The Line In The Sand
David Petch
This will be a brief update, since all items for the week should have been addressed yesterday. Notice the red circles at each of the prior tops during the past 2 ½ years. Each top of significance has had the upper 55 MA Bollinger band rise well above the index and decline. The current top had no such event, although a negative divergence in the charts since January 2006 was developing. The 50% retracement of the past decline lies at 1250. A move below this level will likely place mounting evidence a top is in place. The %K is beneath the %D below the lower horizontal trend line. Declines to prior levels have had healthy bounces, so before we draw any conclusions, lets wait for a bottom to be placed in over the next 3-5 days and see what the bounce looks like. Calling a top by many may seem genius but I remind myself many have been calling for a top the past 2-3 years. This makes their calling a top if successful here irrelevant because a broken clock is right twice per day. To call a top now is the same logic and I would recommend the market show what is going on. Due to the uncertainty if a top has formed, wait to see what happens after a bottom is in place. If the move up only has a partial retracement of the decline or forms a double top, then a shorting opportunity exists. Many have tried to short the market all the way up and have had their heads handed to them so many times you'd assume their bodies have remarkable regenerative abilities.

Figure 1

Red lines on the right-hand side represent Fibonacci price projections based upon uptrending wave price action projected off the subsequent lows. Areas of line overlap form Fib clusters that represent important support/resistance levels. An important Fib support level lies at 1239. A decline to this level implies a top has been put in and a shorting position lies ahead of a partial retracement. Full stochastics have the %K dropping like a stone beneath the %D. The %K broke below a wedge in place since December 2006, so this was to be expected if it occurred. Moving averages are still in bullish alignment (50 day MA above the 155 day MA above the 200 day MA), with the 200 day MA at 1257 (4 points below yesterday's close). This is another big reason why I view 1250 as the line in the sand for trend determination.

Figure 2

The weekly S&P 500 Index is shown below, with Fib time extensions of the decline shown at the top of the chart and Fib price retracements of the decline shown on the right hand side. The S&P has moved within Fib channels for the past 3 ½ years, so this trend is likely to continue. Interestingly, the 61.8% Fib retracement lies at 1239 (this level was a Fib cluster from the prior chart). So, 1239 will definitely serve a key bottom if 1250 is taken out, but what likely would happen at this point is the development of a right shoulder prior to the S&P plummeting down to 1141 during the next phase of the decline. A change in trend will see the S&P go down in three phases to match the Fib channel moves from mid 2003 until present, much like the advance, but at a much more compressed time scale. The %K has fallen beneath the %D. The weekly charts indicate no negative divergence like the dailies. Notice the 2000 top had a huge negative divergence in place. If a wedge is forming, a negative divergence pattern must be eliminated because the wedge structure has a higher probability for determining the trend. If the upper trend channel of the wedge is taken out by the %K in the coming 3-4 weeks, then there is a problem. The prior two charts however, suggest a bottom is 3-5 days away.

Figure 3

The mid-term Elliott Wave count of the S&P 500 Index is shown below. This is the only Elliott Wave chart today, because it is the only relevant time frame. The decline is classified as wave [c] of a flat structure. If 1250 is taken out, then wave [b] becomes (G).[W] and wave [X] lasting 8-12 months at a minimum is underway. If a bottom is placed above 1250 on a closing basis, an impulsive move in wave C will occur to approximately the same price dimensions as wave A, or up to approximately 1350-1380. The course of the next 5 trading days will forge the course of the next few years, so hang tight. The index should bottom in mid to late 2007 around 1050, the 38.2% retracement of the decline. Currently energy stocks and precious metal stocks represent approximately 5% and 2% of the S&P 500, respectively. By time 2009/2010 rolls around, the S&P is likely to be at 1600-1800, with a weighting of 25-30% energy stocks and 17-23% precious metal stocks. Indices are fluid and change with the time, so another reason why the S&P 500 Index will hit new highs in 3-4 years and why it will not decline below 1000.

Figure 4

That is all for now. I will update the USD index and 10 Year US Treasury Index on Monday. Have a good weekend all.


David Petch
Market Letters Digest
www.treasurechests.info
21 May 2006

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