Tuesday, January 5, 2010


As we can see from the daily chart we are continuing in our long term wedge with our bottom to top range getting narrower and narrower. Now I wanted to mention the importance of support yet again. Every retracement we have had here has been very well controlled and contained. I am not talking about controlled in a manipulated term but in terms of price retracement.

Let’s take a look at our 2009 summary for advances and retracements.

June to July: 666-956 = 290 pts advance - 86 pt retracement (30%)
July to Oct: 870-1104 = 234 pt advance - 74 pt retracement (31%)

Now when looking at the daily chart we have 2 possibilities. First one is finding a top around the 1145 range within the next few weeks. If that is the case lets use our previous retracement percentages.

Oct to Jan: 1030 – 1145 = 115 pt advance – 30% would be 34-35 pts with a retracement target of around 1100-1110.

Now as you can see our advances are getting smaller, which is to be expected considering how strong we run up off the 666 levels. So lets make another calculation based on the 2 cycles we described above.

1) 290 points
2) 234 (80% of previous move)

Lets add another 80% for the next move - So another theoretical target would be.

3) 187 (80% of previous move)

So if we take this as a number we can assume that we add 187 pts to our previous low at 1030 coming to a grand total of …. 1217 target SPX. We can support both targets based on the daily chart – 1145 as part of the Oct to Jan mini wedge or 1217 as part of the larger wedge/channel.

Of course this is just pure numbers so lets forget about that one for a second. The main reason I wanted to show the above numbers is due to the fact that we really have only 2 major support points. 880 and 1030 (1016 the important FIB level). Yes we have our trendline that has acted as support but lets assume that we break this trend line. As you can see the norm today is that any long term position can absorb 70-80 points of downside before a new rally “should” start. How do you think big money is going to react when this important level gets broken? Many have chased into this market or have opted to use more and more leverage on the bullish side as its so easy and safe to make money.

So lets take this 70-80 points number again apply it to the 1145 if that will be a tradable top – that means a target of approx 1065-1075 for a move lower. Now IF this level gets broken we have to be ready for a LOT more downside very fast – if this level does NOT get broken we are on for our next run towards the 1217.

Either way - I have to admit, we have a high possibility to break down from this last 3 month mini wedge, but on the bigger picture the chart still supports a 1200 target on SPX. On the other hand, IF we end up breaking the "cycle" we have only a few key support ranges to deal with - so this should make for a swift move lower as de-leveraging and profit taking occurs.

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