Thursday, August 25, 2005
In yesterday's S&P post I said that the market would now drop to the 1/2 point of its current box near 1202 before the move up to 1268 can begin.
In the meantime it can be helpful to visualize the extent of any rally that might occur before the 1202 level is reached.
There are two methods I use to estimate the extent of likely reactions against the trend. The first is my box theory. In the case of the S&P move down from 1248 I estimate that the short term trading boxes for this drop are 12 points wide, but I have not drawn them on the hourly chart above to avoid confusion. In any case, a normal reaction against the trend is generally a box in length so a rally from 1209 should carry no further than 1221.
The second method I use as a check on my box theory calculations is to look at the extent of previous reactions in the same trend. In this case I have identified 4 previous rallies in this downtrend and marked them by solid blue lines on the hourly chart. These 4 rallies moved the market up anywhere from 10 to 13 points. So a rally from 1209 on this basis would end anywhere from 1219 to 1222.
My point is that a rally into the 1219-1222 zone would be normal and would not mean that the move down from 1248 is over.
If I thought that this drop would go much further than 1202 then I would look to sell in the 1219-1222 zone.