S&P 500 - Dec 9, 2008

charts courtesy of stockcharts.com

Yesterday, we discussed a 5-wave complete set from December 5 low and that it should be followed by a pullback. Right on cue, the pullback came today.

It was bit slow to get going in the morning, and at some point had me thinking that maybe I was dealing with an extended wave structure that still wanted to go up.

When in doubt, I always check multiple time frames to perhaps get a better idea. A look at the 15-minute chart, the dismal momentum there and what looked like a diamond formation kept me hanging in waiting for the waves to resolve themselves and the resolution came to the downside as expected.

I usually check things against other securities that are in the same league as the one I follow. I think Dow Jones ETF (DIA) is in the same league as SPY

I took a look at this 5-minute chart of DIA with SPY plotted in the background

What I saw was SPY’s wave strength in the morning was not matched closely by DIA. So, I sat the waves out into the close.

There is no way to say if this pullback is going to stop soon when its C wave is complete or if it is part of a larger correction. I just have to wait and see.

Meanwhile, I can continue to look at other measure to perhaps better assess the ongoing market action

We mentioned breadth was overbought, and it still is overbought

But notice that the index has pulled back on lower volume, it has broken away from a steep downtrend line, mid-term buy signals are still there, and It has moved above its near term moving averages. It has done all this in spite of a stream of really bad economic data. Some say that mysterious buying agents of the future markets are back at manipulating the market up on bad econo-data days. My argument is: Why would I care where the move comes from?

By all measures, it was just a pullback and not a disaster

Still, I really want to see daily momentum to get really get worked up and register a good overbought reading.

Not much else to say. Only that the inverse Head & Shoulder still has potential, and the levels we have discussed (912, 850, 770) are still in play.