Now let’s put Friday in perspective. Here’s the banking index which looks as good as it has in a long time. We should be hitting some turbulence soon as price action is finally going to hit the ridge of resistance from the latter part of 2010. But this is the best rally banks have had since the 77 week lift-off in the Dow back in the autumn of 2010 when they announced QE2. It has a good chance of testing the 200 week moving average. But the takeaway from this chart is you can’t even see Friday’s attempt to take the market lower. So is everything rosy? Are we going straight back up? The SPX chart going back to the May high is a very good GPS system. First of all the dark blue line is the median line to the longer term secular bear market I’ve shown you from time to time. The light blue rising median line is an intermediate from the 2009 bottom. Here’s where it gets interesting. The descending brown line is the trend line that has contained the move since the May peak last year. Then we have a couple of brown rising lines which take the form of an ending diagonal triangle right here. There is also a dotted brown line which intersects the longer term median line from 2009. Here are the scenarios. The market can elect to top close to where we are now with the rising wedge. A move like that if validated could take us down to the November low which was the start of the Santa Claus rally. That projection comes from long term observation of what happens after wedges peak. They usually go to the origin. The other scenario if we break through these lines we go a lot higher and meet the rising dotted line somewhere near the median line from 2009. More than likely that would be the retest of the 2011 peak I’ve mentioned here.
With all of the news coming out of Europe, they didn’t celebrate MLK Day on Monday. They were open for business and their markets shrugged off all of the downgrades. Take that for what it’s worth. Here’s where we are at. The SPX is aiming to create a wedge or it isn’t. In terms of sentiment, we are not quite there. The reason for that is bears would not be able to take the market down the way they did if conditions were euphoric. We are not euphoric, nowhere near it. The last time we had real euphoria in the market was the day they hot Osama Bin Laden. If bears can dominate even half a session we are not in a position to judge that the market has only one place to go which is up. There’s plenty of doubt about it. Right now we are in the stage of ‘wonderment’ that the market can survive a day like Friday. In terms of the bigger picture that means there is more to go to this move.
Click charts to enlarge
Jeff Greenblatt is the author of Breakthrough Strategies For Predicting Any Market, editor of the Fibonacci Forecaster, director of Lucas Wave International, LLC. and a private trader for the past eight years.
Lucas Wave International (https://www.lucaswaveinternational.com) provides forecasts of financial markets via the Fibonacci Forecaster and other reports. The company provides coaching/seminars to teach traders around the world about this cutting edge methodology.