Sunday, March 21, 2010


Dow Theory fans will have been rejoicing this weekend based upon the action in the Dow Averages over the last week. Last week I mentioned that although the Transports had rallied to a new high, the Industrials were lagging behind and that they would need to confirm the new high in the Transports 'sooner than later'. That was accomplished last week with the Industrials exceeding both the interday high of 10767.15 made on January 14th and the closing high of 10725.42 of January 19th. On March 19th the DJIA made a interday high of 10869.54 and a closing high of 10779.16 the day before March 18th.
Another significant level was also surpassed lately: The Transports traded through the 61.8 percent retracement of the 2007-2009 bear market after successfully testing the 50 percent level--which at the time was coincident with the 200 day exponential moving average.(highlighted yellow circles) This can be construed as being bullish although the market has entered into definite over-bought territory. They say that the market climbs a wall of worry in the early stages of a bull run. There is no shortage of anxiety out there--ranging from The Fed, Greece et al, housing crisis, health care reform, the ostensible pending socialist doom being spread by the Obama administration etc etc etc......
How this all plays out over the next few weeks will be interesting to say the least as the market trades in a time harmonic zone in an slightly over bought technical environment.

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Moving averages are a fascinating method of determining 'waves' in market moves. This is not to say that all market moves follow orthodox 'Elliot Waves' but I have found that the interaction between the 21 and 55 day exponential moving averages provide a clue as to the structure of an advance or decline. When the 21 day ema crosses the 55 day ema it is highly suggestive that the move just completed can be viewed as 'a wave' or component in an overall structure of an advance or decline. When the 21 and 55 re-crosses the corrected wave of the structure can be assumed to be complete.
The chart below indicates that 4 waves have been co,complete since the market bottom on March, 09 2009. I have highlighted the 21-55 crosses in yellow. Using this methodology we can assume that the market is currently in its 5th wave since the March 2009 low. This hypothesis is complemented by the behavior of the parallel trading channel. As can be seen below, the upward thrusts are contained in the upper half of the channel (red) while corrections dip below the center line (blue) but find support at the bottom parallel channel (green). The moving averages also support this since the 200 ema provides both resistance and support with regard to the major trend, while the 55 day ema provides both support and resistance for the intermediate trend. The 21 day ema indicates support and resistance on a short term basis.
The Dow is currently at the blue center channel but trading above all three emas. Until the 21 day is violated to the downside the short term trend remains up. The intermediate trend should remain intact until the 55 day ema is violated on the downside. The 200 day ema should contain the major uptrend if the Bull is going to stay in control.
The exponential moving average levels are as follows.
  • 21 day: 10544.43
  • 55 day: 10415.34
  • 200 day: 9934.39

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Doing this blog would not be entertaining unless I could prognosticate about the future of the market:
As I mentioned last week the 1153-1155 area on the SPX would be a natural point for price resistance especially considering that the March 17th "Energy Date" was coming into play. The SPX traded above the 1153 harmonic on Tuesday March 16th, trading as high as 1160.28. On Wednesday, MARCH 17th the SPX traded as high as 1169.84 before stalling and closing the week at 1159.90. It is interesting that the high for the SPX was made on the 17th. This becomes even more intriguing when you consider the nasty candlestick pattern of the last three trading days of the week--especially when it is accompanied by a tentative bearish engulfing line on Friday's Transport daily.

Where does the market go from here?
It is relatively obvious that the markets have entered an over bought stage from a technical perspective. RSI, Stochastics and a series of other indicators are at levels that suggest that risk of a downturn is becoming elevated. Once again the moving averages should act as a guideline as to what the market's intentions are.
But, considering that the 1153-1155 area has been taken out--albeit only by a small amount--we can make a case for higher levels based on the next higher set of price harmonics. This is not to say that the market is definitely going to reach these levels--but if any credence is given to fibonacci price harmonics the levels that follow must be taken into consideration.
Using the moving average cross-over method a case can be made that the SPX is in a 5th wave. Again, I don't necessarily subscribe to the orthodox Elliott patterns but nonetheless a case can be made for a 5th wave in the structure of the market since March 9 2009.
I have labeled the structure as follows.
  • Wave one: XA 666.79-956.23
  • Wave two: AB 956.23-869.32
  • Wave three: BC 869.32- 1150.45
  • Wave four: CD 1150.45- 1044.50
  • Wave five: DE 1044.50- ????
If 1222 is used as "E" then there are a series of interesting price harmonics in place.
  • XA = .971 BC (near equal)
  • DE : .613 of XA and .631 of BC (near .618)
  • CD: .377 of BC (near .382)
  • DE: 1.67 of CD (near 1.618)
Based on this structure a case can be made to expect resistance in the 1218-1225 level of the SPX. This is just below the 1228 level which represents a 61.8 percent retracement of the 2007-2009 Bear.

When would this be expected to happen? Time harmonics indicate the next significant Energy Date to be April 3rd-5th. If the market is in the1220 area in this time frame, market activity should be closely scrutinized for a possible change of trend. Caveat: The market must successfully break above the March 17th (Energy Date) high of 1169.84 first!!!!!

Monitor the moving averages and candlestick patterns for clues.

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Note: Energy Dates will be posted on the top left of the page over the next few days.

1 comment:

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