Wednesday, August 27, 2014

SPX, NYA: Correction Near?

Yesterday, SPX captured the 2004-2010 target zone.  Interestingly, the intraday high was 2005.04 -- and that makes this only the second time in history that the price of the S&P 500 has traded within 9 points of the year (in this case, 2014) that it's trading in.  The last time this happened was in the year 9 A.D., when SPX was trading at zero.

Rumor is that, even back then, certain permabear market services were sending out alerts to "go fully leveraged short" if the market "ever advances from zero and trades at any real number," with "stops at SPX 2000."  My understanding is that some of those subscribers' distant kin were finally stopped out this week, for a tragic loss of 1999.99 points.  It pays to consider both sides of the trade!

Anyway, we're finally into the zone where at least a minor correction would be reasonable -- though this type of thing is primarily for aggressive traders.  Even considering trying to catch a turn here is essentially front-running, since the up-sloping trend channel is still intact.

The question now is whether SPX has another fourth and fifth wave left to unwind, shown on the chart below as green 4 and 5.  I think it's reasonable to assume that it might, but I don't think it's a given.  In a moment, I'll share some more thoughts regarding both counts.

Let's skip over to the NYA, then come back to SPX.  NYA's chart is telling us one thing with high probability:  odds are good that the "final" all-time-high isn't in yet for SPX.  This is because NYA has a three-wave corrective decline, which means that correction should ultimately be retraced completely, to put NYA at new highs as well.  What NYA's chart is not telling us is how we get there -- we can make assumptions in this regard, but any assumptions are only that. 

The easy and obvious assumption would be that we have another fourth and fifth wave left to unwind, shown below in red.  Longer-term, that's probably what bears want to see happen, because it would mean this wave at least has a chance to complete relatively soon.  But there's still another possibility, and that's for the rally to have been part of an ongoing correction, such as a triangle (shown in black).

So, how do we sort one option from the other?  At this moment, we really can't.  Considering that there's still nothing in the way of a notable correction on the charts at present, there's very little info to parse in that regard.  Thus, we'll watch the shape of any pending correction:  If it appears to be an ABC into the red (4) zone, then we'll know to expect new highs to follow fairly directly; if it appears to be a five-wave impulsive decline, then we'll know to expect a deeper leg down.

If a deeper leg down were to unfold immediately, thus stopping NYA from reaching new highs, we would probably have to treat that as a significant buying opportunity, as that would suggest the rally in SPX was only wave 1 of a larger structure.  This is one reason why, earlier, I mentioned that bears probably want to see new highs more directly.

The main reason I'm considering the potential of a deeper correction is because SPX still has me considering the possibility that the rally from 1928 was all part of an extended fifth wave.  The blue path on the chart below would be the typical expected retrace if we're dealing with an extended fifth.  If SPX was not and extended fifth, then the first pending correction should be minor, and SPX has a shot at reaching Target 2 in the relatively near future.  Again, we'll simply have to watch the structure for signs of a three-wave or five-wave decline.

In conclusion:  near-term, the market has a decent chance of beginning at least a minor correction.  Intermediate-term, it's unlikely the final highs are in.  Longer-term, we may be close to wrapping up a large five-wave rally, in which case an appropriately large correction will ensue afterwards -- however, that still appears to be at least a few turns down the road, so probably not what we should be focused on just yet.  Trade safe.

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Monday, August 25, 2014

SPX and NYA: (Insert Witty yet Germane Title Here)

Yesterday turned into "one of those days," so I'm going to have to keep the update short on words in order to

(Editor's Note: Our apologies, but the author has already exceeded his word limit for the opening paragraph.)

Okay then, let's get right to the charts here!

Last update I placed a blue (3) at Thursday's high, because the micro count seemed to show a complete wave -- but my confidence was low.  It turned out that micro count was correct, which allowed me to pick up a few quick points on the short side for the C-wave of (4), and hopefully provided readers with a rough location (blue (4) on Friday's chart) for dip-buying.

We may or may not have another 4th and 5th wave left to unwind -- to be determined in real-time.

The SPX 2-hour chart shows one "out on a limb" count, which is dependent on whether the aforementioned additional 4th/5th wave needs to unwind.

As noted Friday, NYA still suggests higher prices for SPX:

In conclusion, as of right now, the trend remains up and the wave structures remains pointed higher.  As this wave unwinds, I'll use the micro count to help determine whether the market is likely to continue beyond the first target zone (assuming it's reached, of course) or not.  Trade safe.

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Friday, August 22, 2014

SPX, INDU, NYA Updates -- Plus the Purpose of Each Wave and Why the Market Isn't Random

As I was looking over the charts last night, I found myself having the same thought over and over:  Wow, is it tempting to get bullishly complacent here...

This smells like a fifth wave.  Fifth waves are the ultimate bastions of complacency.

In the first wave up of a bull market (talking larger wave degrees here -- daily, etc.), the majority are convinced it's not the start of anything -- they figure it's a counter-trend rally to the prior down trend and soon to collapse to new lows.

In the second wave down (which corrects the first wave), the majority believe the collapse has begun.  They continue to believe this even after the third wave up begins -- at first, they figure the third wave is "another" counter-trend rally.

So they short the third wave just when they should be buying.  It keeps powering higher, and their stops provide additional rally fuel.  Somewhere around the middle of the third wave, we hit "the point of recognition" for the masses, and they realize the trend is here to stay for a while.  There's a sudden "herd mentality" rush to jump on board, and that gives further fuel to the third wave.  These are some of the reasons third waves are usually the longest and most powerful waves.

