As SPY fell Friday after 2:00pm, it did so in two distinct thrusts that were retraced about .618%, and closed while engaged in a third thrust downward. So, a potential Bullish Three Drives pattern is developing. See page 220 in The Harmonic Trader. Here is the pattern so far on the SPY 1-minute chart (click to enlarge):
So, a drop to $73.24 on Monday is a potential reversal area. The equivalent level on the SPX is 729. Since the market is so weak, a further extension of the final thrust down might occur beyond 127% to 161.8%. Those SPY/SPX levels would be $72.80 and 724.95.
In the comments on Friday, I said that the market could bounce when the Russell 2000/IWM hit its November low. And the R2K is only an eyelash above its closing low on November 20th, and its intra-day low on the 21st, right now. So that is good additional evidence for a bounce after a further dip.
Also in the comments Friday, I mentioned that the IWM has a bullish inverted hammer candlestick on its daily chart. So, that is another piece of evidence.
Do you see what I’m doing here? I’m using three different approaches to build a case: harmonics, traditional support/resistance, and Japanese candlesticks. I will continue studying the problem from different angles and see if I can strengthen case further.
The next angle is sentiment. As I mentioned in the comments on Friday, people on CNBC were euphoric over “The Amazing -199 Point ‘Rally’”. In fact, you can see Maria Bartiromo praising the market while it was falling at 3:45 into this interview with Robert Prechter on CNBC Friday afternoon.
That went on all day. As we have been discussing in the comments, there was no panic as the SPX took out a major low. In fact, there was quite a lot of bullish cheerfulness as reflected in such indicators as the put/call ratio. So, I’m thinking if a rally develops next week it won’t get far because so many traders have probably already placed their bullish bets.
Now lets do a gap analysis:
First, lets consider that the Gap of Doom was a “continuation gap” continuing the move down from the February 2nd top. Here is what the textbook says about such gaps on page 219:
Its inference is that prices will go as much farther beyond the gap as they already have gone between the beginning of the move and the gap, as measured directly (and vertically) on the chart.
And indeed, if you look at the Fibonacci retracement I have drawn on the chart, you can see that the Gap of Doom is placed neatly in the middle of the wave down from the top on February 9th to to the close on Friday. In fact, the top of the gap is right at the 61.8% fib (blue line and blue arrow) and the bottom is right at the 50% mark (green line and green arrow).
Prices snapped back hard from Friday morning’s gap down (red “G” on the chart), so it is possible that that was an exhaustion gap which may terminate the wave. Also, during the day Friday, I said in the comments that I was shorting as SPY filled the gap at point “X”. Prices usually reverse when gaps are filled, so I was just fading the gap. However, the fact that SPY was able to fill just about all of the gap is actually bullish because it ate away at most of the resistance there. So, if SPY can climb back up to the “X”, it has a good chance of being able to eventually punch through.
This chart shows some potential rally targets:
The market has two downtrend lines: The 2009 downtrend line (upper blue), and the February downtrend line (black). I have also made an exact parallel to the upper blue line to form a potential downtrend channel.
SPY may want to drop a bit more to tag the lower blue line before moving up. If SPY is not able to recapture the black line, it will likely embark upon an even steeper dive. The purple and yellow lines are potential Fibonacci resistance levels, and the blue “X” marks an ideal spot for shorting. There is triple resistance there from the blue downtrend line, the Gap of Doom, and the turquoise line, which would be a 50% retracement of the drop from February 9th. That’s about 805 for the SPX.
As Phil mentioned, there is a full moon on March 11th, so a rally up to the blue “X” around that time would likely bring out the same frothing-at-the-mouth-bullishness that we saw at the full-moon peak on February 9th. Wouldn’t that be a beautiful shorting setup?
Also on the chart, notice the volume at the November low (black circle), and the volume last week (blue circle). As I have been saying in the comments, volume looks too low to put in another major bottom. However, if volume continues to increase (purple line on volume chart), it would be very dangerous to add short positions.
matt not sure how you got 127% instead of 161.8%
I did same retracements and got nearly same numbers for SPY as you but leg down is supposed to be 161.8 and so is the other one. if you want i’ll post my chart later
but in conclusion i do agree with you after reading the harmonic trader. that is a sweet reversal spot
K,
On page 222, the diagram shows the leg down can be either 127% or 161.8%. Since the low point at 3:24pm was close to 127%, I’m thinking that final extension should be another 127% to make the pattern symmetrical. Do you see what I mean?
