And The Bounce is Done

The bounce due to the bullish divergence between price and the RSI at the August 21 low is over of course. The chart remains bearish.

Price has now entered the SLOT (the 50-78.6% retracement area which I have drawn as a box on today’s chart). This is the area where we should assume that support will hold as price pulls back from a new high. The TD Trend Factor target (purple line at 1614.62) aligns well with the 61.8% Fibonacci retracement and is below the Beta-X trendline (in orange). A close beneath this trendline will significantly raise the chances that the trending impulse pattern from last November is complete.

The SLOT

The working hypothesis is that the August 2 high marked a significant top. I am quite convinced that it ended the rally from the June 24 low. Does it also mark the end of the trending impulse wave from the November 2012 low? Here are some sage words from blogger/trader Leaf West: “Traders know that calling tops is a mug’s game, and that they should always assume that as price pulls back from a new high, that support will hold in the SLOT and that a new high will be made. It is at the point in time when price bounces from support but fails to break to a new high, where traders can then point to that previous high in price and mark that as a more important top. Price should then be expected to make a bigger wave structure in the opposite direction from that confirmed top.”

In West’s work, the SLOT is the 50-78.6% retracement area which I have drawn as a box on today’s chart. Note that one of the features I track is in that box: The next larger Beta-X trendline. A close beneath this line will raise the chances significantly that the trending impulse pattern from last November is complete.

Other items of interest from the daily chart:

1) RSI (top pane). Two readings below 38 will also point to the August high as completing the pattern from November 2012. The RSI is currently at 35.29; marking the first reading below 38.

2) TDST support (1588). Will it hold?

3) Composite Index (middle pane). This indicator is now at an extreme low. This implies that the “final” low for this decline is not yet in. Expect a bounce followed by lower lows.

Bottom Line: The chart is bearish. Let’s see how it develops over the coming days.

The Rally From June 24 Continues

Over the last couple of days the market has continued to advance and the futures are strong this Thursday morning. We have now surpassed the June 18th high of 1654.19 and yesterday we had a qualified break of the TD Trend Factor target (horizontal purple line at 1647.09). If it is confirmed today the next target is at1738.66 – a new high.

However; with the weekly chart (see Monday’s post) bearish I don’t expect a new high to be made. Any price flip on the daily chart would trigger a TD Sequential “sell” signal. There are two Fibonacci resistance zones to watch which are marked on the chart: 1660-1662 and 1673-1675.

A Quick Update of the Daily Chart

A week ago I said “the best I can see for the bulls is a rally that peters out by July 8. I can even see the June 18th high of 1654.19 being broken – but not the May high. This is not a prediction or what I expect but the best case bull scenario I can envision.”

I Just wanted to pop in and let you know that I have no changes to that view. The only thing I want to point out is that Monday’s action not only took us to the 50% retracement line of the entire decline but just about tagged the underside of the Beta-X trendline. Was it a kiss goodbye?

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?’

Time to Step Back -- Quarterly Chart Review

On the quarterly chart of the cash S&P500 we had a very strong up trending bar …. That makes two in a row from the recent low of 666 set in March 2009. Notice how we were able to keep contact with the Long (green) moving average at the low. Since the low the up move continues to look like a bear market rally.

The only positive signal at the low (in the technical indicators I follow) was the TDPOQ on an 8 period TD REI which turned positive when price went above 956.23 in July. Without confirmation I consider that as indicating an oversold counter-trend rally. The REI now indicates that the oversold condition has been relieved and at this point the market is still in the process of determining what the demand level is for stocks is after the huge decline of 2008.

There is a broad area of overhead resistance from 1120-1170 (50% Fibonacci retracement level, previous TDST Support and the Medium (blue) moving average). Above that is 1225-1240.

Bottom Line: The quarterly chart indicates that the bear market rally from March is maturing and that long-term investors should not yet be worried about “missing the bottom”. At the same time it certainly is not inviting anyone to go short. The battle for the rest of the year may very well be the 903 level. If we close above that value at the end of the year the odds of a significant new low become quite low and a double bottom around 666 becomes more likely.

Market Lower Over the Past Week

At the start of my holiday last week I was of the opinion that “… equities have started their most significant pullback since the rally from the March 6 low began. The “proof”, so to speak, will be a weekly technical sell signal which we have to wait until Friday for (but seems increasingly likely).” The sell signal was registered on the weekly chart last Friday and the cash S&P500 has moved lower, hitting targets at 903 and then the weekly moving average and a Fibonacci level near 888.

We have bounced off that 888 target (which is also near the 23.6% Fib retracement). Old weekly resistance (always watched to see if it becomes support) is at 890. On the daily chart we have reached 8 bars down towards a possible TD Buy Setup. The TD Demand Line (thin dashed green line on today’s chart) is at 889 and the TD Supply Line (thin dashed red line) is at 907.66. Both of these lines would be qualified if broken today.

Let’s see if the market can “perfect” the potential TD Buy Setup by moving below 888.86. I think we need to see that before one can speculate on any renewed rally to the upside.