Tuesday, March 24, 2009

Our first B wave has started

With a test of yesterday's high, a failure, and a close below the median line (see top chart) and the hourly 8SMA, we have the technical signals that would warrant our first real move down since this rally began. So, the next question is what level will the market hold.

Past experience says we should test the breakout of the trendline. My EW knowledge says we should retrace a minimum of 38.2% of the rally. Looking at support and resistance lines, we have strong support in the 740 zone. We also have a 50% fib retracement at 744. The trendline looks like it could be tested anywhere between 740-760 depending on how long it takes to get there. Also, we can penetrate a trendline, but we should only spend 2-3 hourly bars below it before we bounce back up. Should this zone not hold a move back down, then my next best guess would the 700 area. The 78.6% retracement sits at 700 and we also have strong support in that area.

Now, as for charting this last move, I have been really puzzled by the more than apparent 3 wave move off of 940. I have also been puzzled by the apparent 3 wave move off of the 11/4 high. Well, now that we have hind sight I've relabeled the whole move off of the 10/27 low a wave 4 triangle. This fits the EW general rule of alternation between waves 2&4, and 'solves' a number of the charting mysteries that was before me. So, with that said, we'll move on to finding where primary wave 2 might end.

EW states that corrective waves often get stopped at the smaller degree 4th wave of the previous wave. If the previous wave subdivided, then the next wave 4 will also provide an area of strong resistance. So what does this mean.
- Our previous wave 4 of the primary wave 1 was a triangle. That means that the apex of the triangle will provide strong resistance to our primary wave 2. The apex was at 874, so that is where I think our first a-b-c will end. Our next wave 4 high was at 1041, so that is where I think our primary wave 2 will end (if not before). 38.2% retracement from the Nov 07 highs is 1012, so that is also an area that will provide strong resistance.

How long will it take? Well, our corrective waves thus far have taken about 50% of the time of the previous wave to correct. With the first bear leg taking 16 months (Nov07-Feb09), then that gives us a target of 8 months. Since we may likely correct to only 38.2% of the whole move, then I have a 4-8 month target.

Good luck, the next months may prove difficult for all but the very best of us. Let's work hard and keep our trading rules so that we're all counted as such.


  1. Nice chart analysis. Thanks for your work. Interesting profile as well. Good job.

  2. Rich,
    I, like many, am waiting for a retest of the S&P 750 level. Unfortunately, I am holding a large position of DXD waiting for the ride down that was sure to happen! Wave counts were off a bit. Still thinking that the next few days could bring a retrace to 750. Your thoughts?

  3. Randy, I'm leaning towards a move towards 860 by end of month, but a move below today's low should trigger some massive selling. Any move above today's high would likely bring in more buyers and push us to the spx 860 zone.

  4. Rich, Do you think if we do push to 860 to end the advance, should we pull back to 750 or would the resistance level be pushed higher?

    Good work on your blog. I have only been reading it for a few days, but I enjoy it. Do you post or talk about your investments? Buys/sells?

  5. strategiclr, I still think we pull back to the 740-760 area even with a push higher. I would expect the broken trendline to be tested at some point. As for talking about my investments, I generally just day trade, but I do buy calls and puts when I think the market is gearing up for a big move, so sometimes I'll mention what stocks I'm looking at when that happens.