Friday 27 June 2008

Lessons Learned


As previously stated this blog documents my attempt to improve my knowledge and application of technical knowledge to the cash S&P500 index. Yesterday provided a good day for “Lessons Learned”.

1) Never take action based on a daily RSI/Composite Index signal if the higher time frame is on an opposite signal. This indicator flashed a “buy” signal at the close Wednesday. As mentioned here just last Sunday the weekly chart is on a “sell”.

2) Do not attempt to use “real-time” Elliott Wave counts. Darn. I LOVE Elliott Wave, but I can’t continue to fool myself any longer. It is too impractical to use on a real-time basis. Nothing works better in hindsight but the counts morph too easily in daily application.

So stick to what works and keep it simple. In my Sunday, June 22 posting I wrote: Daily Chart: Bearish with an immediate target near the 1292 level. I should have stuck with that like glue instead of becoming mostly sidetracked by the technical culprits just mentioned. But how was this target derived and is it still valid? Those are the concepts I want to stick to and explore further in this blog. Hence today’s chart.

The first concept is the market environment. Bullish or bearish? We are bearish since we are below the latest Support line (shown in bright green sloping upward) and will stay that way until we “decisively” break the Resistance line (shown in dark red sloping downwards).

Once a Support/Resistance line is broken we can calculate price targets. For the down move from May 19 the targets are shown as the blue ellipse (symmetry target), horizontal blue lines (Fibonacci targets), horizontal purple lines (magnets) and horizontal orange lines (Gann). Clustering of targets is important. Notice we are in a cluster of 1276.5 to 1284.5 now.

Once a price target is reached we must determine if the market is likely to reverse. Is the market in an area of “price exhaustion”? If so stops should be tightened. Here is where the RSI can come in handy as one tool to spot areas of likely reversals. In a bearish environment (as defined by the RSI itself) price exhaustion is indicated below the 32 level. We are now there – for the first time since the May 19 top. My conclusion? Stops should be tightened here on open shorts and a long position only taken on a break of 1329.13.

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