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