Keene Little : 5/26/2008 10:27:58 PM
Tuesday's pivot tables: Link
The DOW was rejected at its 200-dma last Monday (2nd attempt this month) and then proceeded to drop back below its 50-dma and then 100-dma on Friday. It also dropped back below its broken downtrend line from October, which supported the pullback earlier in the month. It did find support and closed at its longer-term uptrend line from March 2003. Slightly lower is the uptrend line from October 2002 near 12400. That's another 80 points lower but I think we'll see the DOW bounce immediately on Tuesday otherwise it could break through support and head lower. Daily chart: Link
NDX shows a potential H&S top building since its left shoulder in the beginning of the month. A bounce back up to 2000 and then back to 1950 over the next week could build the right shoulder. If that were to play out and then NDX breaks below the neckline near 1950, the downside projection would be to about 1840. Daily chart: Link
SPX broke below its equivalent neckline (by dropping below the May 9th low) so it's entirely possible NDX will follow. But SPX closed very close to its 50-dma at 1371 on Friday and with the DOW so close to potential trendline support I think we're very close to a bounce. After Monday's failure at its 200-dma you can see the crystal clear reversal signal with the shooting star at resistance--it was a nice setup. Daily chart: Link
The SPX 30-min chart shows the tight down-channel that price has been in since last Monday's high and Friday's break below the downtrend line from October. The wave count shows a 5-wave move down last week to Friday's low and that would mean we're due a bounce into at least Wednesday, perhaps up to about 1400-1410 (shown in dark red): Link
There is a way to count it as needing one more leg down to complete a 5-wave move (shown in pink) and that means a down day on Tuesday. We should get an answer fairly quickly as a break of the downtrend line from last Monday's high would likely mean we'll see a 2 to 3-day bounce. A break of Friday's low would mean we could see a drop down to 1350 before setting up the bounce (probably back up to about 1380).
The significance of the wave count, if the 5-wave move down is correct, is that it is idenifying a trend change (to the downside) and that means the bounce from March is complete. That also means we're at the start of the next significant decline that will take us well below the Jan/Mar lows. At least that's the bearish potential. I would guess most of the market is not prepared for that kind of bearish scenario and once again I'm feeling like a lonely bear making this call. We'll just have to see how it plays out the next few weeks and see how the wave count sets up.