Many longer term investors, and traders, believe the stock market is unstoppable to the upside. And, over the past two years or so, they’ve been right. But, we have not seen resistance hold back bulls this firm for quite a long time. We can almost sense the lack of confidence in every bullish breakout attempt even before they fail. We have covered the change in the weekly momentum picture and the contradiction between the weekly and the monthly time frames here in our popular post about the “Ugly Bear Bars” a month ago.
Here’s the essence of that January post, “The most recent weekly major bull wave… seems to be running out of steam. Those who are following the weekly chart are not confident enough to buy breakouts above previous highs anymore. In this environment bears are good to run for at least couple of waves (A-B-C) against the trend”. On the other hand “the monthly bulls are solid as rock…We draw this conclusion because the monthly RSI is just floating in the middle of the sustainable bull zone.” (The sustainable bull zone is the upper green area.)
And, now, after numerous daily bear bars, and seeing the weekly ranging market, I received a question recently. Roughly it was, “Isn’t it possible that we are experiencing another 2007 type reversal and the top is already in?” The inquiring Trader Skillset reader pointed out the ‘07 top when the weekly RSI slowed down the same way it has recently, and went through the steps I described in the “Ugly Bear Bars” post, but the monthly collapse started out from the green sustainable bull zone.
I thought other traders may also benefit from the answer.
Based on our proprietary guideline, when prices turn down with the RSI above 67, then it is best to consider that as correction within the still dominant bull trend. At that stage the probability of the uptrend continuing is still very high – hence our “best to consider” wording. It does not mean that the market can’t form a final top in the sustainable bull trend zone. Sometimes it does. Usually it happens when either the larger time frame is bearish, or when the final wave within the trend is overextended. That is the case with a fifth wave extension (in Elliott wave terminology), because the RSI does not have time to slow down, due to the typically sharp reversal. These turns happen less than 20% of the time, therefore they should be considered to be the less probable outcome. As such, a short trade from the sustainable bull trend zone is either too early or just a scalp for a quick profit.
Regardless of the swift turn, the monthly also confirmed the trend change in May-June 2008 when it was still not too late to give up the premise.
I like the question a lot because the analogy helps me to show you where we are in comparison with the 2007 chart. To my mind, February 2015 might be the equivalent of July-August 2007 when following a 2-3 month pullback a few more uptrend bars reached a new high. Check the red highlighted area on the 2007 and the current chart.
The above isn’t a blind guess, or wishful thinking. It’s based on our Context and Momentum analysis, and I tell you all this, because of our “guidelines-based momentum analysis integrated with Elliott”. If you’re just using Elliott alone, without using a momentum-style confirmation, it’s as if you have a map but without itinerary and with very few reference points. Please, stop driving and ask for your current position and directions!
Finally, let’s review this the short term S&P500 outlook on the hourly time frame (below). I think the current range might get a bearish break attempt to the downside, then fail in the follow through, reverse up to start the last bullish trend leg before the major trend reversal. The rectangle might be a regular flat B correction where the small circle b subdivides into a flat also. Be patient with the pattern and trade inward the box until the price breaks out regardless of the next move’s direction.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.