SPX Daily Chart - 16 August 2011

     Since the August 9 low we have been tracking a rally in the cash SP500 from the deeply oversold condition it found itself in coincident with a TD Buy Setup. Yesterday the market opened right at the short (red) moving average and the risk level (1204.08)associated with the sell setup on the hourly chart. These two factors acted as expected - resistance. The question now is whether they also marked an end to the rally and the beginning of a retest of the low.
     One tool useful in deciding if the retest is "on" is the Range Expansion Index (REI) shown in the top pane of today's chart. Since the index moved above the overbought level (horizontal blue line) Monday with a higher close, a sell signal will now be triggered with a break of 1178.86. Note that this is generally the previous resistance area provided by TD Trend Factor and the fibonacci level. If previous resistance doesn't become support it is a sign of a weak market. This level did provide support yesterday.  If the bulls can continue to hold this level and then get through the short moving average the door is open to 1245.
      Bottom Line:  I favor the bearish case here and believe that we need to retest demand (the low) again before any sustained bullish rally can get underway. The current demand line (dashed green line) reflects the "retest level" well. The allocation mix meter remains at +25%.
     Note: I will not be posting until August 28 - vacation time!

Investigations - Part 4

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

     This infrequent series of postings has been examining two questions. The first is whether one can tell (at the time it is occurring) whether trend exhaustion will result in either 1) just a correction (pullback or consolidation);  or 2) in a full change in trend. To help answer that question we started using D-wave analysis to investigate whether impulse waves 1, 3, and 5 at one time frame are composed of a full five wave impulse sequence on the next lower time frame. For instance, we saw that Quarterly wave 3 (D.3) was, on the monthly chart, composed of a complete five wave sequence from the late 1982 low up into the high of 2000.  However; since this five wave sequence "nested" within a quarterly chart "third wave" and not a "fifth wave", the implication was that a trend change would not occur - only a correction associated with the quarterly fourth wave (D.4). The change in trend would have to wait until the completion of a full five wave sequence at the quarterly level.
     Does this same nesting characteristic show up in quarterly wave D.1 which began at the 1974 low? Yes. You can start a monthly sequence here for two reasons. The primary one being that the higher (quarterly) wave began here. Secondly you may note that the 1974 low (60.96 in in October) is a 21 period low. The analysis then reveals D1 at the 1977.1 (January) high; D2 at the 1978.3 (March) low; D3 at the 1980.2 high; D4 at the 1980.3 low; and D5 at the 1980.11 high. And so, as with quarterly wave D.3, quarterly wave D.1 is composed of five waves on the monthly scale.
     What should we expect during a correction? Will there be a full A-B-C wave structure? That is, will the corrective wave structure "nest" within the higher time frame's single corrective wave? Examining D-wave 2 (D.2) on the quarterly chart. With this wave, the answer is 'no'. The monthly chart only shows one wave down. How then do we know that the corrective sequence is over? The authoritative indication is when the quarterly chart fulfilled the requirement for D.3 to be underway, and in my work that is a high greater than all previous 20 price bars.
     At this point our theory concerning D-waves is that impulse waves sub-divide into five's and corrective waves into one or more waves. Without a definitive number of D-waves in a correction we may want to supplement what we mean by a correction in terms of other tools. One example is to use TDST support and resistance levels. With regard to the quarterly chart, if we were only expecting a correction (pullback or consolidation) from the year 2000 high, then the TDST support level (733.54 at the time) would be expected to hold. Indeed it did, as the accompanying chart shows.
     Next time I want to investigate the decline (Quarterly D.4) from the 2000 high on the monthly chart.
     To Be Continued ....

SPX Daily Chart - 15 August 2011

     On Monday the cash SP500 continued its rally from the deeply oversold condition it found itself in at the August 9th low. This low was in conjunction with a TD Buy Setup. My take continues to be that this rally will end at/near a fibonacci/moving average/TD Trend Factor target and will be followed by a retest of the low.
     Our initial target zone in the 1180 area was reached but only managed to cause a hesitation in price before we rallied through it yesterday. However, this break-out was not confirmed (although qualified) and could be a signal that the next target could prove fatal to the bull case. That next 'target' was the 1215 area yesterday since the short (red) moving average was sinking towards the fibonacci level there. For today that moving average will be even lower, about where we closed yesterday. Therefore the bulls will have a large test today right from the open. In conjunction with this is the test of the risk level associated with the sell setup on the hourly chart. We finally broke above that level (1204.08) in a qualified manner at the close yesterday. However, an open this morning below that value will be non confirmation and may spell trouble. On the other hand, if the bulls can 'pass' this test the door is open to 1245.
      Bottom Line:  I still believe that we will need to retest demand (the low) again before we can get a sustainable bullish rally. The current demand line (dashed green line) reflects the "retest level" well. For now however, we need to watch how price reacts at the short moving average and hourly sell setup risk level this morning. Failure would be a clear indication that the oversold bounce may be completing. The allocation mix meter remains at +25%.
     Note: I will not be able to post August 18-26.

SPX Weekly Chart - 12 Aug 2011

     Although we finished well off the lows it was another downtrending week in the cash SP500 market as we confirmed the the break of TDST support (horizontal dashed green line) at 1219.50. This strong market decline has been the Z-pulse of the price pulse model. Recall that the Z-pulse often contains the sharpest declines as the Delta-pulse often contains the largest rallies.
     Simply put, the market is now in a bear market on this time frame. Note that the low last week came right at the 38.2% retracement level of the 2009-2011 rally. Of interest now are the technical indicators. Compared to the RSI (top pane), the Composite Index (second pane) and Derivative Oscillator (third pane) are threatening to make bullish divergence. Threatening is the key word. These divergences are not yet in place.
     Bottom Line: At this point there is no reason to rush into any new judgments abut the medium term outlook. The allocation meter is at +25%.
     Note: I will not be posting 18-26 August.