Triangle Update

If (and that is always a big IF with these formations) a contracting triangle is unfolding from the August 6 low then yesterday most likely ended the “C” wave.

I had originally thought that “C” had ended on August 24th. Surprise! From Connie Brown’s Technical Analysis for the Trading Professional: “Wave C within a triangle is very sneaky. It usually takes the most time to develop, and every time you think it is complete, it comes back to form another leg in the complex structure.”

So why do I now think that “C” is complete? Five reasons. One; a technical “sell” signal has been generated on a divergence between the RSI and secondary momentum indicator I follow. Two; price turned at a resistance cluster (described in yesterday’s post). Three; momentum has turned down as illustrated by the change in direction of the Derivative Oscillator indicator. Reasons four and five must wait for the completion of today’s trading. If we don’t break Tuesday’s high then we will have both a “fractal” top and a “squat” bar within two bars of the fractal (as described by Bill Williams in his Trading Chaos book).

Let’s see if we get those last two items today, remembering that those “C” waves within triangles are sneaky (as is the market itself)!

It plays out faster in your mind

One problem I always have is that the "waves" of market action always play out faster in my mind than they do in the market.

Although yesterday's action negated the negative RSI reversal that was pointing to a retest of the low, the secondary/confirming momentum indicator is lagging price action and the RSI even more this morning. A sell signal? No, price must first turn down to cement in that signal but it is hinting that a top is near -- as is my timing work.

On the daily chart, the long moving average I watch is at 1499.20. 1503 is 315 degrees up from the low (Gann). On the weekly chart the short moving average sits at 1491.56. It was interesting that after moving above that line yesterday the market failed to close above it.

Finally, the August 8 high of 1503.89 is good chart resistance. This combo of resistance, timing and a lagging secondary momentum indicator may be pointing to yesterday’s high as the peak of the current wave up from August 16. If so I would favor it being the “C” wave of a contracting triangle from the August 6 low.

But I caution myself: the waves take longer to play out in the market than in my mind. Wait for the proof.

Daily Momentum View and Recap

Once again a chart of two momentum indicators (confirming on top and RSI in the middle) and price is presented, this time on a daily basis.

A “sell” signal was generated on July 20 (on close). At this time all three time frames (see previous two postings) were on a “sell” and the market sold off quickly. We then had a “buy” signal when bullish divergence formed between price and the RSI indicator on the close of August 1. However, with the higher time frames aligned opposite this signal only a bear market bounce was suspected, not a sustained rally. In fact the market quickly reversed and moved to new lows and formed a negative reversal in the RSI on August 3.

This negative reversal was negated the next trading day and a new “buy” signal was generated on August 6. Again this signal was aligned against the higher time frames and led to only a good bounce and was followed by yet another negative reversal on the close of August 9.

Perhaps the third time is the charm as the RSI “buy” signal generated at the close on August 16 led to a better bounce. Yet another negative reversal formed on August 27 and has yet to be negated as we begin trading today. This reversal projects, at a minimum, to 1388.58. In other words, a retest of the lows.

Finally, note how our confirming indicator (on top) is lagging on the move upwards over the past few days. With the cash S&P500 at strong Fibonacci and Gann resistance now (a second area of resistance exists higher up at 1509-1514) and my timing work showing a high imminent, now is not the time for me to get bullish.

Weekly Momentum View

After a technical signal is generated on one time frame we want to see it appear on the lower time frames before taking action. As seen yesterday the momentum indicator flashed a "sell" on the monthly chart at the end of June. Selling at that point would have been early.

The weekly chart is presented today. Again, our confirming indicator at the top, RSI in the middle and price bars of the cash S&P500 at bottom. The sell on this chart came on July 20. Note that the highest closing price was on July 13 but the momentum was already past its peak. This bearish divergence was our technical "sell" signal. As of the end of August the weekly chart remains on this sell signal. Unlike the monthly chart we haven't seen any sign of a reversal yet.

By the way, the daily chart showed its own momentum "sell" signal on the 20th of July as well. It was then that the market moved sharply and quickly lower. I'll take a closer look at the latest daily chart before the market opens tommorrow.

Monthly Review

After getting stopped out on Friday it is time to review the bigger picture. On the bottom of today's chart are monthly bars of the cash S&p500. August 2007 was a downtrending month with a higher close.

Above the price are two momentum indicators. The top-most is a secondary (or confirming) indicator and below that the Relative Strength Indicator. Note that while the RSI made a new high in May it was not confirmed. This resulted in a "sell" signal when price turned down in June.

As of today this chart remains on a technical "sell" signal and my market view will reflect that. Of note is the positive RSI reversal that has just been formed. The July RSI low is lower than the February RSI low even though price is higher. Although this event has my attention I need to see a similar signal on the weekly chart (which will be covered in my next post) before it substantially alters my outlook.