A New Beginning - Just The Pulses

Bottom Line: My view has been proved wrong as we have made new highs.

It is time for a change. Why not? The time is ripe to focus solely on what I have been calling Price Pulse Theory. Beginning today it will be called FoxPulse and will be my sole focus. Besides having value in itself, this technique is unique (used only by me) and will allow me to look at other markets besides the equities.

The FoxPulse assigns bullish or bearish ratings to a market across five time frames. FoxPulse1 the shortest, FoxPulse5 the longest. How one uses the ratings is more of a money management issue. For myself, I just use a percentage (of funds available for that market) system. For example I will take a long position as such: 35% based on FoxPulse1; 30% FoxPulse2; 20% FoxPulse3; 10% FoxPulse4; 5% FoxPulse5.

The equity market (as represented by the cash S&P500) is bullish across all five FoxPulses right now. Here is FoxPulse1:

This is a bullish picture. Each upward pulse (Alpha, Delta, Y) in the series (Alpha-Beta-Delta-X-Y-Z) is making higher highs while the downward pulses (Beta, X, Z) are making higher lows. In this situation we want to watch two trendlines. The first, shown in orange, is the early warning line. A close below this level, accompanied by a technical signal, would turn this level bearish. Likewise, a break of the horizontal trend line (in cyan) would turn this level bearish without needing an accompanying technical signal.

Here is FoxPulse2:

On August 6 a bear signal was registered as the Beta-X trendline was broken with a bearish divergence between the RSI and Composite Index. A bull signal followed on September 9 when the peak of the previous Alpha pulse occurred. That bull signal is still in force unless we break below the Beta pulse low of 1681.96. This is the same line as in the FoxPulse1 chart.

Although not shown today the other FoxPulses (3, 4, and 5) are also bullish.

How Goes the Rally Now?

And so the rally continues; although at this point I am still happy to categorize it as counter-trend. Here is an update on the information I am currently watching:

1) Interplay between price and the indicators. Instead of both indicators, only the composite index (middle pane) is threatening a negative reversal right here. Last time we looked the RSI was higher than it was on August 23 while price was not. This potential negative reversal was never actualized as the RSI never turned down. However, it still is leading price higher. More concerning is that the composite indicator is now higher than it was at the August high. Again, if this oscillator was to turn down from here we would have a bearish negative reversal in place. We’ll have to watch and see if that happens.

2) Price Pulse. It is now clear that the August 28th low marked the end of Beta pulses on both the intermediate and medium-term (see weekly update) levels. As mentioned in the last daily post, Price Pulse theory indicates that a move above the previous Alpha pulse high (1669.51) turns the market bullish on the intermediate level. It will now take a move below the recent August 28th low (1627.47) to turn it back bearish.

3) TD Sell Set-Up. The cash S&P500 is on bar 5. Bar 9, if we were to reach it, would occur this Friday.

Bottom line: While the daily chart remains bearish, Price Pulse Theory indicates that the rally has further upside potential in both price and time. Even if a stronger rally develops here I expect it to fail to make new highs. We would then reverse and go on to make even lower lows.

How Goes the Rally?

Although the rally continues it has been a choppy affair that looks corrective to me. There are a couple of things I am watching here:

1) Interplay between price and the indicators. Both the composite index (middle pane) and RSI (upper pane) are ahead of price here. While the RSI is higher than it was on August 23, price is not. More concerning is that the composite is higher than it was on August 8th! Why the concern? As Connie Brown says in Technical Analysis for the Trading Professional, “You are on the wrong side of the market if the oscillators can move without prices following.” In fact, if these oscillators were to turn down from here we would have bearish negative reversals in place. We’ll have to watch and see what happens.

2) Price Pulse. The odds are high that the August 28th low marked the end of the Beta pulse and so we would now be in Delta. Under Price Pulse theory a failure of Delta to exceed the previous Alpha pulse high (1669.51) keeps the market bearish.

Bottom line: The daily chart remains bearish. Even if a stronger rally develops here I would expect it to fail to make new highs. We would then reverse and go on to make even lower lows.

Monthly Chart - August 2013

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!

The SLOT

The working hypothesis is that the August 2 high marked a significant top. I am quite convinced that it ended the rally from the June 24 low. Does it also mark the end of the trending impulse wave from the November 2012 low? Here are some sage words from blogger/trader Leaf West: “Traders know that calling tops is a mug’s game, and that they should always assume that as price pulls back from a new high, that support will hold in the SLOT and that a new high will be made. It is at the point in time when price bounces from support but fails to break to a new high, where traders can then point to that previous high in price and mark that as a more important top. Price should then be expected to make a bigger wave structure in the opposite direction from that confirmed top.”

In West’s work, the SLOT is the 50-78.6% retracement area which I have drawn as a box on today’s chart. Note that one of the features I track is in that box: The next larger Beta-X trendline. A close beneath this line will raise the chances significantly that the trending impulse pattern from last November is complete.

Other items of interest from the daily chart:

1) RSI (top pane). Two readings below 38 will also point to the August high as completing the pattern from November 2012. The RSI is currently at 35.29; marking the first reading below 38.

2) TDST support (1588). Will it hold?

3) Composite Index (middle pane). This indicator is now at an extreme low. This implies that the “final” low for this decline is not yet in. Expect a bounce followed by lower lows.

Bottom Line: The chart is bearish. Let’s see how it develops over the coming days.