Into Laszlo’s Trading Room: SPX Failure Falls Short

Into Laszlo’s Trading Room: SPX Failure Falls Short

The first chart today is from our April 13 S&P500 “sandwich” post, and it shows the actual path prices traveled in the last two weeks or so. This close match demonstrates how powerful Elliott’s wave principle is when it comes to understanding the price action context. Nevertheless we are showing this chart for two other reasons.

The forecast vs the actual path on the hourly S&P500 chart

First, because we want to emphasize that successful context research is not about predictions. Instead of shooting for an accurate prediction, use context research as a scenario plan to adjust your trading strategy. The most essential message of the April 13 post was the possible persistence of the range type behavior for the weeks ahead. And that determined our approach because we thought we’d enter the type of market where support and resistance are both almost equally important. Hence my dummy sketch about the SPX as a sandwich.

It was a type of market where it was better to look for higher probability trades toward inside the range, and when the lack of follow-through after breakouts should “not surprise you“. Just analyze the language of the post for a short moment. Look at how the the open way of thinking and the clearly articulated opinion about the most likely outcome coexist at the same time. What was presented there is a possible scenario which governs my set of trading parameters and preference until it is confirmed by actual short term price action. Which was the case up until today.

As traders we have several action plans. We choose the one that performs best when these range type conditions are present. As we put it “the recent weekly RSI tops (not shown) formed at 63, 61 and 59 respectively, shy of the sustainable bull trend levels (>67). Such a severe loss of momentum calls for an even larger range or a trend reversal…”

In a paradoxical way, we do not analyze charts to come up with imaginary future waves but rather to determine which strategy to pull from our sleeves that fits the existing conditions the best. And, that means observing facts instead of putting our legs into concrete and develop too strong of an attachments to a future that we can’t really foresee.

A trader understands the fine line between prediction and context analysis.

And like I said, I have another reason to talk about that S&P500 today. The price action is just about to leave the track we drew 2 weeks ago.

The last eight daily SPX bar: the failed breakout and the failing follow-through
The market rejected the new high on the daily S&P500 index chart but the new break below the reversal bar also failed.

The problem I sense is on signal level i.e related to timing. To my mind we are very close to the end of a trend but it is too early to call for a top. Here is the story based on facts.

The market cleared the 2,113 support on Monday, which must have been the previous fourth wave of one lesser degree during the breakout to the new all time high. That opened the road to an additional 10-15 points drop and helped to form a healthy size reversal day by the end of Monday’s session. But, here we are on Tuesday’s close and we lack the follow through. Today’ bar has triggered the bear shorts just to close almost at the high of the day; and, what is more, it formed a healthy bull body (when the close is higher than the open). This is a bullish entry bar or at least too bullish to call a top. Certainly it significantly reduces the chances of an immediate strong bear leg. I still believe that the top is close but it is not the current 2,125.73 just yet. You know what my words are: for shorts wait until you have a solid lower high at least on the hourly chart.

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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