Is the S&P 100 Cycle Confirming A Recovering U.S. Economy?

08/14/03 10:45:40 AM

by Koos van der Merwe

I have written many articles on cycles, and shown how a simple cycle can be a reliable arrow in your quiver of technical analysis weapons. Here is another one.

Security: OEX
Position: Buy

Below is a daily bar chart of the S&P 100 index (OEX). I have placed a 53-day cycle on it that called for a cycle low on August 11th. Looking at the chart, you can see that a cycle low occurred three trading days earlier, on August 6th. This margin of error is acceptable, and by all accounts, the OEX should now start rising to test the upper trendline, at or about the 521 level. This level could be the midpoint between the August low and the October low, but this is pure guesswork, as it is very rare that a cycle turns at its midpoint, gold being the exception (see my article, "What Is It With Gold?" June 18, 2003).

To analyse the chart further, I then had the program Advanced GET suggest an Elliott wave count for the chart. As you can see, the wave count is pretty good, suggesting that the low of August 6th was a wave 4. With wave 2 being a simple wave, wave 4 should be a complicated wave, which indeed it is. Wave theory suggests that wave 5 is usually the length of wave 1 and this means that wave 5 could top out at 541, and not the 521 suggested by the resistance trendline.

S&P 100 Index

Graphic provided by: AdvancedGET.

Advanced GET also offers a MOB (make or break) line. The MOB indicator has been designed by Advanced GET as a tool to help determine the target price of a wave 5. It is interesting to see that the target suggested by the MOB indicator is exactly 521. Does this mean that wave 5 will top at the cycle midpoint? Very possible.

The 67 PTI shown on the chart, is a probability factor, suggesting that the probability of wave 4 being true, with a wave 5 to follow, is 67%. Anything below 32 would make the wave count suspect.

I have also drawn in an MACD indicator, with the parameters of 12 and 25, which is suggesting a positive signal, as the maroon line breaks above the blue line.

Finally, the observant will have noticed the only negative in the above scenario -- the key reversal on August 13th. A key reversal occurs when the day's high is above the previous day's high and the day's low is below the previous day's low with the close below the 50% level of the day's trading range. This could very likely lead to a down move before the expected rise to test the upper trendline.

Is the U.S. economy recovering? The OEX suggests it is, but with plenty of hiccups along the way that will test the faint of heart. For the short-term however, the trend does appear to be up.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.