The Last Hurrah...

The market looks like it has one final rally leg - perhaps. Today we witnessed the retrace of the continuation gap at 1018 and a breakout above the bull flag that formed from 1038. That break happened above the top trend line of the flag at 1025. If you were well positioned, you could have played short to the gap and reverse long for a very nice double swing profit. I did get a nice piece of that setup. See the chart for details.



More importantly, we now have to determine our next setup. Though we broke out above the top trend line, we did not have the support needed to hold above two key support levels. First, we eclipsed yesterdays high of 1033 but retreated immediately. Consequently, we had no attempt on 1038 - which is the present high of the long rally. Ideally, we would have had a successful break above that level. That would have eliminated any doubt about where we are headed. So our short term resistance will be 1033 and 1038.

I will first argue a case for a rally to the low 1060's. To do this we need to justify a 1060s target in all time frames. Again, I offer a key portion of the 2 year daily chart for consideration.



First the assumptions. If all rises are retraces of prior highs ( and conversely, all drops are retracements of prior lows) then the rally from the March 6th low must be retracing to the shelf at 1300. Of course, you can disagree - you can choose a prior high and later high if you wish. I choose the end of August - which is almost exactly one year ago. The 1 year fact has no significance in this analysis - I just thought it was interesting. What is significant is the sturdy shelf set at that level. It is the first "true" past support/resistance ABOVE our current level. Everything else is sheer panic-pause-panic-pause-and more panic!

Drop a fib and check the levels. Looks to me like there is general alignment with the 38% and the 50%. If anything, the fib levels might be a little low - but for the market we are in and the time table we are viewing, rough alignment is enough to validate the fib anchors. So, we assume a good grid - where is the price action today? Today's action played out smack in the middle of the 50% and 62% retracement level. Think about it. There is a 78 point swing between the levels, we had a low of 1016 (30 pts above 50% line) and a high of 1033 (28 pts below 62% line). We are officially in the middle of the road!

Continue to look at the chart. What direction are we heading in? Seems to me that we are gasping to go higher - literally gasping - but trying to go higher - even if for one last time. This really does feel like a final push and I can see it reaching 62% and then collapsing. The world fully expects this to happen and contrary to the contrarians - it must. (talk about a contrary view).

OK - we may have a case on the macro level for 1061. Is there anyway to confirm it on higher frequency charts? Let's open the 20 day hourly chart.




I have isolated the last week or so to illustrate a theory. In my prior posts I identified a 5 wave EWT formation starting at 996 and exhausting finally at 1036. That was the last rally leg. I have seen cases made that perhaps we have a double-3 formation (meaning my EWT is contained withing the 3 wave of a higher order EWT), however I do not see that clearly. I see one well defined EWT that exhausted at 1036 and had a final spurt to 1038. This was the last rally and off of that rally I see the bull flag that broke out today.

Again the fib for the rally aligns very nicely - very nicely indeed. This is our first micro indicator. We have bounced off of the 50% retracement - with force! I think this supports a retest of 1038. Further, we have to consider the length of the flag pole - which starts as early as 978 and as late as 996. Let's be conservative and say 996. We have 42 pts of travel up the pole. If this is a indeed a bull flag breakout - add 42 to the bounce at the 1018 gap and we are in the 1060 neighborhood - safely if we measure the flag post from 978 as that gives us 18 more points of upward play.

Finally, I think we see a new 5 wave EWT developing. Open the 5 minute chart for today's action:



I have labeled the bottom of Wave 1 at approximately 1016, the top of Wave 2 and 1025, and the MIDDLE of wave 3 at 1033. It is not uncommon for wave three to have either a gap in the middle or a pause. I think we have a pause to gather strength for the push through 1033 and then of course 1038. I would not be surprised to see a breakout of 12 points above 1038 before the pause preceding the exhaustion wave to 1060.

One final note, the white line is the 50 period MA and the Gold is the 200. Whenever the 50 crosses up through the 200 on the 5 minute chart, I see strong upward thrust several bars later. I am not sure what to expect through the close - but a gap up (type continuation) would not surprise me.

OK. I made my bull case - now what about the bear case? I think it is pretty simple. If we test and fail 1038 convincingly, we have to watch levels of support below. Roughly, these include:

1027-29 (yesterday price action from apex to trend line)
1023 (38% retracement of last rally leg)
1018 (top of gap and 50% retracement and the initial high in the 2B reversal)
1013 (first rise/failure against the 1018 high)
1005-1007 (spot where we broke trend)
1002 (historic price action)
996 (full retracement)

I would be hesitant to go short until a break of 1018 - very important.

Anyway, that's my analysis - and I'm sticking to it!

Good luck all!