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January 1, 2009

Testing, A-B-C

Several times over the last few weeks I've postulated that the current rally in the S&P 500 would challenge the 65DMA. There were two characteristics I believed this test would carry. First, I thought the encounter would occur in the vicinity of SPX 1000 as stocks burst out of an abysmal low. Second, I believed the first encounter would fail. Due to the unexpectedly lethargic nature of the action, our first test is taking place in the low 900s. However, I still expect this first test to fail.

index chart

An important aspect of technical analysis about which all traders should be acutely aware is that TA is an inexact practice. Nothing ever happens "to the penny" except in rare, coincidental instances. More to my point, the fact that price topped about five handles short of the MA Wednesday does not indicate the absence of a test, nor should we be sitting around twiddling our thumbs waiting for a precise 65DMA tag. It may happen. It may not. But as long as the SPX doesn't gap significantly above that MA tomorrow morning, I'm going to be initiating a short position.

Supporting my theory of a near-term drop are several market indicators I highlighted earlier this week which sport readings typically associated with negative inflection points. Although a renewed plunge may occur, I'm not quite ready to call for a return to bear market lows. A drop below 850 significantly increases the odds, while a drop below 820 makes new lows almost a certainty. However, in my eyes the more likely outcome calls for a quick, corrective sell-off followed by a resumption of the mid-term rally. I still believe the rally off the November low will eclipse the 65DMA before completing.

Let's consult our old friend, Elliott, to structure my hypothesis:

index chart

It would be a bit of a messy A-B-C corrective move, but it fits on several fronts and also has the advantage of obscurity... no one else is looking for such action, yet.

Happy New year, everyone. May fortune find you in 2009...


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