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Where To Now?

06/07/10 12:39:15 PM
by Koos van der Merwe

With problems in Europe, the disappointing jobs report in the US, and the oil drama in the Gulf of Mexico, the question is, what's next?

Security:   SPX
Position:   Accumulate

Once again I have to turn to my charts and believe in what they tell me. Once again I turn to The Elliott Wave Principle by AJ Frost and Robert Prechter for guidance, although lately I am beginning to disagree with Prechter's bearish viewpoint. However, that is what makes a market -- opposing views on what will happen next. Every economist has two hands, after all, and this is also true for technical analysts.

Graphic provided by: AdvancedGET.
Figure 1 is once again a daily chart of the Standard & Poor's 500, showing my wave count suggesting that April 2010 is a major Wave I and that market movement since then is a major Wave II. Observe that the index is in the range of the fourth wave of a lesser degree, but this rule does not apply to a major Wave II, which can be as much as a 70% retracement of a major Wave I. In other words, the index can test the 831 level (70% retracement of 1217 - 666 = 551 * 70% = 385. 1217 - 385 = 831), but this is not a fixed perecentage, as a Wave II can bottom wherever it wants to.

The relative strength index (RSI) is, however, suggesting strength with a divergent buy signal, and bolster bullish sentiment. The index will have to break above the 1107.17 level, a point that has become a strong resistance level. Looking back in the chart, you can see that every time the RSI has fallen to the present level, the correction has reversed. There is no reason to believe that this could not happen again.

At the moment, I feel as isolated as a bull in a bear trend, but I am convinced that I am correct in my prediction. The best time to buy stocks is when everyone is bearish, and at the moment, almost everyone is. But most analysts, like economists, do have two hands, so they can only be 50% wrong. The secret is to change your opinion fast.

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.

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Date: 06/08/10Rank: 5Comment: Koos, The probability of a double dip recession have increased dramatically. That said, the 831 figure looks possible. Hope all is well. Dick Slayton
Date: 06/08/10Rank: 3Comment: 
Date: 06/12/10Rank: 3Comment: 

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