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Wednesday 24 March 2010

Are we there yet? Yes!

Well we blew right through the resistance that I was really expecting to hold on the SPX yesterday. Fortunately I was given some warning because I had been playing a classic broadening top pattern both short and long on the ES all day. I saw a partial decline and return to the top trendline which was an early warning signal for the upside breakout that followed shortly afterwards:

I really had expected the resistance to hold though, so I went back to my SPX charts to see what I had missed. I came up with the following SPX 60min chart which at first glance at least made very depressing
viewing for the short side:

There were a number of interesting things to note about this chart.

Firstly it is now obvious that what at first appeared to be a rising wedge on SPX was in fact merely the top diagonal half of a channel which only later became apparent. This is of course exactly what happened in the broader SPX uptrend since last March, where the main rising channel also appeared to be a rising wedge until the bottom was made on Feb 5th, and the perfect rising channel was then revealed.

Secondly we closed at my last significant internal line of resistance yesterday, and if we broke through it today then I could see no significant resistance until we reached the top of the current channel in the 1190 SPX area. That target was reinforced by the slightly dubious quality IHS that has formed in the last few days, with the neckline broken in the last hour of trading yesterday.

Thirdly the SPX wave structure since the bottom on Feb 5th looks very obvious from the chart, with a first, second, and ongoing third wave structure apparent. That would make the imminent interim top and retracement a wave four of course, and I saw a very nice count at PUGridiron's blog after I had depressed myself completely by doing my SPX chart. Here's his take on the current wave count:

Now with the greatest respect to EWI enthusiasts, Occam's razor tells us that the simplest explanation is generally the correct one, and on that basis the primary count for the market we see before us has to be that we are now in the fifth wave up of a bull market wave up since March 2009, and that we are currently in the third sub-wave of that 5th wave. Looking at the wave structure of that third sub-wave, I would agree also with Pug that we appear to have been playing out the fifth subwave of that 3 of 5, and that the interim top and correction that I have been expecting would therefore be the end of that wave and the fourth wave retracement after it.

The bad news is of course that after the fourth wave retracement, there will be a fifth subwave up to take us to the final top of this bull market wave sequence, and the good news is that we should then see a deep abc correction of the full move since the March 2009 bear market bottom.

USD is important here. I've been writing over the last few days about how a new USD wave up is likely to coincide with sideways or negative equities action in the next couple of weeks, and I was remarking to Anna yesterday that a good confirmation signal that an equities interim top was in would be a new high in USD and new low in EURUSD. That is exactly what we have seen overnight. Here's the USD 60min chart at the time of writing:

We're seeing the same picture in mirror image on EURUSD overnight with the strong support from the previous low broken with an impulsive wave down:

The USD target for this wave up is the rising channel top in the 83 area, and the EURUSD target for this wave down is the declining channel bottom in the 1.29 area.

So what does this mean for equities?

Well USD hasn't been a particularly reliable guide lately but it is now likely that we have seen the short term top in equities at the close yesterday, though a rise a little further to the wave 3 channel top and Pug's target at 1189ish is not yet completely off the table.

In my view though, we have seen the wave three top, or are about to slightly higher than yesterday's close, and that view is strongly reinforced by the following SPX daily chart, where we are right at the top of a six month internal channel within the main SPX rising channel:

What are the targets for this retracement then? Well if Pug's wave count is correct then it cannot be lower than the top of the first wave at SPX 1112.42, and I still favor the 61.8% retracement of wave 3 at 1120 SPX, which is also the mid channel line of the six month internal channel on the last chart above.

We may not get that far though, and the other likely targets are the 38.2% and 50% fib retracements at 1140 and 1130 SPX respectively.

This will be a pleasant interlude for the bears before the next wave up. Everyone have fun trading it!

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