Why is this pullback in the markets more significant than any other in the past nine months?  There is a negative divergence which set up the turn in the McClellan oscillator – higher prices, but lower market breadth.  This is exactly the reverse of the positive divergence which preceded the market bottom in March 2009.

It’s been quite a time since my last post.  The real reason is that I was out of the rhythm and beat of the markets since covering a multi-year short bet in March.  I didn’t have the force of character at the time to flip long, at an incredible opportunity cost to my trading account.  The lack of clean pullback from the March 2009 lows has provided very few good entry points.

I have also come to realize the futility in relying on other trader’s calls – most notably Doug Kass’.  I am relying much more on my own insights going forward, with links noted wherever possible to relevant market insights.

The markets are experiencing the second day of pullbacks from multi-month highs.  In particular, the structure of the S&P 500 suggest the possibility of a completed 5-wave series given the near-perfect Fibonacci ratios between successive waves.

Thanks to scooter for posting this updated AdvancedGET daily chart of the S&P 500 futures.  There is a rather large make-or-break (MOB) zone at the 980 – 1,000 century mark.  This target level was originally called in the Advanced GET blog postings starting on July 16.  At that time, the Elliott wave count was putting in an intermediate term wave 4 low.

Once again, we are looking for signals of an ending 5-wave count and trend change.  This should be accompanied by a clear divergences of prices vs. momentum – higher prices, lower momentum compared with the previous wave 3 highs.

The S&P has completed a 50% retrace of the previous leg down from the February highs.  This is the same retracement that defined Elliott waves 1-2, and has also completed a channel measurement before yesterday’s rally fizzled.  Are the markets now poised for the final chapter – fifth of 5 of (5)?

12:45pm – A push to retrace into the Brach zone (62-78% Fibonacci levels).  Is this a possible B wave high in an a-b-c sequence?  The overlapping structure on the 5 minute chart is giving a head’s up signal that price action could stall at these levels.

9:00pm update – Markets have continued to lift thoughout the day, calling into question the Elliott wave count.  It may well be that the ‘dancing with the devil‘ 666 level sets a low-water mark and would be labelled wave 5 lows.  This would also confirm the count and make-or-break levels as provided by the Advanced GET folks in the March 10 blog entry.

These are charts posted yesterday by the Advanced GET traders indicating that the counter-trend rally was imminent.  This software program has a very sophisticated method of interpreting market structure and ordering it according to Elliott wave principals.  The cyan/magenta line is considered a ‘make-or-break’ (MOB) level at which we are to watch for a reversal sequence, especially if a 5-wave sequence has completed as shown below.

“This week could offer us some hope in a very dark market place. Last week, the Dow reached its MOB on the Daily low, setting up a counter trend BUY on the Daily chart. The S&P and the NASDAQ both had more room to go before encountering support. On Friday, the S&P finally made its mark, coming down on the MOB right at the first time objective. Thus, two of the major market indexes are now set up for a counter trend buy on the daily charts. The NASDAQ has been the strongest of the majors, still having yet to make a lower low than we had back in November. I think we have enough at this time to make a play for a possible SHORT-term rally.” — Episode 1, A New Hope

Here is the hourly chart showing a similar reversal sequence taking shape:

Today’s result –  NOTE: The historical track record of Friday bottoms hasn’t been very good. And based on the past 21 bear market lows, dating all the way back to 1929, there have been only two occurrences on Fridays, while twelve have occurred on Tuesday or Thursday. The most likely day for a climactic bottom is a Thursday in either October or March (44% probability).

Rally, and Hoofy will finger the financials and say, “As go the piggies, so goes the poke.” Indeed, with the BKX holding 5% gains, the bull has a point.    – Todd Harrison, Minyanville

There’s also a wolfe running in the midst of this stampede. I included an Elliott wave count in parenthesis, so that you can understand how these patterns overlap into waves 4 and 5 – both setups are leading signals of a bounce sequence.

