The Monthly Chart Review for October 2009

Last month I mentioned that “… the monthly chart shows that the forty point area between 978 and 1020 is the current ground the bulls must hold.” The only meaningful decline in October saw a low of 1019.95. The bulls held the territory they had to and we ended up with another up trending price bar on the monthly chart. However, it was the weakest month in this advance since it started last March. Are we stalling (or topping!) at the TD Trend Factor target of 1085.13 (horizontal purple line)?

In the last monthly report I said that there were three good indicators to watch that would signal a high probability that the rally is complete. The first was the TD Demand Line (upward sloping dashed green line) which sat at 1021.22 last month. We actually broke below that level during October and it was a qualified break. This is another indication that the rally is in trouble. Bears now need to see this break confirmed. Of course those of the bullish persuasion want the opposite. Confirmation requires that we open the month below 1071.86 and then move below the October low. A confirmed low projects to 941.08.

A second indicator is the TD REI oscillator (bottom pane). While still in overbought territory, it still has not been there long enough to indicate that a persistent uptrend has been established. Therefore, bears want to see this indicator fall below .45 in November (there is a solid horizontal blue line on the chart at this level). Bulls would love to see this level held. Beyond that, a TDPOQ “sell” will be generated if we open above 1019.95 on Monday and then move lower than that value.

Finally, it is now clear that the upward moving Level 4 Alpha price pulse is complete. This means that either a complete Elliott Wave zigzag pattern (A-B-C) has formed from the March low or the first three legs (1-2-3) of an Impulse. I have also drawn a Level 2 TD Line on the chart (solid blue line). It connects the 10/07 and 5/08 highs. In October of this year that line stood at 1097.65. Our high was at 1101.36. Note also that it has been a Fibonacci eight months since the February closing low.

Bottom Line: Although we can’t claim that the rally from the March low is complete, the monthly chart shows that it is in trouble. A move below 1019.95 would turn the tide to the bearish side. The first downside objective being the 910-940 area.

Surprise, Surprise! Rally on the GDP Numbers

Not surprisingly, the cash S&P500 rallied on the GDP number yesterday forming an up trending price bar on the daily chart. An oversold rally has begun. The question is whether it can take us to new highs or not.

The bulls will be banking on the fact that the Beta - Z trend line (on the Level 2 Price Pulse chart) held yesterday and that is where the rally launched from. The rally also came with the RSI in the area where bull markets usually find support and was at the weekly short moving average.

However, I think that the bulls are only hanging on by a thread. This may be a “last gasp”. The TD REI has now been less than -.40 for six sessions, which usually indicates that a strong downtrend has developed. A close today above 1063.26 would print TD Sequential “sell” countdown bar #12 (of the required 13).

Working Road Map: With momentum indicators having failed and two versions of the Elliott Wave count showing large patterns having possibly completed, I think the odds that a significant top is in are quite high. Still neutral (since October 9th) but looking to get bearish. Here is my best guess for what happens over the coming days: If the rally that began yesterday is destined to fail then it will do so no later than November 6. I am looking for TD Sequential and/or Combo “sell” signals on this bounce to turn me short-term bearish. When would I turn outright bearish if we just continue down? Below 1019.95.

Will GDP Report Be Used to Rally the Market?

Yesterday was not a good day to be a bull as we had the weakest daily price action since the first day of the month. The down trending day in the cash S&P500 sliced through two downside targets. The only one remaining from those mentioned yesterday is 1016-22 where we have the last swing low, previous TDST Support, a TD Trend Factor target and the area to which the long (solid green) moving average is moving. Also note that the price action has now turned the swing chart (solid orange) down.

The bulls are now hanging on by a thread. For today all eyes will be on the GDP number released at 0830 EDT. Technically, the RSI is back down to 41, the area in which support is found “if” we are still in a bull market. Can the bulls hold here? The TD REI has now been less than -.40 for five sessions. Another session below that value indicates that a strong downtrend has developed. Can the bulls hold here?

With the market at key Price Pulse trend lines (on the Level 2 and 3 charts) the bulls have another reason to try and rally this market. It would not surprise me to see an oversold rally take hold here, especially if the GDP numbers are viewed as “better than expected”. But personally I expect such a rally to fail.

