Awaiting the Peak in the Countertrend UpMove
If nothing else, then the next few days will make or break the current upmove in the equity market. Either the advance will feed on itself in conjunction with -- and reaction to -- all of the government-generated news, programs, and monetary support designed to lift the economy out of its deep recession, or, alternatively, will reveal itself as a classic, sharp recovery rally that turns out to be a massive Bull Trap prior to another vicious downleg.
Right now, my work is telling me that although the situation feels like the former, I should treat it like the latter-- and prepare for a resumption of the dominant bear market perhaps in a matter of hours. We shall soon find out.
Looking at the 4-hour chart of the S&P 500 e-mini futures contract, the combination of Friday morning's upside break of a significant 1-month down trendline at 849.50 and the prospect of government action on the stimulus plan and TARP 3 in the upcoming hours/days propelled the index sharply higher towards a possible confrontation with a very important prior rally peak established on January 28 at 876.00.
My pattern and momentum work argue for still higher prices in the index and its corresponding ETF, the S&P 500 Depository Receipts (AMEX: SPY).
However, all of the action off of the January 20 low at 797.50 remains countertrend, which when complete should usher in a very nasty downside reversal and resumption of dominant downtrend weakness.
But first things first: Where are the next upside targets from where a peak and downside pivot reversal might occur? Target #1 at 859-862 was met on Friday. Target #2 at 869-873 was touched during the final hour of trading; however, no selling pressure emerged.
Upside continuation Sunday evening into Monday morning that stalls in the 870-873 area, followed by a decline that breaks 858, will be initial indication that the upmove is exhausted. If no such sell-off unfolds, then I will be setting my sights on Target #3 at 883-886, which will imply a hurdle of the 1/28 at 876 and continuation to 883-886 prior the anticipated downside reversal.