A Countdown 13 Bar Shows Up

After surging higher during the first half of Monday the market drifted lower during the rest of the day. Now the question is … is there more upside to come? New highs? Or was that it?

A bit strange is that a TD Sequential sell countdown completed yesterday. I use the word strange because it has laid dormant for quite a while. The TD Sell Setup that kicked it off registered back on July 9th (see chart). A more recent TD Sell Set-Up just completed (bar 9) last Friday. Precedence goes to the completed countdown because it’s associated setup is larger than the current setup. The associated risk level is at 1718.66 (solid horizontal cyan line). As usual, this is step one of my three step signal process (see posting on the August 31 weekly chart for an example).

Step 2 requires a technical signal. While the RSI (top pane) went to a new high yesterday the Composite Indicator (middle pane) drifted lower. This formation is not quite bearish divergence. Step 3 requires a price flip which has also not yet occurred.

As for the most recent sell setup, the associated risk level is at 1697.98 (horizontal dashed cyan line). It is interesting that we did not close above that level yesterday, ending at 1697.60 on the cash S&P500.

Bottom line: my view that we fail to make new highs, reverse and go on to make lower lows remains intact – but just barely. If yesterday marked an exhaustion event we should see some downside action today.

Monthly Chart - August 2013

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. In the July monthly posting I pointed out a potential bearish divergence between RSI and the Composite Index. After August’s action we now have actual bearish divergence. This is the second of three requirements I have to turn the chart bearish.

The first requirement is to get a potential DeMark “sell” signal. In our case we had a 9-13-9 (labeled in black on the chart) “sell” signal generated in April 2013. However, note that price closed above the “signal abort” level of 1659.11 (horizontal cyan line) in July. This meant that the new high recorded in August aborted that signal so that it is no longer active.

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. The “abort” level associated with this signal is shown by the horizontal cyan line above the market at the top of the chart at 1793.08. The third requirement I have before classifying a chart bearish is the triggering of a DeMark signal by a price flip. In this case we need to close September below 1630.74.

In candlestick parlance, August was a “Dark Cloud Cover.” Here is what Thomas Bulkowski (http://www.thepatternsite.com/DarkCloudCover.html) has to say about this pattern:

1. Reversals occur 60% of the time with this pattern.
2. It ranks 22 (out of 103) in performance which means that price has a tendency to trend after a reversal.

To me the above shows why a price flip is important before calling the action bearish.

Finally, the price pulses and waves. 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. The Alpha and Beta pulses in such a sequence are shown in red on the chart. These are what I call the ‘super long term’ pulses. The ‘long term’ pulses are shown in green. Creating an Elliott Wave count using the latter we can see a ‘Double Three’ pattern close to completion. Extremely interesting is that TDST Support (horizontal dashed green line) aligns with the ‘B’ wave of the A-B-C Zigzag from the October 2011 low.

Bottom Line: The monthly chart continues to edge closer to being classified as bearish. I put a 25% weighting on this chart (as I do with the weekly and daily). I have recently cut back to a 50% equity exposure. A price flip in September on the monthly would drop that down to 25% (assuming the weekly and daily stay bearish). Stay safe!

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.

Daily Chart Recycles

The cash S&P500 resumed its rally without a price flip, moving above the 1692.51 level which gives us a new TD Setup which recycles our TD Combo and Sequential countdowns. Thursday represented Combo bar 10 and Sequential bar 6 based on the new active TD Setup (shown by the number 9 symbol on the price chart).

The DeMark recycle makes sense in a wave frame of reference also - it appears that we are now towards the end of wave 3 in a suspected five wave impulse sequence from the June 24th low. Note that Wave 3 is now equal in length to a 100% projection of Wave 1.

On the RSI chart (top pane) the indicator has poked to a new high for the move and is now above the 63-67 zone which often signals that a market is transitioning into a bear phase. At the same time the RSI is rising, note that the Composite Index (middle pane) continues to fall. In my ideal scenario going forward we get a fourth wave pullback and then the Composite forms bearish divergence with the RSI in the fifth wave as we reach a DeMark exhaustion signal. But for now, the daily chart must be deemed bullish.

A review of the weekly chart and Elliott wave musings this weekend. Cheers!

The Retest Continues ...

The daily chart is extremely interesting and subtle right now as we’ve moved sideways over the past few sessions just under the May high.

If the cash S&P500 closes below 1680.19 today (Thursday) then a price flip will be recorded that triggers the TD Sequential “sell” signal that printed bar 13 on July 8th. Instead, if the market resumes the rally without a price flip, any move above the 1692.51 level will give us a new TD Setup and recycle our sequential countdown. As reader Wallfly noted in a comment yesterday, a TD Combo bar 13 could print today giving us another item to watch for.

On the RSI chart (top pane) we have had a bearish divergence between the indicator and price. Please note that this divergence is occurring in the 63-67 zone which often signals that a market is transitioning into a bear phase. The Composite Index (middle pane) has now fallen enough where a turn up here *may* lead to divergence with the RSI.