Clarifying Mid-Term
Downside Targets
Now that 1040 on the
$SPX has been violated (on Tuesday), I am beginning to clarify downside targets
for a possible downside move. You will
notice that I am starting with a simple weekly chart using Elder’s Impulse Chart
settings (below). As time progresses, I
may find a need to move down a time frame to a daily chart and/or change my
chart settings to refine and/or further clarify these targets. I also like starting with the weekly chart
because it helps us focus on the big events and reduce noise.
Using this weekly
chart, I would first point out that the tape action around the 1131 area
technically signaled the end of the rally by rejecting its 200 EMA (see arrow)
and then confirmed that rejection with a large bearish engulfing
candlestick. Some might consider this a
right shoulder in a larger pattern, but I do not. I basically see a “broadening top”.
I would add that the
action down from the top has clearly translated into a series of shock events
for the markets (including fat finger day).
Personally, I have been trading the shock events rather aggressively for
two months now. It is a strategy that
has worked well for me, but I would suggest that eventually those opportunities
will disappear. I am not going to be
surprised by a light volume, rather boring, and meandering tape during the rest
of the summer.
Should fierce selling
visit us again and a major decline resume, my first downside target (and major
test of support) for the $SPX is now 975.
This level not only corresponds with the August 2009 lows, but it also
represents a 20% decline from the April 2010 high. My lowest downside target (at this time)
would be the 62% retracement of the recent rally near the 878 area (which also
corresponds with the July 2009 lows).
Given the light volume expected over the summer, I would note that a
move down could take several months.
Comments About My
Perceptual Basis
Why is the 975 area
important to me? Because a decline
greater than 20% would invalidate the currently perceived bull market. There are still technicians out there that
see “their” bull market continuing due to the large move made in the
March 2009 rally. Therefore,
psychologically 975 is an important level to violate in the bull vs. bear
debate. I would similarly note that a
market decline could easily end just above 975 (e.g., saving bulls from
destruction of their perceived bull market).
So …. if you think that 1040 has been a difficult area to break, just
wait till the $SPX gets near 975.
Finally, it may also
be important to clarify here that my general personal perception is that we are
in a secular bear market (going back to 2000 or so). Therefore, the March 2009 rally is actually a
counter trend rally, and we are currently in the process of resuming the
broader secular bear market.
Next Post will be at 4:00 p.m. EDT. You can find it by clicking on the New Post below. Be a friend and shepherd someone along…..
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