New Bull Market. . . Or?

06/15/04 01:37:24 PM

by Koos van der Merwe

The market, as shown by the S&P 500 index, appears to be entering a new Bull market - or is this a sucker play? You decide. Here are the clues.

Security: SPX
Position: N/A

I'm starting with a weekly chart. A daily chart is used to find an entry/exit point, whereas a weekly/monthly chart defines an overall trend.

Figure 1: A last gasp for the S&P 500 index?

Graphic provided by: AdvancedGET.

The above weekly chart by Advanced GET, highlights my preferred Elliott Wave count. It suggests that the down move from 2000 completed a C-Wave in October 2002, and the subsequent trend is a 5-wave impulse pattern upwards. The chart also suggests that the S&P 500 index is completing a fourth wave and moving into wave five. The suggested target determined by the program is 1307.53. This is a 15% rise, which is reasonably substantial. The GET program also suggests there is an 85% probability this target can be reached, and that the index could go as high as 1448. With the PTI at 85%, this is very likely.

Looking at the indicators, the RSI is moving down, suggesting weakness. This is confirmed by the support and resistance lines which suggest a rising wedge formation. Price tends to break downwards from a rising wedge. These two factors alone make the target prices of 1307 and 1488 suspect. Because of this uncertainty I have added the Make or Break (MOB) study of the program to the chart.

The MOB (Make or Break) study is a tool that can help you find the target price area for the end of an Elliott Wave 5, or for any pattern that has an impulse-correction-impulse pattern. The MOB target is only 1184, suggesting the 5th wave could be a flat. This seems to fit in with the rising wedge and falling RSI.

So. . . is this the start of a new bull market, or. . . is this a bull trap?

Figure 2: Monthly chart of the S&P 500.

The monthly chart is showing a very different scenario. Here, the S&P 500 index is in a rising B-wave, while the rise shown in the weekly chart is a five impulse wave in a major B-Wave upwards. B-Wave are notorious bull traps, and as the fifth wave shown in the weekly chart unfolds, many could be trapped in the rising bullish enthusiasm.

On September 30, 2003, I presented an article, "The S&P 500 And Its Lines," which will explain the Gann fans on the chart. I have added the major Fibonocci retracements to the chart, showing that the Index has retraced to the 50% level and could rise to the 61.8% level should it break above the resistance at 1162. With this in mind I have drawn (blue lines) a possible future scenario.

Caution prevails, and the weekly chart is indicating the investing community dislikes the uncertainty prevalent in the world at the moment. Be careful out there.

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.