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Aug 15th, 2010: Weekend Update – Bearish Alternate

Posted by pugsma on August 15, 2010

9:40 pm EST:  ES Futures have dipped to a new low of 1069 (1072 cash), which is right at the top of the gap region of ES 1067 to 1069 (1070 to 1072 cash).  If the bottom of the gap ES 1067 does not hold the drop, then look for ES 1062 (cash 1065) to be tested next.  Final support for the bullish primary count is at ES 1054 (1057).  Interestingly in the ES Futures wave iv looks like an expanded flat.  In the chash market it looks like a triangle.  In either case the target is near ES 1067 (1070 cash).

It will be interesting to see if the actual low occurs overnight in ES Futures, before the cash market can open.  This is the game that played out often near important market lows during run off the 666 March 2009 low.  Remember, on July 2nd 5th/6th when ES was trading at 1003 (1007 cash) overnight and we awoke to ES 1020(1023 cash) and started the recent rally to 1129.

ES Futures (9:17 pm):

8:50 pm EST:  MTU Market Timing Update did an awesome write-up this weekend on the two camps (i.e. bearish and bullish) on the longer term market direction.  Obviously, everyone here knows I’m in the longer term bullish camp, even if we get a drop to 950 or 870 first.   Everyone should read this write-up to understand the difference between the two very different E-wave long-term counts.

4:45 pm EST:  It’s always good idea to keep things balanced and look at the market from both bullish and bearish perspectives.  For this weekend update we’ll consider the bearish alternate count if the market starts to break down below 1057.  

The SP-500 weekly chart after this week’s big 52 point (4.6%) drop has me concerned that Primary Wave 2 (P2) correction down to Primary Wave 1 (P1) up is not yet complete.   And thus, we may not have yet begun Primary Wave 3 (P3) up.   The weekly chart shows the SP-500 closed at 1079 and is decisvely back under the 50-week SMA at 1102.  It doing this, it printed a weekly bearish enguling reversal candle.  The weekly RSI is back under the 50 level, maitaining in the brearish territory.  And the weekly MACD, which was about to have a bull cross earlier in the week, has now hooked back down.   Plus the MACD signal line and histogram are still below zero in bear territory.

SP-500 Weekly Chart (8-13-10):

So what is the alternate count, should P2 need more time and price to correct P1.  It’s possible that the large [A]-[B]-[C] corrective for P2 is not complete at the July 1st low of 1011.  I have the leg down from from 1220 to 1041 labeled at [A]-P2 for both the primary and new alternate (in red) counts.   The difference for the alternate count would be that the [B]-P2 leg just completed on Moday last week at the 1129 level.  The [B] leg would count as 3-3-5 irregular flat.  So the drop down from 1129  to 107 7 that began on Tuesday would be wave 1 of [C]-P2.  In which case we are looking for the end of this wave 1 of [C]-P2 hear at 1077 or early this week at the 1070 area.  From there we would expect to have a wave 2 of [C]-P2 bounce to about 110o to 1105 into late August before a very nasty wave 3 of [C]-P2 down begins.  And you will not want be holding long positions for this wave 3 of [C]-P2 leg down, as I suspect it will be an extremely nasty and prolonged drop for most of Sept and a good deal of Oct.

My initial target area for wave 3 of [C]-P2 is in the 986 area.  And wave 5 of [C] should reach the 951 if [C]=[A].  The  50% correction of P1 is at 943 and coincides well with [C]=[A].  There is a a reasonable chance that [C]=1.62[A] and thus the target would be 841.  The 62% retrace of P1 is at 871 and thus coincides with [C]=1.62[A].   Also, the large head and shoulders with neckline at 1040 targets 869, so it also agrees with this same target area.

So which count is preferred right now?  The primary count that has Wave 2 of [1]-P3 down ending around 1070 and then a big wave 3 of [1]-P3 up about to get underway with targets up in the 1220 to 1250 by year’s end.  Or the new alternate count with wave [C]-P2 underway that targets the 951 area by October and possibily the 870 area by end of the year.   I still favor the primary count, but only slightly at this point.  We are basically in a “neutral” range between 1057 and 1105, where both counts about equally likely.  If the SP-500 can get back above 1105 quickly, then the primary count gains a lot of momentum.  However, if the 1057 level is breached then the alternate count with P2 headed below 1011 becomes more likley.   I willl be watching very closely how the market reacts around 1057 and 1105 over the coming week. 

SP-500 15-min Chart (8-15-10, with alternate in red):

SP-500 60-min Chart (8-15-10, with alterante in red):

SP-500 Daily Chart (8-15-10, with alternate in red):

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