The Monthly Chart Review for October 2009

Last month I mentioned that “… the monthly chart shows that the forty point area between 978 and 1020 is the current ground the bulls must hold.” The only meaningful decline in October saw a low of 1019.95. The bulls held the territory they had to and we ended up with another up trending price bar on the monthly chart. However, it was the weakest month in this advance since it started last March. Are we stalling (or topping!) at the TD Trend Factor target of 1085.13 (horizontal purple line)?

In the last monthly report I said that there were three good indicators to watch that would signal a high probability that the rally is complete. The first was the TD Demand Line (upward sloping dashed green line) which sat at 1021.22 last month. We actually broke below that level during October and it was a qualified break. This is another indication that the rally is in trouble. Bears now need to see this break confirmed. Of course those of the bullish persuasion want the opposite. Confirmation requires that we open the month below 1071.86 and then move below the October low. A confirmed low projects to 941.08.

A second indicator is the TD REI oscillator (bottom pane). While still in overbought territory, it still has not been there long enough to indicate that a persistent uptrend has been established. Therefore, bears want to see this indicator fall below .45 in November (there is a solid horizontal blue line on the chart at this level). Bulls would love to see this level held. Beyond that, a TDPOQ “sell” will be generated if we open above 1019.95 on Monday and then move lower than that value.

Finally, it is now clear that the upward moving Level 4 Alpha price pulse is complete. This means that either a complete Elliott Wave zigzag pattern (A-B-C) has formed from the March low or the first three legs (1-2-3) of an Impulse. I have also drawn a Level 2 TD Line on the chart (solid blue line). It connects the 10/07 and 5/08 highs. In October of this year that line stood at 1097.65. Our high was at 1101.36. Note also that it has been a Fibonacci eight months since the February closing low.

Bottom Line: Although we can’t claim that the rally from the March low is complete, the monthly chart shows that it is in trouble. A move below 1019.95 would turn the tide to the bearish side. The first downside objective being the 910-940 area.

Doji Week

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Although technically an uptrending price bar we really didn’t go much of anywhere this past week in the cash S&P500. In fact, the weekly candlestick ended as a Doji (opening and closing prices essentially the same). With prices now moving laterally for a couple of weeks we were also not able to follow through on last week’s break of the TD Demand line (dashed green line on today’s posted chart). Although the price projection of 837.81 still stands, our failure to break below 878.94 this week makes me wonder whether the bears can push this this market lower immediately.

One piece of evidence to support another bullish foray to the upside was presented by an astute reader of this blog last week. The idea is that although we have now reached a TD sell Setup (nine consecutive upward moving bars) on the chart the arrangement has not yet been “perfected”. Perfection requires that the high of setup bar eight or nine (or a subsequent bar) be greater than, or equal to, the highs of setup bars six and seven. As Jason Perl writes in his (excellent!) book on DeMark Indicators, “… as long as that situation exists, the risk is for a retest of the price high …”

Of course the bears have arguments on their side as well. Last week I wrote “The weekly TD REI … has also signaled a “sell” by dropping through 879.21.” That signal is still active. The 930 price high reached is also noted to be trine the 667 March low and now stands as a price fractal high.

Bottom Line: Is a retest of the high in the cards or are have we already started on our way down? I favor the latter interpretation based on my latest price pulse work, which I will discuss in my next post. I remain convinced that a deep retracement of the rally from March 6 has begun, but also believe that the lows for the year (though perhaps not the bear market) are in.

Enjoy your weekend!

Waiting For Confirmation of a Significant Top

An “outside” reversal day top was made in the cash S&P500 on Thursday. Is the high finally in? I vote “yes” but will let the price action confirm before I take any action.

The answer lies with another question: “Is the Level 1 Alpha Pulse complete?” The fact that a reversal day was made increases the odds that Alpha is indeed complete. At this point we will have “proof” of that fact if we break below Tuesday’s 897.34 low without first exceeding yesterday’s high.

