Expanding Triangles

Given the violent nature of last weeks price action, this report will begin with some words on Expanding Triangles. From Mastering Elliott Wave by Glenn Neely:
Of all the wave patterns under Elliotts theory, the Expanding Triangle creates the most treacherous trading environment. Much worse than its non-trending mirror image (the Contracting Triangle), this pattern continually creates the illusion the market is breaking out. This is quickly met with a reversal and then the break of a support or resistance level on the other side of the trading range. The phrase whipsawed was probably created by a trader experiencing this formation. To improperly diagnose this pattern can cause sever financial pain. Unfortunately, there is no way to anticipate the formation of one of these patterns. On the other hand, strict and proper application of all the rules and techniques discussed in this book should keep you out of the market since you will not be able to decipher what is taking place. Lack of a clear pattern formation is the ultimate no action indicator.

I added emphasis on the last sentence there. We knew something odd was going on with the market the last few months as we witnessed a series of back to back corrective legs, indicative of a triangle pattern. For several weeks, we had been favoring the expanding triangle concept, but because the dwave never set a new high, we had to alter the view a bit on last weekends update. It seems, in the end, we were witnessing an expanding triangle, of a running variety. In a running triangle, the d-wave FAILS to exceed the peak of the b-wave and tends to produce a very large e-wave, as big as 261.8% of the a-wave. Given, the violent and unidirectional price action last week, a powerful e-wave is the most likely and best explanation.

Andys Technical Commentary__________________________________________________________________________________________________

S&P 500 ~ Weekly Close Log Scale

I often look at candlestick charts because its important to see the shapes of the candles and the absolute lows and highs of a single trading period are important to know in order to fix support and resistance points. However, the true nature of a market, especially a confusing one, can sometimes only be seen on a line on close basis. The line on close is the X-Ray of the body of the market. The most important time of the trading day is the open and the close. Most of the volume gets done on the close--thats where real buyers and sellers come together to establish the market clearing price. The expanding triangle x-wave is clear on the Weekly Chart.

b y
1344

(B)
b d 2

a
1

w
1150

a d

1178?

x
a c 4 3 From Mastering Elliott Wave: Running Expanding Triangles are the second most likely type of Expanding Triangle. It is characterized by wave-d failing to exceed the termination of wave-b. If the d-wave fails, the pattern will have a slightly skewed upward or downward appearance; also, waves a & e will probably relate by 261.8%. In this case, that would suggest an e-wave weekly CLOSE of 1178.
1040

c (A)

Andys Technical Commentary__________________________________________________________________________________________________

S&P 500 ~ Weekly Big Picture

The e-wave of an expanding triangle rarely gets retraced by the next wave. The implications are that 1345 will serve as a market peak for at least the next few years. This next (C) Wave should last AT LEAST two years and targets an S&P 500 around 800. Market participants should prepare themselves for a difficult a trading environment through 2013.

-Bb y (B)
Important Top at 1345

z a w x

-A-

(C)

c (A)

Andys Technical Commentary__________________________________________________________________________________________________

S&P 500 ~ Daily: The Head and Shoulder

We actually received a Head and Shoulder top formation. Last weekly, I really only heard one person, Art Cashin, talk about this on CNBC. Perhaps there were others, but it didnt seem like a topic getting much coverage on CNBC, which helps explain why it came to fruition. The exact target for the pattern is 1142, very near the 61.8% retracement of 1156. Theres been this tendency of x-waves to hit exact Fibbo retracements, so my bias is that the market will bounce near that level.
HEAD L.Shoulder R.Shoulder

1261

1142 = Target

If the market does get a decent bounce in the next few weeks, the 1260s will serve as stiff resistance. Longer term investors should be using any good rally (i.e. anything near 1250) as an opportunity to EXIT this market. Its unlikely that the highs of 2011 will be bettered.

(C)

Andys Technical Commentary__________________________________________________________________________________________________

S&P 500 ~ Daily w/RSI

I did hear a lot of technical banter about how oversold the RSI readings were last week. Indeed, we registered a low of 23.9, which is historically oversold. Those kinds of low readings do lead to meandering/grinding rallies in the weeks that follow, but rarely signify THE low in the market. Please observe the vertical date lines showing other days that triggered very low RSI readings. It wasnt until the final panic low in March 09, when it seemed that all the banks would be nationalized, that we got the final oversold reading which was THE ultimate low. In other words, if you were just buying the oversold readings throughout 2008, you would have been broke and stopped out of the market by March 09. Also, even if one wanted to buy for the oversold bounce, its always a safer bet to buy when RSI divergence is triggered--a new low price where the RSI fails to set a new now. (see green lines below as examples).

Andys Technical Commentary__________________________________________________________________________________________________

S&P 500 ~ 120 min. with Weekly Support and Resistance

The support and resistance zones are much wider in the week ahead, which should be expected with the increased volatility. 1235 is the 38.2% retrace of the waterfall move down while 1261 is obvious chart resistance that also aligns with the 50% retracement. The support points of 1156 and 1142 are the 61.8% retrace of the y-wave and the Head and Shoulder target. Shorter term traders can try and buy this market in the 1156-1142 zone and play the short term bounce. Longer term traders/investors should attempt to liquidate length on any kind of rally.

Andys Technical Commentary__________________________________________________________________________________________________

PLEASE NOTE THAT THERE IS ADDITIONAL INTRA-WEEK AND INTRADAY DISCUSSION ON TECHNICAL ANALYSIS AND TRADING AT TRADERS-ANONYMOUS.BLOGSPOT.COM

Wave Symbology "I" or "A" I or A <I>or <A> -I- or -A(I) or (A) "1 or "a" 1 or a -1- or -a(1) or (a) [1] or [a] [.1] or [.a] = Grand Supercycle = Supercycle = Cycle = Primary = Intermediate = Minor = Minute = Minuette = Sub-minuette = Micro = Sub-Micro

DISCLAIMER WARNING DISCLAIMER WARNING DISCLAIMER

This report should not be interpreted as investment advice of any kind. This report is technical commentary only. The author is NOT representing himself as a CTA or CFA or Investment/Trading Advisor of any kind. This merely reflects the authors interpretation of technical analysis. The author may or may not trade in the markets discussed. The author may hold positions opposite of what may by inferred by this report. The information contained in this commentary is taken from sources the author believes to be reliable, but it is not guaranteed by the author as to the accuracy or completeness thereof and is sent to you for information purposes only. Commodity trading involves risk and is not for everyone. Here is what the Commodity Futures Trading Commission (CFTC) has said about futures trading: Trading commodity futures and options is not for everyone. IT IS A VOLATILE, COMPLEX AND RISKY BUSINESS. Before you invest any money in futures or options contracts, you should consider your financial experience, goals and financial resources, and know how much you can afford to lose above and beyond your initial payment to a broker. You should understand commodity futures and options contracts and your obligations in entering into those contracts. You should understand your exposure to risk and other aspects of trading by thoroughly reviewing the risk disclosure documents your broker is required to give you.