A Warning from Level 3

As far as the price pulses go, I have now shown Levels 1, 2, and 4. Today I present the Level 3 pulses along with the Derivative Oscillator (top pane). Hopefully this chart explains clearly why, even though the price pulse patterns are still in bullish mode, I do not feel like chasing the bull here.

Concerning the Level 3 pulses themselves, we are currently doing a Y pulse up. In the current formation from the July bottom the “sell” signal would be a Beta - X trend line break. That line will be at 1033.36 on Monday. Yes, that is still a great distance away but let’s look deeper.

What concerns me here is the action of the Derivative Oscillator. This indicator usually moves smoothly from high to low and it turned down on yesterday’s price action. Furthermore, notice; that from the July low until now the peaks are getting lower and lower just like with the price action from the March low to the June high. As Connie Brown states in her book, Technical Analysis for the Trading Professional, “The market usually breaks down before the market is able to form a fourth oscillator peak.“

Of course we aren’t even positive that a third peak is in. But with other momentum indicators failing and the Elliott Wave count showing a possible Zigzag completing, I think risk of a reversal is too high to be going long now.

Level 2 Price Pulses

Although not as strong, the market (cash S&P500) made another up trending price bar on the daily chart. Price has now confirmed the break above the risk (stop loss) level associated with the TD 9-13-9 signal of September 18. In retrospect we can now say that that signal led to the pullback into the October 2 low. As it stands we are now on day 10 of both the next TD Combo and Sequential. It can also be stated that yesterday continues the Y pulse on the Level 1 price chart presented yesterday.

Yesterday I asked if the Level 1 chart formation “sell” signal (the Beta - X trend line which will be at 1079.17 today) should be used to actually close longs or go short if that trend line was broken. I said Not necessarily. It depends on the higher level pulses. Well, the Level 2 chart is presented today and is bullish until and if its trend line is broken. That line is currently at 1032.14. And so, the two charts taken together remain in bullish mode. The Level 3 chart will be shown tomorrow and will make clear while I do not feel like chasing the bull here.

As far as the Elliott count goes, this chart shows the first two legs complete and that we are now in the late stages of completing wave C of an A-B-C Zigzag.

Level 1 Price Pulses

The market (cash S&P500) soared yesterday, breaking out above 1088.34 -- The risk (stop loss) level associated with the TD 9-13-9 signal of September 18. If that breakout is confirmed tomorrow then the bears will have to wait for the next TD sell signal. However, I for one will not be chasing this move even if the breakout is confirmed and prefer to sit on the sidelines here.

For something more technically oriented, I present for your consideration the Level 1 Price Pulse chart. The pulses are labeled in blue and the derived Elliott Wave count in Black. Recall yesterday that the Level 4 chart showed that an alpha pulse began from the July low. Today’s Level 1 chart uses that date as its starting point.

Over the near term, the market is now rising in a Y pulse. In the current formation from the October 2 bottom the “sell” signal would be the Beta - X trend line which will be at 1075.02 today. Using the pulses would one actually close longs or go short if that trend line was broken? Not necessarily. It depends on the higher level pulses. I will present the Level 2 situation tomorrow.

As far as the Elliott count goes, notice that wave 5 can not be longer than wave 3 if the count is to be valid. That point is at 1108.13. The current fifth wave is part of the larger wave C (or 3) discussed yesterday from the March bottom. I prefer the scenario where we are in the late stages of completing an A-B-C Zigzag.

A Change of Pace - Price Pulses!

Yesterday was a down trending day but the bulls say “forget that”. Look at the futures this morning! Soaring. Melt up? But …. No change as far as my analysis is concerned. I can’t and won’t chase this.

For a change of pace I will be presenting a series of price pulse charts over the coming days. Today’s chart shows the Level 4 action, and that we are currently in an upward moving alpha pulse from the July low. This chart is in a bullish position as it stands and has been so since crossing the blue trend line in the Spring.

In terms of an Elliott Wave count (I find the price pulses work well in identifying Mr. Elliott’s waves) the y-z-alpha sequence up from the March 2009 low corresponds to an A-B-C zigzag pattern. Note that the pulses don’t always correspond in this one-to-one fashion.

Since the pulses build upon each other I will present the Level 3, 2 and 1 price pulse charts over the next few days. This way you can see what they are saying about the future of the cash S&P500. I will most likely jump to the short-term Level 1 tomorrow.

Knocking at a New High

The cash S&P500 is knocking on the door of another new high after yesterday’s up trending day. With that said there is not much to add to yesterday’s commentary. The chart, however, has been changed to reflect the new swing upwards (the orange line). It is of interest to note that each swing high and low has been successively higher since the July low. With the new swing up I have also added the Combo and Sequential counts off of the nine up into September 18.

Please notice the dashed, cyan colored line on the chart at 1088.34. This is the risk level associated with the TD 9-13-9 signal of September 18. With price still below this level and momentum failing on all indicators (RSI, Composite, Derivative Oscillator) on both the daily and weekly time frames, I can‘t turn bullish here and remain steadfastly neutral.

Just Can't Get That Bullish Feeling Back

Friday saw another up trending day in the cash S&P500 market. The positive price action also confirmed Thursday’s qualified breakout above the TD Supply Line (down sloping dashed red line on the chart) and projects to a target of 1101.15.

Please notice the dashed, cyan colored line on the chart at 1088.34. This is the risk level associated with the TD 9-13-9 signal of September 18. We certainly have consolidated since that signal and a qualified break of the risk level would imply the correction/consolidation is over. With price still below this level and momentum failing on all indicators (RSI, Composite, Derivative Oscillator) on both the daily and weekly time frames, I can‘t turn bullish here. I will stay neutral. This conclusion is quite consistent with yesterday’s weekly chart review.

Weekly Chart Review, October 10, 2009

Those of the bullish persuasion certainly had a good showing last week as we essentially opened at the low and closed at the high. The week ended with price threatening to break beyond the resistance provided by both the Long (solid green line on the chart) moving average and the TD Supply line (down sloping red dashed line).

However, although it threatened, the push upwards did not break the TD supply line which was at 1072.04. This means that to qualify a break of the line next week we must open above 1067.99, which seems eminently doable. We would then have to wait a bit to see if the break higher can be confirmed. We will also have to be wary about how we close this coming week, as bearish divergence between the RSI/Composite Index and RSI/Derivative Oscillator persist. In fact, there is now potential divergence between the RSI and price itself. At the same time it continues to be important to note that the RSI still has not been able to break upward through the range typically associated with bear market resistance.

With the above facts in mind I would also be aware that the risk level associated with the TD Sell setup that preceded the late September/early October decline sits at 1079.96 (horizontal red line). That line can not be qualified this coming week so I remain leery about a renewed bull run here.

Bottom Line: If one has a longer-term view I would not be buying equities here, even if this rally has just a bit more of life left in it. If long during this great rally that began in March I would continue to use the 978 level as a “get out of Dodge” (sell) point.