Weekly REI Prohibits a Trade

In last Sunday’s post we were exploring a possible short trade on the weekly chart. It was left with “If the coming week sees lower prices than we will be ready to look at final execution parameters to short the weekly chart.” The new weekly chart is shown with the REI in the top panel. Although the market closed lower the REI has remained above the .45 level.
Why is this important? According to DeMark the fact that the indicator has stayed in the “overbought” zone (above .45) for six consecutive weeks indicates that the uptrend is strong and must be respected. That is, a short trade should not be contemplated at this time based on the fact that a TD Setup has been reached.

Just Another Buying Opportunity?

Just a quick update today. The short moving average did hold the pullback on Wednesday and we did not confirm the TD Demand Line break. Demand once again came in to buy the pullback. It is because of the old adage "Don't fight the tape" that the trading system demands confirmations. We have not yet hit the criteria to short this market. Who knows .... if we keep rallying we might get a TD Combo 13 on the weekly chart Friday!

Moving Averages, TD Demand Line and Trend Factor

After moving slightly higher on Monday the cash S&P500 sold off yesterday. Note how prices went down to the short (red) moving average. This moving average contained the decline at the end of December.

If the short average can not hold we will continue lower to the next immediate target which would be the medium (blue) moving average. This line was the target for many of the recent pullbacks on the chart shown.

Also note that the TD Demand Line (dashed green) was broken. This is a qualified break and a move below yesterday’s low will confirm the short term bearishness. If confirmed, the TD Trend Factor target is at 1085.81 (purple line segment); which is where the long (green) moving average is now.

As far as trading goes .... All we can do is wait on Friday's close and see whether the weekly REI has been relieved of its overbought condition. As of yesterday's close it had not.

Technical Indicators on the Weekly Chart

The weekly chart has just completed a potential perfected sell setup which is supported by the monthly chart (see yesterday’s post for details). Before one takes action there are more ‘ducks’ you want to see lined up. Keep in mind that after a perfected setup has occurred the market ‘usually’ experiences a trend reversal, correction, or consolidation within four price bars of bar #9. If one were to short the current market it would be in anticipation of a reversal.
There are two things I want to see before I would actually short the weekly chart. The first is an indication that momentum is failing. This is done by using two technical indicators: the RSI and Composite Index. Notice that while the RSI (Relative Strength Index) is at a new high for the move the Composite is failing to confirm. The Derivative oscillator is also failing to confirm the RSI high. This is the indication of momentum failure that we need to proceed with a possible trade. Keep in mind that the momentum divergences are only ‘pending’. We need the indicators to actually turn down to make the divergence ‘fact’.
Next we use the REI (Range Expansion Index) to approach the trade. The first requirement is for the REI to be above .45 (it is) and to have been above that level for less than six periods (it has). Next we need a closing price that is lower than the previous close. Since the price was up this week we must wait to see what occurs next week. If the coming week sees lower prices than we will be ready to look at final execution parameters to short the weekly chart.
Let’s see if weakness starts to become apparent this week.