As a slight continuation of last night’s “Elliott Wave” update post, let’s look at the hourly (60m) chart of the S&P 500 from the beginning of 2009 until present (mid-day Friday, March 27) with a special look at divergences, moving average structure, and fractal Elliott Waves.

(Click for larger image)

The year began with a few days of higher prices… then the downward pulse began.

A Cradle Trade (confluence EMA crossover) formed where I’ve labeled fractal Wave 2 and then a deviant Wave 3 took us down to lower prices for the year.  The 5-wave structure that began the year ended at the lows of Fractal 5, and then a month-long ABC Flat Correction consolidated those prices from the earlier decline, and then an even more insidious 5-wave Structure took us down to the March 9th lows of 666 on the S&P 500.

Notice how that structure sub-divided with a lengthy fractal 5th wave.

We now appear to be coming to the end of an upward 5-wave impulse that many of us believe ’should’ have stopped at the 805 level (where there were multiple confluence resistance points there… all of which failed to hold as buyers were aggressive in their campaign – and short-seller stop-losses were triggered once 805 broke).

The final 5th wave appears to be forming a fractal ending diagonal, but it’s so difficult psychologically to bet against the bulls since they took over the battle (of supply and demand) earlier this month.

Beyond fractal Elliott structure, pay close attention to the 3/10 Oscillator as I’ve highlighted the year’s positive and negative momentum divergences.  Use this as an opportunity to see various divergences for yourself.  Sometimes Divergences precede a trend reversal but most of the time, they allow you to play for small scalps (pieces) only and hint that the next retracement might be stronger than otherwise expected.  Other times, divergent signals (like those around March 16th) fail entirely.

Do not build a trading strategy based on divergences.  Use them as a tool in your arsenal.

Also, look closely at the 20 and 50 period EMAs and how they managed to contain price (as support and resistance) many times, and how their crossovers helped you assess the trend structure as it was developing.

My favorite “Cradle Trade” set-up occurred as the 20 crossed the 50 EMA and then price rallied back to test that exact cross-over point.  The most recent “Cradle” formed again on a fractal Wave 2 that preceded the recent rally.

As a rule, moving averages (and trades setting up based upon them) have their greatest significance during a trending move and least significance during a trading range (like that from January 20 until February 17).

There are many lessons to be learned from this chart.  Continue studying it and feel free to share your insights in the comments below.

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