How Goes the Rally?

Although the rally continues it has been a choppy affair that looks corrective to me. There are a couple of things I am watching here:

1) Interplay between price and the indicators. Both the composite index (middle pane) and RSI (upper pane) are ahead of price here. While the RSI is higher than it was on August 23, price is not. More concerning is that the composite is higher than it was on August 8th! Why the concern? As Connie Brown says in Technical Analysis for the Trading Professional, “You are on the wrong side of the market if the oscillators can move without prices following.” In fact, if these oscillators were to turn down from here we would have bearish negative reversals in place. We’ll have to watch and see what happens.

2) Price Pulse. The odds are high that the August 28th low marked the end of the Beta pulse and so we would now be in Delta. Under Price Pulse theory a failure of Delta to exceed the previous Alpha pulse high (1669.51) keeps the market bearish.

Bottom line: The daily chart remains bearish. Even if a stronger rally develops here I would expect it to fail to make new highs. We would then reverse and go on to make even lower lows.

Presenting The July 2013 Chart

Attached is the new monthly bar chart of the cash SP500 (bottom pane). The top pane contains the Relative Strength Index (RSI) and the middle pane the Composite Indicator. Are there any signs of price exhaustion in this chart?

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bearish divergence. Is there anything more substantial for the bearish case?

Of continued interest is the potential 9-13-9 (labeled in black on the chart) “sell” signal generated by DeMark analysis. I use this signal in a conservative fashion – to me it is not activated until we get a price flip. For that to occur in August we would need an August closing price below 1597.57. However, now that price has closed above the “signal abort” level of 1659.11 (horizontal cyan line), a new high in August will abort that signal.

Another DeMark “Nine” is shown in green at the May 2011 high. The subsequent Sequential countdown reached 13 in May of this year. Again, that is a potential “sell” signal if it is triggered by a price flip this month.

The wave count derived from a DeMark-like analysis (see previous price wave series) has a potential Triple Three pattern ending once we complete the final “C” wave up from the June 2013 low.

Finally, the price pulses. A cyclical bear market rally (from the 2009 low) within a secular bear market decline (from the 2000 high) is often composed of an ALPHA-BETA-DELTA sequence. Both the Medium-Long and Medium sequences show us approaching the end of the Delta pulse. More potential price exhaustion.

Potential. Potential. Potential. The monthly chart is screaming “caution” and this is why, as a long-term investor and not a trader, I remain wary of equities right now. But “caution” is not the same as “sell” and so I can’t definitively say that the monthly chart is screaming “get out now.” But I feel like we are approaching the edge of a cliff.

Weekly Update at the Summer Solstice

Although I have been yammering about support holding on the daily chart and a possible temporary low being made I don’t want anyone think I am a bull. No, not at all. In fact, I lean towards the view that the May high was the top of the bull run from the 2009 low. Note that I am not yet committed to this view - hence the question mark on the weekly price chart above (bottom pane).

My first reason for concern regarding the bullish case is the wave count. This is not an Elliott count but similar based on price pulses. We are close to confirming the end of a large Zigzag pattern from the 2009 low. This Zigzag is wave ‘D’ within a large Expanding Triangle from the 2000 high. If this view is correct then wave ‘E’ of the triangle will go below the 2009 low.

Next, there was a bearish divergence between the RSI (top pane) and Composite Index (middle pane) at the recent high. Additionally, we see that a TD Combo 13 sell signal was generated on May 10th and a TD Aggressive Sequential 13 sell signal on May 31st. I use these signals in a conservative fashion – to me they are not activated until we get a price flip. Such a flip occurred on June 14th. On the other hand, these sell signals can be negated. For the Combo signal such a negation requires a confirmed, validated break of the 1655.81 level (shown by the horizontal cyan colored line). Breaks of that line during the weeks of May 17th, May 24th and May 31st were subsequently invalidated. Bottom line: This chart is on a technical sell.

