Thoughts for December 16, 2007...

This week we are going to go back to some fairly basic Elliott Wave interpretation. Just about anybody who is familiar with the basics of the Elliott Wave Prinicple know that price tends to unfold in five-wave formations followed by three-wave corrections. When we look at price movement on the S&P 500 up from the low of November 26, we can see a fairly clear five-wave formation up into the high of December 11. The three-wave formation down from this high seems to be a fairly predictable example a typical Elliott Wave structure.

We can also find further confirmation of this interpretation by looking at the behavior of the Relative Strength Indicator (RSI) as these waves unfolded. The high set on the S&P 500 Index received confirmation by a corresponding high on the RSI. Conversely, as prices closed at a lower low for the close on Friday, December 14, the RSI actually finished higher than on Thursday. This suggests that the downward movement on Friday lacks any real momentum.

We can add to this information the fact that the correction from the highs of December 11 have retraced approximately 46.6% of the previous rally. This suggests that a decline to between 1450 and 1477 would reflect a retracement between 38% and 62%. Such a retracement would be consistent with the proportionality that we typically find suggested by Fibonacci analysis of price movement.

This combination of elements suggests that the current downward price movement possesses many of the characteristics typical of a standard Elliott Wave formation. The structure of the price pattern from November 26 assumed five waves up followed by three waves down. The downward price movement off the high of December 11 has retraced a proportional amount of the previous wave higher. The lower low reached with the close on Friday was not accompanied by a lower low on the RSI. All of this suggests that any further downward movement from this point will be limited.

A post for World AIDS Day...

Yesterday was World AIDS Day. Once a week I post my thoughts on the market, but during the week I work with patients living with HIV/AIDS. Most of the folks I help are in the advanced stages of the disease. I am proud to say that every person with whom I have worked have seen improvement in their lab values. Unfortunately, not every person referred to me has chosen to accept my services. Equally unfortunate is the fact I am only one person, and the need for assistance far outstrips the resources available.

I was asked to speak at my church this past Sunday in recognition of World AIDS Day. After the feedback I received from those who listened, I decided to share my words here. I hope you find them worth your attention...

Today is World AIDS Day. Given that I work exclusively with individuals who live with HIV/AIDS, Beth and Jay asked me to say a few words for the occasion. I had a difficult time bringing my thoughts and feelings together into something well-developed and structured, so I just decided to share with you the ideas I wanted to impart.

Since today is a service devoted to Joseph, I thought about what he and Mary must have gone through in their own experiences as unwed parents. It occurred to me how little we hear about their parents or their family. It made me wonder why they did not stay with an aunt or an uncle or a distant cousin when they returned to the city of Joseph’s origin. It made me wonder if they experienced the same reactions from their family and their community as many people who live with HIV/AIDS do today.

I wanted to share with you the types of people and issues that I see on a daily basis. There are the women who were infected by their husbands. Husbands whom were either stepping out or on the down low. There are the individuals who live with schizophrenia or some other diagnosis of psychosis, whose success with treatment depends more on their mental health care than their HIV care. There are the developmentally disabled, who are simply incapable of managing the complicated regimens that often accompany the treatment of advanced HIV. There are those who are dealing with substance abuse issues so profound that their addictions control them more than the patient’s own sense of self-preservation. There are some who live with one of these. There are some who live with all of these.

There is the patient who served hard time for a crime committed in his youth. Though he has served his debt to society and been out of prison without incident for seven years, he has been repeatedly denied full-time employment. Nevertheless, he reliably pays his bills by mowing lawns, cleaning industrial sites, and working odd jobs. This past week we got back one of his lab results, which was at desirable levels for the first time in years. When I told him how proud I was of his accomplishment, he looked up at me and said, “I just needed somebody to give a ____.”

We can focus on many different interpretations about the meaning of Christmas or how to win the fight against HIV/AIDS, but none can be clearer than this. It is now during this darkest time of our year that we celebrate a gift of light. God sent to us somebody who cared for us and loved us and forgave us for our flaws and our shortcomings, and who asked little more than that we do the same for one another. We may not be able to solve many of the world’s insurmountable problems, but sometimes all we really need to do is care.

Thoughts for December 2...

I have kind of been struggling with what to post tonight. I have decided to be succinct. The S&P 500 traded down toward the lower range of the long-term trend channel that we have previously discussed, and which is illustrated in the chart below. It also declined to approximately 4.6% of its 50-week simple moving average, as we have also discussed. I should not the similarity between these situations and the depth of the thrust down in August.

These declines were all followed by a rally back up toward this same 50-week moving average, as illustrated below. Given the speed with which this rally has progressed, I would find it surprising to see the resistance of this moving averaged violated without some sort of proportional pull-back.

At this point, it is difficult to say how deep that retracement will be. I am of the opinion that the lows of the recent downtrend have been set. I would find it encouraging from a bullish perspective, if the 1460 level was not successfully penetrated. That said, it is entirely possible that we might see another test of the lower range of the trend channel without substantially altering the overall scenario that I have been describing over the last few weeks. It will be an interesting week to watch.

Thoughts for Sunday, November 25, 2007...

We discussed another technique last spring that suggested we were near the end of the rally and the beginning of a corrective period. This technique couples the practice of wave counting from the Elliott Wave Principle with the Relative Strength Indicator developed by Welles Wilder. This technique proved its usefulness on multiple occasions over the years. 2007 has been no different.

If we look at the chart below, we can see that the Relative Strength Index (RSI) tends to peak during the formation of Wave 3. We can see examples of this with the highs set in March 2004 and with the highs set in February 2007. As prices rally to new highs during the formation of Wave 5, we tend to see the RSI fail to confirm these new highs by reaching new highs of its own. That is, a divergence forms between price and relative strength. It was just such a divergence that formed as the S&P 500 rallied to new highs through July of this year, and suggested a corrective period was near.

