Sat 8/27/2011. S2EW vs OEW

(Update Sun 8/28/2011 11:15PM EST)
I created S2 Trading Public Charts at http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID4656059. My spending cycle analysis is on the weekly SPX chart. My EW counts and System cycles are on the daily SPX chart. The System trades and s/r are on the hourly SPX chart. And, intraday volume/TRIN/NYADV/TICK spikes can be seen on the 5min SPY chart. I'll touch them up later and occasionally publicize other charts as appropriate. You can find my old rules for DRSI in the tabs above. I will probably not be able to post during trading hours until Friday, but I'll try to post before or after hours. ES futures are currently indicating a strong opening above 1181 System resistance, so I'll push the System stop up to the next pivot at 1191+.25%=1194 if that gap up sticks. Personally, I'll probably add to my 60% short entry as SPX rallies to 1185-1205 based on RSI/vol/TICK etc and then watch the behavior of the next pullback to determine whether to lighten up or stop out. No counts are really eliminated until 1208+ unless the DRSI-based count or other factors tell us beforehand. Unfortunately, I won't be able to provide near-real-time updates this week like I've been doing the last few weeks. Good luck.

Here's an interesting study that favors 1102 as a SIGNIFICANT bottom or very close to it. It doesn't really eliminate any of our options, but it gives confidence to what we've already determined.
http://jamesgoodeonthemoney.blogspot.com/2011/08/how-now-down-dow.html
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The title of this post is not intended to disparage OEW in any way. S2EW is not as well-defined or well-evolved as OEW (Objective Elliott Waves). Tony Caldaro has positively influenced my trading experiences over the years, and I still frequently read his blog. However, I am going to use Tony's weekend post for some comparisons. Please read Tony's post at http://caldaro.wordpress.com/ before you continue here. And, you are welcome to review my latest counts from Friday at http://s2trading.blogspot.com/2011/08/fri-8262011-only-2-likely-counts-now.html.

Essentially, S2EW and OEW have narrowed things down to the same 3 counts, although I have maintained a possibly important variation of the 3rd count as a separate 4th count.

1. 1371-->1121=123 with an ABC 4th wave to 1181-1233 (likeliest 1191-1215)
2. 1356-->1102=123 with a triangle 4th wave to 1181-1208
3. 1371-->1121=ABC with truncated 5 of C
(4). 1356-->1121=w1 with 1356 as a truncated bull market top

The order of preference above matches S2EW, while OEW's preference appears to be 3, 1, 2. Tony's arguments for his order of preference are compelling. However, I see 3 downtrends in 2008-2009 and 4 downtrends in 2001-2003 that made lower weekly RSIs than SPX made at 1102. And, there are striking similarities between January 2008, October 2008 and today. Those facts make another low very possible very soon.

Dynamic RSI (DRSI) has helped identify the ends of wave structures recently, but 1208-->1121 and 1121-->1191 were both within the margin of error of being called 3 waves or 5 waves. I might be able to refine DRSI with more experience to minimize such occurrences. DRSI does favor 1191-->1136 as 3 waves but that's necessary in any of the above counts and also pretty obvious, so it only helps solidify what we already know and it helped eliminate one low-odds count. DRSI favors 1136-->1181 as a completed 5-wave structure although traditional EW would not allow that with all the overlap, and an irregular flat is possible. Friday's probable 5-wave rally is why I still give the edge to count #1 over triangle count #2. However, there is nothing to prevent a final triangle leg (5-3-5) from still developing below 1191 AND it is not disallowed for the triangle to still be in a large wave C expanding to 1191-1208 thus not completing its CDE legs until next week AND 1181-->1169 was only a 28% retrace of 1136-->1181 which is extremely weak to be a wave 2.

All in all, I think the arguments for the 3 top counts are very compelling no matter the order of preference. Technically, I can still make a case for all 3 counts as long as SPX stays below 1208 and above 1136. The triangle count is much more compelling below 1191, my preferred count is most compelling at 1191-1215 and the most bullish count #3 is most compelling above 1225-1233.

Although there is certainly some value in the above analysis especially for swing trading large moves, I developed my System to avoid the pattern bias and pattern paralysis that EW and other technicals can often cause. If I were to conservatively trade on this EW analysis alone, I would probably build a short position at 1225-1275 or a long position at 1040-1100 in anticipation of a 10-20% reversal and possible 5% drawdown. I would sit patiently idle in between. However, we have more information to rely on.