Matt
Since posting this, I have added a second chart above. If you have already read the first part, you can resume where it says: “Now lets do a gap analysis:”
Here’s Mr. Buffett for an interesting weekend read… although not as interesting as reading Trivisonno.
http:/www.berkshirehathaway.com/letters/2008ltr.pdf
Adding another angle to harmonics, S/R, candlesticks: even EWT says a rally should develop next week–but it won’t be “the big one.” Subwave 3 of 5 of (3) [or subwave 3 of (5) will finish early next week (if not already finished, and I personally think it’s not quite done), and will be followed by a 4 of 5 up—which could be something akin to the wave 2 of 5 up that occurred as the Jan-Feb rally. Naturally, it won’t be the same form as the 2 of 5 up, but it will be up nonetheless. Then we get one last leg down followed by a more major and likely longer-lasting rally (likely to be jagged as is usual and customary for 4s). All IMHO.
Matt,
Thanks for your considered post.
I have added a third chart above. If you have already read through the first two charts, you can resume where it says: “This chart shows some potential rally targets:”
junglegirl,
Thanks, and thanks for your EWT analysis.
Matt
jg – oh Warren is not too bad…
“We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.” Rally on or better in shambles?
From the book of unintended consequences on the road to some place we never wanted to go to: “Although Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing.”
My favorite: “Beware of geeks bearing formulas.”
Mauldin’s weekly e-post for yesterday is also enlightening. It deals in part with what *is* the real P/E for the S&P500.
Matt,
correct me if i’m wrong. I thought most symmetrical is
61.8 to 161.8
78.6 to 127
Again I have been busy working today but I will make a blog post and post the link here so you can see my retracements.
loving your analysis don’t get me wrong. just am trying to clear my mind about the right numbers lol
here is my take on the retracements.
http://investingfreak.com/2009/02/spy-possible-bullish-pattern/
Matt … As you’re working more with fibs I suggest you have a look at the book I linked below. Not easy to digest (at least for me) – but lots of insight and unique thinking. Like all good books written at the leading edge it occasionally wanders off into the area behind the efficient frontier (rhythmic wave analysis of frog skeletons…). Nice pictures, too.
http://www.amazon.com/Fibonacci-Analysis-Bloomberg-Market-Essentials/dp/1576602613/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1235858292&sr=8-1
Matt,
You made a lot of interesting observations, thanks.
In your potential rally targets chart — I think you can draw your Feburary trend line steeper as the high on 2/26 was actually only 78.3 not 79.66.
In cash, waiting for 79.75 to start adding shorts.
K,
You’re right. I was using the TradeStation fib extension tool, but it actually does something different than what I thought it did. My 127% is actually a comparison of the second thrust down to the first thrust. Now I get $73.41 for the reversal number which is only two cents different from yours. I’m glad somebody is paying attention!
Matt
hehehe hey you tell me what to read and I will be your second set of eyes
thanks to that February was my best month to date.
i knew where fib retraced so got out at or before it. LOL
Hank,
You’re right. All three of my trading programs have the same bad tick on the daily chart. I thought that candle looked funny and should have looked at the intra-day charts.
Thanks,
Matt
Yerk,
Thanks. I just ordered a copy. The Harmonic Trader only uses retracements and extensions. It doesn’t go into the use fans, arcs, and time extensions, so I’m looking forward to studying those.
Matt
Yerk… Ditto on the thanks; I ordered a copy, too. Brown knows her stuff, and I like fans, etc. Any tips on using them better are always welcome.
i added it to my wishlist. will you let me know how it is? thanks
EWT: Wave 3 of 5 of (3) [or wave 3 of (5)] has some interesting things going on.
1. If subwave 1=subwave 5, then subwave 5 (which we are currently on) is expected to hit 713.
2. There is a H&S with a slanted neckline from Feb 24 to last Friday. If the neckline breaks, it would project to around 689, eyeballing it.
3. If subwave 5 is a Fib expansion of subwave 1 (and in this bear market, often 5s of various degrees *have* been elongated), it projects to 689!
4. To really freak everyone out, 689 falls on the lower channel line THIS TUESDAY AFTERNOON. The lower channel line has been support for this entire subwave 3 of 5 down. It could hit between 2 and 3, and then the big boys put on a whopping reversal.
5. Look at the 60 min VIX for last week. A nice inverted H&S. It looks ready to finally make its move and douse some of that complacency we’ve been witnessing.
