Tuesday, December 6, 2011

S&P 500 Pattern Update

Click on Chart to Enlarge

Based on the pattern development I have posted here over the last year or so, here is my updated analysis. The first vertical blue line at the left is where I suggested a pattern completion this past summer. And it was confirmed at all levels expected by the following explosive price move down. So it is very clear to me that an upward market phase completed there. Since then we have spent 4 months retracing only about 75% of that decline which took about 2 weeks.

I see two possible ways to logically label the price formations since the August 9th low. Based on time relationships and cycles I have labeled it in the form above as a developing corrective pattern where the "e" wave is expected to approximate the "a" wave in price and time or relate by a 0.618 ratio. The pattern would be very similar (but with a larger "b" wave) to the pattern in silver which topped out this summer before the major swoon in September. Check out that pattern here. Also the great discrepancy between the initial sharp move down and the overlapping correction to follow is similar to what happened in silver. The pattern would also be similar to what happened in gold in 2008 as I have labeled in the chart below. If you look at the declines to follow these patterns you see they are very sharp. So buying January OTM put options may be a high reward trade opportunity for a move projected to break past the Oct lows in the S&P 500.

Click on Chart to Enlarge

The other way I see this pattern possibly being labeled is as an ABC down into the October low, and a still developing upward pattern with a complete A and B and working on C. However, the time relations are so similar in all the waves since August, that the way I have studied these patterns, I would not label it as such.

The conventional Elliott wave labelers I'm sure would say we currently are in wave C up off the Oct low, and they would probably expect a terminal impulse for wave C. Then the next move down would be extremely large and possibly bigger than anything we even saw in 2008.

Back to the first chart above, I have placed a tight red circle showing the resistance area on the S&P 500. The light green line is the average of all the bear market rallies since 2000 that I have shown before. That projects to right around this weekend. Also, the vertical blue lines from the pattern ending in July would show a nice time symmetry if the upward move were to complete right there.

All this is in the context of a possible "buy the rumor, sell the news" type of scenario with the European Union meeting this weekend. Not too dissimilar to what happened heading into the debt ceiling issues this summer in our government.

IF such a pattern as I have projected is completing soon, then we will have to see a major move down to confirm it. The move should at a minimum retrace the advance since the recent November low in less time than the rally took to form.

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