(Update Thu 10/6/11 11:45AM EST)
System support at 1133 was never violated and has now risen to 1135. SPX has rallied to 1160 above the 89hEMA/SMA and just below the 20dSMA at 1162 and just below the downtrend channel from 1220. In fact, depending on how thick your pencil is and how accurate your chart drawing is, one could argue that the line parallel to 1114-->1075 was just hit at 1220-->1160. That makes the wedge down from 1220 unlikely since a wedge should get more narrow, but it keeps my wedge count from 1231 in the forefront but on life support. The US Dollar has fallen below its overnight lows, and VIX has fallen well below its 20dSMA. The odds for a lower SPX low are falling by the hour due to the closing cycle window and improving technicals, and I may virtually eliminate the possibility if SPX cannot get downside traction within hours.
The Friday jobs report looms and could be a catalyst in either direction. The re-addition of 45K striking Verizon workers could aid a bullish outcome, but it's up against waning employment stats for most of Aug/Sep.
Besides the upper SPX channels at 1160-1175, I'll be watching the UUP chart which I made public and approximates the US Dollar intraday. It could also be completing a wedge that may or may not need 1 more leg up. Just like SPX, it is approaching channel and trend lines. Even if the SPX/UUP channel/trend lines are not violated today or tomorrow, that merely maintains, not improves, the possibility for a lower low.
As I've mentioned here many times and as you've personally witnessed, SPX has pushed bearish and bullish technicals to the edge many many times since May (1356/1347, 1102/1121/1136/1114, 1231/1205/1220/1220/1196). So, the same thing could be occurring yet again. However, the difference this time is that numerous cycle windows are closing this week and into next week and 7 of 10 bottoming indicators were triggered on Tuesday adding considerable weight to the 1075 low with the diminishing possibility for 1 more low. I wish I could be more definitive. But, that explains why I am going to move the System to neutral and then long mode over the next 1-4 days as I described earlier. Good luck.
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ES futures are currently fairly flat (now down 7 as I finish this post) but suggest that SPX could test 1150ish where the 50-62% retracements of 1220/1196 and the 89hEMA/SMA reside. Yesterday's NYADV and ISEE suggest a reversal down is imminent, and USD is up strongly this morning in support of that outcome.
There are 3 potential wedge counts. The one I saw commonly blogged was a completed 5th wave wedge at 1231-->1075. That may be right, but, for the moment, I still see the reasonable possibility for 1 more leg down to complete a wedge from 1231 or 1220. Those channels and counts are drawn on my public #3 60min chart. You'll notice that technically SPX could rise to 1160-1175 before bumping into the wedge upper channels, but a wedge should get more narrow, so I think it's important for bears to defend a lower level like 1145-1155 and then see a 2-3 day swoon below 1075 to probably the 1050s.
In hindsight, I could have placed the System in neutral or long mode at the 1075 bottom since 7 of 10 bottoming indicators were triggered, but the last-hour Tuesday rally was the largest such reversal since 1985 and would have been scary to jump on long at the 1103 or 1118 candle highs. So, I don't feel too bad about missing a rally and exiting our short position from 1188 as charted on my public #3 60min chart. The System has made a ton of profits since May and since August with a short bias.
However, it is about time to put on the tear-away bull suit. Take a look at my public "SPX 60min 2candles" chart. It shows you where the System would have entered long (thick blue horizontal lines) if I had switched to neutral or long mode after a downtrend matured. Basically, neutral mode calls for entering and exiting every 2-candle s/r break with a few points of leeway upon initial entry. Short mode calls for entering each 2-candle support break (currently 1133) and exiting each 4-candle resistance break with leeway early in the downtrend. Long mode is the exact opposite. Such a strategy would have done extremely well. I bring that up not to second-guess my decision to stay in short mode, because that proved highly profitable and fit System cycle guidelines, but to make you less fearful about taking the next long entry.
I've mentioned before that I backtested my System in opposite fashion meaning I tested it in long mode when it should have been in short mode and vice versa. The System lost money but not as much as you'd think. The candle system generally keeps you out of huge losers, and using cycles and other technical indicators generally keeps us on the right side of the trend. So, yes, a double crash is possible below 1000, but, my cycle work says it is unlikely and even if we go into long mode before then, we'll almost certainly be stopped out before real serious damage. About the only thing my System can't protect against is a 5-10% overnight move, although you could trade futures or buy overnight protection if that is a worry.
Anyway, I'm telling you all that because I am going to flip the System into neutral mode after the next 10+pt hourly drop that ends below 1121. For now, the System is in short mode, so it will enter a new short position after the next 2-candle support break (currently 1133). It's safest to switch modes once you see a large hourly candle, because then there is a nice 2-candle buffer for any retracement rallies. But, once I do switch into neutral mode, the System will exit its short position on a break of 2-candle hourly resistance. Once I see more oversold indicators and SPX down to at least 1100-1120, I will move the System into long mode which means the short position will be flipped to a long position on any 2-candle hourly resistance break and held until a 4-candle support break occurs. I hope that all makes sense.
The bottom line is that the System is prepared to imminently start a short position but will be shifting into neutral mode as SPX reaches 1100-1120 and then long mode shortly after that. So, the System should fair pretty well if 1075 was the bottom or if SPX makes a lower low. The next cycle low is scheduled for November 1st, so a 2-4 week rally is likely after this next SPX low followed by a higher low around Nov 1st. Good luck.
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