Weekly Chart Update for August 30, 2009

The new weekly chart of the cash S&P500 shows an up trending price bar that is labeled as TD Combo #13. This completes the Combo count and demands our attention. Before we do that let’s update a couple of other price tidbits mentioned in last weekend‘s post.

The price action over the last five days has been enough to confirm the recent break of both the TD supply line (downward sloping red dashed line) and 38.2% Fibonacci retracement (horizontal blue dashed line) at 1014.14. These breaks imply that the bull move from the March low is continuing. The price projection from the broken TD supply line points to a target hundreds of points higher while the break of the Fib retracement line implies a move to at least 1122; the 50% Fib level.

Lower, more immediate targets also exist. The next TD Trend Factor target (based on the July 10 low) is at 1079.38. The Long-term moving average (solid green line now at 1090) is falling towards this level and should coincide with it in a couple more weeks.

Can we reconcile higher price targets with the just completed TD Combo? Of course; but that implies that the Combo “fails“ and does not result in a price reversal. The first item to note is the “risk“ level where the Combo signal may be proved wrong. This stands at 1062.74 and is shown as a bright red horizontal line on the chart. A qualified and confirmed break of this level would certainly allow for our higher targets. Next note that after a Combo signal there are numerous methods for taking an actual “short“ position. Going short on the close of bar #13 is very aggressive and therefore most risky. Waiting for a “price flip” (for September 4 that would be a close below 1010.48) is quite a conservative play. In-between there are numerous DeMark methodologies.

One I like is the use of TD Lines. The price action over the past week has readjusted the TD Demand Line (upward sloping green line that will be at 1014.91 this coming week). Interestingly, that level coincides with the short moving average and 38.2% Fib retracement on the daily chart.

Bottom Line: I would not consider the weekly chart bearish unless we break 1014.91 over the coming week. Even then I would not expect the mid-August low of 978 to be broken. I would view a break of 1014.91 as representing a correction within the ongoing bull run. After any such correction we would rally to new highs -- but then we may face a much more important completed TD Sequential Countdown (we are on bar #9 of 13 now).

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.

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.

Bear Claws Seen

The cash S&P500 broke out of its recent range yesterday with a downtrending price bar. As long as the break below the TD Demand Line (thin solid green line on today’s chart) is confirmed today we have these initial price targets: the intermediate Gann moving average (blue line) at about 915; Demand Line and TD Propulsion targets at 903 and the weekly Intermediate moving average and a Fibonacci level near 888.

One of the reasons to watch carefully for Demand Line break confirmation before getting too bearish was laid out by a commenter yesterday. The TD 7-11 (or TD LV in DeMark’s New Market Timing Techniques book) indicator warns that we may bounce back today. Additionally, note that we made low yesterday by closing the gap on the daily cash chart between May 29 and June 1. Oftentimes these gaps can provide support.

Both the cash S&P500 and the CRB Index made major lows about the same time in March so I am monitoring the commodities closely. Yesterday we had the bearish price flip on that index to confirm technical “sell” signals and a TD Combo “sell". I am now leaning towards the view that equities have started their most significant pullback (even if we bounce higher today) since the rally off the March 6 low began. The “proof”, so to speak, will be a weekly technical sell signal. We have to wait until Friday for that, when we may also get a perfected TD Sell Setup on the weekly CRB chart.

Weekly Review: Risk Growing

The past week was highlighted by the “perfection” of a TD Sell Setup on the weekly chart when we exceeded the 930.17 level. When a Setup is perfected there is a possibility that the current trend in force (in this case the rally from the March low) has become “exhausted”. Such exhaustion will usually manifest itself within a few price bars and may be just a pullback / consolidation (before the market continues its outstanding trend) or it may mark a trend reversal. One way I like to distinguish between the two possibilities is by using two indicators: Welles Wilder’s RSI and Connie Brown’s Composite.

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. The RSI would have to turn down (which would require price to turn down) from here to trigger the actual “sell” signal. Without a signal I favor the pullback / consolidation view. With a signal I would favor a much deeper retracement (move lower). In either event the current upside potential is quite limited (968-973) while downside risk is growing (max would be a retest of the March lows if a weekly “sell” signal is generated). Therefore I would not be a new buyer of equities here and I would protect any existing positions with tight stops. In fact, someone who was thinking “I wish I had sold my stocks” last autumn or early this year may now be looking at a good time to do so (if we get the weekly signal).

Of note in the coming week is the position of the upward sloping dashed green line. 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 sits at 948.42 next week while we closed this past week at 940.09. This sets up the likelihood that we will break below this line (quite possibly right at the open on Monday) -- which should be viewed as another sign of weakness.

Bottom Line: Upside potential is limited over the next few weeks while downside risk grows. Price action on the daily chart over the coming days should provide a good idea of whether we consolidate / pullback a bit from these levels or experience a much deeper retracement of the move up from March.

Pre-Holiday Post

We saw a downtrending day on Thursday that reached for the May 15 low after breaking below the current TD Demand line. As mentioned yesterday, that demand line break was not qualified and; true to form, the market was able to close back above it. For today the only way to qualify that line is to open under it (885.36). Such an open would trigger a trend continuation trade (see below for details).

The strength of yesterday’s decline was enough to favor the interpretation that a Level 1 Z pulse is underway; especially since the Level 2 Beta – X trendline (see May 19 posting for more information) has now been broken decisively. This event, combined with a further decline below 878.94 today would enable us to lower the stop on the open experimental trade position (see below for details).

