A spiraling tape form a channel

Shooting For the Peak? Use Our “Terminal Set Up”

Now that the S&P 500 has reached the 2000 level, investors and traders are becoming more comfortable with the idea that prices will simply continue higher, for years. For instance, Duetsche Bank’s David Bianco recently suggested that the S&P 500 will continue higher towards 2,500, without so much as a 20% pullback. His target may go down in history similar to Irving Fischer’s “Permanent Plateau” comment in 1929.

Don’t spend too much time or brain capacity on similar guessing games.

On the bear side we hear the argument about the extreme levels of optimism which should reverse the market big time.

Bullish or bearish, these are all forecasts, predictions or ideas at bests. We have to be aware of reality:  prices can take the path of several scenarios at any given time. And we can’t fight this truth. We need numbers and solid chart reading skills to be able crunch down any theory to numbers and define the value behind a trading idea.

“Traders can’t put any targets into concrete. We must remain responsive to the feedback of the market.”

Analysis is one thing, operating as a (day)trader is another. Traders can’t put our forecasts and trades into concrete. We must remain responsive to the feedback of the market. But, determining Context is also a part of our process, so we must perform some analysis as well. To demonstrate all this, I would like to give an insight to our view about finding reversal levels above the current 1,990-2,010 range on the S&P 500 chart.

Many technicians are looking for 2,032, or something similar, as the final target for the S&P 500 cash index. They think along the lines of our first chart today and show the target for several degrees of fifth waves at either 2,030 (where [i] = [v]), or the measured target (Where the widest point of wave [iv] would see a 100% extension) at about 2,032-2,036.

30 minutes bar chart of the SPX 500 index on SEP 8 illustrating the "obvious" targets
“Many technicians are looking for 2,032, or something similar, as the final target for the S&P 500 cash index”

And, instead, here’s what Trader Skillset’s train of thought suggests:

  • Final waves have a tendency to miss the targets, and as a result, they end up trapping the late longs and locking out bears who are left on the sidelines waiting for the “optimum level.” This leads us to our Terminal Set-Up definition.
  • Quite often, obvious sideways setups become Terminal Set-Ups. In other words, because they turn the trend at at least a couple of degrees, they fail to make it to the targets because the tug of the new opposite trend simply becomes too strong.
  • The last waves of a long trend are prone to fail between 38.2% and 62.8% to the target. Or, if you prefer, at reverse Fibonacci 138.2% or 161.8% level of the last correction, which happen to be 2019 and 2024 respectively.
  • And, here is an ironic coincidence (or perhaps not!). The July correction’s reverse Fibonacci 138.2% produces a target of 2024, the upper band of our Terminal Set Up target.
30 minutes bar chart of the SPX 500 index on SEP 8 showing our breakout failure concept
Our Terminal Set-Up concept at work. A reversal that fails to reach above SPX 2,030 would function as a trap and would cause much more damage on the downside. Click on the picture to enlarge.

So, in summary, we’re nearing a longer term completed count, and a Terminal Set Up appears likely. As such, we suggest paying close attention to the market’s action near our idealized target range of 2019-2025. And, it is not a prediction, it is rather a definition of a market quality. A potentially large degree reversal has a better chance from 2,024 or below than from 2030+ as it would “Set-up” both longs and shorts for a trap. In other words, we are looking for the spot where “the popular” trades fail.

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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