The Relative Strength Indicator provided further indication of future market direction during the rally into October, as the chart below suggests. The S&P 500 approached and exceeded the highs set in July, but the RSI failed to confirm. Not only did the RSI fail to rally to new highs along with the underlying price, it failed to get anywhere close to the trend-line formed by the peaks of February and July. This suggests that even though S&P 500 rallied to new price highs, the underlying strength of the move suggested that this move was corrective in nature.

This leads us to our characterization of the corrective wave that began in July. One possible corrective formation found in the Elliott Wave Principle is known as a flat. To quote Frost and Prechter, a flat formation "tends to occur when the larger trend is strong, so it virtually always precedes or follows an extension" (Frost, A.J. and Prechter, R.R.. "The Elliott Wave Principle." 20th Anniversary ed.: p 45.). There are few who would dispute the strength of the rally over the past few years.

R.N. Elliott actually described multiple types of flat formations in his original book on the subject. Frost and Prechter focused primarily on the variety that forms a 3-3-5 formation. If we look below at a weekly line chart of the wave formations since the July highs, we can see an initial, simple thrust down to form Wave A. The rally up into the October high could arguably be described as a seven wave formation higher. This would give us a complex Wave B. Since the highs set in early October, the market has declined in five waves to form Wave C. This provides us with the 3-3-5 formation consistent with a flat formation. It also suggests that we are currently in the final wave down of Wave C.

Once again, we can look to the RSI for an indication of what to expect from future price behavior. Even as the S&P 500 continues to decline on the weekly chart, the corresponding RSI has failed to reach equivalent new lows. This suggests that the RSI is failing to confirm these new lows and a divergence is forming. It also supports the notion that we are at or near the end of this decline, as the wave count proposed above also suggests.

Thoughts for Tuesday, November 20...

This is not going to be an extensive post, but I did want to make folks aware of something. As of today, the 50-week simple moving average for the S&P 500 stands at 1472.94. The S&P 500 index, itself, closed at 1433.27. That places the index about 2.7% below the 50-week moving average. If we go back to 2004, then we will see that this has not been a bad place to think about entering the market.

I do not think the downtrend is over. I can actually envision two or three scenarios where we make a final thrust down to around 1400, or roughly 5% below the 50-week moving average. Nevertheless, those investors who pride themselves on buying the dips would not be unreasonable to begin looking for opportunities to do so at these levels.

Thoughts for Sunday, November 18, 2007...

The market action of the S&P 500 really supported some of my recent comments. One point in particular that I would like to revisit is the significance of the 50-week simple moving average. This moving average has provided significant support for the upward trending of the S&P 500 for the past few years. We have not had a penetration of more than three percent of this line since 2003, until August 16 of this year. Of course, that penetration was only intra-day.

We can see from this chart that the recent downward movement penetrated this trend-line during the week ending November 9. This past week the S&P 500 rallied briefly above the 50-week moving average, but failed to finish the week above it. This is not necessarily an ominous sign, but it does suggest that a certain amount of weakness remains in the market. Further evidence of this weakness can be found by looking at a shorter-term trend-line on the daily chart.

You can see from this chart the relationship of the S&P 500 to its 10-day simple moving average. The low was set on Monday, and you can see that things had gotten very oversold relative to this moving average. The rally on Tuesday was very strong. It was a 2% increase over the previous day's close. Nevertheless, that did not get us back to the ten-day moving average. We gapped up above this resistance on Wednesday, but were unable to close above it. This is also consistent with my belief that a fair amount of weakness remains in this market.

I will say that the strength of the upward move on Tuesday makes me suspect that we will see a second test on the 10-day moving average before heading lower. That said, I remain of the opinion that the S&P 500 has some additional downward movement ahead of it. This could easily take us down to test the 1400 level before resuming our longer-term bull market.

Thoughts for Sunday, November 11...

I have spoken recently about the importance of trend channels and of the tendency of the market to travel within two parallel lines. We have spoken about it primarily in terms of the trend channel that formed with the rally off the July 2006 lows. We might also find an excellent example of this from trend that began all the way back in March 2003.

We can see from this parallel channel how the highs of May, June, and July kissed along the upper trend-line of this channel, as well as the high of October. We can also see how the lows of August approached the lower trend-line across the 2003 and 2006 lows. I find it interesting to note that if the S&P 500 were to return to test the lower trend-line again, then it would find itself around the 1400 area. I do not find it a coincidence that we find significance in this same number from a variety of perspectives.

Thoughts for Thursday, November 8...

There was some rather volatile price action on the S&P 500 today. The market declined throughout most of the morning, and reached a low of 1451.01 around 1:15 in the afternoon. From that point, the index began an almost thirty point rally to reach a late day high of 1479.45, before settling down into a closing price of 1474.21.

I recount all of this because it illustrates the recurrent importance of a particular source of support for the S&P 500. I refer to the 50-week Simple Moving Average, which is illustrated on the chart below. If you look back as far as 2004, you can see that this price level has provided an excellent source of support for at least five sell-offs. It is not as though the markets turn on a dime when they hit this moving average, but the S&P 500 has yet to penetrate more than two or three percent below it (with the one exception of August 16, 2007).

I mention this point today, because the 50-week moving average of the S&P 500 Index currently lies at 1471.66. This means that today's trading saw about a one and one-half percent penetration of this moving average before rallying to close above it. In case you are wondering, a three percent penetration of the 50-week simple moving average at its current levels would take the S&P 500 down to around 1427.55. A penetration as severe as the one seen on August 16 would take the S&P 500 to 1405.08. My point being that we do find ourselves testing some very significant, time-tested support. At the same time, it would not be out of the question to see a fifty to seventy-five point penetration of this moving average before the markets finally turn up.

Thoughts for November 7, 2007...

One issue that I discussed on more than one occasion last spring was the concept of a throw-over. One of the underlying principles of Elliott Wave Theory is that markets tend to trend within a parallel channel. A throw-over occurs when price break above a previously established channel. We experienced just such a situation when the S&P 500 rallied above the upper trend-line of a channel that began forming in late 2005 or early 2006. You can see from the chart below that prices continued to rally above this upper trend-line until finally breaking down in July.

