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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