SPX Nearing Primary Resistance

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.

Yeah, forget about all that...

ST-R1 held and pushed the SPX down significantly

So I'm back to the scenario of trying to enter long near ST-S3 which is right at 800 at today's close. Therefore, with my end-of-day accounts not managed by mechanical methods, I'll go 100% long today if the SPX is between 800-805 at my trading cutoff time.

It's unlikely,

as we've now bounced nicely (at 1:30p Mountain) a bit above ST-S2 (chart below) which indicates ST-S2 is being watched closely. The battle appears to be shaping up between ST-S2 and ST-R1.

I need an acronym...

"End-of-day accounts not managed by mechanical methods", I need an acronym for that. It's actually worse than that even. These accounts are also tax-deferred/tax-free. So, EOD-DT-TF for "End of day - Discretionary Trading-Tax Free" and I'll hyperlink it to a definition when I have more time.

SPX Threatening Short-Term Breakout

Sellers could not push the SPX down to ST-S3.

The buyers put up horizontal support at ST-S2 which has a pretty well defined horizontal counterpart (ST-R2). On ST-R2 is a bottom and three tops which to me makes it significant on a short-term basis. ST-S2 and ST-R2 form a small horizontal channel of which the SPX has now broken out. This breakout implies a move up of the channel width to SPX 835 which would fill yesterday's opening gap at which point there should be quite a bit of selling.

An SPX move to 835 also takes out ST-R1.

I've redrawn ST-S1 as the old line became ragged and noisy. Again, this is very common on intraday charts and doesn't bother me much.

So if we assume ST-R1 will fail,

and that it's still the upper boundary of a valid channel, the break would imply a move to 845 which is the 4/2/09 top.

I think this scenario is likely,

and I think some symmetry will come into play with the SPX producing a mirror image of what's to the left of the 'R' and '2' in ST-R2 in the above chart. Symmetry implies the SPX will move to 835 and fill one gap. Then the SPX should correct back down to retest ST-R1. Then move higher, to fill the 4/6/09 opening gap. If we can get those moves to occur an Head-and-shoulders bottom would then be confirmed (with neckline NL?) implying a further move to 860 which takes the SPX up to the primary resistance R1 (in charts below).

Whether this scenario is tradeable on an end-of-day basis for me,

depends on how closely my scenario plays out and where in that sequence the close occurs. I won't chase the SPX today based on an ST-R1 break. However, if the SPX were to close yesterday's gap, then drop back to retest ST-R1 and still be near that test at the close, I will take take that trade hoping to get some of an 825-860 move which is around 6.4% in Rydex Nova. It's unlikely that buy setup would occur today but not impossible. I also remain a buyer on a test of ST-S3 especially if we gap down to it, bounce off a bit and close reasonable close to (but above) ST-S3.

Remaining patient

Buying came in at the top of the gap at SPX 815

just as I suspected and it looks like we may get another late day rally just like the last two days. I wouldn't be surprised to see the SPX close over 825 for the day. That keeps me on the sidelines with end-of-day accounts not managed by mechancial methods for today. I really want that buy at ST-S3. Maybe I'm being greedy but I think being greedy while in cash in a bear market is wise.

One of the things I believe dooms many investors

is the emotional pain from being left behind by a rising stock market. It's a human nature trait that I try to avoid at all costs. Logically, it doesn't even make sense. Every single day, thousands of "markets" are moving all over the place. Very few care if they missed out on the big move in soybeans. (Not that there was one, I don't follow soybeans). When it comes to trading or investing, "the market" is just a number. It really doesn't matter what that number is. What matters is what that number is going to be in the future. Markets oscillate around their true trend. So as a market goes higher, pressure mounts for it to regress back down to its actual trend. That is why I rarely chase markets and panic buy.

Two opening down gaps in a row.

The SPX opened this morning gap down for the second consecutive day.

We actually broke down below the bottom of the downtrending channel ST-S1, but that move is just noise. Intraday charts are far from perfect in terms of acting technically normal around support/resistance. The fact that the break occurred on the open further indicates its lack of importance. Buyers and sellers line up on both sides before the open. Where that battle ends up is where trading begins, the open. Since that number is largely unknown it makes logical sense that there would be some extra noise there.

Two opening gaps in a row tells me,

that there's a little panic going on as people lock in some profits, put on some hedges and speculative shorts near, but actually still quite a bit below important resistance R1 There was a lot of negative pre-open banking news and of course George Soros stated that the rally is "unsustainable", likely because it's going against Mr. "I'm having a very good crisis".

So after rechecking the chart it appears ST-S1 is being taken out right now (11:12a mountain).

In any case, I think the gap below is going to fill soon. If the channel fails now I'd expect a drop of the channel width which overshoots lower than the gap. We'll probably get a bounce off the level of the gap as there should be buyers there. But I think we'll probably see a test of ST-S3. I'm still looking to go long with end-of-day accounts not managed by mechanical methods but won't make that call until 1:30p (mountain) or so. I'll post here around then in any case.

