April 12th, 2011
Guest Author: William Kurtz is the founder and CEO of CandleWave LLC.
Were the Highs of February 18, 2011 in the Dow Industrials and in the S&P 500 the end of the road for the Great Rally, or is there more to come? There are price targets above present levels which appeared to energize the Dow and the 500 when they embarked upon spirited rises beginning on March 17. Follow up:
Follow up:One of those targets, in the Dow, is the 78.6% retracement level of the massive decline from the all-time High of October 2007 to the Low of March 2009. Earlier, in April 2010, when the Dow exactly met the 61.8% retracement of that decline, we thought that the Rally (a countertrend move) was complete, but the market had other ideas.
The “spirited rises” in the Dow and in the S&P beginning on March 17 have propelled the Dow to a point slightly above the February 18 High. The rise now seems to be tailing off. The S&P has never broken its own February 18 High, nor has it reached its own 78.6% retracement level, and appears to be tailing off now, as well.
Both of them appear to be at an inflection point, a fork in the road.
Arguably, the S&P formed an “expanding triangle” beginning on April 1, which can be construed as bullish in nature. We were taught, decades ago, to “Never short an expanding triangle.”
On the other hand, the “Real Body” of the tall black candle of April 8 in the S&P “bearishly engulfed” the Real Bodies of the five daily price bars which preceded it. We remember very well that the Bearish Engulfing pattern which formed in the Dow on April 27, 2010 prefigured the “Flash Crash” of seven trading days later.
Now, in the ten-minute chart of the S&P (not shown here), we can count three waves up from April 8 and then five waves down from April 11 through yesterday. That would suggest that the underlying trend is now down, because a three-wave move is countertrend, while a five-wave move is in the direction of the trend.
The Dow appears to be forming a “rounded top.” What has happened is that the “spirited advance” which began on March 17 has markedly slowed, Momentum has petered out and price tops have begun to “bend down,” leaving behind the picture of a “rounded top.”
A “rounded top” can appear anywhere in the development of a pattern of increasing prices. However, context means everything. We have to ask where it is located, in the context of the entire wave pattern. If, for example, it had appeared at the end of March 2009, it would have meant little if anything, because a major trend had clearly changed from down to up early that month and the Rally, which was necessary as a partial retracement of the decline from the all-time High of October 2007, obviously was still in its infancy. Now, however, when the rally has run its course and the wave pattern is complete, the appearance of a rounded top has great significance. It arrives as the possible “last gasp” of a dying corrective trend.
A “rounded top” can be part of a “consolidation,” which by definition is a grouping of price action on a “way stop” toward higher prices. Oftentimes, a consolidation can take the form of a triangle, which in itself is meaningful, because triangles always represent the next-to-last pattern in a series of impulsive moves.
Triangles, consolidations, and rounded tops are pictures, which the eye instantly recognizes. It is true that they are the result of numbers, but it is the pictures which tell the immediate story.
In the present case, price action in the Dow this morning, as this is being written, tells the story of a rounded top which is now complete. The Dow has opened slightly lower than yesterday’s Close. Prices already have fallen beneath recent Lows, and are back where they were on March 30, and even before that, on February 11. The S&P 500 is acting in concert.
It seems increasingly likely that the Great Rally is over. If, as we think, it has been a countertrend move which began in March 2009, then it will be completely retraced – at the least.
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