The SPX gapped open big this morning,
on a positive earnings report from the bank Wells Fargo. As you can see in the chart above the SPX is now very close to the primary resistance R1 that forms the upper boundary of the the channel that is controlling the intermediate-term of this market. Hopefully I'm not allowing my greed emotions to take over a bit, but I now believe the most likely break out of this channel is to the upside (65/35 odds) in the near future. I do have solid technical reasons for this belief which I'll detail in another report very soon.
I do not think the break will occur today,
as the explosive upside is probably over for today. Today, the SPX should continue to trend upward at a more sustainable rate into the close as I've indicated with S? in the chart below. I've drawn this potential support at less of an angle than the previous two similar lines in the recent past (also on the chart below). There's no way to know exactly what this angle will end up actually being, or even if it will develop. But it's just a potential scenario I'll be following for today. (Note: as of 10:05a Mountain, S? has already failed...). There is a chance that huge buying volume could come in right at the close as big players decide that the break is going to happen at tomorrow's open, and/or funds are being bombarded with investments chasing today's strength which they be forced to invest near the close. This is what appeared to be what happened this morning on a shorter term scale as I'll describe below.
If the SPX breaks above R1,
I think we'll make a run at R2. I recently had a client state that he "wasn't too impressed by R2" being only a two-point line with both points being over six months old. It's a valid opinion and Edwards and Magee would certainly agree with that opinion. However, I believe that Edwards and Magee's (E&M) general criteria is too strict for today's market and especially indexes as opposed to individual stocks. There's an unlimited number of stocks so it's easy to find some tracing out valid patterns per E&M criteria. But there's not many stock "markets" that aren't highly correlated with each other. If one waited for true E&M criteria in the indexes, they wouldn't end up with much to go on. It's my theory that back in the 1940's E&M brilliantly captured a phenomenon of human nature, but today there is also a self-fulfillment component involved. I also believe that "for me", trading and investing requires me to try and imagine future scenarios based on all the technical information I have available. I use those scenarios as my guide for discretionary decisions. They certainly are not even close to perfect but it's all I have available in order to retain strategy diversity from my mechanical systems, which I follow mechanically to manage the majority of my liquid investment capital.
Back to R2.
One of the reasons I consider R2 very important is that it has a parallel counterpart S2, which is a four point line, that forms a channel. When that channel failed, the early Oct2008 collapse of the SPX was launched. Important old lines do degrade in importance over time but as long as they show up on the one-year chart, in my opinion, they remain important.
If the SPX made R2,
we'd have in place the kind of bullishness that I'd expect at the top of a bear market rally of historical significance. The kind of bear rally that would completely fake out almost everybody. I'm not saying that is likely to occur. What I am saying is that even if the SPX makes R2, that does not mean our current financial problems are over. We could still drop back down to test the March2009 market lows and then the R2/S1 channel would take over as the major influence in a continued long-term downtrend, which is the secular bear market/Great Depression case. If that case actually develops, I would not be surprised to see the final capitulation being a drop out of the R2/S1 channel straight down to the 400-450 level as I've discussed in the past. Again, I'm not saying this is likely but just laying out a possibility.
Back to Current Reality.
At yesterday's close we rallied all the way back up to ST-R1. Whether that was based on funds forced to take positions or something more sinister such as news leaks about Wells Fargo or simply some collusion among major players, I do not know. But if anybody had any doubt about the importance of ST-R1, that doubt should be gone considering today's opening action. Sure, the opinion that today's opening move was based on the Wells Fargo news is valid and the opinion that the gap over ST-R1 is coincidence is possible. But this stuff repeats so often. Once you start watching it closely, as I've done now for 20 years, I think the "coincidence" opinion is just plain ignorant. (Sorry to be so blunt...)
My plan
As I said, I'm looking to go long. I think today's opening gap will fill before R1 is overtaken to the upside. It appears to me that ST-S3 is still the logical place for which to hope for a good buying opportunity. There should be buyers at the top of the gap, around 828-830 which should provide a bounce. But I will wait for another test of ST-S3. Since ST-S3 is upsloping that test may happen at 828-830 depending on how long it takes for the SPX to drop back to that level.
If I'm Wrong,
and the SPX breaks out above R1 before testing ST-S3 it will likely be a very dramatic move based on news. This move will almost certainly start with an opening gap which will make it likely that the SPX will drop back down to R1 in a retest at which point I'll enter my long positions.
Once I take my Positions,
there's a good chance that I'll be moving to more of an intermediate-term approach and give these positions some room to oscillate in hopes of getting most of the move up to R2. But I'll certainly switch back to more of a trading mode in early September, if not earlier due to seasonality.
This switch in trading term,
will not effect my writing in this space. I've committed to writing multiple times each week here and I'll be expanding my coverage significantly as well. I hope to continue writing almost daily forever as I really enjoy it. And I think I've figured out how to keep my time overhead low enough so that writing here will remain feasible.