Nearing the Moment of Truth

Turned Down Temporarily

The SPX ran into some selling further below R1 than I had expected and has dropped back just a bit. It ain't over. I expect a real test of R1 to occur in the near future.

The uptrend line S2

One of the most repeating patterns I've watched over the last 20 years is how off lows in every timeframe, the SPX will start a 'V' bottom, move sharply higher, then correct down a little. Buyers than missed the sharp up move come in so quickly that the SPX resumes its move up. Very often a line drawn off that first low at an angle half as steep (or less) as the initial sharp move becomes the dominant support for the uptrend. (We've quantified historical probabilities for that slope in the past and are currently revisiting/updating that topic.) We first mentioned S2 in it's very early stages of formation and it remains a factor. For now I feel that S2 and R1 are going to determine which way the market turns. Since those lines are converging, the SPX is going to break one or the other soon.

Let me be perfectly honest here.

I've watched, researched, and traded "the market" now for nearly two decades. I diversify my business/investment activities widely but the majority of my research is purely on how to predict markets. Having said that, I really have no idea whether the SPX is going to break out above R1, or fail and move lower. I believe that buyers and sellers are battling right now and the winner of that battle, probably with the injection of some unpredictable and surprising event, will determine whether R1 is overcome or not. Any advisor who states that the market is going much higher from here is stating R1 will be overcome and that is simply a guess. Nobody has a crystal ball.

Since I don't know,

I have two choices. One is to "wait and see" and possibly miss out on what could be a spectacular up day as the break occurs. Frankly, this tends to happen to me quite often because I am generally risk averse and buying near resistance is risky because resistance "should" turn turn the market lower. However in this case, its rare that another buying opportunity doesn't come along on a pullback if I'm patient. My second option is to find another good reason to get long on a shorter-term basis with an exit strategy and possibly luck into being long on the breakout day. This happens for me fairly often as well.

In the intraday chart we had some very interesting action at yesterday's close and today's open. As you can see in the chart above, a well defined downtrending channel had formed. In the closing minutes the SPX broke out of that channel. That implies some really felt like there was going to be an upside surprise today. Unfortunately, that breakout was false and the SPX dropped back today to the bottom of the channel. Today's open also gapped down.

Between two gaps.

So we're now trading between two unfilled gaps which may set up an interesting opportunity. If the channel fails, I'll expect a drop equal to the width of the channel down to around 805. Another possibility is that the SPX just rides the channel down in the next few days, eventually getting down to below 815. In either of those cases, I plan on entering the market long hoping for a pop higher to fill the overhead gap at 840. Entering at 815 and selling at 840 is about a 4.5% profit in Rydex Nova which would be my main goal. My secondary goal would be to luck out and be long as some event based surprise launches the market through R1. With the restrictions that come with end-of-day trading some luck may be required to pull it off within the restrictions I'm under with this space. Honestly, I may have to play this one mostly with options, which is beyond the scope of what I can detail here. (You think trading markets is hard? Try doing it while at the same time telling others your plans in advance...) In any case, with 26 minutes left it's unlikely anything will happen today. But I'll definitely indicate any end-of-day actions I plan to take in the coming days.

SPX Turned Back by Short-Term Resistance

The SPX opened yesterday with a gap and ran to R5 where it was promptly turned back lower. As you can see above, the support line S6 which is drawn off the first significant pull back after the explosive phase of the rally, failed to support the SPX much at all. Interestingly, S6 was failing at the exact time President Obama was heralding the G20 Summit reforms as, "turning point" in the world's quest for recovery. All important turning points start with very minor technical failures. I don't think it's likely but it would not surprise me one bit if the "turning point" actually ends up being the end of this intermediate-term upmove. I'm not saying any thing negative about our President or any of the world leaders, this is just how the market often works. In the short-term, yesterday's opening gap will put pressure on the SPX to drop back down to fill the gap. As the gap opened it jumped through a minor line of resistance (S7) which should now act as support as the SPX comes down. Normally S7 wouldn't even be worth mentioning but any time a market gaps over something it becomes more important. The gap also created a little Island Reversal pattern which is an area of pricing separated on both ends by gaps at similar levels. That pattern implied a move higher equal to the height of the pattern but that happened immediately upon yesterday's open. While interesting, Islands are of minor importance in the SPX chart. In Summary, I think probability has the SPX eventually dropping down to S7 but not quite filling the gap. The failure to fill will be due to lots of buyers in and at the high side of the gap. Those buyers should launch another run up to attempt to break out of the important R1 (in charts below) which is now only about 25 points overhead. A break above R1 would be a very bullish indication and I think the SPX is going to make multiple attempts at a break. It's going to be interesting to watch how the SPX acts as it attempts those breakouts. For now I plan to wait on the sidelines and just watch the show.