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May 29, 2007

Update of the SP 500 Index
by David Petch

The following was published for the benefit of subscribers on May 25, 2007.

The decline in the S&P 500 and other broad market indices likely was a shot across the bow for what lies ahead later in the year. Technically the S&P could have completed the move up, but technical evidence suggests that a topping formation will develop over the course of the summer before a sharp decline in September/October.

The upper 55 MA Bollinger band is still rising, suggestive a top has not yet been confirmed; the lower 55 MA BB has curled up to confirm a top is in so at some point over the next few weeks, the upper 55 MA BB should curl down. Notice how low the lower 55 MA BB is in relation to the lower 21 and 34 MA BB's; given the depth, it is unlikely that we are going to witness a crash but rather a topping formation lasting until late August/September. Fibonacci time extensions of various waves are shown mid chart, with September 24 and 25 overlapping. This overlap sets up the possibility for a point in the future where the S&P begins to break down. Short-term stochastics have the %K beneath the %D, with a negative divergence that has persisted for the past 7 weeks. Given the technicals, it appears the S&P has further downside to approximately 1480 before grinding higher and remaining range bound over the course of the summer.

Figure 1

Red lines on the right hand side represent Fibonacci price projections of upward trending wave price action projected off their subsequent lows. Blue lines represent Fib price retracements of the move from the March low until the recent high. Areas of line overlap form Fib clusters, which indicate important support/resistance levels. The S&P has found support at a Fib level, with a lower Fib cluster around 1480 (the likely low for the current decline). Moving averages are in bullish alignment (50 day MA above the 155 day MA above the 200 day MA), with the 50 day MA acting as support at 1477.02. Full stochastics have the %K above the %D with no sign of a crossover. When a crossover occurs, it will indicate a top has firmly been put in place. Given the powerful uptrend in the S&P, it makes stating a definitive top is in place impossible. Minimally, the pattern presented in Figure 4 is complete, but the pattern could develop into a complex triangular formation. Many people are now trading the S&P at the same angle and when this occurs, the complexity of the patterns only rises. I still would not recommend anyone short the market because the whipsawing action could result in substantial short-term losses. Playing with puts, calls or shorts should only be done with money you would use on a trip to Las Vegas.

Figure 2

The weekly S&P 500 chart is shown below, with Fibonacci price retracements of the decline shown on the right hand side (denoted in blue). Notice how the S&P has moved within Fib channels since late 2003; every time the S&P broke to a higher Fib level, it eventually back-tested the breakout before going higher. The S&P fully retraced the decline from where I start the Elliott Wave count, further confirming the move likely has terminated. Just because the S&P has put in a top does not necessarily mean a crash is going to occur. Figure 1 showed how low the lower 55 MA Bollinger band was relative to the index indicative a topping formation is likely to develop. The lower 55 week MA Bollinger band is at 1168.68, down from last week's value of 1170.97; there is no confirmation with the weekly lower 55 MA BB that a top is in (it likely will be a lagging indicator). Full stochastics have the %K above the %D within the confines of a rising stochastic wedge. Should the %K fall beneath the %D, it will confirm a top has been put in place.

Figure 3

The mid-term Elliott Wave chart of the S&P 500 Index is shown below, with the thought path indicated in green. I have not provided any labeling scheme for the current decline due to there being 5 distinct ways of labeling the pattern. The S&P should decline to around 1480 before bouncing higher. Expect the S&P to remain within a trading range of 1400-1550 over the course of the next 2-3 months before a fall correction. If the S&P has an impulsive move from 1480 to 1450, then that would require the mid-section of the chart to be labeled as a flat (3-3-5) (the current move up would represent the terminal portion of the flat). The S&P pattern is extremely complex, so if one has a hard time following this, no worries, just remember the possible ways the pattern can develop.

Figure 4

The long-term Elliott Wave chart of the S&P 500 Index is shown below, with the thought pattern forming denoted in green. The expected pattern is a topping formation and I am still formulating how to label the lower Degree pattern. Due to the minimum of 5 different ways to label the pattern, it suggests it is not yet complete. The Elliott Wave count up to Minor Degree (denoted with pink lettering) is accurate, but the lower Degree must be kept in an open reading frame until further wave structures better define the pattern.

Figure 5

David Petch
TreasureChests.info

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