Monthly Chart

As stated in previous postings I use price fractals and CIT’s to help define the wave count; key word being “help”. In today’s chart I present the monthly cash S&P500 wave count that makes use of those principles. Careful study will show that the wave positions are a bit different than those shown in the larger time frame Quarterly chart. This is due to the loss of resolution as one adds more data. However; notice that they both show the market being either in intermediate degree (3) of Primary “Five” or minor C of intermediate (B) of Primary “Four”.

Based on the quarterly chart I preferred the former count. The monthly shows a five wave impulse pattern from the 2002 low (which marks primary wave “Four” in the preferred count) up into the March 2005 high. At the same time note that the RSI; which started below 40 indicating a bear market in this time frame, moved up to the 65 area. This is the area where bear market rallies typically end.

We then experienced a very shallow a-b-c flat pattern into the October 2005 low. As we moved into 2006 the market rallied and the RSI moved above bear market resistance confirming that the monthly chart was now in bullish mode. Indeed, it appears that another five wave impulse pattern is forming from the October 2005 low. In my opinion, wave 3 of that impulse completed at the July 2007 high.

The question then revolves around the action since that high. What worries me greatly is that both the August 2007 low and October 2007 high are price fractals. Do they mark waves 4 and 5? If so we have completed intermediate (3) or; having more bearish implications, we have completed a large a-b-c zigzag from the 2002 low. Should we be concerned here?

The RSI indicator says yes. The last signal from this indicator was a “sell” that was generated at the end of November 2007 when the market turned down. October 2007 was at a new closing price high but the RSI failed to confirm. This is bearish divergence.

In my next post I will continue this discussion of the price action since July 2007 by looking at the latest weekly chart.

Quarterly Chart Time

The yearly chart of the cash S&P500 left me with the question “Are we in wave ‘Five’ or wave ‘B of Four’?” Today I turn my attention to the quarterly chart. The last quarter of 2007 displays as an uptrending price bar with a lower close. The most recently completed price pulse (the blue lines on the price chart) went from the 2Q2006 low of 1219.29 to the 4Q2007 high of 1576.09. A new downward moving pulse began at the 1576.09 high.

The middle pane of today’s chart is the Elliott Wave Oscillator as described by Tom Joseph (http://www.esignallearning.com/education/marketmaster/tjoseph/default.asp).
Note that the oscillator peaked where we have Primary degree wave “Three” labeled in 2000. The oscillator then pulled back to the zero line giving a high probability signal that a wave “Four” was forming.

Now take a look at the RSI. Of importance is that the 40 level held during the pullback into the 2002 low. This indicates that even with such a large decline we are still operating within a larger bull market environment. This interpretation was confirmed when we broke back above the RSI 65 level in 2007. Of course, the bull market view was confirmed by price itself when we made a new all-time high during this year. Not shown on today’s chart is the Composite Indicator. It flashed a “buy” signal when it made a bullish divergence with the RSI at the 2002 low. As we enter 2008 we do not have a corresponding “sell” signal.

As mentioned yesterday, my Elliott counts are guided by the formation of price fractals. Also important are the CIT (Changes-In-Trend) points labeled with the green ellipses. The last CIT was at the 2002 low.

What about the wave count? The technical evidence supports the view that the preferred count should have the 2002 low as Primary Wave “Four”. From that low we are in the third wave up: intermediate degree wave (3) of Primary wave “Five”. The alternate count would have the 2002 low as Intermediate wave (A) of Primary “Four”. Under that scenario we are in minor wave c of Intermediate wave (B) of Primary “Four”.

Although we have two choices it is important to recognize that both counts indicate that a bearish move lies ahead. It will either be intermediate degree (4) of Primary “Five” or intermediate (C) of Primary “Four”. But how close are we to this bearish scenario? That is, how close are we to completing intermediate degree wave (3) of Primary wave “Five” or Intermediate wave (B) of Primary “Four”? I’ll take a stab at answering that question when I look at the new monthly chart in tomorrow’s posting.

Happy New Year!

I begin the year with a look at the long term chart of the cash S&P500 index. I don’t do this because I build Elliott counts from the longer to shorter timeframes; rather I do it to construct the framework we are operating in within the shorter timeframes.

2007 was an uptrending price bar on the Yearly chart. Two significant facts about this bar were one, that we made a new all-time high; and two, we failed to make a new all-time closing high. The market is essentially at the exact value it was at the end of 1999. Back then (at the end of the rip roaring bull move) if you had told someone the market would be lower in eight years you would have been mocked and labeled an idiot. After all, the market always goes up doesn’t it? The price pulse that began the upward move from the 2002 low of 768.63 continues. Note that the short moving average provided support during the decline from 2000 into the 2002-03 period.

I make wave counts using a certain methodology. One component is price fractals. These are shown on the chart using a diamond symbol. Note the fractals at the 2000 high and the 2002 low. I believe that these two points represent the ends of Elliott Waves.

Next I review the RSI indicator. Of note is that the index sits at 74.4. A reading this high indicates that the S&P500 is in a bull market within this time frame. I also observe that the 74.4 reading is well below the peak reading of 97.9 set with the previous all-time closing high of 1469.25 set in 1999. Since 2007 closed at 1468.36 we have a situation where both price and the indicator are below their highs. The magnitude of how far below (price virtually none; the RSI quite a bit) does not matter. We are at least two years away from any bearish divergence on the yearly chart.

So what do I know from this information? We are most likely in the late stages of an Elliott Wave Impulse pattern (made up of five waves labeled 1-2-3-4-5). I strongly favor the interpretation that the 2000 high is wave “Three” of primary degree from the 1982 low. This then implies that wave “Four” either ended at the 2002 low or continues to this date. That is, the 2002 low marks either the end of wave “Four” or wave “A of Four”. Furthermore, if the latter count is correct the fact that we have made a new high limits the type of pattern that may be forming to either a triangle or expanded flat.

So which of these two counts is preferred? Are we in wave “Five” or wave “B of Four”? We’ll next look at the Quarterly chart to see if we can make a choice.