Part of the issue is finding the right timescale. This is a 30 minute S&P futures chart and it demonstrates some very interesting material. The three humps all demonstrate Serge's trademark pattern the "Kiss of Death". Late to the party but perhaps we'll get one more?
One thing I have been in tune with is the timing of oscillations. This timing actually goes back to 2010. The 1st of the month has been an indication of where the market is heading. Note the 1st arrow on this chart began the crash (that was the day the debt deal was signed and the market staged a fake out morning rally). The 1st of September (second arrow) marked an amazing short entry. Now the 1st of October is coming up. What will happen?
Now note the intermediate resistance line (big red line). Yesterday's rally hit this ceiling square on the head. Today marker a "lower high" which is in itself a bearish thing and has created another steeper minor trend resistance line. Now note the green line. This marks a former resistance line turning into support. Finally note the amount of horizontal resistance at 1180 and support at 1140. Frankly, I first noticed this way back in that first rally when I stopped out at 1160 in both directions. I knew from there that 1160 was the "mode" of this corrective pattern and that we would be oscillating over that point. Never knew it would last this long!
What this boils down to though is that the market is likely to get turbulent inbetween all this support and resistance. Darned market is coiled like a snake. My bet is that The first of October will again send the market south (and that a lot of this last rally was quarter end positioning). Somewhere around that pink arrow is where it will top out. It could spike above that line (as it did on the 13th) but it won't get far as 1200-1220 has demonstrated solid resistance.
Elliott Wave
It's always a task trying to fit Elliott Wave into the S&P, especially as the futures chart and actual index can often look dramatically different. This picture is my best effort. It continues with my unorthodox "truncated" 5 wave which is the only way I can make any sense of the pattern.
In my previous post I did a pretty good job at forecasting waves "1" and "a" on the right of this picture. Here's the flashback:
(Why I didn't go long at 111 is beyond me. I'm a better analyst than trader). I was surprised by today's sudden downturn although there's plenty of room left in the interpretation. We can either trace out a small a,b,c flat pattern as indicated by the blue line; or C can extend for two days in a hell of a rally for a 5/3/5 pattern (the dashed line).
What is critical is the pink horizontal line. If the market gets past this then my interpretation is dead wrong and most likely signifies that a bull rally is on.
Mindsets
Lately I've been focusing on trying to understand who is driving the market. John Hayden in his book RSI: The Complete Guide made two observations that stuck with me. The first is that at any point there is a certain group of traders controlling the market. I made the observation in a recent blog post that I thought technical traders were controlling this market. A quick perusal of Serge's blog comments would demonstrate that majority rule was indeed in effect.
The second observation is more subtle. As traders we're taught that a market goes up when there are more buyers than sellers and vice versa. Hayden makes the interesting observation that the opposite can happen. That when buyers retreat from a market that the sellers have no-one to sell to. A trending market requires buyers and sellers (how else can one explain the high volume during market panics?) At that point the market can stagnate or even reverse itself. He claims that this is part of what drives retracements.
So given this information we need to understand at any point in time (a) who is buying and selling and (b) what are their mindsets.
Serge compared this market correction with 2008 and I felt it was a reasonable analogy but this evening I got to thinking about it and I think it falls short in the "mindset" analysis. The general mindset in 2008 was that the market was "fine". Recall that this was the "nobody could predict this" financial crisis. The initial 2008 drop was considered by many to be a correction and a buying opportunity. It was of course a fake-out, but it was this ongoing general bullishness that powered the first bear rally (which I think we'll get but not as soon as now).
Today we don't have that mindset. The general perspective is that we are in a recession. The 2009-2010 market rallies were a surprise and still suspect in the minds of both professional traders and much of the general population. There is so much talk of recession right now that the expectation is a market that is going to be lower.
Who is buying? The buyers are those who missed out on the 2010 rally. The main suspect I've identified are value fund managers who are buying based on what they believe are juicy forward P/E ratios. You can read about them every week in Barrons. Combined I believe that they have enough unallocated cash to keep the market in the 10,000 range. I believe an enormous amount of buying pressure would come in at 10,000.
The net result of the general economic expectations but good corporate numbers equates to exactly what we're seeing; a middling market. In my previous posts I've demonstrated how this part of the stock market cycle generally sees the market retreat to the mode (50% retracement) and then effectively go sideways for a year to three years. I believe we're seeing this in action. Granted, there is a lot of dead space to fill between 12,000 and 13,000 and I believe we'll see the market spend considerable time there but I don't think we'll be back in that range before the market tests the support level in the low 10,000s as I believe is the expectation of much of the trading community.
And If I'm Wrong
There is the possibility that the market will reverse overnight. If we gap down tomorrow then the market could fall very rapidly to the 106 level. This would make a very good momentum play as I doubt we'd get a gap fill at this stage of the game.
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