I also note that we seem to be reacting bearishly after the TD Combo Sell Setup mentioned in yesterday’s post and the trigger of a TD REI “sell” signal when 903.95 was broken. Furthermore, the fact that the TD Supply line target of 943.17 has not been reached and the Composite Index / RSI non-confirmation are also bearish developments.

The only way the market can qualify the current TD Demand Line (at 891.41) would be to open above that level (quite doubtful). This piece of information suggests a bounce may be at hand.

Also of interest: 929 is trine the March 6 low in price. In time, 930.5 is square May 7. Yesterday’s high was 929.6.

Yesterday I put out a twitter tweet during the day announcing that the long trade had been validated per the draft trading plan and to raise stops to the trade entry level. Our first foray under the plan has ended up as a “draw” (of course there would have been commission charges).

A short position (not to exceed 3% of the account balance) would be taken on a move below 897.34 today. All such trades are hypothetical (based on the cash S&P 500; not a tradable contract) and do not constitute advice to buy or sell any instrument. Initial stop would be placed at the most recent high.

Still Waiting on the Level 3 Alpha Pulse to End

Another day, another uptrending bar in the cash S&P500! The stampede continues! We have now fulfilled the 892.64 price target of the previous TD Supply line. A new TD Demand Line sits at about 879 which would be qualified on a drop below it today. 879.21 is yesterday’s low and a move below there would also trigger an REI “sell” signal.

The analytical challenge with the price pulse right now is determining whether the Level 1 Y pulse has completed or not. If so it ended at last Thursday’s high; Z ended at last Friday’s low and we are now in Alpha. In this scenario both the Level 2 Y pulse and the Level 3 Alpha pulse *must* end coincident with the Level 1 Alpha pulse. Since we want to go short when the Level 3 Alpha pulse is complete we would take a position on a break below 866.10. The other possibility is that our Level 1 Y pulse is not yet finished. In this case we would not take a countertrend position until a break below 847.12. An earlier warning *may* be given by the break of the Level 2 Beta – X trendline which stands at 856.22 today. Which way should we go for today? Use the 847.12 level. A quick break below 866.10 today would almost certainly mean that the Level 1 Y pulse concluded yesterday and not last Thursday.

One last point. The RSI has not been above the 67 level on the daily chart since this bear market began in October of 2007. It is close to doing so now. I continue to believe that the lows for the year are in but we will see a deep retracement (a retest of the March low) over the coming months. In fact, I would not be surprised that we remain in a range (oh, say 666-1100 or so) for another 18 months! An RSI value above 67 would strengthen the case that the low for the year is in.

Based on the draft trading philosophy a short position (not to exceed 3% of the account balance) would be taken on a move below 847.12 today. All such trades are hypothetical and do not constitute advice to buy or sell any instrument.

Monday Morning Musings

The cash S&P500 formed a downtrending price bar on Friday but there is nothing new to report. We are looking at a countertrend position on a break below 847.12. An earlier warning *may* be given by the break of the Level 2 Beta – X trendline which stands at 853.28 today.

The price target on the qualified break of the latest TD Supply line stands at 892.64. Yet another Supply line sits at 888.11 today but would not be qualified if broken. Meanwhile the TD Demand line sits at 862.68 and would be qualified if broken. Finally, the DeMark REI oscillator would signal a “sell” on a move below 866.10 today.

Trading Philosophy (draft): The objective is to identify the trading condition set-ups for swing trades (about a dozen trades per year held for varying times up to 2 months maximum).

** Countertrend trades will be taken when a new Level 3 Price Pulse begins. Each of these trades will be broken into three equal “positions” when executed with the goal of taking profits at each of three price objectives.

** Trend continuation trades will be taken on qualified breaks of TD Supply and Demand Lines. Each of these trades will be thought of as one unit with the goal of taking profits at the single calculated price objective.

** The capital exposure for any one position will not exceed 3% of the account balance. All trades will be held with a protective stop-loss.

Based on the draft trading philosophy a short position (not to exceed 3% of the account balance) would be taken on a move below 847.12 today. All such trades are hypothetical and do not constitute advice to buy or sell any instrument.