(Update Thu 2/3/11 11:30AM EST)
The target upper end of the 1287-1295 target range was met. There are a few indications that support further rally until we see SPX 1275 taken out to the woodshed.
1) I've given evidence for a possible 1 of 5 of 5 count at 1309 and a 1313-1315 convergence target area.
2) A new 1.5-2 month cycle arguably started 2 weeks ago in terms of price and 3 days ago in terms of momentum. I've found momentum to be the better thing to watch, so the cycle is nascent. It is not very common for a new cycle to top in just a few days except when it is rebounding from extreme oversold conditions and backtesting the 20dSMA which is not the case today. Even a left-translated cycle top should last a couple weeks.
3) A small NYAD change near an extreme high like we had Tuesday usually leads to a decent pullback within 1-2 days and sometimes a top, but coming off a cycle low or strong momentum low, it usually signifies a rally kickoff especially when above the 20dSMA, 50% retrace of previous cycle high and 3-candle low all of which are true today. If SPX rebounds today from 1295, that would signify a shallow retrace more typical of a rally kickoff.
4) VIX has dropped below its 20dSMA today. Yesterday, it closed just above its 20dSMA which usually leads to a bounce and corresponding SPX drop which it did temporarily. But, now, the bounce may be over and support broken.
Of course, the monthly non-farm payrolls announcement tomorrow could throw a wrench in the works and the corrective structure of the last 2 days can expand downward, but the technical evidence favors more upside IMHO. I am long again with stop tentatively at 1294. I may also exit the trade if I don't have a decent profit buffer going into the close due to the NFP risk. Although the potential 1 of 5 of 5 count from SPX 1011 would suggest a FIBBEWIE SPX target of 1342-1352, it is worth noting that Dynamic RSI could have easily supported another high on SPX yesterday (as Dow did) meaning 1275-->1309 could be a 3-waver and the 1st leg of an EDT. If so, SPX could potentially do something like rise to 1310-1313, fall to 1305ish and then exhaust an EDT at 1313-1320 probably next week. I do expect USD to make a significant bottom within the next 1-2 weeks. It could have done so yesterday. If so, the demise of SPX is imminent and I'd like to see Shanghai confirm by dropping a few percent in the next week. So, all in all, I think more SPX upside is likely but it may only last a few days, and, once 1275 is taken out (support will trail higher), SPX is in deep doo doo for a few weeks. Good luck.
(Update Thu 2/3/11 10:00AM EST)
Dynamic RSI confirmed the rally from 1275 is complete once SPX dropped below yesterday's low. I was stopped out of my long. Any rally to 1313-1315 or even 1350 would require another rally once the current correction is complete. Tomorrow's non-farm payrolls has the chance to either kickoff the final rally of this uptrend from July (if we just finished 1 of 5 of 5 from 1011) or possibly even submarine 1275 which would indicate a more serious downtrend. The current correction would be a 40-60% retrace around 1287-1295. Good luck.
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Tuesday's large gap up after testing the 20dSMA was a classic System buy signal and the potential pullback from 1288-1292 to 1271-1276 was eliminated in the first few minutes. My new cycle work suggested the SPX 1271 low was a likely cycle low, and 1275 proved to be a good buy point. Also, Dynamic RSI told us that the SPX 1271 and 1275 RSI lows did not violate the 1174 RSI low meaning SPX was possibly just completing a wave 4. When you combine a likely cycle low with a System 20dSMA test and a possible wave 4 low, you get moves like we saw on Tuesday.
Tuesday's close resulted in some overbought indicators including a small NYAD change at an extreme high. Those indicators often suggest a 1-4 day pullback or even a trend turn. However, the small NYAD change near an extreme high often occurs at the kickoff of rallies especially if there has been more than a few days of weakness. And, given that SPX made a new high early in a new cycle, a rally kickoff is the likeliest case. So, SPX may not pullback much before rallying further. However, S2EW suggests SPX is in a wave 5 from 1173 and wave 5 of 5 from 1011. Each of those 5th waves has already surpassed the length of their corresponding 1st waves and it is highly unlikely they will grow to the length of the very extended 3rd waves, so I suspect the 5th waves will grow to some Fib multiple of the 1st waves which would target 1315-1350 based on the smaller multiples. There is pivot and Fib resistance at 1313-1314. On an even smaller time scale of 5-15min charts, a backtest of 1300-1303 may be all we get today, because Dynamic RSI suggests 1302 is a mini wave 4 low and a near-term downtrend will result when it's broken. So, overall, my guess is that 1313-1315ish will serve as the end of an impulse wave from 1275 which could turn into a multi-month top OR it could end up being only the completion of 1 of 5 of 5 with ultimate extension to 1350ish. The last 3 times since 2004 that 4-5 cycles have made higher lows as we have today since July 2010, the final cycle did not turn down until its latter half. That means the rally could continue for 2-4 more weeks and reach 1350. However, the next System 3-candle sell signal could be a BIG one but we'll need to see how the 20dSMA reacts.
I am currently long looking to exit above 1310 (or stop out below 1302) and hopefully I'll be given the opportunity to go short around 1313-1315 assuming my technical indicators are supportive of a short-term top as that area is approached. My Shanghai Midnight indicator has not confirmed, and, based on past examples, I expect Shanghai to start its next big downleg prior to or coincident with SPX, so keep your eye on that index to help confirm an SPX top. Also, I expect USD to make a significant bottom in the next couple weeks probably between 74.23 and 76 thereby removing some of the SPX rally support and probably sending gold further down at that time (it may rally in the meantime). Good luck.
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