Weekend SP 500 Index Overview

Dec 13, 2008: 10:16 PM CST

Let’s take a moment to view the daily and weekly charts of the S&P 500 Index to determine the structure and technical position entering next week.

S&P 500 Weekly Chart:

We’re still in a lengthy confirmed downtrend with volume reaching very high proportions into the price lows of October and November, signaling potential capitulation selling into these lows – though increased volume at new lows is not a solitary reason to get bullish by any means.

November’s price lows – which actually broke the 2002 bear market lows on the S&P 500 – occurred on a positive momentum divergence, which actually is bullish to an extent – price has supported so far off these lows.  Any break of the 750 level soon would be tremendously bearish.

The moving averages are in the ‘most bearish orientation possible’ and the falling 20 day EMA is set to reach the 1,000 level soon, which would be an initial target on any counter-trend rally which could take place (this is also similar to a 38.2% Fibonacci retracement of the large-scale move).

Let’s zoom in to the daily chart for a better perspective.

S&P 500 Daily Chart:

The market is in an extremely choppy period, and notice how the range is currently contracting into a rough balance area which could be disturbed with a sustained price break-out this week or the next.  An inspection into the shorter time frames (such as the 60 or 30 minute chart) reveals a complex consolidation, or triangle pattern formation.

We’re clearly in an Elliott Wave 4 corrective phase… but the debate is over *which* Wave 4 we are in.  I’ll try to address that in a later post, but for now, let’s focus on the current price structure as it is playing out each day.

The moving averages remain in the ‘most bearish orientation possible’ while price continues to be in a confirmed downtrend (or series of lower highs and lower lows with no relief in sight in terms of price structure).

However, there is a positive momentum divergence which has built under price, so that warns us against becoming ultra-bearish until that divergence is ‘worked off’ which appears to be occurring.

Price has broken and closed above the falling 20 day EMA, and it would be very bullish should price hold the current level and breakout above the falling 50 day EMA around 940… and more remarkable if price could take out the 1,000 price level attained in early November… but let’s take price action one day at a time.

The fact that the market has rallied (or at least held its own) this week in the face of such overwhelmingly bearish economic news (after the November Jobs report and the possible failure of Congressional action on the “Big 3” US Automakers, among other news of reduced retail spending).

Whatever the structure, the market is forming a corrective phase, though some stocks are showing remarkable strength in this environment.  I caution from getting overly bearish or bullish at the moment, and let the market sort out some of the news and breakout one way or the other from the recent ‘choppy phase’ it seems to be trapped within.

Always guard your capital and manage your risk in this environment.

Corey Rosenbloom
Afraid to Trade.com

8 Comments

8 Responses to “Weekend SP 500 Index Overview”

  1. peterthepainter Says:

    this is the first piece i have seen recently that is not starting to sound bullish at least in the short term…very interesting…like the little warning at the end…

  2. Anonymous Says:

    If the wave 3 down is not yet complete, as seems to be case, we can expect a repeat of the earlier down move in the first week of November. In that case, a lower low will be caused through breakdown of the support at around 750. Let us not forget that divergences can continue for quite a while, as the trend continues. However, longer the duration of the divergences, stronger will be the reversal, if and when the reversal takes place. Wave 3s are atrocious. Let us give them the respect they deserve.

  3. NotAfraidofTrend Says:

    Given the earlier ferocity of wave 3, Wave 4 up could not even have started yet. There is a much higher probability of continuation of wave 3. In that case, we will see a retest and probable breakdown of 750 within the next 2-3 weeks. Moreover, the PPT, Plunge Protection Team, is probably going broke trying to lift this market.

  4. Corey Rosenbloom Says:

    Peter,

    I try to take the market one price swing at a time, and it appeared that the 750 S&P price low was significant, and that it appeared some sort of corrective phase was ahead for us – that’s playing out currently but there’s a debate about exactly which Wave 4 (or which counter-trend rally) are we experiencing.

    I’m bullish short-term… but clearly not long term as the debate in the Elliott world is clear that we’re heading lower into a terminal 5th wave… the debate is about when it will come.

  5. Corey Rosenbloom Says:

    Anon,

    I am tending to agree with you now. I initially thought (hoped) that large-scale Wave 3 terminated at the November lows but now I’m not so sure after having discussions with other Ellioticians and factoring in a time (equality) component.

    Divergences do tend to put a pause on a trend but you’re right – once the work themselves out, it’s back to the prior trend… sometimes with force as funds use counter-rallies to sell strongly.

    It could be we have a massive 3rd wave, which seems to be the case, and would hold with the teachings of Elliott & Prechter.

  6. Corey Rosenbloom Says:

    NotAfraid,

    I echo the same comments I made to anonymous. The more I study this and sort of take off the “gosh this market needs to rally into the New Year” effect, the picture is setting up for one of harder (down) markets ahead… and that we’re probably in fractal 4 of large scale 3… rather than in large scale 4. That’s troubling, but we need to have objective analysis of the structure and wave counts, and the more I hate to admit it, I’m beginning to believe there’s still yet to go with this awful 3rd wave impulse down.

    Additional comments are encouraged.

  7. Anonymous Says:

    People who kept pushing the wave count back into wave 3, are in denial. We are more than half way through wave 4.

  8. NotAfraidofTrend Says:

    Predictive values of Elliott wave counts is questionable. They are always great for analysis after the fact. However, the most conspicuous are the wave 3s and even they can get confusing! But, the larger trend should always be given the benefit of the doubt. I agree with Corey that may be in the fractal 4 of larger wave 3 instead of in larger wave 4.