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.

Reasons to be Cautious

Since we have finished up a week it is time to look at the weekly chart. Today I want to talk about the RSI as compared to price.

Note the points where the RSI lows are marked with “bulls”. These points signify positive divergence between price and the RSI indicator. The first such point is on the week of 10/24/2008. The cash S&P500 rallied for two weeks to a high of 1007.51 but fell short of the previous swing high of 1044.31 on 10/17/2008.

The next RSI positive divergence occurred on the week of 11/21/2008. It was followed by a seven week rally to 943.85; but this was still short of the previous swing high of 1007.51. The key point: Positive divergences fail during bear markets.

Now let’s take a look at the RSI high on 1/2/2009. This point is marked with a bear because it denotes a negative reversal. The RSI is higher on 1/2/2009 than 10/31/2008 although prices are lower. The calculated minimum target for this reversal is 800.03 -(968.75 - 931.8) = 763.08. This price was hit the week of 2/20/2009 on our way to the 666.79 low of March 6, 2009. The key point: Negative reversals succeed during bear markets.

Now then. The March 6 low marks another positive divergence; and what a rally we have had! But look at the previous swing high: 943.85. We are still nowhere near that level. Lastly, look what happens if this rally fails and the RSI dare turn down from here. We will get another negative reversal. There are three, in fact, as shown by the dashed blue lines. The three calculated *minimum* targets work out as: 630.72, 567.52 and 244.24. These are not pretty.

Since I believe that a high was just made on the daily chart I would have very tight stops here if I were a bull. If one had a bearish view (which I do) then I would look to take action on a move below the last swing low of 791.37.

Close Enough?

The chart has been updated with the price action while the price targets (blue ellipses) for yesterday (first shown a few days ago) are unchanged. We hit right between the two. I would have liked to see the high "in" the ellipse; but, as the Rolling Stones are fond of saying, ".. you can't always get what you want."

We did have a negative reversal in the RSI (RSI value higher on Friday's close than on the August 8 close while price was lower). The minimum target works out to 1388. This time the reversal is being confirmed by my second momentum indicator.

Finally, yesterday's price bar was day #2 in a Robert Miner "Snap Back Reversal" pattern. And so, I have to lean towards the view that the "C" wave rally from August 16 is complete. If this view is correct we should break the August 16 low without exceeding last Friday's high.

Moving Averages

The cash S&p500 is having a hard time at resistance provided by the "red" moving average. Notice how this was also at a cluster of many open and closing prices between Aug 9-14. 1447 is also 180 degrees up (1/2 the circle) from the bottom.

There was also a negative reversal in the RSI chart yesterday at this resistance; target of 1399. I don't feel quite as confident in this signal as the last one since my other momentum indicator is not confirming. However; I do feel a pullback here would not be surprising. A pullback for a day or two would set us up for a run towards the blue and green moving averages.

Another one of those thingys

The cash S&P500 made high exactly in the area of resistance mentioned in my last post. Accompanying that high was yet another Negative Reversal. The calculations show that the minimum target is 1438.35, indicating a retest of the recent low.

At this point I am counting the move up into Wednesday's high as wave "a". I won't be surprised if the current decline turns out to be the "b" wave in an Elliott Expanded Flat pattern. This interpretation, if correct, would imply a successful retest (even if we do get a slightly lower low) followed by another sharp leg higher before the bear trend continues.

Buy Signal Negated

Easy come, Easy go. The RSI "buy" signal shown last time was promptly negated by the development of a "negative reversal" on Friday.

Thursday was not a very bullish day - volume and price movement were lower than Wednesday, and the "potential" negative reversal was in place. As shown in the chart, the RSI closed at a value higher than that of July 30 even though the closing price of the cash s&p500 was lower. The reversal was confirmed on Friday.

This cancels the previous buy signal. Now, even though the technical indicators are setting up to issue another "buy", we have to wait for that to happen. Buy signal or not, I will not go long -- my methodology will not allow me to go against the "larger" trend which is still firmly down.