S&P 500 BOUNCES OFF 100-DAY LINE -- IT LOOKS LIKE A FIFTH WAVE UP IS STARTING
S&P 500 CLEARS 50-DAY AVERAGE ... After breaking through its January down trendline earlier in the day, the S&P 500 also managed to close just over its 50-day moving average today. Combined with a pickup in trading volume on the big board, it was a good technical day. You'll notice that the recent decline in the S&P didn't even come close to challenging its (red) 200-day moving average. Which would seem to indicate that moving average lines didn't so a very good job of defining the recent downturn or the recent upturn. Which brings me back to another moving average that I wrote about last Friday -- and that's the 100-day average. I'd also like to revisit the 20-day average. Both are part of Bollinger bands.
Chart 1
COMBINING THE BANDS ... Last Friday I showed how to combine Bollinger Bands on daily and weekly charts. Let's review. The solid blue lines on Chart 2 are Bollinger bands surrounding the middle (dashed) line which is a 20-day moving average. In an uptrend, prices usually trend between the 20-day line and the upper band -- as they did from late October to the end of December. When prices closed below the 20-day line at the start of January (see blue arrow), that turned the short-term trend down and signaled a drop to the lower band. Prices trended below the 20-day line throughout the rest of January. Today, however, the S&P closed above that resistance line. That suggests at least a bounce to the upper band at 1198. Based on the chart so far, it looks like the 20-day average has done a pretty good job at defining the early January top and the early February bottom. But there's more.
Chart 2
100-DAY AVERAGE PROVIDES SUPPORT... The red dashed line on Chart 1 is a 100-day moving average. You can get that by using a 100-day Bollinger band (or by simply plotting a 100-day average). Notice that the lower 20-day (blue) band touched the (red) 100-day average before turning higher. The fact that the shorter band turned up from that point is very important. That's because the blue bands define the short-term trend, while the red line defines the long-term uptrend. In other words, the 100-day average is a major support line. The reason for that has to do with the application of Bollinger bands to weekly charts. On weekly charts, a 20-week time span is used. Just as a 20-day line provides support on a daily chart, the 20-week line provides support on a weekly chart. When applying the 20-week average to a daily chart, it translates to a 100-day average. One way to pinpoint the end of a downside correction is to wait for a market to cross back over its 20-day line after nearing support at its 100-day line. That's what's happened to the S&P 500.
WEEKLY BANDS ... Chart 3 shows how the 20-day week average works with weekly Bollinger bands. The principles are identical to the daily chart. During an uptrend, prices trend between the 20-week line (which acts as support) and the upper band. That happened between April 2003 to February 2004. Once the 20-week line was broken, prices trended sideways between the upper and lower band through most of last year (see second box). An upside penetration of the 20-week line during October started another upleg. And, so far at least, the 20-week (100-day) line is acting as support early in 2005. That's why the 100-day line is important. In my recent writings, I left open the possibility of another rally attempt which could even challenge the recent high. If my Elliott wave counts are correct, that would make the January decline a "wave 4" in a five-wave advance that started in August. While that calls for higher prices over the short-run, it brings the market ever closer to a major top.
Chart 3
