Strange SP 500 Confluence Ahead

Oct 30, 2008: 10:43 AM CST

The S&P 500 is striking a strange chord that will resolve eventually into a potentially large trend move – the question is “Which way will it move?”  Let’s see this and look for clues.

First, the S&P 500 Daily Chart:

If you look at this structure, you likely see a powerful “sell” signal setting up as price tests the falling 20 day EMA and has formed a shooting star (yesterday – bearish reversal candle) and a similar pattern (so far) today – both of which have upper shadows at resistance, which hint at a bearish reversal.

However, you also see a clear and present positive momentum divergence on the prior two swings down (the wave structure is very choppy and volatile) which hints at possible bullishness.

Ultimately, I feel we’re in an Elliott Wave 4 retracement up which is taking the form of a classic descending triangle formation (which isn’t technically the same as an Elliott 5-wave triangle).

It’s also quite possible – from an alternate count – that the recent wave 3 down ended at the spike down around October 13th, formed a sudden and violent wave 4 up to 1,050, and then formed a 5-wave (mini) impulse down into new price lows at 850.  IF that is the structure, then we’re likely in a larger wave 4 up of the larger structure, but let’s not get too caught up in that for the time being.

Let’s drop our timeframe down to the hourly chart to see the recent action and see if it offers any sell signals too.

The S&P 500 Hourly Chart (showing recent triangle structure):

Here’s where it gets interesting.

A classic Elliott triangle pattern is a five-wave affair (which is what we could be seeing) and that the “E” corrective wave may be finishing and ready to roll back over to the downside.

However…

I wanted to point out a couple of points of bullish developments.

Most obviously is the triple-swing positive momentum divergence that has set-up for the better part of October.  Momentum precedes price, and divergences often resolve in reversals.

Second, we see that – no matter how you draw the descending trendline (off the spike high or off the ‘most touch’ method) we see price has indeed broken out of the triangle formation on the hourly charts, and in fact, both trendlines could provide potential support at the 920 level.

Finally, we see “Confluence Support” via these trendlines and from a cross-over of the 20 and 50 period EMAs at the 920 level – the 20 EMA just crossed ‘bullishly’ above the 50.

So what’s going on and what might happen?

I hate to say that it’s unclear, but there are possibilities.

1.  Should price find support at this level and break above the 20 period EMA on the daily chart, that would be a strong buy signal for a potential larger move up (retracement only – likely not to go beyond 1,150).  Keep in mind that multiple positive divergences on different time frames can lead to powerful moves.

2.  If price breaks support at the 920 (and especially) 900 level, look to get aggressively short, as we would be set-up for a test of the lows at 840 and could see if that level would hold and if not, then expect new lows to materialize from that.

Now, we’re near the US Presidential Election, and historically there’s a burst in the stock market as the new president is elected – provided there are no recounts (even after the recount fiasco in 2000, the market surged once certainty was achieved).  Keep in mind this possibility.

Historically, November/December have been good months for the market – let’s see if they continue to do so in this highly volatile environment.

Stay alert and continue to guard your capital.

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Published by Corey Rosenbloom of Afraid to Trade.

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10 Comments

10 Responses to “Strange SP 500 Confluence Ahead”

  1. Anonymous Says:

    Try using the descending triangle wave count to Dow Industrials ;). Dow indicates this is NOT a triangle. Good luck.

  2. Corey Rosenbloom Says:

    The structure on the Dow is similar to that of the S&P, both in terms of breaking above the key 20 and 50 EMAs and also breaking out of, and supporting on the upper trendline (unless it needs to be redrawn).

    I’m not seeing much difference in the two markets – what am I missing? We could be forming a rectangle, possibly.

  3. anon Says:

    Corey, It is a neat analysis. Let’s say the indices move up, what happens to the Elliot wave pattern [because we are talking about completion of 4 waves and will the 5th wave remain incomplete]?

    Good point about new president, I think November will be positive. But, with the GDP contracting further, I see Dow registering the lowest in Dec. – remember in the 1987 crash, it was in Dec. we saw the lowest.

    Another point – very short term – since the elections are only 3 days away, I guess the present govt.’s PPT is working hard to keep the indices positive everyday. So, I don’t see a big down day for another 10 days atleast between all this.

  4. Anonymous Says:

    Well, the simple fact is ‘E’ is greater than your ‘C’ in the dow. Thats not possible for the triangle structure you are postulating. I do think, there was a Ending triangle, which finished in the Oct. 23-28th timeframe and we have already broken out of that. Your ‘A’ on the SP500 is wave 4, by my calculation.

  5. alen Says:

    we could rally to 1050 on the SP and then fall in wave 5. the rally would complete a running flat in EW terms. The 845 low on the SP was just enough to keep the whole thing in an upward tilt.

    For the MACD the bulish divergence could last for 2 months. there was one starting in january of this year and the low didn’t come until March for the ABC zig zag and wave 2. the whole theory behind it is that average prices trend up buy you could still get a violent down trend to make a higher low on the MACD and then go into wave 4.

    and a wave 5 will be a nice set up for a reverse head and shoulders to start the B wave of this downtrend

  6. alen Says:

    P.S. for all you fundamentalists wave 5 should start the downtrend just as earnings warning season starts. i work in IT for my day job and Sun Microsystems is offering a deal. buy by the end of the year and pay in 2009. we have to buy a new backup system at a total cost of around $60,000 and they are #2 on our list after IBM. Nice accounting gimmick. they recognize the revenue and earnings this year because 2009 probably doesn’t look so good

    Only reason IBM is on the list is they are A+ or A- rated on their bonds making them eligible for the Federal Reserve CP program. Sun risks bankruptcy.

  7. Richard Says:

    My belief is that the 0.5% funded Bank of Japan currency traders, having taken profit, will continue to short sell a number of currencies, and especially short sell the EUR/JPY, which will cause continued disinvestment globally, which will of course stimulate the S&P to sell off.

    Gold is back to the $730 region of a year ago. Is $730, strong support for gold? Tommorrow October 31, will likely tell.

    I’ve put my “investment money” far, far away from the current financial system. I recommend that others do likewise, safe and sound in a guarded vault, like BullionVault and GoldMoney, with an account personally at streetTracks Gold Trust, and in physical possession of gold coins.

  8. Spike1 Says:

    Take a look at ‘E’ above it’s forming a rare Diamond pattern. I play the SSO and the top to bottom of the diamond is ~3points, so add 3 to any break, if you play by the book it should break down but in these times who knows, be safe and place buy stop above and short below.

  9. Anonymous Says:

    Well, you got the confirmation today that it is NOT a triangle. A contracting triangle, by definition CANNOT form higher highs and lower lows….

  10. Bob Says:

    what setting are you using for MACD?
    same for all timeframes?