SPX Monthly Chart - June 2011

     On a monthly basis the cash SP500 gave ground in June, breaking below the TD Demand Line (upsloping dashed green line) in a qualified manner. June's downtrending price bar was also a price flip (closing lower than the close four bars prior) that cemented the TD Combo sell countdown in February. Note that this was also the first price flip after a sell setup bar #9 in May. These developments continue the deterioration on this time frame. In my long-term (investing) asset allocation work the actual "sell" signal would come with a break below the March low of 1249.05.
     Using the RSI (top pane) as a trend indicator, a bear market was signaled on this time frame in September 2008. Of great interest is the fact that we have now turned down right in the area reserved for bear market resistance shown by the double red lines. That is, this indicator is currently saying that the rally from 2009 is most likely corrective in nature and that we may have run out of steam.
     Another negative development on the monthly chart is the decline in the Derivative Oscillator (middle pane) over the past two months which has led to a bearish divergence with price. Previously, a 'failure at the zero line' (indicated by the arrow) by this indicator in September 2010 combined with the sharp fall from an extreme reading in December 2009 (while prices only moved sideways), was a warning for a sharp rally. That rally occurred and now the bearish divergence should be cause for concern.
     The qualified break of the Demand Line provides a calculated objective of 1276.35 which was met in June. The TD Trend Factor target was 1270.41 (shown by the purple line) and was also met. On the monthly time frame the next support area is provided by the moving averages in the 1214-1225 area. Finally, let's keep in mind that the lower time frames are showing that the bounce up after meeting the monthly Demand Line and Trend Factor targets is still ongoing. I will cover the latest weekly chart by Monday morning.
     Bottom Line: Although I think that risk to longer term investors (like myself) is growing, the monthly chart remains a bullish contributor in my work. That is, it does not negatively impact asset allocation towards the equity market at this moment. A break below the March low (as mentioned above) would change that situation.

SPX Daily Chart - 29 June 2011

     The cash SP500 broke out to the upside yesterday and sliced through the medium (blue) moving average. The next upside target is resistance in the 1313-16 area caused by: previous TDST Support, the daily long moving average and the weekly short moving average.
     The hourly chart has reached ten in its sequential sell countdown and will be the focus during the day today.
    Bottom Line: The allocation mix meter is at +50%. My near term scenario assumes that an intermediate term low is in and that a choppy rally will now take us back above the 1344 level. However; I remain quite concerned that the rally high from the 2009 low was made on May 2. As such, any break below the March low of 1249.05 will cause me to lighten my position even further as the allocation meter would fall to +25%.

Investigations - Part 3

Note: It may help to refer to the previous postings in this series.

     If one were following along with the Quarterly chart they would have seen a sell setup bar #18 in 1999.2 (2nd Quarter 1999). Any multiple of nine should be of interest to the analyst as weakness (in the case of a sell setup) may appear within the next five price bars (by 3Q2000).  Is this a sign of the exhaustion that actually materialized just three bars later at the March 2000 high? It would seem so.
     Also keep in mind that on the next higher time frame (the yearly) we saw a sequential sell countdown bar #13 in 1998.  This was the first indication that the risk of a top was very high.  Note that the yearly warning came before the quarterly.
     Another question is whether the trend exhaustion at the 2000 high would result in just a correction (pullback or consolidation) or a trend change. Can D-Wave analysis help to answer that question? If one assumes that the yearly D.3 wave (an impulse wave) should be composed of FIVE quarterly waves then the answer would be 'just a correction' since the quarterly chart was itself in a D.3 wave and not D.5. The implication is that the trend change would not occur until after the full five wave sequence at the quarterly level. However ... this assumption rests on the hypothesis that the waves nest in this fashion (five waves compose an impulse wave), and we haven't conclusively shown that yet.
    So let's examine quarterly D-Wave 3 a bit further. It began at the 1982.3 (3Q1982) low and ended at the 2000.1 (1Q2000) high. The question: Does the monthly chart show a five wave D-wave sequence within that block of time? The answer: Yes. You can start a monthly sequence because the 1982 low (102.2 in August) is a 21 period low. The analysis then reveals D1 at the 1983.10 high; D2 at the 1984.7 low; D3 at the 1987.8 high; D4 at the 1987.10 low; and D5 at the 2000.3 high. The monthly cash SP500 chart (from 1983) is attached to help visualize this sequence. It also shows where the quarterly sell setup bar 18 and the yearly sequential bar 13 occurred.
     Again it appears as if the higher level, impulsive, D-wave (Quarterly D3) is constructed by a five wave sequence at the next lower time frame (Monthly). Still, we have only seen a couple of examples, and that is not a big enough sample size. However, the point I want to make is that with such an assumption one would have only expected a 'correction' on the Quarterly chart since a fourth wave was expected to be followed by another (wave 5) impulse. I will explain this further next time and then look at how the first Quarterly wave (D1) in the sequence from the 1974 low played out on the monthly scale.
     To Be Continued ....