THEN I will turn off the SGA and we can have 4 of 5 of (3) up, then more down action, then finally a choppy wave up where we go hunting the “Junglegirl gap” (VIX) and a SPX 13, 34 EMA cross.
(Warning… I’m sooo tired right now… hope I didn’t inadvertently mess up any subwave labels and confuse anyone.)
Stay tuned.
Caution: I notice Stockcharts also has some bad info on their charts. For example they don’t show SDS daily trading up in the 120s, yet I know it did on November 21st.
Point 3 above, 689 is the 1.382 expansion of subwave 1.
If the scenario above plays out, we will get one more mini-bounce on the way to about 689ish. That bounce could occur around 721, give or take a few points. It shouldn’t bounce higher than 734.5. The 721 area also sits on a trendline (channel line) that has been hit over and over again–from both above and below– since February 10th.
Apologies for being a blog hog. Ideas on paper take up more space than they do in my head!
makes me wish i held on to SKF but a new month starts new trades
thanks JG
Re the 10:52 post, I’ve been thinking it over. The EW rule is that a 4 cannot retrace the entire 3. Given that I expected 741 to be an absolute war due to longstanding support, the last bear market, etc., I will allow for any retrace off of around 721 or so to get up to about 750, give or take, as a max. 740-745 feels about right.
Since I have now hit a Fib number of posts (11/27 = 40%, close to the mattgical 0.382), I’ll stop. Later everyone!
(Thank your lucky stars I’m not shooting for 1.618!)
More on taxing trades:
http://www.govtrack.us/congress/billtext.xpd?bill=h111-1068
Well, I made it for almost an hour. Can’t help myself… read Denninger from Saturday and Friday. Monday/Tuesday will be very interesting.
http://market-ticker.org/
(Does TA stand for Technical Analysis or Trading Addicted?)
I’m now 14/31 … shooting for that 50 Fib. Just like the market, once one Fib gets surpassed, it’s onto the next one. Postomania.
Jungle, keep’em coming. We’re reading them all.
Interesting bill, George. I doubt it will get passed, but who knows. Pretty hilarious series of events they highlight in that first section…I’ll translate:
“The Bush administration and the Fed did some really stupid things. Rather than try to fix said stupid things, we allowed them to go on. This bill still doesn’t simply fix said stupid things, but instead devises a way to remedy (possibly a stupid way to remedy) said previous stupid things.”
Don’t you love Government in action?
On a related note, I’ve read some theories stating that foreign exchange markets might benefit from a very small tax (less than 0.1% was roughly what I recall). This would intentionally make the markets less efficient; The hope being that it could slow down the fast pace of currency shocks and eliminate things like the carry trade which can introduce unwanted instability into the markets. Gotta love economics, one giant experiment with ourselves (a big No-No if you understand the scientific method).
I for one, would prefer to see some clarification in the wash sale rule. It currently states that you must buy back a “similar equity.” There is no clarification for options. I would argue that an SPY put option that expires in a year is very different from one that expires in a month (same date of purchase). I also have no idea why they have it set as buying back an equity within +/-30 days of selling the same equity at a loss counts as a wash sale. Locially, it seems that it should only be +30 days. Afterall, if I knew beforehand that I would sell something at a loss, why would I have purchased? It seems pretty absurd that we should have a “gray area” in our tax code (granted it goes in favor of the IRS, so maybe it isn’t all that absurd).
Thanks for all that info junglegirl. I’m still not seeing any capitulation low yet either. But 689 on Tuesday afternoon could probably do it.
I saw quite a few very bearish blogs that turned bullish just before the November low because we dropped so far, so fast (granted, they were ALL early by about a week!). In hindsight, it was pretty obvious. I’m trying to look for clues like that right now and it just isn’t there.
Tel Aviv down 3.5% today.
http://tase.co.il/TASEEng/Homepage.htm
offtopic… i had an idea of how to use salmonella peanut butter… mouse bait!!!!
Ben is too busy to care for the details… “The US Fed’s Open Market committee collects economic forecasts from respected sources every two months or so, and summarizes the results on their website. I note that the forecasts starting in 2007 have been getting more pessimistic at an accelerating rate. If you extrapolate that, you’re talking bottoming out in 2012 or later, not e.o.y. 2009 like Bernanke is saying now.”
towelie,
Good translation. More regulations on trading has the consequences of back-firing on the Fed. Profitable trades are already taxed. This would tax unprofitable trades. It could discourage and eliminate some traders and thus the Fed may get less revenue.