A new TD Supply line has been formed and sits at 923.20 today. Also note that the Swing Chart (the orange lines that move in a “step-wise” fashion) is on the verge of making a lower high for the first time since this rally began in March.

Well …. It is a Friday just before a three day weekend so respect the bulls today! Have a great holiday weekend. I will post the weekly review either Sunday or Monday morning.

The experimental trade position remains short from 897.34; stop & reverse currently at 930.17. Lower that stop & reverse to 924.61 on a move below 878.94 today. A trend-continuation short trade would be taken today ONLY if the open is less than 885.36. If taken the initial stop would be placed at 900.43. Calculated price objective: 827.71.

Waiting For Confirmation of a Significant Top

An “outside” reversal day top was made in the cash S&P500 on Thursday. Is the high finally in? I vote “yes” but will let the price action confirm before I take any action.

The answer lies with another question: “Is the Level 1 Alpha Pulse complete?” The fact that a reversal day was made increases the odds that Alpha is indeed complete. At this point we will have “proof” of that fact if we break below Tuesday’s 897.34 low without first exceeding yesterday’s high.

I also note that we seem to be reacting bearishly after the TD Combo Sell Setup mentioned in yesterday’s post and the trigger of a TD REI “sell” signal when 903.95 was broken. Furthermore, the fact that the TD Supply line target of 943.17 has not been reached and the Composite Index / RSI non-confirmation are also bearish developments.

The only way the market can qualify the current TD Demand Line (at 891.41) would be to open above that level (quite doubtful). This piece of information suggests a bounce may be at hand.

Also of interest: 929 is trine the March 6 low in price. In time, 930.5 is square May 7. Yesterday’s high was 929.6.

Yesterday I put out a twitter tweet during the day announcing that the long trade had been validated per the draft trading plan and to raise stops to the trade entry level. Our first foray under the plan has ended up as a “draw” (of course there would have been commission charges).

A short position (not to exceed 3% of the account balance) would be taken on a move below 897.34 today. All such trades are hypothetical (based on the cash S&P 500; not a tradable contract) and do not constitute advice to buy or sell any instrument. Initial stop would be placed at the most recent high.

Supply Line Break Negated

The cash S&P500 formed an “inside” day on Monday. This raises the odds that Friday’s high is a Level 1 PRP and completed a Delta pulse. If so the market is now in an X – pulse. Price Pulse Theory would expect the market to drop below; perhaps significantly, the Beta Pulse bottom of 826.83. Corroborating this theme is the fact that yesterday’s price action negated the TD Supply line break of last Friday on the daily chart.

Today’s chart has two TD Lines to watch. The green up sloping Demand Line lies at 848.38 and would be qualified if broken today. Breaking below this line projects to 816.34, although the first target down would be a retest of the 823-827 area. On the upside is the TD Supply line at 870.27 which would also be qualified if broken today.

Bottom Line: I still favor the bearish view that ultimately looks for a retracement of the March 6 to April 17 rally that goes below 780.

Supply and Demand

To a certain degree Thursday’s price action was the opposite of Wednesday’s. After starting lower prices ended near the highs of the session but ended up being classified as a downtrending day. I think it is fair to say that the past couple of sessions have been a consolidation and not much else. What we do know is that Tuesday’s low of 826.83 is now considered a fractal and Level 1 Price Reaction Point. This confirms that it is the end of the Beta pulse and that Delta is underway. As Delta is the strongest upward pulse we must respect the ability of the bulls to hold up prices here.

A good way to measure bullish capability is via the price relationship with the new TD “Supply” line shown on today’s chart (the downward sloping red line). If the cash S&P500 can open above that line today (852.55) expect the bulls to retest the high. Otherwise odds are that the bears will be unable to prevent a trip back towards the 825-827 area; our immediate downside target.On the other side of the coin, a move below the TD “Demand” line (the upward sloping green line) at 830.52 would target 779.26.

Bottom Line: Risk/ reward favors the bears here. Ultimately looking for a retracement of the March 6 to April 17 rally that goes below 780 but lets watch the supply and demand action for short-term market direction. I will update during the day via twitter if key lines are broken.

Currently Neutral

The cash S&P500 formed another downtrending price bar on Wednesday but this time with a higher close. Indeed, it looks like the bulls will not give up without a fight. We remain on a “Price Pulse (PP) Theory” sell signal but before I can get too bearish I need to see a break in the price pulse trend, which right now requires a break below 814.53.

So far the pullback from Monday’s high has been very shallow and didn’t even reach the Qualified Level 2 TD (Tom DeMark) Demand Line target of 834.97 (we got down to 835.58). Support remains in the 826-829 level. This support is provided by both Fibonacci confluence and two moving averages. As noted yesterday, since the Z pulse is fundamentally the weakest in the entire cycle we should watch it for hints about overall market health. So far the market continues to look more bullish than bearish here.

Time-wise, the odds are high that if a short-term low is still in the making it will come today. We can’t say the low is in yet; particularly since a TD (Tom DeMark) Anti-Differential down arrow has now appeared at Monday’s high.

The current Price Pulse based on Level 2 PRP’s is in a Delta pulse (green labels) from the March 30 low and gives permission to re-enter longs on a move above 864.31.

To wrap up: currently neutral. Bullish above 864.31; bearish below 814.53.