Working Road Map: With momentum indicators having failed and two versions of the Elliott Wave count showing large patterns having most likely completed, I think the odds that October 21 marked a significant top are quite high. Still neutral (since October 9th) but looking to get bearish. Here is my best guess for what happens over the coming days: The next short-term bottom (which is due this week) will lead to a push up that must complete by November 6 and most likely will fail to make a new high. I am looking for TD Sequential and/or Combo “sell” signals on that bounce to turn me short-term bearish. When would I turn outright bearish if we just continue down? Below 1019.95.

Signs of a Significant Top Continue to "Sprout"

Although not as strong a down day (as objectively measured by the swing index) the cash S&P500 still drew a down trending price bar on its daily chart. Price has been declining since the TD Sell Setup was perfected on October 19. Yesterday’s decline has now produced a complete five wave count (and hence price exhaustion) under D-Wave from the March low to the October high.

So where are we with regards to this developing pullback? Looking at the attached chart we can see that we are still in contact with the medium moving average (solid blue line). Yesterday’s low was at the 50% Fib retracement of the rally up from October 2. If this is not the low where else should we look? Three technical targets jump out, the first being the gap from 1057.58 - 1060.03 formed on October 7-8. Interestingly the weekly long moving average sits at 1057.35 today. The next target is the 1048-1051 level. Here we have a Fib retracement, TDST Support, and the price target from the recent break of the TD Demand Line (up sloping dashed green line). Below that is 1016-1022 where we have the last swing low, previous TDST Support, a TD Trend Factor target and the area to which the long (solid green) moving average is moving.

Working Road Map: With momentum indicators having failed and two versions of the Elliott Wave count showing large patterns having possibly completed, I think the odds that a significant top is in are now quite high. Still neutral (since October 9th) but looking to get bearish. Here is my best guess for what happens over the coming days: The next short-term bottom (which is due this week) will lead to a push up that must complete by November 6 and will most likely fail to make a new high. I am looking for TD Sequential and/or Combo “sell” signals on that bounce to turn me short-term bearish. In the meantime let’s see how price reacts to the 50% Fib level reached yesterday and/or the lower targets mentioned.

Bulls on the Ropes

After an attempted rally that failed just below the TD Supply line (down sloping dashed red line), prices moved lower to the medium moving average (solid blue line). With a failure to hold above the 1066.71 level the odds of one more push to new highs have decreased quite a bit, but it’s still not impossible. Such a move up will have to occur by November 6 and may wind up being only a failed retest of the current highs.

If I have my level 1 price pulses correct, the Elliott Wave theory based on them says that either wave 3 or C is complete from the March low. If it is Wave C then we have completed a Zigzag pattern. This is my preferred count but either demands that a correction now unfold. D-Wave will show a complete five wave pattern (and hence price exhaustion) only if we close lower today.

Working Road Map: With momentum indicators having failed and the Elliott Wave count showing a possible large Zigzag now complete, I think the odds that a significant top is in have risen substantially. Still neutral (since October 9th). Here is my best guess for what happens over the coming days: The next short-term bottom will lead to one final push up that will most likely fail to make a new high. I am looking for TD Sequential and/or Combo “sell” signals on that bounce to turn me short-term bearish. In the meantime let’s see if the medium moving average or the TDST support line (at 1050.10) holds.

Weekly Chart Review, October 25, 2009

Although price formed an up trending bar on the cash S&P500 weekly chart we did close lower. This price action registers the first bearish RSI/Price divergence since the bull run began in March. Furthermore, the RSI (top pane) has failed to push through the area normally reserved for bear markets (shown by solid horizontal lines). That is, the RSI (along with price) has rallied into an area where resistance should show up if the market is still in bear mode (which it started in late 2007). Well, we have hit that resistance and now have an outright bearish RSI “sell” signal.

The question here, if one agrees that the market is topping, is how far down will we now go? At this point I note that there are no TD signals on the weekly chart. This would infer that any decline would hold above previous TDST support at 875. So maybe I am not in the “gloom and doom” camp right now, but with other momentum indicators failing and the Elliott Wave count showing a possible Zigzag (from the March low) completing, I think the new RSI divergence clearly shows that the risk of a reversal is too high to be long now.