Stocks Overdue for a Rally

Mar 10, 2009: 10:20 AM CST

That’s quite an ambitious headline, but it seems the US Equity Market is more than ready for a counter-trend retracement rally up.  Let’s look at the S&P 500 to see the structure and how far the rally might last.

S&P 500 Daily Chart:

Friday’s close and Monday’s close both resulted in dojis in deeply oversold conditions.  Dojis traditionally reflect ‘indecision’ between buyers and sellers and are often seen at key turning points in the market (reference early January 2009 and February 9th).  Like any signal, their forecasting is of course not 100% but they can indeed be powerful short-term (minor) reversal signals.

So we assume an upward retracement will build off these levels (if not, then bulls may throw in the towel which creates a capitulation move).  The first line of overhead resistance  may come in around 750, which was prior support and also reflects the falling 20 day EMA.  Should price break above this level, then the next zone to watch would be the 800 level, which reflects two Fibonacci confluence levels and the falling 50 day EMA.  This level also reflects prior support as well.

If price were to retrace higher than 800, it would call into question the fractal Elliott Wave Structure that may be developing, and an alternate count would be required.  At the moment, we have the structure in Wave (5) (whether it’s 5 of (3) or the final (5) of the entire 5-wave decline beginning in 2007 is still up for debate) and specifically in fractal wave 3 of (5).

Wave 1 of (5) began in early January with Wave 2 of (5) ending around February 9th which places this big swing down from there as a fractal Wave 3 which appears to be coming to an end as we inter counter-rally Wave 4.  This line of thinking would be invalidated if 4 entered the price territory of 1 at 800 so watch the 800 level very closely.

For the meantime, it appears like we’re getting this expected rally.  Keep watching price every day and be aware that this is a counter-trend play and so use extra caution as needed.

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Corey Rosenbloom
Afraid to Trade.com

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10 Comments

10 Responses to “Stocks Overdue for a Rally”

  1. Andrew Stanton Says:

    The fourth wave of one lower degree seems to be about 740 to 780 on that chart. That has to be the obvious target if it’s only 4 with 5 still ahead.

  2. Corey Rosenbloom Says:

    Andrew,

    Good call! That level will be very critical to watch.

    If we trail above 780 to 790 and then 800, something stronger is upon us and we’ll need to reexamine the forecast.

  3. Anonymous Says:

    Corey,
    Someone I subscribe to see’s the exact same count as you currently. However, on a much larger scale he views us being in a 9 year correction that started in 2000. Late 1999 and early 2000 being the end of wave 3(wave 1 ended at the start of 1969). Since then we have been in a Flat ABC correction which will be ending soon with a final wave 5 probably in mid April. So, his take is this will end wave C of a 9 year correction and start a Gigantic wave 5, which he believes will be an investment opportunity of a lifetime.
    Any thoughts?

  4. dacian Says:

    Corey, can you offer more on “if we trail above 780-790-900 we need to change the forecast”? Would that mean that if we move over 780 level without looking back it might be that we won’t have a 5.5?

  5. Chris Says:

    Corey,

    I went long late last week based on those DOJ candles. I got into SSO and BGU near SPX 682. I know you can never get bottom however wave 3 down of 5 appeared to me to be getting long in the tooth.

    Question is like you say .. is it Wave 3 or 5 or Wave 5 of 5 last put in last week. Time will tell. I figured if its only a Wave 4 bounce I shouldn’t get hurt since I moved my stops up to break even and get stopped out for little can. Good news is if thats the case I can buy the bottom for sure of Wave 5.

    It was a LOW Risk entry set-up. Last Friday’s low on SPX near 667 lined up with quite a few key support areas.

    Not sure how far a Wave B bounce might take us but if SPX 667 was Wave A bottom then will be interesting how many months this bounce rally goes. I think SPX 950-1000 might be it before washout Wave C down come in which kills market.

    Corey – Thoughts/Comment?

  6. Corey Rosenbloom Says:

    Anon,

    I sort of go back and forth on that. I do agree that we’re in an ABC that started in 2000 (2000-2002 = A; 2002-2007 = B; 2007 – 20?? = C) but I’m up in the air as to whether or not we peaked with a grand supercycle V in 2000 or if it was a III, meaning once we wash out here, then a V is yet to come. I try to trade one day and one week at a time and not get too caught up in the huge, huge picture so I can’t make a definitive statement as to the current structure and whether or not we’ll have a super rally off the C lows.

  7. Corey Rosenbloom Says:

    Dacian,

    Well, it would break the cardinal rule “Wave 4 cannot retrace into the price territory of Wave 1.”

    It would mean either that we’re still in a corrective phase or that – lower probability – somehow that wave 5 had already completed.

    That 800 level seems to be key for Elliott Forecasts in terms of Wave 5 down.

  8. Anonymous Says:

    (Translate by Google)

    Greetings from Spain.

    Alert Dax Index.
    Wave 4 near overlap wave 1.

    Watch S & P 500 by correlation of international markets

    ——————————————-
    (Original language)

    Saludos de España.

    Alerta Indice Dax.
    Onda 4 cerca de solapar onda 1.

    Vigilar S&P 500 por correlación internacional de los mercados

  9. Anonymous Says:

    Possible limitation to wave 4, S&P500 to 750 points due to the correlation with Dax and other international indices.

    Correlation of other indices:
    Ibex35
    EuroStoxx 50

    Imagenes:

    http://img5.imageshack.us/img5/9853/img12367768985523.gif

    http://img5.imageshack.us/img5/4731/img12367782274406.gif

    I take this opportunity to thank your work.

  10. Corey Rosenbloom Says:

    Anon,

    Excellent charts – thank you for sharing. Great to have you from Spain – I would love to visit there!