SPX Resistance or Blowoff?

By: Dominick | Sat, Aug 19, 2006
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In our July 23rd update I stated:

"The markets are playing tug of war, as both bulls and bears fight for this territory. In my opinion, one side is about to lose real soon and the markets will start to trend out of this range."

The SPX had closed that week at 1240.29. I have repeatedly stressed how important the 1242 area is in my work on most updates. Our members had many good laughs in the months of June and July as the SPX seemed to vibrate around this number. In hindsight, you can see how easy this important # was tested and launched upon! Since that last update, the market never went near 1242 again. It started to advance that Monday morning in an impulse move but then painted a very choppy overlapping move to its Aug 4th high of 1292. From that high, the bear trap began. We had a nice ABC from the June lows into that Aug 4th high. There was your perfect B wave that would have given us a nice 4 year cycle low in October.

On August 10th and 11th we saw the SPX put in a double bottom at the 1261 area, and hasn't looked back since. It has been a brutal short squeeze as the bears were convinced that the market had topped and was declining in a 3rd of a 3rd, again. Even Friday's close showed that we still have some last minute bears that refuse to give in, sending the SPX to another closing high as they covered into the closing minutes. Once again the sentiment was so bearish a week ago, it was obvious that a rally was nearby. I had expressed to members that between the crash calling that was going on, and a target at 1360 that never was achieved, I was turning bullish.

Looks like we now have the last finishing touches of an impulse leg from either the Aug 10th or 11th low. Along with that I have a SPX-VIX sell signal into the close and we are up against a lot of resistance as seen in the chart below. Combine the three, and we have the ingredients for a healthy consolidation/pullback into the next week. Besides, this leg seems to be ahead of itself timewise. After that pullback, I expect to see additional gains as the SPX and Dow try to make a new high for the year. We will be monitoring that pullback very carefully, as we want to make sure that we didn't just finish an extended ABC up to Friday's high.

As we monitor the SPX, my eyes will be glued to the OEX as it has a textbook pattern. The chart below shows you how this index has quietly advanced to within points of its old high! It clearly displays waves 1 through 4, and now in the final stages of a diagonal 5th. There is a cluster of targets just above it at 605/615. As price approaches that area, the RSI will also reach t/l resistance.

In my opinion, what this market decides to do with these targets will tell us the outcome of the rest of the markets. If its intentions are only to reach the lower band of targets, the SPX and almost every other market will not make new highs. With all the work that the SPX and Dow seem to be doing, it might make sense to think the OEX will travel high into the cluster, or begin to lag.

Many traders last week have complained about every little thing they could cling too, from the NASDAQ and Russell lagging, to volume and breadth. Have we forgotten that if the market were about to make A top that's exactly something you would invite, rather than short and complain about? How easy we forget how long the A/D line lagged in 1999/2000

My focus will turn to the bearish side when we make a high, and then spend time looking for areas to prove a possible important top might have been made. At the moment, if a new high is out there, I have a 1360 target for mid September, knowing anything above the May high will do. We will monitor market structure, Fib levels, cycle work, and most importantly sentiment.

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Author: Dominick

a.k.a. Spwaver

This update is provided as general information and is not an investment recommendation. TTC accepts no liability whatsoever for any losses resulting from action taken based on the contents of its charts, commentaries, or price data. Securities and commodities markets involve inherent risk and not all positions are suitable for each individual. Check with your licensed financial advisor or broker prior to taking any action.

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