays chart show, the trend is up. And at 7:30 EDT the futures are strongly up. Instead of anticipating “sell” signals I need to wait for them to occur.

Bulls Fighting to Hang On

Although we formed a downtrending price bar on the cash S&P500 Monday the bears failed to move price below the 923.85 level. This has allowed the bulls to “hang on” to the idea that the rally from the March low can extend even further.

The price action on Monday did raise the odds that the 951.69 high set last Thursday was a Level 1 price reaction point and the end of the Delta pulse (see chart). On the lowest (BLUE) level the bears would gain the upper hand with a move below the aforementioned 923.85 level. At the GREEN level the odds are also high that we also just finished a Delta pulse. At this level of the price pulse the trend remains bullish unless the X pulse can break below 879.61.

Bottom Line: Unless the bulls can rally this market (and I think that unlikely) above 950.96 today (new TD Supply Line) I think the bears will gain control of the price action. This would lead to a Level 1 X pulse low below 923.85 over the next few days, a weak bounce up in a Y pulse later this week and then another sell-off in Z into the middle of next week. This type of price action would have to be scrutinized as to whether or not it triggers a technical “sell” signal on the weekly chart, which would open the door to a deep retracement of the rally from 666.79.

Bulls Losing Control?

We finished last week with an uptrending price bar that had a lower close. The failure to continue the rally from Thursday has the cash S&P500 remaining in a precarious position (as far as the bulls are concerned). Although we did manage to move above 949.38 before breaking 923.85, the latter level is still one the bulls need to hold or the lowest level price pulse trend would become bearish.

Based on the early morning futures it looks like a move below 934.13 today would confirm Friday’s qualified break of the TD Demand Line. The price projection associated with this break is 907.38. The overhead TD Supply Line stands at 949.31 and would be qualified if broken today.

Bottom Line: I think we are at the “do or die” point as far as the continuation of the rally from the end of March is concerned. A weak session today with a break below 923.85 would put the bears in control.

Weekly Review: Risk Growing

The past week was highlighted by the “perfection” of a TD Sell Setup on the weekly chart when we exceeded the 930.17 level. When a Setup is perfected there is a possibility that the current trend in force (in this case the rally from the March low) has become “exhausted”. Such exhaustion will usually manifest itself within a few price bars and may be just a pullback / consolidation (before the market continues its outstanding trend) or it may mark a trend reversal. One way I like to distinguish between the two possibilities is by using two indicators: Welles Wilder’s RSI and Connie Brown’s Composite.

This week we note that although the RSI (top pane) has confirmed the new price high by making a new high itself, the Composite Index (middle pane) is lagging. This is *potential* bearish divergence between the two indicators. The RSI would have to turn down (which would require price to turn down) from here to trigger the actual “sell” signal. Without a signal I favor the pullback / consolidation view. With a signal I would favor a much deeper retracement (move lower). In either event the current upside potential is quite limited (968-973) while downside risk is growing (max would be a retest of the March lows if a weekly “sell” signal is generated). Therefore I would not be a new buyer of equities here and I would protect any existing positions with tight stops. In fact, someone who was thinking “I wish I had sold my stocks” last autumn or early this year may now be looking at a good time to do so (if we get the weekly signal).

Of note in the coming week is the position of the upward sloping dashed green line. This line has served as a good proxy for the “demand” of equities over the past few weeks and is why Tom DeMark (TD) labeled it as the Demand Line. It sits at 948.42 next week while we closed this past week at 940.09. This sets up the likelihood that we will break below this line (quite possibly right at the open on Monday) -- which should be viewed as another sign of weakness.

Bottom Line: Upside potential is limited over the next few weeks while downside risk grows. Price action on the daily chart over the coming days should provide a good idea of whether we consolidate / pullback a bit from these levels or experience a much deeper retracement of the move up from March.