Throw-overs are important to recognize because they are almost always followed by an equal and opposite movement below the lower extreme of the trend-channel. We saw an example of such a reaction when the S&P500 declined below the lower trend-line of this same trend channel at the beginning of August. You can see this principle illustrated in the chart below. I find it interesting to note that this index continued to make a series of higher lows throughout much of the period that it remained below the lower trend channel.

We saw a subsequent example of the importance of the trend channel concept when the S&P 500 broke back above the lower trend channel in September. If you look at the chart below, you will see that this rally took this index back to the upper trend channel. It tested the resistance of this trend-line once, failed, and then fell back again to the lower trend-line.

One reason why I revisit this point tonight is to illustrate the significance of the breakdown on Wednesday, November 7. As the chart below illustrates, the S&P 500 fell down to the lower trend-line, bounced off of its resistance, and eventually penetrated below it. This whole scenario supports my belief that we did indeed see the beginning of a significant corrective pattern in May or July of this year. We completed the first wave down in August, formed the second wave into October, and have since been working on the third and final wave of this formation.

Thoughts for November 6, 2007...

Most of this past spring, I talked about the need for a longer-term corrective pattern that would take us into the fall. It is my belief that we have been in this corrective phase for the last six months, if we use a monthly closing price chart. My guess is that we have completed the first two waves of a three wave pattern. October began the third wave of this formation.

Over the next few weeks, I plan to revisit some of my comments from this past spring, and discuss how many of them played out. Many of these same concepts will be important as we consider the future movement of the U. S. equity markets. These include the throw-over of the trend channel that we saw from May to July, the divergences of momentum oscillators that took place through much of this same time, and other technical tools that have provided meaningful information as things have unfolded.

I hope that you will find the discussion useful.

Thoughts for Sunday, July 15...

There is a technique for wave counting that uses the Relative Strength Indicator (RSI) to assist with the identification of waves in a motive formation. The theory is that the Relative Strength Indicator peaks at Wave 3, or, in an extended formation, Wave 3 of 3. It is then followed by an RSI divergence as Wave 5 unfolds to new highs in prices without corresponding highs in RSI.

If we use this technique to characterize the rally up from March 2003, then we find an initial wave up from March 2003 that ended in December 2004. As the chart below suggests, the RSI peaked with a price peak in February 2004. This was followed by a three-wave flat corrective pattern, and a final surge higher from July to December 2004. As the S&P 500 rallied to new price highs at the end of 2004, we saw a divergence on the RSI that failed to confirm the new highs. True to form, this was followed by a ten-month corrective pattern that left prices a approximately the same level as they were in December 2004.

We saw a similar situation beginning to set up this year. As the chart above illustrates, the Relative Strength Indicator (RSI) peaked with the highs in February. We then saw a divergence on the RSI as it failed to make new highs with the rally into the end of May. All of this agreed with the many other indicators that suggested some sort of top was in order. Ultimately, equity prices are determined by the balance and imbalance between buyers and sellers in the market place, and not the tools that technical analysts use to predict future trends.

This was made abundantly clear as the S&P 500 and the Relative Strength Indicator both rallied to new highs. This suggests that the wave up from July 2006 is extending. Moreover, since this is the third wave up of the rally that began in March 2003, we might expect the RSI to rally to a peak above that made in February 2004. We can assume that the price of the S&P 500 will continue to rise with it. It is also possible that we will have another wave, after the one that began this week, in which the RSI diverges from even further price highs.

Thoughts for Tuesday, July 3...

The markets have entered into a period of consolidation. There will be gyrations up and down, but all of them will remain within the larger confines of a corrective wave structure. The more important questions are what formation and what degree.

One possibility is that we are in a sideways triangle formation. If we look back to the end of June on a line chart of the S&P 500, then we can see that we have made what might be counted as four three-wave formations. The current wave up would be wave D of the triangle. Triangles are composed of five three-wave formations. That would imply that our next wave down would be limited in magnitude, and remain within the narrowing channel formed by the last two highs and lows. If we bounce off the lower trend-line around 1490, then that would suggest that we have a final wave to run about 75 points higher.

The second possiblity is that we break the 1490 support and make another lower low. This would suggest that the high in mid-June marked the end of the five-wave structure up from March. It would also be consistent with my hypothesis that we have already entered Wave 4 of a longer-term wave structure. Whether this is Wave 4 of the bull market that began in March of 2003 or Wave 4 of the rally that began in July 2006 remains unproven. Nevertheless, I am of the opinion that the market will need to test the 200-day simple moving average.

I think it is important to reiterate that the markets have seen a marked narrowing of breadth, a definite decline in volume, and unmistakeable divergence between price and momentum oscillators. Since the beginning of June we have also seen a lower high and a lower low on the S&P 500. Our current rally has not gotten close to the 1540 highs, despite greater strength on the NASDAQ Composite. These all support the bearish case.

Over the short-term (1-3 weeks), I am mildly bearish on the S&P 500. Over the intermediate-term (1-3 months), I am also mildly bearish. That said, I remain bullish over the longer-term (1-3 years) and continue to expect a bull market into 2010. The direction of the shorter term price movements will be defined by the magnitude of the next downward movement. If we break the 1490 level, then I expect an eventual test of the 200-day moving average that could even reach the March 2007 lows. If 1490 holds, then the next logical resistance would be 1565.

Thoughts for Wednesday, June 20...

I really have not posted much lately because there has not been much to add. The market remains very weak from a technical perspective. Breadth and volume continue to deteriorate. Oscillator divergences that were present a month or two ago have only grown even more pronounced. There is really no reason to believe that the market is doing anything other than forming some sort of intermediate-term top. The only real question is how much higher will the market rally before beginning this correction.

I have to admit that I do not know. What seems absolutely certain, though, is that the S&P 500 will not begin any serious downward movement until it breaks below a trend-line that we have discussed previously. We broke below this level when I last posted, but the markets rallied sufficiently by the end of the week to close above this trend-line. We will need to close below the long-term trend-line formed by the highs of May 2006 and February 2007 to confirm the downward break.

