Swing trader's perspective on the S&P 500

Today in the equities markets was, like the two days preceding it, a good example of why it's better to trade technicals than fundamentals. There's still plenty of bad fundamental news, such as the information in the "Got Bearishness?" post yesterday about p/e ratios in the S&P 500 and why they portend a move much lower. Speaking of technicals though - and without trying to talk down the markets because that's a losing proposition too - here's a look at why swing traders still need to remain on guard. The essential point is that volumes on the upswing haven't put the confirming stamp on this being the first rally in a trend reversal. The volumes on declining days during the week or so prior were higher. You'd have to argue those were capitulation selling volumes, but I think they are also easily seen as selling on the move under the November 2008 lows, which were tested today. The volume on the move up since Friday should classically be greater, in order to signal we're witnessing something significant enough to pull the markets out of the decline they've been in for months. I've also marked on the daily chart (below) additional signs of caution, such as the resistance levels at the .382 retrace back to the February highs and the 20-day moving averages (and Bollinger Band mid-line).

Normally a swing trader (that's mainly what I do) is looking to see whether, after several good days up, the market can sustain an orderly pullback and then a resumption upward to justify buying the market. Even without the better volumes that I'm looking for, I may still give it a try on the long side, IF (1) there's an orderly pullback and (2) a trigger day that closes above the high of the prior day ... but I would not view it as necessarily having a high probability of providing a lasting rally. These types of considerations make the difference between a head fake bear-market rally, and the real deal. For example, a continued move higher could see the S&P 500 get to its 50-day moving average at about 800, but there doesn't give a huge risk-reward calculus for a swing trade. A pullback that might, for example, test the trendline I drew yesterday and drew again on the daily chart today, would give a nice pop if it let to the 50-day moving average, with less risk (of going back under 666) than coming in at today's level.

Here's my daily chart, and below that my weekly chart. You can see that a continued move higher perhaps to the 50-day MA would also test back to the mid-line of the weekly chart's downtrending channels. Further below, I'll discuss Elliott Wave very briefly.

Now remember, my Elliott Wave markings on the weekly chart are just my own views, which I marked there around the end of December / early January. I know that Tony Caldaro's OEW count is different, and there are others with different EW counts as I've posted here too. Doesn't matter to me right now ... I view today's action as confirming that the move down from the February highs is most probably a 5-wave move, as I'd come to suspect. Question being obviously, "is it enough" to put the lows in? That depends on the bigger picture Elliott Wave count. Personally, I tend to see this 5-wave move as either a third of five (with today being the finish or part of the finish of wave 4, consistent with Andre Gratian's EW counting if you remember his weekend update posted here (check the Turning Points label in list at right)), or as a first of five. I know that's rather bearish, but I don't know that getting to the .618 retrace on the monthly chart I marked is really "enough". For one thing, I am not confident it's the correct .618 retrace level. As Tony Caldaro's monthly chart shows, the level of 640 would be a retrace back to the lower lows that the SPX made back around 1974. This would correspond nicely to the Dow Jones Industrial Average level of 6427 that I've got marked as the .618 retrace back to 1982. (By the way, my numbers may be off very slightly by a couple of dollars and cents; so approximately Dow 6400-6450 would do.)

Well this should be enough to explain how I'm viewing the current market levels. For swing trading, my hat's still off to anyone who bought the close Monday, who was in the green today, as I've been happy to TMAR longs yesterday and today. Daytrading, is as I see it, whether or not I'm able to post any charts related to that during the day. From here forward, from my swing trade perspective, I'd need to see a combination of the VIX falling under the support levels I identified in my prior post, as well as a recognizable trend reversal pattern on the daily chart. Naturally, if that happens, I'll be posting it here as soon as I can. Since a classic trend reversal pattern would require at least a few more days to play out, we cannot rush it ... but don't worry, it will either show up - or not!