S&P 500 - May 4, 2009

charts courtesy of stockcharts.com

Combo No.3, Please!


You know those restaurants that have menus that get to be known better by item numbers than the name of the actual dish? Today felt like that.


In the post of April 30, I listed 4 scenarios, and market took No. 3, which I wrote as


A take off from here, if accompanied by healthy kick-start volume, and new momentum peaks, may be a disaster for the bears. In my books, such a development can reset the bull case to a new ground zero. They can start fresh from here. It will, after all, be seen by all technicians and their grannies as a successful H&S breakout. Under this scenario, I will seriously consider taking my bearish bets off.

Technically, we have an index that has broken above a very important resistance level at good volume (not spectacular), and awesome breadth!



Volume still leaves more to be desired, but it is as simple as this:

There are very well defined levels of support and resistance on the chart above.

Index has risen to the top of a rising channel which I have been presenting on a 60-minute chart as my road map.

It has just killed a bunch of bears on it way above what looks like a potential neckline (the blue line)

It has made new RSI peaks on the daily chart above , and on 60-minute, 15-minute, 5-minute charts

It is not a perfect picture. Volume and some slower momentum readings are lagging

Now let’s have a closer look and ask the same question I asked the previous post

This is the same road map that I have been posting every day. Having only the above chart in mind, forgetting all perma animals, is the above a chart you would short, long, or stay away from?

You need to be able to answer that question for yourself

I covered the shorts I had established on Thursday north of 880. I still have some shorts that are well hedges with either other long positions or options.

I do not want to establish a new position here, long or short. Why?

On one hand, I do not believe a new bull is born. It is very hard to commit to a rally one does not believe. And, even if it is a new bull, I will join at some point, and my existing long positions will do fine. So, no new longs for me.

On the other hand, I am concerned that we may get into a melt up situation that I have been mentioning recently, with bears getting smoked in and out of existence, and laggard money managers chasing everything up and up. May sound a bit far fetched, but 900 sounded far fetched a few weeks ago. So, no new short for me.

Also, if we have topped as bears are sure to assure us yet again, then we will have a break of my roadmap channel and a lower low, and I’ll take it from there.

My decisions are based on the makeup of my holdings, and my personal risk tolerance. That is why I am saying you have to answer the question on your own, and for your own.

When I decided to blog about the market, I had one goal in mind. My goal was, and still is, to do as unbiased and objective an analysis as I possibly could. Teach why I know, and learn a thing or two. It may be not very popular to present opposing scenarios and outcomes. But markets are not simple, straightforward entities. How can they be? They crystallize efforts, emotions, dreams and trepidations of millions of people. In short, it is analysis and not expert advice that this blog is supposed to be about. There is no guru here - just a serious student of the market.

Getting back to the market, I have a hard time seeing this rally as a first leg of a bull market. I use Elliott Wave as my main tool for price analysis and, under Elliott Wave, a bull market needs impulsive waves.

The only way I can count this rally as an impulse is this

So far so good, but it is the recent action that casts a doubt over the bullish case

A series of overlapping waves. The only possible way under Elliott Wave for a super bull count on the above chart (with overlapping waves) is to have a series of 1’s and 2’s, which, if true, will be bullish beyond the dreams of many perma bulls.

Is it possible? Yes, since all the smaller waves appear as 5-wave structures. Is it probable? I don’t think so, but market does not play based on what I think and nor should you.

The recent action has cast doubt over my count of maintaining the latest rise as an intermediate B wave.

It is still technically possible, but in order to stay probable, index should not rise much, say, not beyond 912 pivot, in other words, index will have to start falling apart as soon as tomorrow to keep the major B scenario viable by historical norms

So, I have upgraded my triple abc-x scenario to preferred count

Again, my approach is technical, and I use Elliott Wave as one of my main tools for price action interpretation. I view the rally as corrective because of all the overlapping waves.

I may be wrong, and we may be witnessing the super bullish count I presented above. We may also be witnessing a precedence being made with a new type of impulsive wave structure.

I prefer to stick with what I deem probable and use stop losses and position sizing to minimize my losses if I am wrong.

As my combo number 3 scenario is being served (minus the volume), and as I am really concerned about a melt up situation, I’d rather stand aside and watch what happens. If we start getting a series of lower lows and lower highs accompanied by declining momentum, then I may reconsider shorting. Otherwise, I will be content with what I have for now, and I will day trade if I get a setup.

To finally wrap up this long post, there is a potential for the index to be at a ground zero for the bulls. Bulls know that they have cornered bears and all they need to do is kill them. That could open the door for a melt up and I want no part of it at the moment of this writing. It may not happen that way. But even the possibility of it is enough to scare me. Let's see if bears can give us a short term lower low any time soon

In closing, let’s take a look at another breadth chart

Remember I pointed out to consolidating RSI and McClellan oscillator, and wondered if they were coiling to spring back? They may have sprung back. We need some follow through action to confirm that.

Technical analysis can be as simple as drawing lines and nothing more. Take a look at the 60-minute roadmap that has kept me out of so much trouble. Nothing fancy, just a ruler and nothing more.

Speaking of lines, short term trend is up. Mid-term trend is up. Long term trend is down.

Resistance is 912, and then 935 (Jan 2009 top). Support is 885 neckline, frequently contested 850, and 830 (low point of right shoulder, and 55 EMA)

Trade what you see not what perma creatures want you to see!