Mon 2/28/11. Bounce Over, Trounce Imminent?

I decided to take a few days off from trading until Tuesday while family is visiting, but I did take about an hour to review the charts today. The Thursday reversal still allowed daily Dynamic RSI to support 1294 as a wave 4 from 1173, while hourly Dynamic RSI does not support that. However, I tend to favor the daily interpretation in this case because daily RSI9 is closer to the RSI10-20 sweet spot than hourly RSI63. Also, Dow daily supports SPX daily. However, support for a wave 4 is not a prediction that 1294 is yet another nested wave 4. It is common for Dynamic RSI support levels to serve as temporary reversal areas.

On a smaller time frame, Dynamic RSI actually favors the drop from 1344 to 1294 as 5 waves, and, thus far, it favors the strong bounce as 3 waves. I had earlier predicted that 1325-1336 would be revisited after a Wed/Thu low. The lack of conventional reversal readings near 1300 led me to think a cascade down near 1276 was possible against the typical odds but sub-1276 will have to wait. Now that a bounce has occurred from 1294, I think those same weak reversal signals favor that the bounce is built on a weak foundation which favors a wave B or 2 with an outside shot at a slight new high (maybe 1344-1365ish). And, since SPX has now entered the 2nd half of its 1.5-2 month cycle ending March 23rd +/- with other cycles seemingly converging around mid-March, I would say cycles favor a downtrend too (no new high) but a downtrend could potentially wait another few days after a new high and then drop rapidly for about 2-3 weeks. That may a bit wishy washy, but the bottom line is that I feel the technicals currently favor a new downtrend and I will likely short Tues/Wed depending on closing daily indicators, and, likely, any new low below 1294 at this point will confirm a downtrend in daily Dynamic RSI and into the cycle low around mid-to-late March. And, if SPX does make a new high this week, the downtrend is likely to be sharper in March. If SPX can get well below the 20dSMA into the cycle end date, it would be common for the next cycle to backtest the 20dSMA and then test or break the previous low before forming a multi-week uptrend. If SPX somehow makes a new high this week and then does not fall too far below the 20dSMA by mid-to-late March, we should see new SPX highs into June +/-. Good luck.