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Why Do We Believe We Will Go To 1200 on the SPX?

From Elliott wave principles, we know that move in the trend are subdivided in 5 waves while counter trend moves are subdivided in 3 waves.

Looking at the price action since early March, we can clearly identify 5 waves to the downside. [have a look at the Sigma Whole Market chart below(aggregate of 16 US indexes)].

Sigma Whole Market Index

In this context, we have two major scenario:

- This 5 waves decline is the beginning of a consolidation within a bull market (started in March 2009). In this case, this consolidation will be subdivided in an 'ABC' move (where A is in 5 waves, B in 3 waves, and C in 5 waves). In this case, the bottom of the 'A' wave would be June's low and we would be in the 'B' wave. So, it would remain the C wave (subdivided into 5 waves) to the downside starting in a couple of days. (if we assume A=C, bottom should be around 1200 on the SPX).

- The second major scenario would be that we are in a bear market, so the major trend is to the downside, and in this case the move started in March would be subdivided in 5 waves. In this case, June's low would be wave 1, we would be in wave 2 (now), and it would remain 3 waves to come where 3 and 5 would be to the downside (in the trend) and the wave 4 would be a counter trend wave. (In this case, bottom should be much lower than 1200).

So, based on those scenario, it looks clear that whatever the situation is (consolidation in a bull market or bear market), there is more downside to come, and 1200 is a reasonable target for the SPX. (clear view on the medium term).

As we are mainly active is short term trading, we are mainly interested by one question: Is the counter trend rally (started in early June) already over?

There are a couple of days we are working with 2 different scenario (have a look at the chart above for details):

- the counter trend rally is over and we are heading for 1200

- we need one more high (around 1380-1390 for SPX) prior to the decline (we call this scenario 'double top scenario')

After Friday's session, we can say that we have a better visibility on current situation, but we can't do a clear choice between the two scenario: double top (SPX at 1380-1390) prior to the selloff or direct selloff (SPX at least ~= 1200).

Looking at last week price action from both the SPX and the NDX, we can notice that after a sharp decline, both indexes reversed their decline on Thursday's morning and started to rally until Friday's close.

We can also notice that during the rally started Thursday morning, the NDX retraced 50% of its decline and the SPX retraced 61.8% of its decline (2 major retracement levels in a counter trend move).

But the most important thing is that we can clearly identify 3 waves (for each index) during this rally.

S&P500

NASDAQ

So, if the right scenario is the decline, we must decline now. (3 waves counter trend and major retracement level).

If the right scenario is the double top, then we need a 5 waves move to the upside. So, after a short consolidation early next week, we will move above 1362 on the SPX, and above 2595 on the NDX.


Conclusion:

We don't want to favor any scenario at this stage, but on a risk/return basis, we consider it is attractive to be short at this level.

Why?

We are close to important retracement level, and we can use tight stop loss if/when we move above those levels and if we detect a 5 waves move.

If this situation happens, we will close our short position and we will open a long position.

Looking at our indicators, we can notice that the Sigma Trend Index(STI) moved back in positive territory. The swing indicators moved from '3' (neutral) to '4' (positive).

So, even if we must remain open to both scenario, based on our indicators, the double top scenario seems more likely.

But on a risk/return approach (small loss if tight stop loss vs important gains), the short side looks the most attractive for the time being.

We will remain vigilant, and ready to reverse our position if/when the wave count move in line with our indicators.

Sigma Table

For those of you interested in our intraday move, you can visit our site during the day: we post all our trades in real time. You can also subscribe to our twitter account (@SigmaTradingOsc), it is free and you are updated on our latest view/trades.

Current position:
- short 2 SPX at 1336.99
- short 1 NDX at 2578.46

 

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