Elaborations on a Bounce/Bottom Forecast ~ The Risk Averse Alert

Wednesday, January 27, 2010

Elaborations on a Bounce/Bottom Forecast

Just before 2:00 p.m., prior to the largely irrelevant Federal Reserve confirming the fact that, their power to mask systemic insolvency "continues to contract," I put out a tweet saying:
SPX price/RSI divergence + bid fear keeping RSI below 50 = a bounce/bottom near.

Way back in early-2003 this similar condition was the essence of things which at that time were signaling an approaching bottom, this as seen on daily charts of major indexes. Shades of the same price/RSI configuration have been evidenced over the past few days, as seen on charts plotted at 5-minute intervals...

SPX 5-min

Today, especially, you see the kind of diverging price/RSI performance wherein fear remains a fixed part of the equation. This is reflected by the fact that, as the S&P 500 traded lower, RSI, although positively diverging, remained on the sell-side of its balance (i.e. below 50).

Like I said, this same kind of thing (on daily charts) happened back in early-2003. Its occurrence provided a piece of evidence then that, while selling was becoming exhausted, the bid providing support was neither irrational nor imbalanced. Rather, stronger hands could be thought behind the bid.

Now, from my perspective such observations, of course, are taken in context of Elliot Wave possibilities. So is the case, too, regarding this present projection for a "bounce/bottom."

As such, then, were top in, a "bounce" correcting the initial move down can be expected. And were top still ahead — its manifestation proving further illusive despite a wealth of evidence supporting my view that, the rally off March '09 bottom is but a counter-trend rally in a larger bear market — then the next turn higher appears at hand.


Per this latter possibility, there have been many instances already where, the slightest of RSI divergences have presaged yet another turn higher in benchmarks like the S&P 500, but with nothing momentum-wise (MACD) to further account for this. Quite the contrary. Such has been life these recent months.

Yet yesterday's Elliott Wave count applied to the S&P 500, as well as the same recently applied to the Dow Jones Industrials Average, loom large. Both support the case for claiming top is in.

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Anonymous said...

Might I ask, my dear TC, why does one who is concerned about "the long term" post charts of intra-day movements? Would you care to do an elliot wave analysis of that 5-minute bar chart?

TC said...

The point of including the 5-minute chart here simply was instructional, this for the sake of demonstrating price/RSI performance typical at moments when a bounce/bottom might best be anticipated. Like I said, this same kind of price/RSI configuration was demonstrated when bottom was forming from Q3 '02 through Q1 '03. (That particular occasion likewise was a moment when entering into the realm of greater likelihood was longer-term, Elliott Wave-related possibility for continuation of the post-1974 / post-1982 advance, an occurrence leading me to communicate to a relatively small circle of associates at that time my sense that the 2000-2002 correction likely was ending, which correction, itself, I forecast to this same small circle in January 2000, projecting the area in which major indexes bottomed in October 1998 as being a likely objective.)

There's really nothing "hard and fast" about this sort of analysis, per se, but the underlying "psychological profile" typically revealed by this particular price/RSI configuration leads one to suppose that, at least the right combination of buying support and fear are in place to preclude collapse anyway. So, absent any momentary, increasing likelihood of collapse, prospects for a turn higher in light of this particular price/RSI configuration are seen improved. At least this has been my experience up to now. Yet I do not doubt a new lesson might be delivered sometime ahead. Such is nature's way.

Per applying Elliott Wave analysis to the 5-minute chart of the S&P 500, absolutely! Piece of cake. Do you see how on Friday, 1/22/2010, RSI registered its worst reading (slightly below 20) of any over the duration of the S&P 500's decline from its top at the close of trading on Tuesday, 1/19/2010? This likely marks the formation of a "3rd wave of a 3rd" wave (in this instance wave 3 of iii of 1 of (1) of (C) [of an (A)-(B)-(C) decline that began October 2007]. (Mind you, nothing about this wave count is set in stone, so to speak. My point simply is, being that Elliott Waves possess certain, defined characteristics, RSI can be used to quantify these. In this instance, being that 3rd waves typically are the most "dynamic," a third wave down is likely to coincide with RSI registering its most negative reading.)