(07/26/10) Fibonacci Analysis for Trading These Markets

Friday made a new high that ruined a bearish count for some bears. Don't feel too sorry for them, because they can still devise another bear count. This weekend, I wanted to look at the big picture again, and because there is some ambiguity in the weekly chart of ES, I have compared the weekly charts of other indices. It was an informative exercise.

First, we will look at the weekly chart of ES that has been guiding my analysis by providing an overarching view of the market. Back on May 6, when we had the big one-day crash, I presented an overview of the market and said that I thought it was very possible that we were seeing a W4 of the rally from March 6 developing. I gave two W4 targets with the 61.8% retracement of W3 being the most extreme target that had to hold. Well, as you can see on the chart below, ES did get down to the extreme level and reverse. Now it stands as a line in the sand for the bulls. This count on this chart is made by AdvancedGET, but this software is not the Holy grail. It merely gives one way to count this market. Because not all the indicators confirm ES making a new high, I look at the other indices in the charts following. To confirm that this is most likely a W4, ES needs to get above 1029.50 (Wave B of W4).

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Next I look at the Dow Transport weekly chart. The Dow Transportation average has traditionally been a leading index. The analysis of this chart shows that all the indicators and other factors I look at are favorable to a successful W5 developing. Specifically, where the PTI (profit taking index) fell below 35 on the ES chart (not good for a successful W5), it is greater than 35 on this chart.

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The Nasdaq has been a strong segment of the market throughout the rally from March 6, 2009. As with the Transports, the Nasdaq weekly chart also supports a successful W5 taking out the W3 high. Also, like the Transports, W3 ended at the 78.6% retracement of the former market high (not the bubble in the early 2000?s). Getting above this level will be very bullish.

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NEXT: Timely Look at the Dow, More

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Then we look at the mighty Dow. It too supports the development of a successful W5 with a reversal at the most typical W4 target level (50% retracement of W3).

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The overview of the weekly charts of the indices seems to support the count that I have on the charts. Until ES says otherwise, I will go with this bullish view of the market. I am sure EWI won't approve of this count, but I never was a joiner. I want to live up to my motto, "Always original, sometimes right!" For those who believe that W3 was the end of an impulsive move and not W3, I say that that is entirely possible. That count is not far behind this count. I can make GET give me that count by using a daily chart. I must admit that one consideration that makes me favor the more bullish view of the market is the "summer rally" phenomenon. No matter which view is correct, it doesn't make a difference in my daytrading tomorrow.

So what about the next trading session? That is really what my analysis is all about. Actually, we are at a somewhat tricky spot. I can make a case for either strength or weakness. Just because I believe we are in a W5, it doesn't mean I think that every day will be up. The chart below explains what I am seeing in the market. Bottom line, the most bullish thing I can see happening is a gap through the 78.6% resistance level I have on the chart and a strong rally. The next most likely scenario is consolidation under the resistance before heading higher. And then there is a bearish scenario where ES corrects back to the former W4 before heading higher. I can't predict which will happen, but I will give updates as ES yields more data.

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