Attached is the new monthly bar chart of the cash SP500 (bottom pane). The top pane contains the Relative Strength Index (RSI) and the middle pane the Composite Indicator. In the July monthly posting I pointed out a potential bearish divergence between RSI and the Composite Index. After August’s action we now have actual bearish divergence. This is the second of three requirements I have to turn the chart bearish.
The first requirement is to get a potential DeMark “sell” signal. In our case we had a 9-13-9 (labeled in black on the chart) “sell” signal generated in April 2013. However, note that price closed above the “signal abort” level of 1659.11 (horizontal cyan line) in July. This meant that the new high recorded in August aborted that signal so that it is no longer active.
Another DeMark “Nine” is shown in green at the May 2011 high. The subsequent Sequential countdown reached 13 in May of this year. Again, that is a potential “sell” signal. The “abort” level associated with this signal is shown by the horizontal cyan line above the market at the top of the chart at 1793.08. The third requirement I have before classifying a chart bearish is the triggering of a DeMark signal by a price flip. In this case we need to close September below 1630.74.
In candlestick parlance, August was a “Dark Cloud Cover.” Here is what Thomas Bulkowski (http://www.thepatternsite.com/DarkCloudCover.html) has to say about this pattern:
1. Reversals occur 60% of the time with this pattern.
2. It ranks 22 (out of 103) in performance which means that price has a tendency to trend after a reversal.
To me the above shows why a price flip is important before calling the action bearish.
Finally, the price pulses and waves. A cyclical bear market rally (from the 2009 low) within a secular bear market decline (from the 2000 high) is often composed of an ALPHA-BETA-DELTA sequence. The Alpha and Beta pulses in such a sequence are shown in red on the chart. These are what I call the ‘super long term’ pulses. The ‘long term’ pulses are shown in green. Creating an Elliott Wave count using the latter we can see a ‘Double Three’ pattern close to completion. Extremely interesting is that TDST Support (horizontal dashed green line) aligns with the ‘B’ wave of the A-B-C Zigzag from the October 2011 low.
Bottom Line: The monthly chart continues to edge closer to being classified as bearish. I put a 25% weighting on this chart (as I do with the weekly and daily). I have recently cut back to a 50% equity exposure. A price flip in September on the monthly would drop that down to 25% (assuming the weekly and daily stay bearish). Stay safe!
