Monday, June 14, 2010

Correction or Thrust?

The charts below show the Advance-decline line and the SPX. The First chat is from the Feb 5th 2010 low, and the second graph is from the March 6 2009 low.
Although I don't profess to be an Elliott technician for demonstration purposes we can hypothesize about 2 scenarios.

Scenario 1. The recent downdraft in the market took the form of a A-B-C correction which has ended and now the market is in the early stages of another blast to the upside. This is marked by the green ABC and i, ii ii...etc.

Scenario 2. The recent decline is a five wave structure with wave 1 down ending on May 25th. with the subsequent activity forming an A-B-C corrective wave to the upside. This scenario is marked in the red i, ii, iii, iv. v A-B-C...etc nomenclature.

The standard technical indicators suggest that the path of least resistance is to the upside--favoring the bullish scenario. But in a bear market blind reliance these indicators can destroy a trading portfolio quickly by terminating their pattern abruptly. RSI, MACD and ADX should be respected and monitored constantly--if they reverse themselves there are usually serious consequences.

The key indicators to watch are the Fibonacci retracement levels and the Fibonacci fan lines on both the SPX and the Advance-decline line.

On the SPX 1109.17, 1130.29 and 1151.41 are key levels. If the markets reverse at the 1110 area and break the recent lows there is big trouble ahead. On the other hand, if the S&P breaks through the 1151 area the bullish case will be substantially fortified. The retracement levels on the AD line are as important.

It should be noted that there has not been too much damage done to the advance decline line during this decline which may be interpreted as being further evidence that the market just underwent a correction and not a major break of the intermediate trend.

A S&P close above 1155 would likely cause me to abandon a bearish market view. If the long term cycles are really putting as much pressure on markets as I suspect they are--the market will have an VERY difficult time getting above the 1130 area for perhaps more than 2 days in a row before turning down.

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