A narrow price channel means one-way-traffic

A Nasty Grind – S&P500 Update

Most articles that are about S&P 500 forecasts will start with that upfront. But, we’re different here at Trader Skillset, because we want to share the thought process, in addition to the forecast. It’s the equivalent of “teaching one to fish” rather than “providing a free meal.” So, we’re going to bury the lede, and give you the theory and thinking first – followed by the forecast at the end.

Here’s the current status of the S&P 500 as we see it. Small daily bars have been forming a series of daily higher highs and higher lows but with the lack of strong intraday trends. The market feels like it’s just about to reverse in the next hour or day, as the majority of the new highs don’t get any follow through. Yet the shorts (sell positions) require quick covers right at the first support, otherwise the grinding higher nature of this bull phase will squeeze out the bears again and again. We can hardly identify more than 3-4 quality setups per day on a 3-minute time-frame, and the situation on larger day trading time-frames is worse. A 15-minute chart may provide you with 0-1 setups per day.

Do you have the feelin’? All right, but where is the key?

As always the answer is “over there” on a larger, dominant time-frame. So, let’s review the daily and the weekly considerations. First of all, many of the daily bulls are waiting for a pullback to buy as going long up here is too expensive (the risk bulls must take is too large for the potential reward). And check out the weekly chart. You’ll see bull bodied trend bars (closes above the opens) in the past four weeks. Last week’s (from November 10) small bar represents a very weak breakout which somewhat overshadows the weekly traders’ short term happy outlook, but they have no “reason to sell” as we speak now. The imminence of last week’s low is tempting. It might call for a bearish trigger which can cause temporary break of the trend and form a terminal setup.

As we are looking at larger timeframes, we’ve also done something similar to Frost’s and Prechter’s (Elliott Wave Principle – Key to Market Behavior, 1978 p. 78-84) explanation of the personality traits of the different Elliott waves. Their description provided the inspiration to come up with the unorthodox “soft attributes” that assist with determining the dominant market perspective. This kind of contemplation about bull’s and bear’s and other animals’ motives on multiple timeframes is the initial assessment of a trading idea. This is the way to understand the “story” behind the move.

daily detail of the S&P500 index with the tight channelOne of the apparent attributes of the bullish grind that speaks to me at present is the initial trend channel break after a low-momentum but still powerful move. The market has been moving in a tight, increasing channel which is a very sound pattern that is not worth betting against. This structural element represents a strong agreement on higher prices, as bulls immediately buy any pullback and bears do not put up much opposition. Sound familiar? Something like this (to the left) usually appears during wave three price action, when the end of the channel does not mean the end of the larger degree trend leg. When the market leaves the channel, as it did last Tuesday, volatility increases and the market soon draws a kind of swishing move – shaking out and confusing those who have not seen the pattern often enough to understand it. In a bull version like this, it will look like a false breakdown to the downside, followed by a short lived, failing bullish attempt to return prices to the original track of the channel. Finally, the market corrects or reverses as the larger degree trend exhausts. If noting more, the lesson to learn is to avoid labeling the top of a narrow channel with a 5 or C because that is very likely just the end of a wave 3; therefore, one more swing down and up is still to come.

This is an important background aspect of my current interpretation of the S&P500 index as the “swishing movement” down and up might be filling the rest of the month:

 

30-min time frame Elliott interpretation about the past month of the SPX - one additional high might be missing
A decline below last week’s low is due within a couple of days. The support at SPX 2,005 is very likely to hold at first.

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.

About Laszlo Nagyferenczi

Laszlo Nagyferenczi is a day trader, analyst and instructor as well as the creator of the proprietary Context-Momentum-Signal concept. He has authored over 200 blog articles about his unique approach to trading and the Elliott Wave Theory. His clients appreciate his ability to go from the theoretical to the practical i.e. all the way to the actual trade set ups.

Originally hailing from Hungary, Laszlo is fluent in English and Hungarian with a long list of education credentials including BA in Economics, Certified Elliott Wave Analyst (CEWA), Certified Adult Educator for T-Groups, Professional Co-Active Coach (PCC) at CTI. The real education, though, has been the trial by fire in the markets, with real capital at risk.

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