Thoughts for Thursday, June 6...

I was quite outspoken about the possibility of a top around 1525. You can find my arguments for that level in most of my posts through late May. When the S&P 500 closed above 1525 on May 30, it seemed most prudent to look for the next potential resistance areas. That analysis yielded the numbers of 1582- 1585. These numbers seemed optimistic, but they were the result of sound methodology.

As it turns out, the markets only rallied for three more days before beginning their decline on Tuesday, June 4. This created an ambiguous wave pattern that fell far short of the next proportional level of resistance. What is certain is that in three days the S&P 500 wiped out price gains dating back to May 10. Perhaps the most convincing aspect of this decline can be found in the fact that 89% of the issues on the NYSE were declining and 93% of the volume on Thursday was on declining issues. This has very negative connotations.

Furthermore, the price decline on Thursday took the S&P 500 below the upper trendline of the trend channel that I have discussed previously. Should we remain below this level after the close on Friday, then that would suggest that we have begun a move downward that will penetrate the lower line of this trend channel by a margin equal to the amount that the upper line was exceeded. I discussed this point more fully in my post on May 22.

If we make an effort to keep our interpretation of the recent price fluctuations as simple as possible, then we would have to assume that the rally up from mid-March is complete. We have a complete five-wave pattern on the weekly line chart. We have a throw-over with a subsequent breakdown. We have some impressive negative volume to accompany this downward price movement. I think we must accept that this could lead to a decline to between 1375 and 1400.

The more bullish interpretation would be that the downward movement that began on Tuesday of this week is merely Wave C of an expanded flat corrective pattern that began with the highs around 1522- 1525 on May 21. I would really need to see the S&P 500 rally back above that upper trend-line in rapid fashion for me to adopt this particular interpretation.

Thoughts for Thursday, May 31

I have been meaning to look up an old report that I wrote in October 2002, and finally found it tonight. The image below is one chart from that report. It is based on a quarterly line chart that I was using for very long-term analysis. The projection I made was for a low of around 750 at some point in 2003. The S&P 500 wound up reaching a low of 788 in March of 2003.

More importantly, I was speculating what would happen after we made a new low. The results of my analysis raised a few eyebrows at the time, and was actually quite a big deal for me because it represents a departure from Robert Prechter's long-term view. Now that the S&P 500 is rallying to new highs, I thought it would be a good time to revisit this report.

If you take a closer look at the last paragraph on the chart, you can see that I suggested that the S&P 500 would rally approximately 1468.35 points to a high of around 2218.35. I expected this top to be made in 2010. We have now officially rallied over half-way to that projected target since the March 2003 low. It will be interesting to see where the S&P 500 winds up in three years.

Thoughts for Wednesday, May 30...

The rally today invalidated the wave count that I have been proposing here. This means the trend remains up, and returns my bias to bullish. 1375 remains a distinct possibility for the future, but it will have to wait for now. Our first task should be to locate the next probable area of significant resistance.

To locate the next level of resistance, we will begin by comparing the length of our current wave to previous waves. It was the length of the wave up from October 2005 to May 2006 that yielded our initial price target of 1522. As the chart above illustrates, that would have given our current wave a length roughly equal to the October 2005 to May 2006 wave. Since this level has been broken, the next probable level will be a length 1.382 times the length of our initial wave. This suggests that our current wave will assume a length of 218.51 points. If we add that amount to the March 2007 low of 1363.98, then we obtain a probable target of 1582.49.

Another way to calculate the next probable level of resistance is to use the initial thrust up in March as the basis of our projections. This initial wave up assumed a length of 74.91 points. Interestingly enough, if the final wave up assumes a length equal to the initial thrust up, then that would put the S&P 500 at 1580.89. This gives us two fundamental methods of calculating probable resistance pointing to roughly the same area.

This suggests that the 1580.89 - 1582.49 level should be our primary target for the current wave higher.

Thoughts for Tuesday, May 29...

Last night I mentioned some intraday and closing price levels on the S&P 500 that would serve important roles in determining the current course of the market. The S&P 500 rallied up to the 61.8% intraday retracement level at 1522, and then wound up closing at the 61.8% closing retracement level at 1518. This has given us a nice proportional retracement of the initial thrust downward last week.

Given the five-wave structure of that initial thrust downward that appear on the hourly chart, it would seem probable that another downward thrust remains. My reasoning for this is one of the more basic principles from Elliott Wave Theory, which tells us that an initial five-wave formation will always be followed by at least one more five-wave formation. Elliott Wave Theory would suggest to us that the very least we can expect from our current structure is a 5-3-5 zigzag pattern down.

Should the second thrust down equal the length of the initial thrust then it will have a length of 23.53 on an hourly line chart. If the Tuesday high should prove to be the end of a corrective wave higher, then the next phase of downward movement should extend to around 1496.71. We might also look toward the low set on the open of May 11 at 1491.47 as significant support.

I would look at the 1496.71 number as important. If this downward movement is just some sort of short-term correction, then that will be the important number. This is because in corrective zigzag formations the lengths of the two thrusts down tends to be equal. If we see the S&P 500 extend down to the 1491.47 level, then that would be more suggestive that thiese waves are part of a larger structure.

Thoughts for Monday, May 28...

I thought that I would talk a little bit about what I will be looking for tomorrow. Last week, the S&P 500 declined from an intraday high of 1532.43 on Wednesday, May 23 to a low of 1505.18 on Thursday, May 24. That is an intraday decline of 27.25 points. If we use closing prices, the S&P 500 declined from a closing high of 1525.10 on Monday, May 23 to the Thursday close of 1507.51. This is a total decline of 17.59 points on a closing price basis. The rally on Friday took the S&P 500 to an intraday high of 1517.41 and a closing price of 1515.73. Neither one of these perspectives surpassed the 50% retracement mark.