SPX Daily Chart - 28 June 2011

     So far I would call the price action since the completed buy setup (on June 13) a consolidation, but we are now on the verge of breaking out to the upside. The hourly chart recorded a completed sell setup yesterday but didn't even pullback in response. This indicates that a full sequential countdown on that time frame is to be expected - which points to the rally continuing for at least another day or two.
     The only fly in the ointment is that the break above the Supply line (downsloping red dashed line) yesterday was not qualified. Oftentimes this means that further consolidation is needed before a move can begin in earnest. In any event, the next upside target is the medium (blue) moving average in the 1303/4 area. Above that we find resistance in the 1313-16 area.
    Bottom Line: The allocation mix meter is at +50%. My near term scenario assumes that an intermediate term low is in and that a choppy rally will now take us back above the 1344 level. However; I remain quite concerned that the rally high from the 2009 low was made on May 2. As such, any break below the March low of 1249.05 will cause me to lighten my position even further as the allocation meter would fall to +25%.

SPX Daily Chart - 27 June 2011

     Perhaps the most constructive aspect of the basing action over the past dozen sessions has been the ability of the RSI to hold bull market support on Friday's decline. This comes after bullish divergence between price and the RSI with a completed buy setup bar #9. Even though we closed below the short (red) moving average on Friday, that break was not confirmed on Monday.  Have the bulls steadied the ship? Perhaps; but it may take a little more work before a good rally can kick off. Why? The Supply line (downsloping red dashed line) can not be qualified from here. We may need a little bit more basing action. If price can resume moving higher then the next target would be the medium (blue) moving average in the 1303 area.
    Bottom Line: The allocation mix meter is at +50%. My near term scenario assumes that an intermediate term low is in and that a rally will now take us back above the 1344 level. However; I remain quite concerned that the rally high from the 2009 low was made on May 2. As such, any break below the March low of 1249.05 will cause me to lighten my position even further as the allocation meter would fall to +25%.

SPX Weekly Chart - 24 Jun 2011

     In last week's update it looked like the battle would be over the Trend Factor target (1265.68) and the long term trendline, and that seems to be the case. We broke below each target last week in a qualified manner but failed to end the week below either. This is an indication that the bulls may be able to hold, but only an indication. To invalidate last week's break the bulls are going to have to hold here again this week. At the very least the bulls will want to keep price above last week's low. They will also want the weekly RSI to turn up without dropping below the bull market support zone (38-42). So far it has held, falling to 44.7 last week. However, even if the bulls are successful, the longer term picture is still dicey. Without (at least) a sequential buy setup appearing (which would take at least three more weeks) it looks like any bullish counter attack will be just that - a counter trend rally within a larger bearish decline.
    Bottom Line: The allocation meter is at +50%. If the long term trendline and the Trend factor target are not enough to support the market then the March low is the next target. Any break below the March low of 1249.05 will cause me to lighten my position further as the allocation meter would fall to +25%.

Investigations - Part 2

     Do D-Waves nest? This will be a particular focus of my studies going forward. Take the yearly DJIA chart briefly discussed in part 1 of this series. D2 ended at the 1974 low. On the Quarterly chart we can start a D-wave sequence there since it is a 21 quarter low. We then get (Quarterly chart): D1: 1976.3 high (1976.3 means quarter 3 in 1976); D2: 1980.1 low; D3: 2000.1 high; D4: 2002.4 low; D5: 2007.4 high; DA: 2009.1 low. The quarterly cash SP500 chart (from 1983) is attached to help visualize this sequence.
     The point I want to make is that a Quarterly five wave sequence is currently shown complete at the 2007 high. Recall that the yearly chart is awaiting D3 completion. Can we make the assumption that it completed at the 2007 high since a complete quarterly chart sequence 'nested' in the yearly wave 3 position?  Such an assumption would; at the very least, suggest that one pay particular attention to signs of exhaustion at the 2007 high using other techniques. I will do that in the next posting of this series. Another question raised: Does a higher level 'impulse' wave (D1, D3, and D5) always contain five waves at the next lower level?
     To Be Continued ....