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.

Time to Step Back -- Quarterly Chart Review

On the quarterly chart of the cash S&P500 we had a very strong up trending bar …. That makes two in a row from the recent low of 666 set in March 2009. Notice how we were able to keep contact with the Long (green) moving average at the low. Since the low the up move continues to look like a bear market rally.

The only positive signal at the low (in the technical indicators I follow) was the TDPOQ on an 8 period TD REI which turned positive when price went above 956.23 in July. Without confirmation I consider that as indicating an oversold counter-trend rally. The REI now indicates that the oversold condition has been relieved and at this point the market is still in the process of determining what the demand level is for stocks is after the huge decline of 2008.

There is a broad area of overhead resistance from 1120-1170 (50% Fibonacci retracement level, previous TDST Support and the Medium (blue) moving average). Above that is 1225-1240.

Bottom Line: The quarterly chart indicates that the bear market rally from March is maturing and that long-term investors should not yet be worried about “missing the bottom”. At the same time it certainly is not inviting anyone to go short. The battle for the rest of the year may very well be the 903 level. If we close above that value at the end of the year the odds of a significant new low become quite low and a double bottom around 666 becomes more likely.