S&P 500 market analysis for the week of March 16 with Turning Points by Andre Gratian

March 15, 2009
Week-end Report
Turning Points
By Andre Gratian

A 3-dimensional approach to technical analysis
Cycles - Breadth - Price projections

“By the Law of Periodical Repetition, everything which has happened once must happen again, and again, and again -- and not capriciously, but at regular periods, and each thing in its own period, not another’s, and each obeying its own law … The same Nature which delights in periodical repetition in the sky is the Nature which orders the affairs of the earth. Let us not underrate the value of that hint." -- Mark Twain

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I am going to start by showing the investor sentiment index (courtesy Sentimentrader) because this is the second day in a row that this index has shown this negative a reading on the short-term side, something I have never seen before.

This strong warning of an impending short-term top should alert us to look for other short-term negatives appearing in the market. There are several in the hourly SPX chart (above). Negative divergences have developed in all the indicators and are most emphasized in the A/D oscillator at the bottom of the chart.

After we reversed from 667 and confirmed an uptrend, a price projection was given to 745-750. The rally carried a little higher -- a sign of strength -- but after failing to move beyond 758 and establishing a double top, the SPX is now very vulnerable to a reversal.

As we know, these negative signs are only precursors and need to be confirmed. With the lower channel line at about 750, just below where we closed on Friday, we now have an opportunity to do this by breaking below that level. Next, we would want to continue below 742 and, at the same time, to see all the oscillator uptrend lines be penetrated to the downside. Breaking 742 would give us a projection to about 734. If we find good support at the 734 level, there is a chance that we will try to extend the rally to about 771, but let's first see if we have a reversal on Monday, and how much weakness it generates before we decide if we already have a top.
The black parallel trend lines which served as resistance on the upside should now provide support on the downside.

From an Elliott Wave perspective, we are looking for the completion of minute 4 and the beginning of 5. Let's recap our EW count on the daily chart below. But before we do that, let's take a look at the daily indicators.

I pointed out the positive divergence which clearly showed when we reached the given projection level of 668. As expected, it brought about a strong reversal. But now, although the hourly indicators are showing all sorts of negative divergence, there is none on the daily indicators, and this is why I don't want to jump the gun and declare a short-term top before one has been confirmed. This is also why I believe that there is a chance to go to 771 … and maybe even higher!

We have labeled the chart (which you will have to click on to enlarge to see more clearly) with the preferred count: we are now in minute wave 4, of minor wave 5, of intermediate wave 3. I will give a projection for minute wave 5 and the anticipated intermediate low after it gets underway.

In Elliott, there is often the possibility of alternate counts which can only be determined for certain after the pattern is complete, and this time is no exception. In fact, there are several alternates. But let's confine ourselves to the most probable: are we approaching the end of [the larger] wave (3) or (5)? From a strategy standpoint, it will not matter too much, since either one is capable of bringing about a very strong reversal, and that will give us time to make that distinction. In either case, we still have to complete minute wave 4 and 5 in order to complete minor wave 5 -- unless wave 5 decides to go AWOL, which happens occasionally! That would mean that 667 is the intermediate term low.

What I am trying to convey is that we are at a critical juncture, and if we are to get it right, we can't depend on EW to give us perfect text-book patterns every time. Thank Goodness we have a whole array of other tools to help us if the EW picture gets murky. I believe that by the end of next week, the market will have clarified its position.

Andre