Torn Between Two Trendlines

Wednesday saw the cash S&P500 form an “inside” price bar that moved from one (short; red) Gann moving average to the other (long; green). This price action makes it very likely (although not a certainty) that the X pulse from the 845.61 (April 2) high is over and that we are now in an upward moving Y pulse.

The ability to hold above the red moving average shows that the bulls are still kicking. Note that the bounce yesterday was also at a Fibonacci confluence zone (horizontal dashed lines). The next lower level of such support is at 796. The bulls may be still kicking; but are they getting tired? Are the bears about to grab the upper hand?

Two things to watch today: 1) the price action at the long moving average. Failure to move through it cleanly leans bearish. 2) The BETA – X trendline. If we are in a Y pulse our “Price Pulse (PP) Theory” will issue a sell signal if Y completes and we fall down through that trendline. Of course, the key here is whether X has really completed.

In summary bears should act on a move below 814.53. Anyone lucky enough to have good profits from the swing up off the March 6 low might want to book profits on a move below 814.53 also.

Price Pulse Theory

Tuesday saw a downtrending bar on the cash S&P500 that ended at the short Gann moving average (red line). If the uptrend from March 6 is to continue this moving average should provide support as it did from March 30 to April 1.

Another methodology that takes advantage of the Level 1 Price Reaction Points (PRP) within the data is “Price Pulse (PP) Theory” as first espoused by Tony Plummer. A complete PP cycle consists of six segments: alpha, beta, delta, x, y and z. Delta is usually the strongest upward pulse and Z the weakest. On the current daily chart a PP cycle began not at the low but just previous on March 3. That low is labeled Z. A PP “buy” signal was generated when the Delta pulse moved above the previous Alpha pulse high and is marked by the solid line at 724.12 with the bull icon. Interesting is the fact that the short Gann moving average also bottomed at this point.

After the cycle completed at the March 20 swing low a new cycle began. In this current cycle we first note that the Delta pulse failed to move price much above the alpha pulse high of March 26. Since Delta should be the strongest pulse in the uptrend this failure to strongly move prices should be taken as a warning. As explained yesterday we then had a negative divergence in the RSI. However; although weakness appears to be setting in, the theory will not trigger an outright “sell” signal unless the current X pulse moves below the Beta pulse low of 779.81.

Top Being Made on the Daily Chart?

The cash S&P500 began the week with a downtrending price bar. When combined with the "inside" day made last Friday, the April 2 high is now defined as both a fractal high and a Level 1 Price Reaction Point (PRP). Technically the daily chart looks toppy here as we have now put in a negative divergence with price on the RSI (see chart).

That being said, the up trend in the PRP’s (higher lows and higher highs) continues; and the end of the wave up from the March 6 low can not be “finalized” until that trend breaks. Right now it will take a move below 779.81 to do that.

I have added a couple of interesting Fibonacci levels (dashed green and blue horizontal lines) that align with the closing prices on two of the last three sessions and the 180 degree Gann target (solid horizontal red line). These resistance levels were drawn using closing prices of the previous swings from November 21, 2008 to January 6, 2009 and then January 6 to March 6. Perhaps even more interesting are the Dynamic Gann Lines (sloping orange) drawn from those same swing points. Note how they caught both the recent swing high and the previous swing low of March 30.

To recap: The chart is looking like a top is being made but I want to see the trend change before getting too bearish here.

Quick Weekly Chart Update

Today I would like to quickly update the weekly chart; following up last weekend’s posting.

The positive divergence recorded at the March 6 low has led to a ferocious rally but we are still quite a bit below the previous swing high of 943.85. Recall that positive divergences fail in bear markets. If this rally fails and the RSI turns down from here we will still generate the three negative reversals identified last weekend.

That said the key in the paragraph above is “IF this rally fails and the RSI turns down …” There is no rule that says the bulls can’t continue their charge! One final point; I also keep a point and figure chart of the RSI. We have now reached the downward moving trendline from the RSI peak of May 16, 2008. Let’s see if the bulls can push it through or not, with a move above 877.86 being very bullish indeed.

In sum I still view this rally as the bear market variety.