S&P 500 - April 16, 2009

some charts courtesy of stockcharts.com

What did the bears do to deserve this?

Index kept rising on so-so volume. Breadth was positive.

Notice diverging momentum, diverging McClellan oscillator.

Notice diverging volume pattern.

Notice the low CPC

I can go on with TICK data, and sentiment polls and economic news. But as you should remember, since I have said it so many times, the most important indicator is price.

Any market participant who ignores that because of low CPC, or sentiment polls, or economic news, or Nouriel Roubini, or bubble-crook-in-chief-creamer will pay the price at some point.

There is no way of saying how far market may go in one direction before slowing down, or turning due to diverging momentum or converging mass psychology.

First, and foremost, is price, then momentum and breadth. Everything else is complimentary at best. That is how I have played it and I see no reason why I should re-arrange the tools of my tool box

The mid-term trend has been up for many days as I have mentioned post after post. I either join the trend, or stand aside. If I think I am clever enough to go against the trend, I need to have very disciplined trade strategy or the market will teach me a painful lesson sooner rather than later.

If price action is more lateral and range bound, then oscillators can be used ahead of typical trend following tools like moving averages.

I primarily, but not solely, use rules and guidelines defined by Objective Elliot Wave (OEW) to quantify, and determine the directional bias of bigger waves and that, to me, is trend. That information is proprietary and I cannot divulge it publicly. But one can easily use a trend line to determine trend independent of waves.

I guess a simple line on a simple chart is not as sexy as this fancy indicator or that, but my experience has taught me that it works.

The mid-term trend is up, but momentum and breadth are showing signs of fatigue. All that means is that caution is warranted. Nothing prevents the market to consolidate sideways, cool off overbought conditions and resume it advance. I don’t think that will be the case, but, as I have said many times market does not care what I think, and we may be better off trading more of the market and less of our thoughts.

Remember this chart?

Index has the support of its short term MAs. It has risen above serious resistance levels. It has broken out of a down sloping channel. In addition, look at breadth measures that we have been reviewing day after day, and index has done almost everything right. There are some nagging concerns. Average volume has been contracting, RSI is having a hard time to get into really hot overbought territories, and ADX is not indicating a very strong trend.

I must be sounding like a broken record, but I don’t care: this is a rally in its later stages of it development but there is no way to say how far it can stretch.

Price action on Thursday reduced my active wave counts to two.

This is the cash index chart



My road map has so far served me better than all the expert opinions out there that I have heard.

The future chart is becoming a bit choppy. I will still follow it but I will keep the cash index chart as well

Yesterday I said

Resistance is at 850–860 area, which is of special importance at this point. If index rises above that, chances of the peak of April 13 being the 5th of a diagonal decreases significantly.

Index did that and we are now down to two counts for now

1. The peak of April 13 was a the first wave of an extended wave up that sill carry the index farther than many bears would dare to even imagine

2. The peak of April 13 was wave 3 of an ending diagonal, and we are currently in the 5th wave of that diagonal

If index violates today’s low in a meaningful way in the hours and days ahead, say, index falls below the pivot of 848 and cannot climb back up, then this rally is very likely over. If it keeps rising in an impulsive way, then it is what it is and some are just buying.

My stance has not changed. I have some put spreads that I wrote about, not a big position and I will hold on for now. I have no desire to go seriously long here. I am warming up to my friends of a few months back, the bears.

And I will treat all opinions, including my own, as just opinions and nothing more

Before wrapping it up, let’s look at a nice setup

An inverse head and shoulder that worked nicely today.

Another way of playing the coming days is to pay attention to the neckline and the rising short term trend line and trade around them till things change.

Short term trend is up. Mid-term trend is up (but giving warning signals). Long term trend is Down.

We said things might get crazy during expiration week. It’s not over yet