This is similar to other taxes being levied in the past. For example, the yacht industry. Considered a luxury by the Fed, they were TAXED OUT OF BUSINESS; they simply could not compete. For decades, the only place you could buy a yacht was from foreign manufactures. Tens of thousands lost their jobs, etc. The unintended consequence of this was the Fed eventually lost revenue – to this day!
I’m a simple person with a simple mind, simple solutions and simple pleasures.
If “I” can “get it”, why can’t “they”?
Taken off the 1987 low a 61.8% retracement
brings the SPX to 735…665 using 1980/1982
and below 665 all bets are off.
U.S. Govt. will pump more money into AIG…
can’t let AIG fail because AIG insures deposits
in banks outside U.S.
George-
Open your wallet. Mid-Eadt needs $Millions…
U.S. said they would pump in the money.
George,
Think of Washington DC as a parasite. It is growing and steadily eating away at its host. Eventually, the tax-eating class will devour the tax-paying class. After devouring the yacht-building industry, the parasite doesn’t reflect upon its mistake. Rather, its simple central nervous system feels happy and cheerful after eating a delicious meal. Then it starts thinking about the next part of the host it will eat.
The parasite can’t be stopped. It is too powerful. It will only die after it kills its host.
Matt
Sherry,
I didn’t hear about that one.
Matt,
That’s a great way to characterize the process. It’s frustrating, but I don’t let it get to me. I try to figure out ways to benefit from it.
Being here is one way: Great analysis today Matt.
George-
Excuse my typo…should read Mid-East. I think
the dollar amount is over $900 Million…just
pennies if you always operate in $Trillions.
Sherry,
Got it. I remember when Condoleezza Rice took $300 to the Palestinians as a good-will jesture before the latest mid-east crisis.
That allowed them to buy those rockets they fired at Israel?
Color me confused.
“Let the person among you who is without sin be the first to throw a stone…: (John 8:7)
Eh, not a good one but…
As soon as our elected officials take a pay-cut, I will too.
$300 million, that is…
County to raise taxes?
My property taxes rose 37% this year and 84% 4 years ago.
I know I said I wouldn’t do the “politics” thing here on the blog. But I did want to share with you a letter (too easy to ignore e-mails) I wrote to my local County Commissioners. I’ll be relating this information during their next meeting (hard to ignore that!).
They are considering raising taxes AGAIN to pay for their tax “deficits”. During this current down-turn, they need more funds to be “revenue-even”. They estimate they need to raise taxes 10.5% to break-even. The problem is they “rose to the occasion” when revenues peaked by finding ways to expand and spend the excess.
I won’t put the entire letter here, but the bottom line of my message is that the county needs to establish a revenue “baseline”, put aside any excesses above that baseline and use those excesses when there are short-falls. Then, they won’t have to raise taxes because they can “weather the storm”.
An important aspect of this is that the baseline is dynamic and their budget needs to float with it. This can be based upon population, economic conditions, whatever, but some guideline that is below any current revenue level or an average based upon historical figures. In short, they need to cut back expenses in order to meet the baseline and save any excesses.
I mean, what are they going to do if the economy continues to get worse: take all our income? Not reasonable. What are they thinking?
And guess what? Having this kind of process would not only smooth out their budget, it would eliminate job losses, stop knee-jerk reactions, produce and preserve more revenue, keep their functions at a consistent level, and keep us citizens in food.
(I still believe it is a sin to tax food.)
Matt,
StockCharts for SPY shows an opening gap (“gap of doom”) for Feb 17 in the hourly but not the daily chart. I reported this as a perceived error to StockCharts Support.
Their response:
I’ve compared our daily data for SPY on February 17th to other public data sources and our data matches those other sources:
( http://stockcharts.com/webcgi/wb.exe?Data.web+SPY )
S&P 500 SPDRs (SPY) DAILY bars
Day Date Open High Low Close Volume
=== =========== ========== ========== ==========
Tue 17-Feb-2009 80.1600 82.9580 79.1700 79.2200 478873280
———————-
( http://finance.yahoo.com/q/hp?s=SPY )
PRICES
Date Open High Low Close Volume Adj Close*
17-Feb-09 80.16 82.96 79.17 79.22 478,910,100 79.22
———————-
( http://bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPY&close_date=2%2F17%2F2009&x=22&y=20 )
SPDR S&P 500 ETF
Tuesday, February 17, 2009
Close: 79.22
Open: 80.16
High: 82.958
Low: 79.17
Volume: 478,910,600
———————–
So at this point I think the daily data is correct and should not be changed.