Markets often have a way of consolidating at the 1/2 way mark of a swing in price action.  It is the very basis of a measured move setup (aka bull flag or bear flag).  The structure is an impulse followed by a shallow counter-trend movement (the flag or a-b-c retrace) before resuming the directional movement.  Here is one of rin’s charts outlining a downside target on the 45min timeframe.  Notice the unfilled gaps which are a confirmation of the trend direction.

As far as the Elliott wave count is concerned, we have not reached an intermediate wave 3 low.  The numbering which I presented in the previous post needs revision, and in this context, we use Fibonacci projections to determine some time of price level at which the markets may produce the next consolidation sequence.  There is a nice confluence of measured move target and 162% extension of wave 1-2 around 650 in the S&P.  Another number which is often bantered around is 600 – the eventual wave 5 of (5) downside target comes into play and would create a perfect Elliott wave structure where wave 1 price impuse is equal to wave 5.

3:30pm update – A third measured move is completed in this week – futures are testing the 666 devil pivot.

4:05 pm update – Amazing how numbers like 666 can ignite a fire.  Obviously the media headlines are a bit behind, since the move happened in the last 30 minutes of market action.

Back on November 26, 2008 I posted a weekly chart of the S&P 500 showing the Elliott wave count.  At that time, a PTI (profit taking index) used to measure the strength of the decline suggested that we would revisit the lows at a future juncture.  Well, here we are retesting the November spike lows.

The markets are at a critical juncture, since a trend termination often leads to a rip-roaring move in the opposite direction as either too many bulls or bears are caught on the wrong side of the price action.  This is what happens when a 5-wave count completes.  We already witnessed this phenomenon following the November lows, and are very close to another cycle of whipsaw action.  Based on the previous weekly count, I have now updated the daily chart with wave (4) highs and now the final countdown is in progress to the wave 5 of (5) to complete the downtrend since the 2007 highs.

Looking at a more finer granularity, the hourly chart is suggesting that wave 3 on the daily may be in place.  If so, we can expect a rather quick lift back into the mid- to high-700′s before the final retest of lows.  At that juncture, a rally lasting more than a few days will be possible.  Shorting the pops becomes an ever-more-dangerous trading stance and becomes now more of a game of looking for good entry points on long positions.

What type of signals do we look for to guide our trading stance?  The final fifth wave is one which will be marked by divergences in price action versus momentum and breadth indicators.  Some of the popular measures are the advance-decline ratio, the p&f bullish percent, or even the McClellan Oscillator shown below.

I like the Advanced GET package and have been following the postings that the staff does to illustrate the strengths of the program.  At the heart, it is based upon Elliott Wave Theory and uses different trend-following or counter-trend setups.  What you will notice is the 5,35 oscillator often used in their charts.

JCI triggered a counter-trend (type 2) buy setup today on a wave 5 termination and channel breakout.  There is a positive (bullish) divergence of prices vs. momentum, in this case, lower prices on higher momentum reading.

Here is the same chart showing the setup while enabling the ‘MACD oscillator’ feature on this website.  If you are scanning for similar opportunities, you can review the symbols grouped  in Technical Patterns >> Bull Divergence or Bear Divergence.

10:05 am – The first short sale is triggered as the SPX approaches the BZ (Brach Zone) running from 867-871.

10:30 am update – Parallel channel projection suggest a bounce at these levels. A ‘b’ wave low? Thanks to tipper in b-line channel.

11:00 update – a completed gartley pattern rises to the 78% retrace level at 871. Another a-b-c measured move is in place. This will require a tight 2 point stop, since the gartley setups have been having difficulty in the last few trading days

1:00 pm update – an amazing resilient market in the face of another round of bad news. A wolfewave is running in the stampede higher. Notice that all scalp trades are best handled with 30 minute entry/exit time horizons.

4:00 pm update – the markets manage to close the AM gap down. Most bulls consider this wildly positive action in the face of ugly news. The fact that the automakers are shot down in a senate vote is certainly far below the radar on this rather rambunctious day. Except for the noon hour, intraday jerk and scream motions are limited to 30 minute scalp plays.