I have expressed my concern about the lack of volume with the downward movement on Thursday, May 24. At the same time, I have expressed ample evidence that the recent rally has become technically weak and vulnerable to a decline back to the 200-day moving average and March lows. The rally on Friday was not enough to change my opinion that an important top has been formed.

In order for me to change my current opinion, I would need to see a retracement beyond the 61.8% retracement level of the thrust down on Thursday. That means I would not begin to become concerned about any upward intraday movement until it surpassed 1522.02 or, more convincingly, above 1526 on the S&P 500. More importantly than that, I would want to see a closing high above 1518.38 or, more convincingly, above 1521. The numbers represent the 61.8% retracement levels, along with the more extreme 76.4% retracement levels. Such significant retracements would exceed those typical of proportional retracements.

It is important to remember that these levels would not represent an invalidation of the analysis that I have been presenting. They would, however, represent a prudent point to step aside from any aggressively bearish positions until a clearer picture becomes evident.

Thoughts for Sunday, May 27...

I have been discussing the possibility of that the S&P 500 has reached a position where we have a high probability of a top. We have a five wave structure up from October 2005. We have a five-wave structure up from March 14. We have a large amount of proportionality between all of the waves. We have experienced a throw-over above the upper trend-line of the trend channel. All of these add to my suspicion that we are nearing an important top.

Another factor that adds to my suspicion is volume. I use a 10-day moving average to track recent volume trends, and to let me know if recent volume was relatively strong or relatively weak. Our recent volume trend peaked out with the highs of February. At that point the 10-day moving average was around 2.05 billion shares. Our highest intraday point came on May 23. By that point, our 10-day moving average had declined to 1.80 billion shares. This point adds to our evidence that the rally on the S&P 500 has lost its steam.

By the same token, our decline on Thursday was not accompanied by strong volume. As the chart above illustrates, the 10-day moving average was at 1.71 billion shares but the volume for that day was 1.33 billion shares. If the price movement on Thursday was a significant change in trend, then we would have preferred to see volume greater than our 10-day moving average. This tells us that volume did not confirm our downtrend, and suggests that we remain cautious in our bearishness.

There are some other tools suggesting that we are in the process of reaching a top. I have offered the Relative Strength Indicator as an example of a momentum oscillator that is not confirming our recent highs. Above is a chart with a 20-day Momentum oscillator, a 60-day Commodity Channel Index, a 14-day Relative Strength Indicator,and an Ultimate Oscillator. I used a few different time frames to show how prevalent the divergences are from many different perspectives. On each of these, you can see that the oscillators are not making new highs to confirm the recent highs. This suggests that the market has become technically weak.

I also wanted to add another point to my comments on Thursday night. During that post, I speculated that a corrective formation on the S&P 500 would take us down to around 1375. The chart above shows the 50-week simple moving average. As you can see from this chart, it has acted as significant support at several points since 2004. I think it is interesting to note that the 50-week moving average is currently at 1380.54. So, there is some evidence that there is important long-term support around 1375 on the S&P 500.

Thoughts for Thursday, May 24...

The market began a trust downward on Thursday. It is my belief that this completes the formation of a significant top. First of all, It is my belief that today's decline confirms the completion of the five-wave structure up from the low of March 16.

I say this because my primary concern in the progression of this upward wave was that it would expand into a complex wave formation. As I have stated on more than one occasion, this would have been inconsistent with the typical wave formation, but it was a possibility to consider. The decline today took the S&P 500 below the level that would be allow a valid expanded third wave within the formation up from March 16. This fact, along with the wave counts that I have discussed previously, were enough to turn me bearish on the S&P 500.

On Tuesday, we discussed the possibility that the recent rally performed what is called a throw-over above the upper limits of the trend channel that began with the rally from October 2005. We might debate about which highs to draw this line across, but they all make the same general suggestion. If the market rallied above the upper limit of this channel, then it will most likely drive below the support at the lower end of this channel.

If we use the trend-line that I have drawn on the chart above, then that would suggest a throw-over of 28.1 points. A similar decline below the lower trend-line drawn on the above chart would put the S&P 500 around 1376.83. This is significant because it is also in the same neighborhood as the low of March 16. It would also put the S&P 500 between the 38% and 50% retracement levels of the rally up from October 2005 to present. As a result, 1375 does not seem like a bad place to make our initial price target.

Thoughts for Tuesday, May 22...

Little has changed from the trading on Tuesday. The S&P 500 once again failed to reach 1530 and fell back below the critical 1525.70 level. This leaves the five-wave formation up from May 10 intact, and the possibility of a top remains a valid consideration. There is not much else that I can add to this point at this time.

Instead, I would like to point to a development on the longer-term chart. The concept of trend channelling tells us that price patterns tend to travel within a parallel channel. When the prices move beyond the boundaries of that channel, it has important implications. In fact it was a similar situation that prompted me to predict a severe downward move on September 9, 2001.

When prices break above of the upper limits of a trend channel, we call this a "throw-over". It is important to note the magnitude of move above the channel, because it is commonly followed by a similar price movement below the trend channel. We call that this reaction a "throw-under". The fact that we have seen just such a breakout on the S&P 500 is what fuels my anticipation of a significant downtrend to correct this "throw-over". It is the tendency to see a reactive "throw-under" that should eventually take this index back below the March low.

Thoughts for Monday, May 21...

On Thursday night, I presented the possibility of a five-wave formation up from May 10. I calculated this formation using a line chart of closing prices. As I discussed Thursday, in order for this to remain valid the S&P 500 cannot close above 1525.70. The index closed at 1525.10 on Monday. This leaves my current count valid, even though I could attack it on more than one point.

The alternate count would be that the current wave is assuming some form of complex formation. This would not be a typical wave formation because Wave 3 was complex. That is, it took more than five waves to complete the formation. Typically, only one wave within a five-wave formation does this. This would suggest that the formation up from May 10 should be comprised of only five waves. It is for that reason that I will stick with my current wave count.

Thoughts for Sunday, May 20...

