S&P 500 - July 24, 2007

some charts courtesy of stockcharts.com

Index finished off a strong week on a positive note.

We expected a 5th wave, and it seems like we got one on Friday.

Now, the question is whether what we saw was a wave 5 or a wave 1 of another extended 5th wave.

Once again, signs of short term momentum deterioration are there.

Notice that price could not make it past the mid-channel line that we discussed. Instead, it dropped to the lower boundary and just walked it up. There are bids that come in to support the tape. Some say manipulation, some say real bullish sentiment, some say forward-looking nature of the market, whatever. The raison-du-jour seems to be High Frequency Trading Programs (HFT). Remember we started talking about HAL-99-99 super computers running trades months ago? Now, other folks are discussing it as well in the blogosphere, and even on Bubble-Paganda channels by real smart-looking heads in expensive-looking ties.

Bottom line that going against the underlying bid of the tape is hard, and takes good timing and lots of discipline. The rest is just spin, air time, and silk ties.

Now, no one’s gonna bang a gong when the bid is pulled, so, buying a bullish tape with an overbought daily picture and deteriorating short term price momentum may create a lot of headache, at least for the short term.

So, if I am trying to pick a tradable top, I can take short term sell signals near my pivots, and give it a bit of room to play. I will need a lot of discipline to admit defeat. I may also need to secure my position at the end of the day somehow since the tape can awaken and rally at 4:00 am

If I am planning to buy to keep, then, I must wait for a pullback. At least enough to cool the 60-minute frame a bit.

This has been a very strong wave. Just see how it rushed into overbought areas of RSI early on, and did not give much back.

There are two possibilities:

One that what we have seen since the latest low in July was true money positioned for the second half of the year. This is not discussed by many. If that’s the case, as I have mentioned before, players are pricing a mother of all recoveries, and a hell of a span of earning expansion. Pricing for perfection? More like pricing for once-in-a-generation fantasy gratification. Maybe they know something that the non-governmental, hard-core econo-data either does not know or does not show. Maybe they are just delusional. Only time will tell.

The other possibility is that it really has been HAL-99-99 super computers for the majority of the volume. If so, the rush to exit may get ugly as algorithms looking for ways of screwing us over pennies per trade over millions of trades do not care if China’s gone on a high-density diet of coal and copper, nor do they give a hoot if the Chinese drink oil for breakfast or not.

There is no other way I know to play this market than paying attention to charts and technicals, take it one level at a time, and do all sorts of position gymnastics to protect myself – YES, I am paranoid. All sorts of characters have all sorts of fingers in every hole of this market and I trust none of them with my money.

The biggest trick the market pulled on majority of its participants was turning them into wrong animals. Bulls? Bears? Sharks may survive better among sharks.

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For the day, volume came below average. Breadth was positive.

Short term momentum and breadth are overbought, but are yet to signs of rolling over.

Not much else to say except that we seem to either have or be very close to another complete wave set, if the current minute 5 wave does not extend, that is. A break below 960 may be a first indication that a pullback is underway.

Any sustained activity below 960 should give the bears room to see if they have in them to do some damage.

Any sustained activity above 965 will maintain the positive short term posture.

Let’s Wrap Up:

S&P seems to be near the completion of the current rally’s wave structure. Short term momentum shows signs of strain. Daily frame is overbought. A break of 960 may a signal a pullback is under way.

Bulls own the market. It is their ball to drop. Bears seem weak (if not dead) and incapable of inflicting lasting damage. If they are still alive, and healthy, they should seize any opportunity below 960.

Short term trend is up. Mid-term trend is up. Long term trend is down.

Index has gone through several levels of resistance with relative ease. They have all become support.

Resistance is 984, and 990, 1018. Support is 961 pivot (a long term level from 2003), 955 (top of the 875-955 range), 935 (Jan 2009 top, July 1 peak), 923-928 (tested multiple times), 910-915, 908 (55 EMA), 875-885 (base of a W bottom) and the frequently contested 850

There are well established intermediate buy signals on daily frames.

I leave you with these charts

I really don’t think explanation is needed for Nas100. It has been a beautiful position, and that's all there is to say about it. 1515 is an obvious area of support. We have had good experience with our channels. Let’s see how well this channel on the chart above behaves.

A bullish pattern set against two bearish formations.

Pick your spots! Be disciplined! Treat all opinions as opinions at best, and harmful noise at worst!
Have a good evening!