Illustration: the S&P500 is stuck between support and resistance

Into Laszlo’s Trading Room: The S&P500 Sandwich

Monday, 0:23 a.m. The S&P500 has not been to a new high since February 25; that is to say, for 31 trading days now. Despite the all-time-high drought, we have not observed too much bearish activity; the deepest spot formed less than a 4% decline than the 2,120 SPX peak. When the market is so firmly sandwiched between support and resistance, that usually means the presence of corrective price action. To be exact, in Elliott wave terms, that might constitute a bullish triangle which would eventually lead to a break to the upside (check daily chart below).

From a trading point of view, it still is not the best idea to go for the momentum breakout on the buy side at 2,120. It would be a low probability trade due to the lower high reversal of March 23. You can read more about the lower high of 2,115 in my previous S&P500 index related post here: “SPX sellers strike early”. Whenever a range type market can’t poke above the initial high there are usually ample sellers at, or just above, the top to overwhelm buyers and force the failure of the breakout attempt. Or, at least the chance of a successful breakout is much lower, compared to those cases when an ‘interim’ higher high forms during the sideways correction.

Daily S&P500 chart with the triangle Elliott wave interpretation
The possibility of a triangle terminal setup and the ensuing breakout on the daily S&P500 chart. To complete the structure the market might need as long as 3 more weeks.

 

Traders will likely find enough reasons to look for a sell setup or profit taking in case of a breakout, and that can cut the next bull leg short, pushing the market back into the range. The weekly and the monthly momentum readings also raise the possibility of this bullish then bearish scenario. 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, most probably after another leg up in the sequence.

Speaking of loss of momentum or deceleration, I added Fibonacci retracement studies to the last two corrections on the daily chart. The lowest point represented a 38.2% correction of the previous bull wave in December. Lately the market retraced back to the 50% of the February rally in March. The increasing relative depth of the consecutive corrections (at the red circled areas) is a clear indication of the deceleration, and it gives us a hint about the terminal nature of the ensuing breakout. What is more is that this year’s rally is much shorter than the one at the end of last year. Don’t let the lack of follow-through buying surprise or trap you. Be relentless closing out your longs if the breakout fails.

In line with the daily analysis the consolidation of the strong move of the last two trading days can start shortly as soon as Monday’s session in the form of a small degree fourth wave within the still unfolding three-wave structure for wave D of the triangle. The juncture of important trend lines might be right for the wave D top:

 

30-min intraday Elliott Wave analysis of the SPX chart
Short term S&P500 Elliott wave interpretation projects a dip and an important top to form the next 2-3 days.

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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