The S&P 500 did wind up rallying to complete the five-wave formation as we discussed in my Thursday night post. This rally wound up stopping right at the 1522 price target that I have mentioned on more than one previous occasion. This implies that a potential top is in place. I would prefer to have some downward price movement to confirm this analysis. Additionally, the S&P 500 can move up to 1525 or so without invalidating this count.

The number of 1522 was arrived at by using a standard technique of Elliott Wave analysis. I believe that the recent rally off of the March lows represents Wave 5 in a formation that began in October 2005. The first wave in this formation rallied 158.11 points before completing in May of 2006. The next rally began in July 2006 and ran up to the highs of February 2007. The length of this rally was 237.81 points. It just so happens that 237.81 is roughly one and one-half times the length of 158.11.

This proportionality was no coincidence. It is common for the lengths of the waves in a five-wave formation to unfold in a such a manner. It is also common for two of the waves to be of equal length, while a third is extended. Given that Waves 1 and 3 were proportional to one another, with Wave 3 being extended, it is only consistent with common Elliott Wave Principles to expect Wave 5 to be roughly equal to Wave 1.

As the chart above shows, a rally from the March low of 1363.98 of 158.11 points would place the S&P 500 right at 1522. The exact target was 1522.09. Friday's high was 1522.75. Should this level hold, then that would create a perfect Elliott Wave formation in terms of price proportionality.

It would also imply that a sizable decline awaits over the next few months. It would not be out of the question for this to reach down to the March 2007 low of 1363.98, but should not go below the May 2006 high of 1326.53. So, this is roughly 10% from our current levels. I will discuss probable targets more specifically should this prove to be a top.

Thoughts for Thursday, May 17...

Sometimes the market does not make a lot of sense. Take the current situation. The real question is whether the S&P 500 remains within the fourth wave of a five wave structure, or whether it has already entered into that fifth and final wave. If the S&P 500 declines and closes below 1505.85, that would confirm that we remain in wave 4. This remains my primary count. If I had to guess, this is what I would say will happen.

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If we rally from this point, then it will suggest that the market has reached an important top. I try not to go through life making grandiose or flamboyant statements. Nevertheless, if the S&P 500 rallies to close over 1520 (but less than 1525) on Friday, then I would view that as a major shorting opportunity.

If you take a look at the chart above, you can see that the S&P 500 continues to hug the lower side of that trend-line extending across the March 14 and April 12 lows. This trendline extends up to 1525.05 on Friday. At the same time, the Relative Strength Indicator (shown above the price chart) has developed even more sever divergences that when I mentioned it last week. When divergences get this severe, it is either because we are in the middle of a corrective formation or approaching a major top. If we close below 1505.85 on Friday, it will confirm that we are in a corrective formation.

Let us assume for a moment that I am wrong. Let us assume that the S&P 500 completed Wave 4 with its low on May 10. If this is the case then we have already completed the first three waves of Wave 5, and could be ready to make the fifth and final wave up. I have illustrated this hypothetical count above. Wave 1 began on May 10, and ended on May 11. It assumed a length of 14.38 points, using closing prices. Wave 3 began on May 15 and ended on May 16. It assumed a length of 12.95 points, also using closing prices.

This means that the fifth and final wave should not exceed a length of 12.95 points. There is alway the possibility of an extended wave, but there is usually only one extended wave per five wave structure and the rally from March 28 to May 9 served that role. This means that the S&P 500 cannot rally above 1525.70 in this scenario. So, any rally above 1520 could be considered a potentially major top. I would seriously consider an immediate bearish position, should this scenario unfold.

You might also notice that this would put the S&P 500 in the neighborhood of the 1522 target that I have discussed previously. It would also put this index back at the resistance formed by the March 14- April 12 trend-line. We are also reaching a time cycle point on Monday.

I do remain faithful to my insistence that the S&P 500 needs to finish the week below 1505.85 in order to create Wave 4 on the weekly chart. I also tend to think that the severe divergence in the Relative Strength Indicator on the daily chart is most likely due to an incomplete corrective formation. That said, I am mindful of the possibility that the market could rally, and have shared with you the important implications of such a possibility.

Thoughts for Wednesday, May 17...

The TRIN closed at 0.65 yesterday. That is not a resounding indication of a top, but it is low enough to serve as one. The S&P 500 closed at 1514.14. This places the broad market index squarely within the 1513- 1515 area of resistance that we have discussed previously. Furthermore, we have seen a three-wave formation up from the low of 1491.42 on May 10. All of these suggest that there is a good probability that the markets will give us that c-wave down to complete wave 4 of the rally up from May 14. This would simply give us a flat corrective formation prior to our rally to form Wave 5.

My primary target has been 1475.11. I still like that number for a few different reason, but the flat nature of this correct wave suggests that we should also consider the area around 1489.90 as likely target. I think that both of these numbers represent legitimate targets. Of course, we need to break below support at 1499.01 first.

To the upside, my primary target is 1522. I do not think I have discussed that frequently enough here. Nevertheless, there are a couple of sound methodologies that point to this number. I hope to discuss them further in the days to come.

Thoughts for May 15...

Around the beginning of May, we discussed the importance of a trend-line that extends up from the lows of March 14 and April 12. The S&P 500 tested this trend-line support on May 1, and then dropped through it on May 10. The chart below shows how this former source of support has now become resistance. We can see this trend-line serves as resistance on May 11, 14, and 15. In fact, this line extended up to 1514.54 on Wednesday. This was also the area of resistance between 1513 and 1515 that I have discussed previously.

There is no real reason to alter my anticipation of a further decline on the S&P 500. As I have stated previously, my primary expectation is for a decline to the 1475 area. This would represent the final wave within a larger three-wave corrective formation. If and when we do rally to higher levels on the S&P 500, I would anticipate that the March 14 to April 12 trend-line would serve as upside resistance to the ensuing rally.

Missed it by that much...

It is my belief that the S&P 500 will eventually have a down week. I will go out on a limb, and guarantee it. Sooner or later... at some point in the not too distant future... the closing price on the S&P 500 will be lower on one Friday than it was the previous Friday. Will it be Friday, May 18? Could be.

