Thursday, October 1, 2009

A Tale of Two Counts

Editor’s Note: We just finished a glossary that will be included in our new website. It does not pretend to be all inclusive. However, we invite readers to offer technical analysis terms that they would like to see included. Hopefully we already have most of them, but we will appreciate any and all suggestions.

On Tuesday, the S&P 500 suffered its fifth decline in six sessions, with a loss of 0.3%. Breadth was negative by more than a 2:1 margin and down volume bettered up volume by a 7:4 ratio. Total volume expanded by 29%. All and all, Wednesday was a classic distribution day.

DJIA Hourly

We don’t like to get too hung up on hourly “close only” charts because different sources can provide slightly different data, and a tick here and there can make a difference in how one counts a wave. With that in mind, the data for the DJIA and S&P tell slightly different stories. Specifically, the 9/25-9/29 rally on the DJIA is a clear “five” while the same rally for the S&P is better counted as a “three.” One hourly downtick is the difference. In order to resolve this conflict “we went to the video tape” – an hourly range chart for both indexes provided by StockCharts.com. Here, the rally for both indexes is best counted as a five wave pattern.

But a conflict remains. Yesterday’s decline carried the DJIA below the 9/25 low, while the S&P remained above that low. Moreover – and more importantly – the DJIA’s decline was sufficient to both lock in the rally from the early September low as a complete pattern and to overlap the 8/28 high. By contrast, the S&P has neither overlapped nor locked in a complete rally.

So now what? It seems that the best way to bring both charts into some sort of harmony is to count the 9/25-9/29 rally as the end of a (3-3-5) “B” wave within a larger correction from the 9/23 high. If this is correct, then the overall structure for the decline is counter trend. In other words, the larger uptrend from the July lows probably has some unfinished business.

That said, both hourly and daily momentum have a bearish bias, and the S&P may still need to undercut the 9/25 low with a “C” wave to bring it in line with the DJIA. Thus, lower lows would help clear up the picture. With that in mind, we will moderate the downside somewhat to 1036-1015 in order to account for the wave relationship implied by the “B” wave rally. It will still take a decline through 992-991 to lock in the July-September rally as a complete Elliott Wave pattern. The July low (869) continues to be tactical support.

First resistance has been lowered slightly to 1070-1080. Second resistance is 1121-1156.

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