ELLIOTT WAVE COUNT FOR S&P 500 - REVIEWING LONG-TERM RETRACEMENTS FOR SPY AND DIA - INTERNATIONAL INDICES ALSO NEAR KEY RETRACEMENTS - XHB CHALLENGES RESISTANCE AS XLF TESTS SUPPORT
ELLIOTT WAVE COUNT FOR S&P 500 ... Link for todays video. Chart 1 shows an Elliott Wave interpretation for the S&P 500 over the last three years. There are currently four waves with a potential fifth wave coming. Wave 1 extends down from October 2007 to March 2008, Wave 2 extends up from March 2008 to May 2008, Wave 3 extends down from May 2008 to March 2009 and Wave 4 extends up from the March 2009 low. Based on this count, I view Wave 3 as the prior decline from which to base my retracement. There are, of course, other interpretations out there. Remember, technical analysis is part ART and part SCIENCE (subjective versus objective). For example, the science is the five wave sequence. The art is deciding where to label the waves. The idea is to introduce enough science to back up the art.
Chart 1
Here is the breakdown of my Elliott Wave count. First, I am using a 5-day EMA to smooth out the daily data. Second, Wave 3 should be and is by far the biggest of the four waves. Third, Wave 3 subdivides into 5 Waves, which makes it an impulse move. Impulse moves are in line with the bigger trend. Corrective moves run counter. Fourth, Wave 4 retraced 62% of Wave 3, which is normal for corrective wave retracements. Fifth, Wave 4 subdivides into an ABC correction, which is typical for corrective waves. Wave A and Wave C are pretty much equal. Sixth, notice that Wave 4 has yet to exceed the low of Wave 1. Based on all of these items fitting together, it sure looks like a five wave decline with Wave 4 nearing its end, if not already. The most bearish interpretation calls for a Wave 5 move below the Wave 3 low. However, a truncated Wave 5 is also possible and such a fifth wave might extend to support around 900.
REVIEWING LONG-TERM RETRACEMENTS... I showed short-term retracement resistance coming into play in Fridays Market Message. Long-term retracement resistance levels are also in play on a number of weekly charts. First, lets review the Fibonacci Retracements Tool, which is used to identify key retracements. The Fibonacci Retracements Tool shows the 38.2%, 50% and 61.8% retracements. The 50% retracement actually stems from Dow Theory. After an advance or decline, Dow noted that it was common for a counter trend move to retrace around 50%. The 61.8% and 38.2% retracements stem from the golden ratio (1.618) and the Fibonacci number sequence. The Fibonacci sequence was discovered by Leonardo Pisano Bogollo, a middle ages mathematician from Pisa. You can read more on this fascinating sequence by Googling Fibonacci or in Wikipedia.
Once deciding to use the Fibonacci Retracements Tool, users must pick the move from which to base the retracement. This always opens up debate - lots of debate. For example, I chose to base my SPY retracement on the May 2008 to March 2009 decline. Many readers wonder why I did not use the October 2007 to March 2009 decline. There is nothing wrong with using this decline, but my preference is for the May 2008 to March 2009 decline because it represents Wave 3 down (as noted above). I view Wave 3 as the prior decline from which to base my retracement. Chart 2 shows the S&P 500 ETF (SPY) with the 62% retracement around 110.43. The ETF surged above this level in early January, but fell back and it looks like resistance is forming. With the bounce over the last two weeks, SPY forged a reaction low upon which to base support. A move below this low would forge a lower low and officially start a downtrend.
Chart 2
The bottom indicator window shows 14-week RSI. Notice that the 40-50 zone acted as support during the uptrend (until January 2008) and the 50-60 zone acted as resistance during the downtrend (until July 2009). RSI is currently testing support at the top of the 40-50 zone. A break below 40 would turn long-term momentum bearish. Chart XX shows the Dow Diamonds (DIA) with similar characteristics.
Chart 3
INTERNATIONAL INDICES ALSO NEAR KEY RETRACEMENTS... The next charts show five international indices with the same settings as above (weekly charts, Fibonacci Retracements Tool and 14-week RSI). Some have retraced more than others, but all are currently trading in the 38.2% to 61.8% retracement zones. First, notice how similar these charts look. All declined sharply from May 2008 to March 2009 and rebounded with big advances the last 11 months. Second, notice that all bounced off their 40-week moving averages over the last two weeks. Third, notice that 14-week RSI dipped below 50 three weeks ago and bounced back above 50 this past week. A moment-of-truth appears to be near. These indices forged higher highs in early January and held their 40-week moving averages with a bounce this month. Support has been set and further weakness below these rising 40-week moving averages would be quite negative.
Chart 4
Chart 5
Chart 6
Chart 7
Chart 8
XHB CHALLENGES RESISTANCE AS XLF TESTS SUPPORT... The Homebuilders SPDR (XHB) and Financials SPDR (XLF) are in the spot light for different reasons this week. Perhaps the first to break will provide an important clue on the rest of the market. Chart 8 shows XHB challenging resistance from its prior highs. The ETF broke resistance at 14 in July and then traded sideways as it established resistance around 16. There have been at least three attempts to break above 16. A clean break above the 2009-2010 highs would be bullish and signal a continuation higher. Looking at the move since October, there is a slight uptrend with support around 14.5. A break below this level would be bearish for XHB.
Chart 9
While XHB challenges resistance, the Financials SPDR is testing support. Both industries benefit from a low-interest-rate environment. Banks are also able to take advantage of the steep yield curve. Chart 9 shows XLF trading flat since August and testing support around 14. A move below the October-February lows would break support and argue for at least a retracement of the March-September advance. Should support hold, a break above resistance would signal a continuation of the prior advance. Will XHB break resistance first or will XLF break support? Which one breaks first could foreshadow the direction of the overall stock market.
Chart 10
