HEAD & SHOULDERS

The Wave 4 Correction

11/04/10 08:56:48 AM

by Koos van der Merwe

The Republicans have taken the US House of Representatives. How does this affect the market?

Security: SPX
Position: Hold

The Republicans have taken the House of Representatives, and the Dow Jones Industrial Average (DJIA) drops as expected. Is this because of the feeling that government is now at a stalemate? I don't believe that. The market may be correcting because of the political uncertainty rather than any negative action. The charts are saying that a wave 4 down is followed by a wave 5 up, which is usually a very strong move up. Let us now look at the Standard & Poor's 500.

FIGURE 1: S&P 500, DAILY

Graphic provided by: AdvancedGET.

Figure 1 is a daily chart of the S&P 500 and shows the following:

A. An inverted head & shoulders formation with a target of 1246.87 (1129.30 - 1011.73 = 117.57 + 1129.30 = 1246.87). This target could be the target for wave 5 of Wave III.
B. The relative strength index (RSI) is flirting with the sell zone, suggesting that the wave 4 of Wave III correction should be on the cards. However, note that a definite sell signal has not been given.
C. However, Fibonacci projections of wave 1 of Wave III are suggesting a 1.50 projection of 1218.32 and a 1.618 projection of 1232.39, the latter close enough to the inverted head & shoulder target to be considered.

Being the proverbial optimist (I am a Canadian citizen), and feeling confident that politics in the United States does not lead the market, I believe that the S&P 500 is still very bullish, and any correction is simply another opportunity to buy.

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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HEAD & SHOULDERS

The Wave 4 Correction

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