Saturday, August 22, 2009

Challenges Ahead

In order for the SP500 to make it to its measured move target of 1158.76 in the weeks ahead, it will have to prove itself by advancing above multiple lines of resistance that lay dead ahead. The first is the upsloping trendline created by the May, June and August highs that also happens to be parallel to the major median line for this rally. The second is the 1044 level which is the Oct 08 swing high and the current 400dema (400dema not shown). The third is the minor median line created by the June/July correction.

We can judge the strength of the rally by which path it takes. The weak case is if it remains in the tight channel between the major median line and the green parallel trendline 2. The most probable path is for it to break above the green line 2 and the 1044 level and oscillate between the minor median line 1 and the green line 2 until the target is hit or the time symmetry is satisfied. The strong case is if it surges ahead of all three lines of resistance. In that case, we would expect a move to the upper major trendline followed by a sideways wedging action to complete the time symmetry.

By determining which path the market is taking, traders can evaluate how aggressively they need to be exiting long positions as we move into September. Obviously, the weak case would demand the most defensive approach.

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