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Technical Analysis by Zoran
Zoran Gayer
EWP on the S& P 500 index 7 April 2003

The domineering pattern is the large HEAD & SHOULDERS pattern that has formed across the top of the chart that started to form shortly after the Asian crisis. The neckline of that pattern has formed on the low of the LTCM (Long Term capital Management fund) debacle and the WTC destruction low. The HEAD and SHOULDERS pattern has not reached its target low. As it stands more down side. To negate the HEAD & SHOULDERS, the S& P need to rise above the controlling neckline. The second point of control is the descending trend line joining red (B) with dark magenta [2]. Price action is well below that line. This bearish control line is a long way from being threatened.

The long term Elliott position is dependant on how you label the up move. See my previous submissions for the long- term view. This labeling presupposes that wave three is now topped and that it started in 1982. Since 1994, an extended fifth has played out. Extended fifth are commonly followed by IRREGULAR TOPS. For this explanation of this pattern, see Robert Beckman's "POWERTIMING" on extended fifths. Elliott believed that extended fifths were often completely retraced. That would give a target somewhere around 450. R. Neely is of the opinion that extended fifths do not retrace more that 61.8% of the extended fifths giving a target of about 720. The HEAD and SHOULDERS target measured linearly on log scale the equal percentage move target is about 550.

So the target is somewhere from 450 to 720. It does not matter what the target is from a trading point of view. Additional segmentation should give closer target as the S& P approaches this broad band.

Below the HEAD & SHOULDERS NECKLINE a TRIANGLE has formed. I have named this the "IRAQI WAR TRIANGLE" for the resolution of that TRIANGLE will start the next major move (Up or down.)

The TRIANGLE that is forming will be the resolution between the economic factors affecting the US economy and the impact on it by the IRAQI WAR. The market will sort out the opposing factors and come to a resolution. It does this by either three swings or five and occasionally by more. In the IRAQI WAR TRIANGLE, it is five. Once it reaches its resolution (or bifurcation), price will moves off in its resolved direction with determination. The fast break is confirmation that a consolidation has ended and is heading off to another consolidation and bifurcation.

There may be dispute whether the low is a TRIANGLE or a FLAT. This arises from the view that 775.68 low on July 24 is a wave three or a completed five as in this chart. Some have move the completed impulse to point [B]. In finality, this will make little difference in trading. Both interpretations will have the same break. The present up move in a FLAT is the "C" wave. In the Triangle interpretation, it is the "E" wave.

The Initial method in determining green (1) is the internal structure of (1). As the correction wave two plays out a parallel channel is drawn and adjusted until the consolidation is complete. Lastly relationships on time and price are selected that give best order to the structure. Based on these criteria the July low was selected for wave green wave (1), thus the following pattern is a TRIANGLE and not a FLAT from the October low.

The logic of this type of valuation is based on the assumption that markets are self- order seeking mechanisms in an uncertain and constantly changing environment. Certain time and price levels will resonate through previous action and project into the future creating order. The predictive process improves greatly if this harmony can be identified in real time. Often it is seen easily retrospect. Why is this so?

The up move from the low at [D] on 12 March has kept above the red dotted line which is the inverse of the [C] - [D] slope. While ever the action keeps above the dotted red line, the up move has greater momentum than the down move. Based on the principle that the slower move generally corrects the faster move, the suggestion is that the up move is the trend and not the down move. We can say it is bullish

The larger degree suggests a down side break from the IRAQI WAR TRIANGLE. Thus, the up move from [D] is not behaving correctly for an "E" wave and a BEARISH view. A slower up move was expected. When the HEAD and SHOULDERS pattern formed last weekend a downside break would have endorsed the negative view with a down side measure below the red dotted line.

The S& P returned to test the underside test of the neckline, which is normal for a HEAD, and SHOULDERS break. This happened just as the Jessica rescue unfolded, then with some other IRAQI successes driving the S& P above the H& S neckline and into short covering rally.

The HEAD and SHOULDERS of last weekend failed to reach the down side target. The Jessica rally led into short covering keeping the S& P above the critical red dotted line. Additionally the dismal economic news had no effect at all with the market concentrating on every blow in the IRAQI war. The assumption that the war win would have already been discounted (for it was a no match affair) proved to wrong.

CONCLUSION

  • The short- term pattern is positive. To have a semblance of bearishness price action needs to break below the red dotted line in the previous chart.
  • The larger degree remains bearish.
  • The conclusion of the IRAQI TRIANGLE will provide the bifurcation point and break. From the fast up move from the 12 March low, suggests that there will be a positive break through the upper magenta line fixing the bifurcation point on the 12 March low. This is inconsistent to the BEARISHNESS of the larger degrees.
  • There is a good possibility that a zigzag combination is playing out as an "E" wave pattern. I have labeled this projection as a TRIANGLE TOP. However, I would expect the pattern to drop through the red dotted line before taking bearish action on it. I hope that there may be other clues to act sooner. The topping projected TRIANGLE on this page is amongst many possible topping patterns.
  • The Economic data continues under perform and come in under expectations. The market seems to be completely reacting to events in IRAQ (Besotted with the IRAQ war.) It is ignoring very bearish fundamentals.


Zoran Gayer

8 April 2003

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