The System is currently short at 1175 with stop at 1185 (or possibly 1195 if there is a large enough gap up on Monday). The System has every reason to look for shorting opportunities. Daily 3-candle resistance is currently at 1260.23. SPX resides below its 20dSMA, 50dSMA and 200dSMA, and all of those moving averages have turned down. SPX resides way below the 62% Fib retracement of its previous cycle high at 1347. The next cycle momentum low can occur any day between August 23rd and September 21st (price low can extend a few days), but we have no signs of a bottom in that window yet. There are 3-4 larger cycles all converging on the first half of October as another important low. The 89hSMA/EMA has served as resistance as it usually does during downtrends. The VIX 20dSMA has served as support. My historical TRIN and crash stats as well as other stats seen on Cobra's site favor another low. August 2011 looks eerily like October 2008 which would allow a little more upside but not much. The Fed did not announce QE3, did not pontificate on any new tools and did push for Congressional action, but it seems some people are now predicting QE3 on September 21st due to the extended meeting. That's probably likely but only if we get more bad economic/EU data as I suspect. All of these things favor a retest of 1102 sooner rather than later. Unfortunately, none of those things totally preclude a further rally to 1191-1233 (or even higher in my count #3), but they do put somewhat of a time constraint on the rally. Most sharp downtrends need 1-3 weeks to complete. So, the current rally is likely constrained to a maximum of 1-2 weeks more but can end at any moment.

If SPX does rally higher next week, we can look to other markets for topping clues in addition to the System, DRSI and other technical indicators. Gold dropped over 10% in 2+ days and then retraced exactly 60% of that drop in 1+ day. I can see 2 scenarios for gold that fit the SPX EW patterns above. If gold retests/breaks its low, money should flow into stocks and SPX should rally until a new low in gold is established probably within 1-2 weeks. However, if gold rallies past 1840-1850 into its typical bullish September period, gold could very well test 2000 and push SPX into its final tailspin. I'd imagine gold would get a boost if the US Dollar breaks through 73.45 and completes a 15-month wedge just below 72.70. In the last couple years, that would have been supportive of SPX, but the last 2 USD drops to 73.42 and 73.45 were associated with the steep SPX drops in August. USD currently sits at 73.81. Maybe the markets recognize that USD is at a critical level in which a further breakdown would be detrimental for the economy. Regardless, I think a sharp move in USD and gold on Mon/Tues could set the SPX direction for 1-2 weeks.

In the big picture, SPX has entered a new bear market. OEW agrees. In my custom analysis, the break of 1220 did the trick and the break of 1130/1150 further confirmed it. The break of each key top in the previous bull market almost always confirms that the next bear market rally will fail even if that rally lasts months. Bear markets usually end or have their largest/longest retracements once the next key level is not broken on a lower low. So, given that 1220 and 1130/1150 broke, we know there are extremely high odds that the 1102 low is likely to be retested. The next bull market tops to penetrate are 1101.36 and 1080.15, but those are minor tops. The next major top is at 956.23. Still, I think a good argument can be made that the next SPX low only needs to penetrate 1080-1101 to keep a bearish tone over the coming months.

Another thing to keep in mind is price-volume support. It is NOT a coincidence that SPX crashed below 1220 nor that SPX found solid support at 1102. Sure, there was a Fib 38.2% retracement at 1102 but other Fibs were blazed through. Support convergence matters a ton, but one key factor was price-volume support. It's obvious on my weekly chart. Think back to 2006-2008. There were various bottoms at 1220, 1270, 1256 and 1200 with all kinds of selling exhaustion, short-covering and buying just above those levels. With the late 2006 and early 2007 strong rallies plus the strong selloff in 2008, there was just not much price-volume support at all below 1220 until 1050-1120 which is basically where SPX consolidated for 1 year from late 2009 to late 2010. What's scary is that below 1050, there is a cluster of Fib/pivot support around 1011-1019 but very little price-volume support until 840-900 where the last 2 bear markets consolidated. So, things will get a little scary below the 2010 pivots at 1040 and really scary below 1011. I doubt SPX will get that far in the current downtrend, but a scary 10-20% drop below 1011 is a picture of what's to come likely in early 2012. In addition to the pivots at 1040, the price-volume support at 1050-1120 and the next minor bear market markers at 1080-1101, there was also an overnight ES low around 1080 a couple weeks ago as well as key 2001/2006 pivots at 1061 and 1081. Thus, I am not leaning towards SPX breaking 1040-1050, but, if it does, 1011-1019ish should provide spike reversal support.


So, for the short-term, we have a likely price and time target for a rally high (1181-1233 with an outside chance of 1260ish within the next 0-2 weeks) and we have a likely price and time target for the next low (Sep 1-23 at 1050-1100 with an outside shot of 1011-1019). We are also expecting a lower or higher low in the first half of October but we'll worry about that later. As the next few days unfold, we should be able to narrow the counts and price/time targets, but I don't think there are many people projecting things to the degree I already have and we cannot lose sight of the big picture. Personally, I am looking for good short entries using my System, my big picture analysis and spikes on SPY 5min volume and TICK/TRIN spikes, and I will take quick profits and shrink my position with each surge down below 1102. Once I see bottoming signs in September, I will completely exit shorts and build a long position with the intention of taking profits into a multi-week 10%+ A-wave rally.

I plan to update my charts on Sunday and possibly create a Public Charts List that you can review at any time. If I do so, I will post an update/link at the top of this post. Good luck.