Odds Now Favor Pullback

The cash S&P500 printed an “outside” day on Thursday. After exceeding Wednesday's high within the first 15 minutes of trading we went on to make a lower low than Wednesday. This lower low confirmed Wednesday’s break of the TD Demand Line and negates the previously very bullish 1332 price objective. Now we not only have a technical “sell” signal (bearish divergence between the RSI and Composite indicators) in place, but the aggressive version of TD Combo hit bar number 13 yesterday (chart shows the regular version which remains on day 12).

And so the evidence now favors the view that a pullback is underway. Is it the Level 3 Beta Price Pulse pullback (see my post of July 25th) that I have been watching for? Under my current roadmap the Beta low will be in by September 2. Definitive proof that the pullback is underway would still be provided by a break of the July 29 low of 968.65. Failing that we would need to see yesterday’s high hold through August 21. Although not definitive, a failure to break yesterday’s high by next Tuesday would strongly favor the view that the anticipated August pullback is underway.

Conclusion: With our bullish TD Supply Line projection negated, a technical “sell” signal in place and an aggressive TD Combo sequence completed the odds now favor a pullback. An initial wag at a downside target would be somewhere between 922 and 955. I still expect new highs before the Autumnal Equinox.

Has the August Correction Begun?

Although we closed well off the lows it was a down trending day on Wednesday in the cash S&P500. A technical “sell” signal (bearish divergence between the RSI and Composite indicators) was flashed at the close. This is a “warning sign” that the expected August pullback may have begun. Let’s look a bit deeper.

The last time a bearish divergence between the RSI and Composite occurred was at the close on July 28th. That signal was followed by only a one day decline before the rally resumed. Will that be the case this time? Well, the supply/demand situation remains bullish until proven otherwise. The last confirmed break of a TD line was of the Supply Line with a calculated price objective of 1332.32! That objective remains active until a new target takes its place. Yesterday we had a qualified break of the TD Supply line and confirmation of that break today would create a downside target, negating our very bullish price objective. But until that happens I still have my eye fixed on the current daily chart target of 1020-1025.

Since any confirmation of the just mentioned TD Demand Line break would have such a shallow minimum objective (996.43), of more concern is holding above the July 29 low of 968.65. A break of that low would be proof that the larger Alpha pulse (shown in my roadmap post of July 25) is complete and that the expected August pullback (Beta pulse) is underway.

Concerning the bearish divergence between the RSI and Composite Index (chart shown yesterday)mentioned at the start of this post: This signal favors the imminent start of a pullback. However; note that the TD Combo count remains at twelve. Thirteen is required for a signal.

Conclusion: Without a TD tool confirming the technical sell signal I favor only a minor correction here. That is, it can not be said that the expected August pullback has began. Therefore, although I remain bullish with a short-term target of 1020-1025, I am now very cautious. Right now only a break of 968.65 would confirm the August pullback (correction) is underway; otherwise we would have to see a failed retest of the recent (Tuesday) high.

Continuing to March Up the Demand Line

It was another up trending day as the cash S&P500 continues to climb the TD Demand Line. Let’s update how this price action fits into the bull and bear arguments we’ve been following.

The current target on the daily chart is the 1020-1025 area, but will we hit it before a pullback commences? The first item of interest is the TD Supply line. We confirmed the breakout yesterday which favors hitting the price target quickly. The (unbelievable?) price objective from this breakout is 1332.32! Does that mean we have to see such a price? No. The supply and demand equilibrium are constantly changing. As Jason Perl writes in his DeMark Indicators book, “The objective will remain intact unless the market has a qualified downside breakout …” In my work I take the liberty to change that to “qualified and confirmed” downside breakout. So let’s look at the Demand Line now.

The TD Demand Line (the upward sloping green dashed line) stood at 998.14 yesterday. Since the low was 996.68 we broke, and qualified, that line. However, we now need to confirm it. Any open today above 998.14 is a non-confirmation. In this case we will have to re-qualify the line; which sits at 1005.51 today. Actually, since the price projection from such a downside break at this point is so shallow, of more concern is holding last Wednesday’s low. A break of 968.65 (Wednesday’s low) should be taken as a sign that the larger Alpha pulse (shown in my roadmap post of July 25) is complete and that the expected August pullback (Beta pulse) is underway.

Concerning the potential bearish divergence between the RSI (top pane) and Composite Index (middle pane) mentioned yesterday: An outright “sell” signal would still occur if both of these indicators were to turn down from their present level. This action would favor the imminent start of a pullback. Of course; just as was the case yesterday, the signal will not even occur if we have yet another bullish day today.

Also note the TD Combo count. It has now reached twelve. Recall that a count of thirteen (which may come as early as today) could trigger a sell signal.

