S&P Blog Monday Jan 21

Sorry for the break in continuity. I guess I am too unfit to be travelling as much as I do. I’m either going to have to get fitter or stop travelling as much. For the moment, I have opted for a personal trainer to create the habits to improved fitness!

Today I shall be writing about the S&P but whereas in the past, I focused on my thought processes, today, I’ll focus on my tools. Figure 1 shows the matrix of tools.

FIGURE 1 Matrix

I replaced the matrix with this one from Hank Pruden’s “The Three Skills of Top Trading”. The difference between the approach I use and that of Hank’s is Hank uses a more quantitative process. The matrix serves as a check list to make sure I am trading what I see rather than what I hope to see.

In the S&P, the most sensitive of my indicators, the Sentiment Indices are beginning to register oversold readings. We need to remember that these tend to lead prices by at least 2 weeks and up to 6 weeks. I use the tools to put me on notice not to get too aggressive. The time to be aggressive is when the Sentiment Index is no worse than neutral.

My main tools are in the Price Matrix. The yearly trend (12-month swing), has registered a possible Upthrust Change in Trend - an uptrend that began in 1982. However the Volume configuration is not there: the high on the Oct 2001 high was much higher than the volume on the Mar 2000 high. Nevertheless, if the signal is confirmed by a monthly close below the Primary Sell Zone (1455), we can expect minimum target of 787 to 613. Figure 2 shows the 12-M swing

Figure 2 12-M S&P

The 13-week (quarterly trend) and the 18-day (monthly trend) need Whole Point Counts (WPCs) at or below their respective break down point to confirm the change in trend in those timeframes (see Figures 3 & 4). Strictly speaking we don’t need the WPCs given that the 12-m line has turned down; but I prefer to see WPCs in the respective lower timeframes as a final confirmation.

Figure 3 13-w S&P

Figure 4 18-d S&P

If the trend is down, what would invalidate the possible signal? Preferably without the WPCs forming, acceptance above the Primary Buy Zones of the 13-w and 18-d. These are 1431.6 and 1422 respectively basis cash.

Volume and momentum all suggest further downside. The Ray Wave structure suggests 1289 to 1290 (basis ESH8) a possible area for a bounce. The 5-d impulse stats show the 5-d line has gone almost mean + 3 standard deviations as at Fri’s close. The cycle services I subscribe to indicate a cycle low this week, Tues to Thurs. If we do get a bounce, the quality of the bounce will tell us whether or not a bear market has started.

Assuming the bounce has a bearish structure, a preliminary resistance area would be 1366.5 to 1354.5 (basis ESH8). The next level to watch is the 1388 (basis ESH8), the start of the directional move down on the 30-minute Market Profile (See Figure 5). The 1388 is well below the Primary Buy Zone but given the momentum and volume to this downside move, acceptance above the 1388 would give me cause to re-evaluate.

Figure 5 30-Minute Market Profile ESH8

The question I am usually asked is: “I did not get short before the break. Should I short the market now?”

My answer: “I don’t know what the market will do. But on a risk-reward basis, with possible support coming in for both price (statistically for the 5-d and on the Ray Wave targets) and time (cycles, this week), I’d treat a short now as a high risk rather than low risk trade.

The time to get short was when the market failed at the top of the Value Area providing a possible Ray Wave Failed 5th (See chart 6). For now, wait for the bounce, whenever it may come but it will come.