The S&P 500 only needed to close below 1505.62 to be down this past week. It finished up at 1505.85. That is fine. It seems probable to me that the rally that lifted the S&P 500 to that level was merely a b-wave in a larger three-wave corrective pattern down. It would not be unreasonable to see a final downward thrust over the next couple of days.

The area around 1475 continues to serve as my promary downward price target.

Best wishes,

Eldinril

Time for Wave 4...

The S&P 500 made an intraday high on Wednesday, May 9 of 1513.80. If you go back to my post on April 29, you might see mention of that exact number as a potential source of resistance to our upward movement. For whatever reason, this appears to have proven correct.

We have now entered into what I consider to be Wave 4 of the wave up from March 14. You can get a fairly good representation of this interpretation by viewing the weekly chart I posted on April 30. The only real requirement for this interpretation to be valid is that we close tomorrow below 1505.62 on the S&P 500. This was where that index closed on Friday, May 4.

Our next challenge is to determine how low our current decline will go. Elliott Wave Theory tells us that it is not uncommon for a correction to retrace back to the area of Wave 4. It would not be unreasonable to assume that the low set on May 1 was the low of Wave 4. This suggests that the S&P 500 could continue down to the 1476.70 level.

This level becomes increasingly intriguing when we look at things from the perspective of Fibonacci ratios. Let us assume that the low of Wave 3 was 1412.54 set on March 30, and the high of Wave 3 was the 1513.80 high set on May 9. This gives the total wave a length of 104.90 points. A 38.2% retracement of this wave would be 40.07 points. This would place the S&P 500 at 1473.73.

This gives us two different methodologies within the principles of Elliott Wave analysis that both point to the level around 1475 as potentially significant support. I would view this as our primary target for this decline of the S&P 500.

Momentum Divergences...

On April 23, we discussed the technical divergences that were apparent on the daily chart from the perspective of breadth and volume. On April 24, we also mentioned divergences that were forming on the weekly chart from a momentum perspective. The measures did not signal the end of the upward movment, but they did act as confirmation of my belief that we are in the midst of a final wave up of a longer-term price structure.

Those divergences we discussed at the end of April still exist. In addition to those signs of technical weakness, we can now see similar momentum divergences beginning to appear on the daily chart of the S&P 500. This means that even as the market continues to rally higher, the breadth, volume, and momentum of this upward movement continues to deteriorate.

This can be a frustrating time for some traders. There is plenty of technical support for the argument that we are nearing a significant price high for the market. We simply have not reached it yet. We continue to make higher highs and higher lows within a well-defined trend channel. We are just below important resistance levels for the S&P 500 at the 1515 and 1520 levels. We also have incomplete wave formations. It can be difficult to maintain the patience necessary to ride this formation up to its top.

Trend Channels

Last week, we discussed the lower trend-line of our rally up from March 14 on the S&P 500. This trend-line was tested by the lows of May 1, before the index resumed its upward trend. The chart below depicts the channel formed by the upper and lower trend-lines as the formation continues to unfold. The upper trend-line of this channel was at 1516.20 on Monday. It has a slope of roughly 2.45, which will extend increase this potential source of resistance to 1518.65 on Tuesday.

One other potential source of resistance can be found in the rally from July 2006 to February 2007. If we draw a line across the lows of what represented Wave 2 and Wave 4 within that larger price formation, we can see a trend-line that extends up to the highs set last week on the S&P 500. This line extends up to 1517.01 this week.

This gives us a confluence of two important trend-lines for the S&P 500 that happen to cross near an important date from a time cycle perspective. Furthermore, we discussed the importance of the 1515 area from the perspective of proportionality and Fibonacci price projections in my post on April 29. We could even bring in some longer term price projections that suggest resistance around 1522. It will be important to watch how the S&P 500 behaves as it enters what must be viewed as an important area in terms of price, pattern, and time.

It's Street Sense!

Winning the Kentucky Derby takes a combination of a special horse, a skillful jockey, and a fistful of luck. All of these were exemplified in the winner of the Kentucky Derby, Street Sense, and his jockey, Calvin Borel. In the picture below, you can see Street Sense on the far right (his jockey is wearing the yellow and green silks) entering the final turn at Churchill Downs. Borel successfully navigated his horse through all of that traffic before turning Street Sense loose and winning by two and one-half lengths.

Betwixt and Between...

On Tuesday, the S&P 500 tested support at the lower trend-line we discussed yesterday. On Wednesday, this broader market index bounced up to test the upper trend-line, which we also happened to discuss yesterday. Will the S&P 500 break through the resistance at 1495, or will we revisit the lower trend-line one more time?

It is my personal belief that the S&P 500 should finish the week ending on May 4 at a lower price than it closed on Friday, April 27. This is because I think it would be most logical for the market to assume a formation like the one I posted on April 30. In order for this to happen, we need a down week.

This would suggest that Wednesday's encounter with resistance at 1495 on the S&P 500 will not be followed by a Thursday breakout. Instead, it would suggest that the market will somehow move lower over the course of the next two days.

This would make sense from a wave count perspective because it would create a three-wave corrective structure. The chart depicts that scenario. I think it is important to note that the lower trend-line that served as support on Tuesday has extended up to 1486.48 on Thursday. This may well serve as support again over the next two days.

Trendlines...

One of the most powerful methods of predicting future market behavior can be found in the concept of trend channeling. This is based on the concept that most price trends tend to happen within the confines of a well-defined channel. The recent behavior of the S&P 500 is no exception...

If we start a line at the highest price point of what I am calling the end of Wave 1 in May 2006 and extend it across the high point of Wave 3 in February 2007, we can see that the S&P 500 rallied right up to test this line when it made its highs of last week. We have backed off of that resistance for now, but I expect that this trend-line will continue to serve as significant resistance over the next few weeks

We can draw a similar line across the lows of 1363.98 set on March 14 and the 1434.01 set on April 12. If we extend this line up, we can see that it reached 1479.52 on Tuesday, May 1. The S&P 500 reached a low of 1476.70, but could not hold it. We might assume that this trendline offered some support to the downward movement seen on this day. If you are curious, this same support line will be at 1483.03 on Wednesday. We will see if this support holds for a second day...

