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November 18, 2006

Leonardo or Santa?
by Dominick

The Nov 10th update stated:

Thinking this might be the end of a small correction instead of a failed high, we took the trade that we had been waiting for just as many others traders probably fell into the trap.

We still have no confirmation of a top and that's been what's kept us from shorting too early. If 1360 gets above us, that's the signal. But absent that, if our present setup is correct, there might be a nice long trade as soon as Monday morning.

In fact, we went home last week holding our long position from Friday. Instead of seeing the previous Thursday's high as THE top, we counted Friday's low as the end of a 2nd wave flat. That analysis proved to be 100% correct as the S&P futures tried to sell off at Monday's open, but just couldn't, and as soon as they caught traction, vaulted up ten points.

Tuesday gave us the expected smaller degree second wave, and, from there, the explosive third wave. As it was occurring all the financial TV shows were debating "the news" behind the move, but since we were expecting it, it was funny to listen to some of the "reasons" for the advance. They still don't get it! It was purely a technical breakout as wave three took out all the stops just above a triple top. After ending the third wave on Thursday, we obviously expected a fourth. The futures gapped down into a corrective abc pattern on Friday right down to previous fourth wave support.

Unlike the TV shows, my proprietary trend charts have forecast and explained these moves all the way. In last two weeks I've stated that, if 1360 holds as support, then the 1405 area would be challenged. This week's high, in fact, was 1403.76. This number still looks and feels good, but I'm forced to come up with higher targets yet again as the pattern continues to dictate higher potentials. I have been saying all along not to short above the 1360 level. I will now add a higher level that will signal "caution" to us. Watching the S&P lose 60 points before reaching your sell level is now a bit too much. Besides, Elliott wave patterns have given us new areas that should be shorted once they fail to become support, but these are for members only. My trend charts are now available in real time to members only, but I'll tell you this: the weekly chart, which gave a buy signal in August, has finally reached the level where it might finally rollover a trigger a sell signal, but we don't have that confirmation yet. Click here to see the weekly chart. The daily has finally come off its 5-month buy signal as of the 14th, and now hints that the topping process is in effect.

There are a few ways to count the pattern off the June or July lows, but, nonetheless, I would like to see the S&P's make a new high early next week, hopefully Monday, followed by a retest of Friday's low (support at 1392 SPX), then rally nicely to a new high at roughly the 1415/1420 area. We'll be adjusting the target in the forum as soon as we see where we find support, but whatever THAT high is, it will be the first time the Elliot pattern from the summer lows might seriously be at risk.

As you read last week, I'm also now on alert for the perfect Fibonacci 1.618 Extension in time from the 2002 lows. Other analysts may be watching this target or others for next week, but every cycle that's been mentioned for the second half of this year has been completely run over. Remember the supposed four year low? Many traders blindly take positions into a biased target, but I'm not about to do that, no matter how good the turn looks. I need to see confirmation from my technicals, along with a complete and ending pattern. Give me an up/dn/up swing before the end of the week, and this Fibonacci cycle might actually become reality. It either completes there or consolidates once again for another series of fourth and fifth waves, for the so-called Santa Claus rally.

The Dow Jones Composite is another index that's played out nicely. Any reversal from here is the awaited setup.

We're also watching the potential of the DJI ending its second leg up into a perfect .681% on the First. As you can see in the chart below, we're either running into trouble ahead, or going right through all resistance to a 13k+ target.

Friday's COT report shows the commercial traders have added to their bearish positions on the large S&P contract. This is also the first week since summer that the large speculators are net long the market. I don't see a runaway bull at this time, but with that said, if the Fibonacci date doesn't halt things here soon, we'll have to challenge year-end seasonalities. The last thing you want to do is be in front of a fund manager buying gamma to have his portfolio catch up to it's peers!

So, it's going to be a close call next week - either Leonardo wins or Santa's coming to town. Either way, patience next week will payoff.

Precious Metals

Don't forget the precious metals. They have also been rallying. Have they started an advance? Or is this a bull trap triangle? We are on top off that within the Forum. Joe has also been writing on that market. Those updates have also been posted here. If you have missed them, they are also in the free access forums of my home page.

If you've enjoyed this article, signup for Market Updates, our monthly newsletter, and, for more immediate analysis and market reaction, view my work and the charts exchanged between our seasoned traders in TradingtheCharts forum.

Continued success has inspired expansion of the "open access to non subscribers" forums, and our Market Advisory members and I have agreed to post our work in these forums periodically. Explore services from Wall Street's best, including Jim Curry, Tim Ords, Glen Neely, Richard Rhodes, Andre Gratian, Bob Carver, Eric Hadik, Chartsedge, Elliott today, Stock Barometer, Harry Boxer, Mike Paulenoff and others. Try them all, subscribe to the ones that suit your style and accelerate your trading profits! Those forums are on the top of the home page Trading the Charts.

Dominick,
a.k.a. Spwaver
TradingTheCharts.com

This update is provided as general information and is not an investment recommendation. TTC accepts no liability whatsoever for any losses resulting from action taken based on the contents of its charts, commentaries, or price data. Securities and commodities markets involve inherent risk and not all positions are suitable for each individual. Check with your licensed financial advisor or broker prior to taking any action.

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