Is This What We Have To Look Forward To?

Uncanny Close In The Qs

The January range displayed its predictive effectiveness this year as the April high and today's close were precise multiples of the January range above the January high.  Long entries were possible on a breakout above the August high which was above the January high, and the November pullback which remained above the April high. Shorting opportunities were available in June and August against the January high.

I will be reviewing the trading strategies in the strategy tracker for 2010 and giving my outlook for 2011 next week.

Wave B of (B) Is Nearing Completion

I've shown what I believe to be the most likely count for the Qs with a zigzag for wave B.  The correction from the April high would then either be an expanded flat or a running triangle or even possibly a running flat with 5 waves down terminating above the July low.  A running flat was seen in the middle of the 2002 to 2007 rally and could show up again.  It would probably be best at this point to wait for the secondary reaction in wave [ii] or [a] of C down to complete before getting short or adding to existing short positions.

While not shown, one possible alternate is that the move from the early November high to date is part of a 4th wave expanded flat correction and the Qs could see another new high.  That would not eliminate the above expectations for an expanded flat or running triangle, but it would change how it is counted.

Mirror Mirror On The Wall

In a somewhat strange manner the highs and lows of the Qs since the March 2009 low have formed an almost perfect mirror of the decline from the October 2007 high.  The only significant difference being that the rally is stretched in time compared to the decline.  At some point this unusual behavior will break down, but if the correspondence continues to hold up, we may be looking at a significant decline in the very near future.

Happy Holidays

The SP500 appears to be completing a small degree 4th wave triangle while the Qs seem to be completing a 4th wave zigzag in a ending diagonal triangle.  My best guess is that Santa Claus will deliver tomorrow followed by muted selling next week with perhaps one more attempt at a high by next Thursday.  The last day of December is usually a down day while the first day of January is usually an up day.  However, either on January 3 or right after a correction should begin.  Once underway we can begin to assess the prospects for the extent of the correction.  At a minimum the April high should be tested.

Posting will be minimal until the end of next week unless something dramatic happens.

VIX Approaching 3+ Year Low

For the fourth time since October 11, 2007 the VIX is approaching the 15 level.  Each time this occured it was accompanied by a selloff.  Will this time be different?  It's possible, but beware a false breakdown in the VIX that sucks in the last of the bulls.

I suspect we may see a new 3 year low in the VIX coinciding with a market top.  However, the subsequent rise in the VIX should be limited to the July 1 high of 37.58 which is the origin of the declining wedge pattern.  This should correspond with a wave  C or 2 low.

Any sustained break of the 15 level would indicate the SP500 is ready to run to its all time high now instead of later.

SP500 At Resistance

The SP500 has neared resistance at 1256.98 at the March 21, 2008 low with a high today of 1255.82.  However, this is an area of weak resistance.  I define weak resistance as a previous swing low that has been penetrated by a subsequent swing high.  Strong resistance is a previous swing low that has not been penetrated.  The July 15, 2008 low of 1200.44 was a level of strong resistance.  Price did not penetrate that level again after closing below it on the weekly chart in 2008.  We can see that this was a strong resistance level in the price action this year as it has taken 3 attempts for the market to successfully move above 1200.44.  We should say successfully so far, as a failure to hold support at that level now would likely be viewed as a major failure.

When the market hits an area of weak support or resistance it is unlikely to hold that level.  We can see that once the SP500 failed to hold support at the 5/12/06 high of 1326.70 for the third time in 2008, the previous levels of weak support from the 2002 to 2007 rally gave way rather easily which partly explains the severity of the crash that occured in 2008.

I have pointed out the likelihood for an intermediate to long term top at the current time window.  Should the market top in this area, there is weak support at 1219.80 and 1200.44 and strong support at the August high at 1129.24.  The previous July low of 1010.91 is an area of weak support.  While double bottoms are common, a low that occurs well above a previous support zone creates a level of weak support.  The next lower level of strong support is the 6/12/09 high of 956.23.

Based on the above, I expect that a top that occurs now would likely try to hold the 1200 to 1220 zone.  If that zone fails, the 1100 to 1130 zone would probably halt the decline at least for a sizeable countertrend rally.  If the 1100 to 1130 zone holds, then a new base should form to propel the SP500 back to the vicinity of its previous all time highs.  If that zone fails, I would expect a retest of 950 to 1000 to follow before another rally could materialize.

The one thing to really keep an eye on here is if the 1256.98 level is taken out, there is little to stop the SP500 from racing ahead to its all time highs as there are no strong resistance levels remaining.