Last week, we acknowledged the presence of a Head and Shoulders top on the chart of the S&P 500 ($SPX), while also noting the 7-wave momentum pattern, which, more often than not, sets the stage for a powerful reversal.
W.D. Gann believed that "Bull or Bear campaigns took 3 or 4 sections to complete the move." Several years ago, I discovered that by applying this guideline to the MACD, configured using the Elliott Wave parameters of (5, 21, 34), as opposed to the default parameters of (12, 26, 9), I can actually pinpoint bull and bear turning points with uncanny accuracy, and on just about any time frame, as long as I properly identify the relevant support and resistance levels and use them in conjunction with my adaptation of W.D. Gann's guideline. Later on, I managed to incorporate classic and harmonic chart patterns into the overall strategy, as well as the all-important auction marketplace model (i.e., market profile).
The 7-wave momentum pattern (i.e., 4-section pattern, according to Gann) that set the stage for Thursday's midday reversal is depicted in chart 1 below. The chart also depicts the 5-wave pattern (i.e., 3-section) that preceded the September reversal.
Chart 1. 5-wave and 7-wave momentum patterns, coincident with relevant support or resistance levels on the price chart, very often portend high-probability reversal points.
Last Thursday, when the alleged HS top confirmed by breaking below its corresponding neckline, The $SPY proceeded midday to form an inverse HS pattern, indicating an upside target of ~204.50, which at the time was the vPOC (volume point of control) established just the prior day (Wednesday). This is depicted in chart 2 below.
Chart 2. The reversal pattern (HS bottom) that formed midday last Thursday.
Now if you're wondering why the S&P 500 decided to reverse course on Thursday from ~2025, take a look at the weekly chart below. The index clearly bounced off its 50-week simple moving average. With the latter still slightly down-sloping (I color-code the direction of my 50-ma on all time frames), I wouldn't be surprised to see more gyrations in the near future. I don't believe this is going to be an all-clear move to the upside.
Chat 3. The weekly 50-sma contained last week's decline. Notice that the entire correction, which tested the October 2014 low, appears to have unfolded as a corrective zigzag (A-B-C).
Now to the critical question of whether the correction is over – The quarterly chart of the S&P 500 below depicts the index testing the October 2014 low (a lower-degree 4th wave) and bouncing off the 15-ema (the short-term trend indicator), which continues to diverge widely from the 50-ma (the intermediate trend indicator). This alone raises the odds that the correction is likely over, or at least its nominal low is already in place. (in many cases, such as with symmetrical triangles, a correction ends at a higher low upon running out of "time," which W.D. Gann himself is known to have cited to be more important than "price".) As forecasted back in late 2014 (see Market Outlook on 61point8.com) and subsequently reiterated in various analyses following the August 2015 tumble, this multi-month correction is/was a higher-degree 4th wave, with the 5th wave likely underway (or soon to be). That being said, the index remains range-bound at the current time, and the first move off the bottom is often disbelieved anyway. Whether this 'disbelief' was manifested in the recent move down to 2025 remains to be seen. 2016, in my eyes, is more or less like 2012, which would imply another BTFD type year in the coming.
Chart 4. The quarterly chart of the S&P 500. A bullish price flip will be registered on this time frame, should the index close above 2063.11 at the end of June.
As a result of the powerful reversal that played out in recent days, $NYMO has managed to recover after spending as many as three weeks in negative territory (Chart 5). Moreoever, the $SOX continues to outperform the S&P 500, and in turn the latter is outperforming the Utilities sector. Finally, the Nasdaq Banking Index ($BANK) and the Dow Jones Transports ($DJT) have also bounced back from their respective lows of last week.
In conclusion, risk appetite appears to be alive and well, at least for now.
Chart 5. $NYMO averted a danger zone by crossing back over the zero line.
Short-Term Trading Considerations
Per the chart 6 below, we remain on the sidelines, awaiting a move above the April 27th high of 209.82. Specifically, we're observing the price action in relation to the black, red, and yellow lines in order to determine whether the purple A-B-C was a countertrend move ahead of more downside, or whether the blue Shark harmonic pattern (0-X-A-B-C) will ultimately fulfill its objective.
Chart 6. Conflicting patterns call for standing aside as we await more clarity.
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