From a wave perspective … A move to a new high from here means that the action from May 22 is wave 2 in an upward trending pattern from the X-Pulse (wave 4) low. A break below the April 18th low (1536.03) would be the proof I need at this time to commit to the interpretation that the rally from the 2009 low is complete as the “D” wave of an Expanding Triangle.

Finally, at this time the break of the Beta-X trendline on the weekly chart is not qualified but should at least worry the bulls.

A Qualified Break of the Beta - X Trendline?

On Thursday the Beta-X trendline was broken and the market ended just above TDST support (see chart of the daily cash SP500). Note the selloff occurred after hitting the Fibonacci 61.8% retracement level.

Did we have a qualified break of the Beta- X line? To answer that question I use the 3 criteria outlined on page 107 of Jason Perl’s book “Demark Indicators.” In this case we fail to meet any of the three conditions and conclude that we did not have a qualified break. That may change today, but so far we can’t say that that important line has broken.

On top of that the RSI stands at 39.5 today – in the zone reserved for bull market support. Additionally, the Composite and Derivative Oscillator values are threatening to form bullish divergence with the RSI.

Conclusion? A snap back rally today could mean that at least a temporary low is in place (TDST Support held!) and that a retest of the May high would not be unexpected. Therefore, rally today and the question goes back to the bulls – ‘can you keep the rally alive?’

A Cursory Look at The World Gold Index

On the longer time frame charts (not shown) it looks like gold is closer to an ultimate high (in the rally from the 1999 low) than a low, but will have to wait until sometime in 2010 for "the" top.

On the Weekly chart (shown) we have been working on a TD Sequential Sell signal for quite a long time now. The TD Sell Setup was completed on January 16, 2009 and we have just now (September 4, 2009) printed bar #13 of countdown.

While countdown was proceeding, a bearish divergence between the RSI and Composite Index in late February of 2009 led to a pullback. That was followed by a positive reversal signal in these same indicators in April 2009. The associated minimum price objective tied to that positive reversal is 1020.37. So far we have reached 998.

Now that we've printed countdown bar #13 the first question revolves around taking a short position. Should I? And if so, where do I make my entry? The most aggressive action would be to go short now (on the close of bar 13). I would not advise this as there is no confirming RSI/Composite signal and we have not yet fulfilled the already mentioned minimum price objective off of the April low. Let's turn to the daily chart for help.

As of September 4, 2009 we are currently sitting at TD Sequential countdown bar #11. During the coming week it is possible that countdown will complete. If so we will have time-frame confirmation between the daily and weekly. However … we will also have to watch for the possibility that countdown gets canceled on this time frame. That would occur if TD Setup (currently on bar #6) reaches nine bars (or more) and exceeds 1017.

Conclusion: Although we have reached TD Sequential Countdown bar #13 on the weekly chart, it is a bit premature to short the gold market here. Let’s see how the coming week unfolds. Longer-term, if a significant pullback does unfold here it might be a final opportunity for traders to get long the precious yellow.

I will try to update this analysis periodically.

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.

Edging Higher

The cash S&P500 edged higher yet again yesterday as I continue to wait for a routine 1-4 price bar pullback in the index. Today’s chart shows both the Composite Index (top pane) and Relative Strength Index (RSI) (middle pane). A turn down in the RSI here will cause a bearish divergence between it and the Composite Index; a technical sell signal to accompany the in-place TD Sell Setup.

Can't Rule Out a Rally Attempt Here

It’s not a surprise but it’s now official. The swing chart of the cash S&P500 index (the orange lines on the price chart that move in “step-wise” fashion) has turned lower for the first time since the March low. The index has also confirmed the break of 886 (the 23.6% Fibonacci retracement value). This points to a move towards the 846 level (the 38.2% Fibonacci retracement value); but we may not get there directly.

Even though yesterday’s decline officially turned the swing chart bearish the RSI (top pane of today’s chart) is still holding in the area where bull markets find support. If the rally from March is truly over then a break below 38 on the RSI will come. However, the bulls shouldn’t be expected to just give up on their hard fought accomplishments. If 38 is eventually broken it may be after another rally attempt. There are timing reasons to expect some kind of a bounce here over the next few sessions.