BTW, it is not unusual for the intraday data to not match the open, high, or low on the daily data bar. The daily data bar is often updated after the market closes to reflect the results of an “audit” process that the exchanges perform after the market closes. If any missing or incorrect trades are found during that audit process, the daily quote is updated and those changes appear on our charts. Unfortunately, the exchanges do not update the intraday bars during the audit process and therefore we have to leave them “as is.”
[end of StockChart response]
Who is the ultimate authority for the correctness of stock market data?
The “gap of doom” may not exist. However, since many people still see it on their hourly charts they might still trade accordingly.
Josef
Josef,
Well, if the exchanges want to re-draw a candle, I can’t stop them. Having watched every tick on the 17th, I can say that I never saw a single tick get anywhere near that gap. Are the values for SPY that we see in our trading programs and on CNBC not to be trusted?
TradeStation does not show the “fixed” candle on its daily SPY chart, and I think that they have it right.
I would be very curious to see how they do that “audit”. How do you examine zillions of trades? And exactly how many trades were alleged to have occurred up at the top of that wick? Maybe there was one fat-fingered trade, or maybe somebody had a buy-limit order in from the previous day and they are counting that, or some other such nonsense.
In any case, if I’m not mistaken, Japanese Candlestick rules state that a gap is not filled until there is a close above the gap. So, by that convention, the gap is still wide open anyway.
Matt
here is another fib drawing to the time frames that I am not capable of doing.
http://www.chartingstocks.net/2009/03/dow-6000/
Matt,
Some of the errors I reported to StocKCharts earlier they corrected – data entry errors.
I was not overwhelmed by their cross reference to Yahoo and Marketwatch. Same bad data in – same bad data out.
Anybody manipulating the data source?
Thanks for your very helpful comment and as always many thanks for this great blog.
Josef
K,
That doesn’t make sense that they chose a non-chart low to draw those fibs.
I’d prefer spx 609 for a reversal if the November low continues to break. That’s based on using a B-C leg for two fib measurements and a channel. B-C provides a 1.27 leg down to 605 and a fan arc of 1.618 to the approx area. The oversold channel and these two fib extensions all hit in the approx. area D.
See the chart here.
you are right george but I wish i had data going back that far
Some clarification about EWT rules: EW has both rules (not to be violated) and guidelines (frequently observed but can be violated).
Two “rules” for motive waves include:
“Wave 4 never enters the price territory of wave 1″ p 21.
“Wave 4 always retraces less than 100% of wave 3″ p 30.
However, when we get down to small-scale waves, even Prechter admits that sometimes a 4 runs a tiny bit into a 1 and we just overlook it, as it’s close enough. That’s why I said above that we could go higher than 734.5–especially given that the 741 number sits up there like a giant bull magnet.
Great weekend stuff everyone—thanks for all the interesting posts.
George-
Most laws that benefit you and I never make
it into public pubs (like the 77,000 pages of
tax code). I’m looking into a no-cost way a
friend told me about to boost social security
payments. I’m doing it for Dad, but if I find
something useful, I’ll let you know. I know
in the past, the Govt. has allowed folks who
took their Govt. retirement money out to
retire when eligble and pay the money back
from retirement checks.
Cringely sez Steve Jobs has gone missing from the internet:
http://www.cringely.com/2009/02/wheres-steve/
Matt – great parasite analogy, but I think you meant to refer to parasitoidism: http://en.wikipedia.org/wiki/Parasitoidism, the difference being that the parasitoid kills its host.
The current economic crisis (which I believe resulted from prolonged govt intervention and meddling) has given the Obama admin the perfect opportunity to begin “assimilation” of the America population into his/their (Pelosi/Reid) grand democratic ideal for society, kind of like a Borg state where we serve the collective.
I expect social unrest before this is all over – from all sides – the gov’t, its Borg legion and the Picard like free market resistence.
George – property tax revolts will sweep the country, beginning with property owners all disputing their inflated property tax assessments, can you imagine the backlog that will create for the county tax assessors offices – which are already running on empty from personnel cutbacks???
And what about America’s number one homeowner – US banks with foreclosure properties – you think they want to be responsible for paying inflated property tax bills?
This is lining up to be a real mess.
i didn’t want to keep going in the performance thread so here goes
http://www.ritholtz.com/blog/2009/03/q4-bank-stress-ratings-for-all-us-banks-bac-c-jpm-and-wfc/
stress testing