Okay...

The best way to describe where I think we are right now on the S&P 500 is to just show you the count. I am still knocking the rust off of my Elliott Wave skills, but I really do feel that there are a lot of technical aspects within the larger market that support my assertion.

If we count up from the lows set at the end of March, we can see that the S&P 500 has made three distinct waves up. The characteristics of these three waves on the daily charts indicates that this is a motive wave higher. That is, this could not have been a corrective three up. That means we will see more movement to the upside after a brief correction down to somewhere between 1450 and 1465. I will talk more about those price targets tomorrow.

Looking for Resistance...

So, the market broke through critical resistance this past week when it rallied above the 1485 level. 1485 was an important area of resistance as calculated by two methods of Fibonacci ratio analysis. Our new challenge is the identification of the next area for resistance. We can use these same methods again to determine the probable location.

The current wave up began from the low of 1412.84 made on March 30. If we assume that this rally will assume a length proportional to the initial wave that formed between March 14 and March 23, then we can use Fibonacci ratios to project its length. The first Fibonacci projection point would be at a location 1.38 times the length of the initial rally, which was 74.91 points. This would give the formation up from March 30 a length of 103.38 points, and suggest that the next level of resistance will be at 1515.91.

An alternate method of calculating the next potential area of resistance would be to assume that the wave up from March 14 to March 23 represents a proportional amount of the total wave length. Had this initial wave been 62% of the entire length, then the S&P 500 would have topped out at 1484.80. This did not happen, so the next degree of proportionality would assume that the initial wave 74.91 point rally represents 50% of the total wave length. This would mean that the total length of this rally would be 149.52 points higher than the low of 1363.95, and suggests that the next level of resistance will be at 1513.80.

This give us two methods of Fibonacci analysis that point to the 1513- 1515 area as potential resistance on the S&P 500 index.

And up we go...

So, I have spent a fair amount of time discussing why the S&P 500 looked like it was in position to begin a wave downward. I was saying this on the assumption that we were in the midst of a corrective wave that began around February 22. This was all proven incorrect on April 25, when the S&P 500 broke through the resistance around 1485.

When this index closed above the closing price of April 20, it created an extended wave pattern. Elliott Wave Theory tells us that this would not happen in a corrective wave, so that means we have already entered Wave 5 of a pattern that began in October of 2005. Because this is a motive wave formation, the S&P 500 will have to complete a pattern of at least nine waves. That means at least one more thrust up awaits this index.

More divergences...

Tonight I would like to share with you the chart from a slightly longer term view. Below you will find the weekly bar chart of the S&P 500, accompanied by graphs of Stochastics, the Relative Strength Index, and the Commodity Channel Index. This chart offers two additional arguments for a bearish scenario over the next six to eight weeks.

First of all, if we draw a line across the high set in mid-December, connect them with the highs set in February, and then extend that line out to the right, we can see that the S&P 500 rallied right up to the trend-line created by that series of highs. This suggests that the index will experience some resistance in this area beyond that created by the Fibonacci calculations I shared on Sunday.

Next we need to look at the collection of trend oscillators that I have included on this chart and compare them to the price behavior illustrated below them. Here we can see the S&P 500 rallying to new highs and finding resistance from a trend-line created by the recent highs of the index. Meanwhile, none of the oscillators included on this chart is reaching a new high. In fact, you could argue that they are all making a series of lower highs. This divergence between price and momentum offers further evidence of weakness in the current upward price trend.

Topped out...

The S&P 500 closed today below its closing price on Friday. I think that this is an important event for the short-term picture of the broader stock market. It is important because the lower close completed what might have been a corrective wave up.

If you will forgive the incorrect nomenclature in terms of degree, you will see that since the lows of March 14 the S&P 500 has completed two five-wave formations higher. Elliott stated that waves in such formations cannot extend. This suggests that if this upward movement was corrective in nature, then that wave must be complete. That would suggest the stock market will head down toward its March lows.

We can find support for the notion that this index is at or near a top by taking a look at the breadth and volume of the S&P 500 over the last three weeks. The chart above illustrates two points. The first is that even as the S&P 500 rallied to new highs, the number of stocks participating in that rally declined. The second is that the number of shares traded as these new highs increased began to decrease, quite dramatically in the last week. Both of these points suggest that the recent rally in stock prices was technically weak.

(My thanks to PARL for his discussions on the weakness in the McClellan Oscillator.)

Probable Resistance...

The S&P 500 rallied into the weekend with a closing price of 1484.35. This left the index just below an area of probable resistance. We can discern this by using two separate principles from Elliott Wave Theory.

If this rally up from the low of March 14 represents nothing more than Wave B of a larger corrective formation, then we can expect that it will consist of a three-wave pattern up where the first and last rallies are either equal or proportional to one another. This suggests that the wave up from March 30 will be roughly equal in length to the wave from March 14 to March 23. Since this latter rally was 74.91 points in length, we can expect the current rally to travel roughly the same distance. A 74.91 point rally up from the low of 1412.54 on March 30 would leave the S&P 500 at 1487.45.

Another method to calculate probable resistance assumes that the entire length of a formation will be proportional to the initial wave of the formation. In this case, we might assume that the rally from March 14 to March 23 represents 62% of the entire rally. Given that the initial rally was 74.91 points, the completed wave would have a length of 121.21 points. A 121.21 point rally up from the low of 1363.98 on March 14 would leave the S&P 500 at 1485.19.

Here we have two methods of calculating probable resistance both pointing to the same general area. This suggests that the S&P 500 can expect some degree of resistance between 1485.19 and 1487.45. Given that this index ended the week at 1484.35, we might expect any upward movement in the broader stock market to encounter some difficulty.