So far the answer to the question asked in Tuesday’s posting matches my “I don’t think so …” gut feeling. It appears that the currently in force Weekly technical sell signal (RSI/Composite divergence) with TD Sell Setup may take precedence over the perfected TD Buy Setup and technical buy signal; but let’s give this a bit of time to play out. In fact, there is a possibility that the composite index (middle pane) may form a bullish divergence with the RSI if we can rally here. This would create another technical “buy” signal on the daily chart.

Bottom Line: Even with a rally attempt I remain bearish on equities here. Overhead resistance lies at both the short (solid red) and intermediate (solid blue) moving averages and then again with the TD Supply Line (dashed red line).

Weekly Update for June 28 - A Cautious Bear

Since the weekly TD Sell Setup was perfected on June 5 the market has been undergoing a pullback/consolidation. A technical “sell” signal was given on June 19: Although the RSI (top pane) has confirmed the new price high by making a new high itself, the Composite Index (second from the top) did not confirm. Since the RSI then turned down this is a *confirmed* bearish divergence between the two indicators.

So far we have seen a bearish price flip and a move down to the short moving average over a three week time period. A typical pullback/consolidation runs 1 to 4 price bars after a perfected signal. The question now is whether the rally that began in March will resume. Or will we have a deeper/longer correction due to the added technical sell signal? I favor the latter scenario but note that this week’s price bar is a Doji candlestick where the opening and closing prices are essentially the same. A Doji is a reversal candlestick. In particular, the Doji formed on our price chart is classified as a “dragonfly”.

The following discussion is from the excellent candlestick section of stockcharts.com:

“Dragon fly doji form when the open, high and close are equal and the low creates a long lower shadow. The resulting candlestick looks like a "T" with a long lower shadow and no upper shadow. Dragon fly doji indicate that sellers dominated trading and drove prices lower during the session. By the end of the session, buyers resurfaced and pushed prices back to the opening level and the session high.

The reversal implications of a dragon fly doji depend on previous price action and future confirmation. The long lower shadow provides evidence of buying pressure, but the low indicates that plenty of sellers still loom. After a long downtrend, long black candlestick, or at support, a dragon fly doji could signal a potential bullish reversal or bottom. … Bearish … confirmation is required for both situations.”

One confirming factor to consider is volume. The Dragonfly is a better indicator of a bottom if volume increases; and it did last week – we had the highest volume since May 15 (bottom pane).

So where does this leave us? In my opinion we will only get confirmation that the uptrend has resumed if we can qualify and confirm a break of the current TD Supply line (downward sloping dashed red line on the price chart). For next week the line sits at 951.26.

The buzzing of this week’s Dragonfly has made me a more cautious bear and has caused me to look up. But unless we get confirmation by confirming a break of the supply line I will go back to eating my salmon.

Weekly Chart Review

This past week is a perfect example of why one should not anticipate signals in the technical indicators. In my last weekly report I noted “This week we note that although the RSI (top pane) has confirmed the new price high by making a new high itself, the Composite Index (middle pane) is lagging. This is *potential* bearish divergence between the two indicators.” Of course I then proceeded to have the mindset that the signal would develop, expecting a decline to start any day. Needless to say there was no price decline over the past week and at this point we face the same *potential* bearish divergence between the two indicators.

Since the weekly TD Sell Setup was perfected on June 1 the market has gone sideways for nine sessions. As I stated last week “Without a signal I favor the pullback / consolidation view. With a signal I would favor a much deeper retracement (move lower).”

Will we get our technical sell signal over the coming week? Who knows? But one “tell” may be associated with the upward sloping dashed green line on the price chart. This line has served as a good proxy for the “demand” of equities over the past few weeks and is why Tom DeMark (TD) labeled it as the Demand Line. It will be a sign of weakness if the price action falls away from this line; indicating a fall off in demand.

If demand for equities does not fall off here recall that the next price target from the monthly chart is at the 970 level.