Price Waves #3 - The 2007 to 2009 Decline

In my last post we reviewed the wave count from the 1974 low using Quarterly Chart data. We wound up with an A-B-C count for the price action between the years 2000 and 2009. That A-B-C pattern is either an Expanded Flat or the first three legs of an Expanding Triangle. The difference being that the third leg (down into the 2009 low) would be a five wave impulse in the Expanded Flat scenario but a three wave corrective pattern in the Expanding Triangle. To distinguish which pattern is forming requires price data on a lower time frame. Since the monthly chart does not resolve the data well enough to answer the question I will take a look at the weekly chart.

The above chart shows a clear Zigzag pattern. We must therefore conclude that it is an Expanding Triangle and NOT an Expanded Flat forming in the fourth wave position from the 2000 high. This implies that the subsequent rally from the 2009 low is wave “D” of the triangle and will itself be a corrective wave pattern. I will start to explore that premise next time and introduce a D-Wave modification.

Price Waves #2 - Quarterly Data

Looking at the DJIA from an objective Elliott Wave view:

Starting from the 1974 low of 570.01 (which was a 48 period low) which was identified as the last (Wave 2) low on the next higher time frame (yearly chart):

1. H greater than 12H: 1976.3.

2. L less than 7L: 1977.4. This means that W.1 up ended at the 1026.26 high of 1976.3.

3. H greater than 20H: 1981.2. This means that W.2 down ended at the 729.95 low of 1980.1.

4. L less than 12L: 2002.3. This means that W.3 up ended at the 11,750.28 high of 2000.1.

5. H greater than 33H: 2006.4. This means that W.4 down ended at the 7197.49 low of 2002.4.

6. L less than 12L: 2008.4. This means that W.5 up ended at the 14,198.10 high of 2007.4.

7. H greater than 7H: 2010.4. This means that W.A down ended at the 6469.95 low of 2009.1.

8. 2007.4 high is exceeded: 2013.1. This requires that the W.4 low be moved to 2009.1 since the model requires an A-B-C after a five wave impulse.

A. The chart shown is of the cash S&P500 but is similar to the DJIA.

B. Note that a complete five wave impulse from the 1974 low, which would compose the larger Wave 3, is not yet complete. This meshes with the fact that the yearly chart (last posting) showed the larger Wave 3 not yet completed.

C. The A-B-C pattern from 2000 is either an Expanded Flat or the first three legs of an Expanding Triangle. The difference between the two is that the third leg (down into the 2009 low) would be a five wave impulse in the Expanded Flat scenario but a three wave corrective pattern in the Expanding Triangle. To distinguish which pattern is forming I will take a look at the weekly chart in my next posting.

SPX Daily Chart 3 Jan 12

SPX Daily Chart - 13 June 2011

     On Monday the cash SP500 broke TD Support of 1279.20 in the process of meeting the weekly TD Trend Factor target of 1265.68 - the low of the day was 1265.64. This price action also completed a daily buy countdown bar #9 and bullish divergence between price and the daily RSI. It looks like any rally from here might just be counter trend.
     The hourly chart has shown a good attempt to form a base from which to rally over the past two sessions. There was bullish price/RSI divergence yesterday and the market is fighting to finally hold the area reserved for bull market lows; which is an important first step in starting a rally.
     In today's session I will be watching to see if any rally attempt at the open can clear the 1279.52 level. If so, Chuck tells me that this will mean the Elliott Wave from the 1345.2 high is complete. He says it would be either wave '3 of C' or 'c of C' (depending on whether an expanded Flat or triangle is forming from the February high. I have added Chuck's count to today's chart. Most importantly would be a bullish price flip on the daily chart - a close today above 1279.56 would do the trick. If these two conditions are met we may have an actual multi-day rally attempt on our hands.
     Bottom Line:  The allocation mix meter is at +50%. My near term scenario has the current decline ending imminently (if it hasn't already) and holding above the March lows. This will be followed by a choppy rally that takes us back above the 1344 level. However; I remain quite concerned that the high may already be in for the rally from the 2009 low.

Longer-term Elliott Wave Count

The reason this blog has been slanted towards the “bearish” view on equities is perspective. I am not a short-term trader. The time frame that drives my overall view of the market is the weekly and higher time frame charts.

Today I present my Elliott Wave count on the weekly cash S&P500 from the all time high set in 2007. When viewed from this perspective my objective rules tell me that the trend is still down. In fact, those rules indicated that the trend turned “sideways to up” on 7/27/2007 and then “down” on 1/4/2008. Except for a brief “sideways to down” period from 5/23/08 – 6/27/08, the trend has been “down” since then.

However; some of my other work is now pointing to the possibility that although the downward Elliott Wave pattern is not yet complete the low for the year (not the ultimate bear market low) may have already been registered. Once the current rally (from March 6) ends the wave 4 Expanded Flat pattern from the November 2008 low will be finished. We would then need a wave 5 decline that ends the pattern from the May 2008 high. This decline would ideally end below the prior wave 3 low of 741.02 but does not have to move below the “b” wave low of 666.79.

In sum I still view this rally as the bear market variety but will be watching the next pullback very carefully to see if we can successfully retest the March low. And what of that next pullback?

On the daily chart we are at resistance right now. If we get through it he next target to watch is the 865-870 area. We will know that a serious pullback is underway if we break the Beta – X trendline shown in my previous post.

Now We Watch the Character of the Decline Over the Next Few Days

The cash S&P500 formed a downtrending price bar on Monday making last Thursday’s high a fractal, CIT (Change-In-Trend) and Level 1 Price Reaction Point (PRP). As such I have high confidence that it marked the end of the Elliott Wave up from the March 6 low. “IF” this wave was the C-wave in an Expanded Flat from the November 2008 low then we are going to make a new low (below 666) by May 7 before we go back above 833. If the current swing down from last Thursday does not complete by tomorrow (April 1) then we can have even more confidence in this scenario.

The next significant technical support area to watch for is 764-769. This area includes a previous swing low and PRP at 766.20 (March 20); Fibonacci confluence; a Gann target, and the intermediate moving average I like. There is only minor support at 773.

On the flip side, the next short-term upward move (which will most likely be here and gone by the end of this week) must not make a new high. The “I was wrong” point (stop loss if you will) remains at last Thursday’s high of 832.98.

New Roadmap Still Points to Move Below 666

What a bullish day! With 804.3 broken we must conclude that the move down from Jan. 6, 2009 to the low on March 6, 2009 was a complete zigzag pattern. This triggers our alternate Elliott roadmap while keeping the view that we get a new low (below 666) before a potentially large multi-month rally can unfold in equities. Today’s chart shows that a large Expanded Flat pattern may be unfolding from the November 2008 low.

Under this scenario the cash S&P500 can’t move above 877.86. If it does it will imply that the low of the year is in and that the market has started a large fourth wave rally that will last into early 2010.

Next resistance can be found at 826-839 where both Fibonacci confluence and a Gann 180 degree up target exist. Two technical items to watch over the next few sessions: 1) The volume yesterday was lower than it has been in a few days and 2) The composite indicator fell while the RSI rose; setting up a possible negative divergence. Both of these developments indicate forthcoming weakness.