This long term monthly candlestick chart of the Sp500 is quite important. It shows that we are a very important battle line now in this long running debate between new bull market or bear market continuation point.
That is exactly where we stand right now according to the chart below. We stand at a point so precise that we are either on the cusp of a new bullish breakout trend, OR a continuation bear market point.
This chart makes it crystal clear. The main chart is the monthly candlestick price chart of the sp500 and the bottom left part of the chart is the ZOOM in of the current monthly bars. The bottom right of the chart is the ZOOM in of the daily time frame with the same long term down trendline cascading through prices.
What the main monthly (top portion) of this chart shows is that price has so far run all the way from March of 2009 back up to the top of the channel by the end of April. So we hit the top of the channel by end of April and then very strongly rejected the top boundary of the channel and slammed down in May Flash crash.
Now we find our selves once again hitting the underside of the channel by the end of September (similar in the sense that we hit the underside of the channel the first time around at the end of April). And by Wednesday of next week will be October 6th. So there seems to be some similarity in terms of the time frames (end of month) that we hit the underside of the channel and then very early in the first part of the next month we get slammed down hard.
You can see that the monthly candlestick for October is already forming right on the underside of the channel. Obviously it is only 1 day of trading in October so far but you can see the monthly candle trying to decide if it wants now to either strongly REJECT again the underside of this channel or do the complete opposite.
If you look at the daily portion of the chart above you can see that the doji reversal we had on Thursday was already a rejection on a daily basis above the channel. A similar occurrence happened on April 26, 2010.
The trend lines that define the top channel are drawn as precise as possible. My charting program snaps the trendline to the exact high or low price tick. Of course there is always some wiggle room, but I have to trust the preciseness of the line.
I must admit it is quite fascinating at how precisely price is reacting to this line even after all this time and confusion in the markets.
So the bottom line is that this current October monthly candle is now either going to bust above this channel or get slammed down in a strong bearish rejection.
This chart helps to give me confidence in the short side of the market because it looks very unlikely for me to see a northward breakout right from the first week of October. At a bare minimum I would think we should see at least a small bottoming tail created on the monthly October candlestick.
However at the same time, we need to keep in mind that a very strong gap up early next week right from the get go, or by Friday’s unemployment report, has the potential to create an unprecedented upwards surge in the market based on this long term channel set up. This scenario would only really become truly alive if we see price move above and hold above the long term down trendline with conviction. If we do not start to do that for a good portion of next week then I have to still believe in the short side.
I am no elliottwave expert, but the structure here also looks as though wave C down is about to commence and elliott wave 3 of 3 down into October. So the elliottwave count seems to confirm the bearish continuation scenario.
The ‘easy’ scenario for shorts next week would be a slam down hard early next week, followed by a short and weak rally once again back up to this long term down trendline, and then a total an all out rejection and collapse after that, see chart below for this speculation:
I can’t rule out the possibility that short positions will have to take some ‘heat’ next week, but I am hoping that the market obliges to this small head and shoulders pattern and makes it a bit ‘easier’. . .