I believe we have tipped over the edge on the S&P. In this post, I’ll set out why I say this and suggest some parameters to monitor.

To summarise this blog, the Ray Wave count suggests that we have topped out with a 5th Failure and ‘normal’ technical analysis’ supports the view.  The one drawback: The Whisper Number’s sentiment reading is oversold as are the other SI readings but not to the same extent as Whisper Numbers; this is an amber signal for me not to get too aggressively short.

ANALYSIS

The chart below shows the Ray Wave Count on the quarterly trend (13-week swing) 

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CHART 1 13-W Ray Wave

In the next chart I zoom in on the price action and go down to the 18-day (monthly trend)

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Chart 2 18-D

The S&P reached the Primary Buy Zone at 1370.6 to 1431.6 (basis cash) after reaching a swing on 12-11-2007. But note that the swing high failed to reach the minimum 78.6% retracement area in an established sideways market.

Ideas corner: when you are in a sideways market, the market moves from high to low, low to high; if the market returns to an extreme without first achieving the opposite extreme’s minimum target, we can expect the opposing the price boundary to be breached. In this case, we are at the Primary Buy Zone without having reached the minimum upside target. I am looking for 1370.6 to be breached.

Chart 3 shows the ESH8. You’ll notice that the price action on Jan 4th created a gap on the day the market popped into the Primary Buy Zone. The question in my mind was whether the gap was common gap or a breakaway gap. Last night’s price action suggests the latter.

When yesterday, the market open gapped up after a rest day, and failed to close the gap in the 1st 90 minutes, I thought the S&P would rally. I closed out my shorts and went long at the bottom of the developing value area with a stop for the longs below the lows of the day. You know I got stopped out. However once the lows were violated, the probability of the gap being a breakaway gap substantially increased. I waited for a rally to reinstate and increase my shorts. 

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Chart 3 ESH8

SCENARIOS

1) The S&P has been down for 8 consecutive days (excluding one inside day); it’s time for a breather and I would expect another inside day today. For this reason, I have created Primary Zones base on yesterday’s open and close. I’d expect those zones to hold.

2) If the market breaks above yesterday’s high, then the key areas to watch are 1447 to 1443 (basis cash). Apart from being 50% of the gap, there are a number of other ratios coming into this area.

Acceptance above 1147 suggests the gap will close. That in turn suggests the market is heading back up the Primary Sell Zone. I rate this the lowest probability scenario.

3)  A more likely scenario is the market will break above yesterday’s high and the 1447 to 1443 zone will hold. Should the market reach 1447 to 1443, I’d lean against this area to go short and look for intraday setups and triggers to enter.

4) The second lowest probability scenario is another strong day down. Acceptance below yesterday’s low on volume would warn us this is occurring. Since I dislike jumping on board a directional move once the 1-d swing is statistically overbought, I’ll give trading the ES a miss if this occurs; I’ll be content to manage my current short position.

Best of luck and do take care!

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