Keene Little : 2/26/2007 12:39:08 AM
The pullback in the market from last week's high has a corrective look to it. Groan go the bears. Yes, it means we could be setting up for another run to new highs. The futures are up some on Sunday night and if that holds true through the night then we could kick start the rally with a gap up on Monday morning. If you're short from last week then figure out how much you're willing to give back before you cash in your chips. As of Friday's close I was looking for one last little dip on Monday to cover my short and reverse long. I'm still hoping for that but we'll have to see how it sets up on Monday.
As I show on this DOW 30-min chart, with both the bullish and bearish wave counts on it, I was looking for support at the uptrend line from November but any early rally on Monday could throw cold water on that expectation and the bounce might have already started off Friday's low. If we do get an early push down in the morning I would certainly test the long side around 12600-12610. Link
Not as obvious on the DOW but more so on the SPX is a 3-wave move down from last week's high. For that reason any rally out of the gates on Monday, especially with a break above its last bounce high at 1456, would leave little question in my mind that we're going to see new highs, if not immediately then after another pullback/consolidation. If that's to happen then two equal legs up from February 12th (the a-b-c move up for the 5th wave of the ascending wedge from November) is at 12861.70 (SPX 1477) and makes for a potential upside target.
I've menioned a potential turn date of Feb 23 +/- 3 days and that puts us in a turn window of Feb 20-28. This date was derived by using the same number of days for the rally from October 2002 to January 2004 (wave-A in the A-B-C correction to the 2000-2002 decline) and the rally from October 2005 to the present (wave-C). I put the EW labels for this move on the following DOW weekly chart: Link
Typically we will get equality between waves A and C in either time or price or both. Therefore we might have already made an important high last week and all we're going to get is a bounce this coming week that then turns lower again. We won't know that until after the bounce gets going and we see what kind of pullback we get from it. So buying support for the DOW could be just a short term trade but the potential is there for a move to a new high.
But the possibility that we'll see the market consolidate for a little while and then head for new highs has to do with another turn window centering around March 9th, and this one has the potential to be a very strong turning point. Referring to the weekly chart of price action since the January 14, 2000 high I show a Fib time study based on the 2000-2002 decline. Using that decline the Fib time cycles are then projected from the October 2002 bottom.
Notice how many turns happened at Fibonacci time ratios (highlighted in yellow), including the bottom in July 2006. The next important Fib turn date is at 162% of the length of time for the 2000-2002 decline and that falls on March 9th. That's a Saturday and it's +/- a few days so either side of that weekend.
Therefore if we do have some more rally left in this market I'm thinking DOW 12862 by the 2nd or 3rd week of March. Perhaps it'll be during March opex. If the rally takes that long then that would mean chopping sideways for a while before heading higher and then the top of its parallel up-channel for the a-b-c move up from February 12 will be closer to 12900. If you're in short positions that's the potential I see so manage your risk accordingly.