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Saturday, July 31, 2010

The Bearish option based on the Fib fans!!!

This is a long term look at the SPX with the Fib fans, back to the 1929 crash.
This is the close-up view, and it was remarkable how the Green Fib fan, from eighty years ago acted as resistance last year to the "Hope" rally, together with the red bearish Fib fan placed on the high of 2007. The SPX is trapped in the least bullish, and bearish part of their respectable fans. Which one breaks down first will most likely set the trend for years to come. If the SPX can not break out of that bearish fan, support from the long-term bullish fan does not kick-in until the SPX reaches ~715, and on the flip side, if the SPX can break-out to the up-side of that fan, there are no long-term bearish fans left to provide resistance, a very bullish long-term trend would be very likely.
And this is a shorter time version, with a bullish fan added from the low last year. Here the shorter-term bullish Fib fan has its last point of support down around the ~1000 level, a break below here will put that SPX 715 level into play from the chart above. For now, the SPX still has room to run up towards the 1150 level before running into resistance.
The Summation Index is still bullish, and is trending higher, but the last couple of days the momentum has weakened, as evidenced by the distance between daily bars. This chart supports the idea that we are likely to head higher short-term. Just a quick warning, the SI is a great indicator, but it lags a couple of days around major trend changes. I always get suspicious when the SI starts to consolidate, as that is normally a sign a trend change is on the immediate horizon.
After reviewing the Fib fans, and the all important Summation Index, it is very possible that the SPX could run-up to the 1140-1150 level before a trend change takes place, and using those charts, here is the best way the counts would fit in with all the charts above. A Ending Diagonal for the "C" wave of 2 up. This goes back to the count where the 5th down truncated, marking the end of the 1st wave down, and now we are in an expanding zig-zag for the 2nd wave up. VERY important that 1152.08 does not get exceeded, as that would invalidate this count because the 5th wave of "C", cannot be larger then the 3rd wave in a contracting Ending Diagonal. One thing I really do like about counting this as an Ending Diagonal is that is explains why we have had SO many corrective over-lapping waves that have added a new meaning to the word frustration. Note, the Fib retracement levels were set for the bottom of the 1st wave down, and not the low of the 2nd wave.
Having the MACD and RSI diverging now is something to be aware of, it is possible we can still achieve higher highs as divergence can go on for awhile before the price action follows, but it is another sign that this rally is losing momentum.

5 comments:

  1. Great stuff Mike. I agree, a little more upside before we drop. If we had indeed started the third wave down after Minor 2, you would think that, 5 days in, we'd have a lot more to show for it than we do.

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  2. Ditto that! Great work Mike... thanks.

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  3. Terrific stuff Michael! One thing I am concerned about in the next couple of weeks is Gangster Bernanke announcing some form of QE2 to prop up the ailing economy and to kill the threat of deflation. I am wondering what that might do to the bear case and if we could even see new highs for the year. Thoughts?

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  4. Many thanks for charting the Fib Fans. The clarity they provide is a revelation. I follow your blog every single day and thank you for all your hard work.

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  5. Great chart work as always Mike, always enjoy your analysis

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