Monthly Chart Update

The monthly chart (attached) has now completed a perfected “sell” setup. We have discussed the possibility of this happening previously. The Support level associated with this setup is at the March 2009 low of 666.79.

What does T. DeMark have to say about trading these setups? One of his suggestions is to use TD Supply and Demand Lines for entry providing an oscillator is an overbought position. Please note that this is a different strategy for trading than the one I presented on January 10.

Let’s build a trading system based on some of these ideas. We start once a perfected setup has occurred (like in the present monthly chart). Next we want to see the Demand Line (in the case of a sell setup) broken. In the case of the current monthly chart we have already broken that line (dashed green upsloping line) and so instead we want to see the next price bar open below the Demand Line. Unless we open about 150 points higher on Monday this will happen. However; before you initiate the trade you want the REI (not shown on the chart) to be in a mildly overbought position. It is not. The short trade can not be taken.

If you were to apply these same rules to the weekly chart you would not have been able to short that chart in early January either. But something new is being threatened on the weekly chart and I will look at that tomorrow.

Elliott Wave - Part 2

Today’s chart is a weekly depiction of the cash S&P500. The double zigzag is depicted as a-b-c (the first zigzag) - x - a-b-c (the second zigzag). The two zigzags are separated, and connected, by an ’x’ wave.

Motive patterns are always composed of five waves and labeled 1-2-3-4-5.
Corrective patterns are always composed of three or five waves and labeled as a-b-c or a-b-c-d-e. When ‘Double‘ or ‘Triple’ patterns form the corrective patterns are connected by ‘x’ waves.

Note again the Fibonacci influence. Motive patterns are composed of 5 waves; corrective patterns 3 or 5 waves.

To whet your appetite: Elliott waves are ‘fractal’. That is, a single wave will itself be a complete pattern on another timescale.

Eliott Wave - Part 1

Today I want to begin a series of postings on Elliott Wave; my true love within technical analysis. At its core, all the Wave Principle says is that bull markets are followed by bear markets, which are followed by bull markets. This pattern of bull-bear repeats endlessly.

Each market (bull or bear) is made up of one of 13 distinct patterns. These patterns are classified into two groups: Motive or Corrective. Motive patterns define the bull phase of the cycle, corrective patterns the bear phase. Therefore it is correct to say that motive patterns are followed by corrective patterns which are followed by motive patterns, etc.

Here are the Motive patterns: Trending Impulse, Leading Diagonal, Ending Diagonal, Extended Impulse, Truncated Impulse

Here are the Corrective patterns: Zigzag, Double Zigzag, Flat, Expanded Flat, Expanding Triangle, Contracting Triangle, Double Three, Triple Three

As an aside it is interesting to note the prevalence of Fibonacci numbers here. There are 13 patterns, 5 motive patterns and 8 corrective patterns.

To whet your appetite: I am thinking that the rally from March 2009 is a Double Zigzag pattern.

Want to Short this Market? We Need a Bounce.

As per recent postings, the weekly chart completed a perfected sell setup two weeks ago. This signal is supported by the monthly chart (see the January 9th post for details). Keep in mind that after a perfected setup has occurred the market ‘usually’ experiences a trend reversal, correction, or consolidation within four price bars of bar #9. That has certainly happened!

But … we did not go short due to the REI indicator being in an extreme overbought situation. That condition has now been alleviated and the REI is back below .45 (see chart). If we now get a bounce in the market that pushes the REI back above .45 we will once again be in a position to enter on the short side.