S&P Futures: Market Wrap for October 4, 2010

In my weekly wrap up I presented a case for a bearish turn... the completion of W. 2. Moving forward I will be using a similar format so that everyone can see how I combine 4 factors to locate a possible trading opportunity and make a trading decision. I hope everyone finds this helpful and I'd like to get some constructive feedback.

Here's the bottom line as of the close of trade.

Momentum: Overbought. Weekly momentum is starting to roll over. Daily momentum continues to decline but remains in overbought territory. 60 minute momentum is oversold and has turned up indicating sideways to up prices early on tomorrow.

Pattern: Possible beginning of W.3 or building a larger W.4 decline that can't be ruled out at this juncture. That's why I stated in my weekly wrap that at a minimum a 3 wave decline would transpire. Keep in mind that my suggestion to go short was based upon the fact that two viable wave count interpretations indicated that the market position had a high probability of a decline for today's trade.

Price: The decline from 1153.5 has remained in channel lines. If indeed a larger degree W.3 is unfolding, then price MUST break through the bottom channel trendline in an impulsive manner (See red bar). Tomorrow that line crosses 1119. A break of 1119.25 would also bolster the bearish case. Conversely, a break of the upper channel line and a close above 1144 would indicate that the decline from 1153.5 was just part of a larger W.4 correction and we can expect new highs with limited upside potential.

 Time: High to high cyclical patterns indicate that a momentum high should be reached within the first hour of tomorrow's trade.

Trade Strategy: As long as weekly and daily momentum remains in overbought territory, short positions should be established on lower time frames. Look for 60 minute momentum to reach an oversold condition. Enter a short position on a lower TF as the lower TF momentum makes a bearish reversal. 

Best of Trading