US Markets – Is the down trend under risk?

 Uncategorized  Comments Off on US Markets – Is the down trend under risk?
Sep 022010

As a trader it's very important that one remains open minded in the market to see the patterns and trends that are evolving. With the S&P surging to one of it's sharpest gains in the last 2 month's, I did try to take a view on markets like someone starting today on a clean slate.

As can be seen from the chart below - there are 2 competing patterns that are trying to overrun each other's lines of defence, namely the bearish head and shoulder pattern(red) and the bullish (potential) inverse head and shoulder pattern (IHS - blue). What is also obvious is that there have been 3 breakouts (circled in orange) that have not seen a follow through.

S&P 500 Daily Charts

In order to anticipate how this stalemate is likely to resolve, lets try to look at the longer term market structure using Elliott wave analysis.

S&P weekly charts - EW Count

It can be seen that the S&P is still progressing in its fifth wave and is essentially in a down trend. So one should expect this rally to fail somewhere along the way.  Even if the S&P does manage to break out of the IHS neckline at 1131, the probability of it failing under 1220 looks remarkably high. The reason being that the price and time have squared at 1220 high in April and (unless my calculations are wrong ) 1220 is likely to be a multi-year high. Also, a retest of the high of at 1220 would once again be within the template of 1937-38 bear market structure (see April 28th post).

So, I see this as a short term trading opportunity on the long side though I still do not find any overwhelming reasons to be bullish over the medium- long term. Also, my cycle analysis is pointing to a cycle high on the 6th of September (with 1 day tolerance) and I will be watchful to see if the market is coming under pressure under the obvious resistance levels of 1094-1100 and 1131.

PS:  I have looked at the US markets in isolation using the S&P. The SOX is well below its July lows and Russell 2000 has retested its July lows - these under performances are usually good leading indicators.