Bottom Line: Bullish with a short-term target of 1020-1025 but cautious -- watching for the start of a pullback within the ongoing rally. For today, the first warning sign that the pullback has begun would be a break below the TD Demand Line with an end-of-day RSI/Composite Index divergence. A break of 968.65 would confirm the pullback (correction) is underway.

Watching For the Start of a Pullback

We began the week with an up trending price bar on the daily chart of the cash S&P500. Let’s update how this price action fits into the bull and bear arguments laid out yesterday.

The current target on the daily chart is the 1020-1025 area, but will we hit it before a pullback commences? The first item of interest is the TD Supply line. After failing to confirm a qualified break last week we now have a new qualified break when we went through 996.56 yesterday. If we see confirmation today it favors hitting the price target quickly.

The second issue involves both the RSI (top pane) and Composite Index (middle pane). An outright “sell” signal (bearish divergence between the two) would occur if both of these indicators were to turn down from their present level. This action would favor the imminent start of a pullback. Of course the bulls rightly point out that the signal will not even occur if we have yet another bullish day today.

The last point is that the current TD Demand Line (the upward sloping green dashed line) is right under the market at 998.14. A price move below that level today would be qualified. The bulls respond that, even if qualified today and then confirmed tomorrow, it would only project a shallow retracement of the rally. But remember that those price projections are minimum targets. Of more concern at this point is holding last Wednesday’s low. A break of 968.65 (Wednesday’s low) should be taken as a sign that the larger Alpha pulse (shown in my roadmap post of July 25) is complete and that the expected August pullback (Beta pulse) is underway.

A developing story to add to the mix is the TD Combo count. It has now reached eleven. Recall that a count of thirteen (which may come as early as Wednesday) could trigger a sell signal.

Bottom Line: Bullish with a short-term target of 1020-1025 but cautious -- watching for the start of a pullback within the ongoing rally. The first warning sign would be failure to confirm the qualified TD Supply Line break of yesterday while moving below the TD Demand Line and seeing RSI/Composite Index divergence. A break of 968.65 would confirm the pullback (correction) is underway.

Arguments by Bulls and Bears Over Near Term Direction

To recap my views as we head into August: The monthly chart (discussed Saturday) and my cycle work (posted July 25) are both short term bullish (through the Autumnal Equinox until as late as late November) but point to weakness afterwards. The weekly chart (yesterday’s post) is warning that within this bull run a pullback may be close at hand (will occur this month). The immediate question is whether we will hit the weekly chart target price of 1012-1028 before that pullback. So how does the latest daily chart add to this picture?

The current target on the daily chart is the 1020-1025 area, which nests nicely within the weekly target zone. But will we hit it before the pullback commences? The first argument against hitting the target right away is Friday’s price action. Although we closed a tad higher it was an “inside” day that failed to confirm last week’s qualified break of the TD Supply line (confirmation could only occur Friday if we had traded above 996.68). On the other hand, there is a new opportunity for the bulls since the new Supply line would be qualified on a move above 996.56. We would then have to see confirmation tomorrow.

The second bearish point here is that both the RSI (top pane) and Composite Index (middle pane) continue to show technical weakness here. An outright “sell” signal in the RSI would occur if it were to turn down from it’s present level. Of course the bulls would say that the signal will not even occur if we have a bullish day today.

The last argument by the bears is that the current TD Demand Line (the upward sloping green dashed line) that is right under the market at 990.77. A price below that level today would be qualified. The bulls respond that, even if qualified today and then confirmed tomorrow, it would only project a shallow retracement of the rally. Of more concern at this point is holding last Wednesday’s low. A break of 968.65 (Wednesday’s low) should be taken as a sign that the larger Alpha pulse (shown in my roadmap post of July 25) is complete and that the expected August pullback (Beta pulse) is underway.

Bottom Line: Bullish with a short-term target of 1020-1025 but also being cautious by watching for the start of a pullback within the ongoing rally. The first sign would be a move below the TD Demand Line. A break of 968.65 would confirm it as underway.

Weekly Chart Review for August 2, 2009

After a typical pullback following the perfected TD Sell Setup in early June the cash S&P500 has now posted three up trending weeks. As outlined in the post a week ago Saturday, I have an overall bullish view for the next couple of months. As stated yesterday the next upside target is in the 1012-1028 area. The biggest question going into August is whether we will hit this target before an intervening pullback.

One item to note on the chart is the TD Combo (dark red) count which has now reached ten. Even with the aggressive version of TD Combo it takes a minimum of thirteen bars to generate a signal. This means that we have a minimum of three weeks to wait before we can get a weekly chart sell signal from this tool.

Even without a TD Sequential or Combo sell signal we can still get a pullback within the ongoing bull run and I expect one in August; particularly since we just hit the monthly chart’s target of 971 within the last two weeks. The August pullback will retrace the rally from the July 8 low. Going into the coming week any such pullback can be identified as underway if the July 29 low of 968.65 is broken. I will watch it closely using the daily chart.