After what seems like forever, the fourth wave correction comes along and confuses the heck out of everyone.  It knocks out the trend followers.  They jump back in.  It knocks them out again.  The permabears are convinced it's the start of a new collapse.  But the majority do not believe it's anything other than a correction -- and they're right.  During fourth waves, counter to "contrarian" philosophy, the majority sentiment is usually correct.  The job of a fourth wave is NOT to strike mortal terror into the masses (like the second wave did), it's to try and screw everyone up and make trading hard again (and fourth waves serve another purpose, which we'll discuss momentarily). 

Eventually, the fourth wave finally ends.  Wait, no, sorry -- just got the memo here, it's not over.  Maybe it's a triangle?  Ah, an expanded flat!  Okay we can move on to the next paragraph now. (Sorry -- just a little fourth wave humor there, for the Elliotticians in our audience.)

Finally the fourth wave ends and... wait, that was only wave A of the expanded flat!  Hang on...

Okay, whew, eventually the fourth wave ends (really!) and the market enters the fifth and final wave up.  By now, bulls are fat and happy.  Nothing can go wrong!  See, we're at new highs again, just like we told you idiot bears!  All dips should be bought going forward, forever and ever, amen.

Complacency reigns.

Bears, on the other hand, are sick of it.  They thought for sure that last fourth wave was the start of the end.  They're done.  No more shorting!  Ever.  It's a proven historical fact that more bears join monasteries during high-degree fifth waves than during any other wave.    

And this is one of the other jobs of fourth waves in a bull market: They condition traders to buy the dips.  By the time the big fifth wave rolls around, traders have become deeply conditioned by all the fourth waves that have unraveled at lower degrees over the recent months (or years) and which have culminated with new highs each and every time.

Think of where we are now -- every time bears think something is getting going on the downside, the market recovers.  Fourth wave at subminuette degree -- new highs!  Fourth wave at minuette degree -- new highs!  Fourth wave at minute degree -- new highs!!!  Etc.  There's been no end to the new highs.

See, all of this is necessary to ultimately create the psychology we encountered back in waves one and two.  Once the trend finally does change, no one will believe it anymore -- not even the handful of remaining bears.  Everyone will think it's another fourth wave "correction" -- right up until that big third wave down hits and wipes everyone out.

And then we rinse and repeat all of the above, but heading down instead of up (for a bear market or major bull correction).

This is a glimpse into what creates the patterns and fractals that make up Elliott Wave Theory.  It's not some crazy esoteric voodoo; it's simply a reflection of human nature.

The market isn't random -- because people aren't random.  They're irrational, yes -- but they're at least partially predictable in their irrationality.  If you walk into a crowded theater with something strapped to your chest that looks like a bomb, then walk up on center stage and threaten to detonate yourself, you will most assuredly get an irrational reaction.  But you will not get a truly random reaction.  In fact, given a few control studies, I'd be willing to bet that we could determine exactly what percentage of the audience would react irrationally and in what way (plus or minus a few percentage points).

(Please note I am NOT suggesting anyone attempt this.)

Individually, strangers are completely unpredictable.  Yet people have a finite range of reactions -- so if you obtain a large enough sample, you can predict -- with high accuracy -- what people in most any group will do in most any situation.  And you can then piece all that together into a pie chart (a finite and closed chart), with only a very small percentage of people falling outside the "normal" reaction ranges.  It might look something like this when you're all done:


People taken individually may seem to behave randomly; but collectively, we behave predictably.  People are funny that way.  As noted, this reality of human nature effectively allows us to predict what an entire group of people will do in almost any situation, minus a very small handful of outliers.  That's why they only need to poll a few thousand people to figure out how an entire country feels about an issue, instead of polling millions (or polling everyone).

And this is why I find it plain silly when people think the market is random, and that Elliott Wave is some impossible theory.  Virtually nothing that involves the herd is truly random.

Anyway, I digress.  The point I started off to make was that the current market's sentiment feels like a fifth wave at higher degree.  That doesn't mean it can't run for a while, though.

Let's start off with NYA, which suggests SPX still has farther to run into new all-time-high territory:

The SPX 2 hour chart is shown below (the referenced fourth wave would be at micro degree -- see next chart).

 The SPX 15-minute chart shows a beautifully-defined channel:

INDU may provide an interesting clue about where we're headed.  Sure looks like a fifth wave here:

Another look at INDU's very-long-term wave count shows that it's possible we're closing in on the end of a massive B-wave rally, but I currently think it's a bit more likely that we'll need to unravel a much larger fourth and fifth wave before the end of the world.  In practice, though, we don't really need to know the answer to that question, and it's irrelevant at this moment.

All we need to do is identify the inflection point where the trend changes from up to down, like we did last month, and know when it's time to stop shorting and/or go long again, like we did this month.  Action is always taken in the present, so trying to determine very long-term wave counts is done primarily for context and to aid in alertness.

To bring up this chart in its full 2200 pixel glory, right mouse-click on the chart and select "open in new window."

In conclusion, we may be nearing a small fourth wave correction at micro degree (SPX 15-minute chart), but it presently appears unlikely that the rally is done for good.  NYA and INDU are both begging for new highs after their recent large ABC declines, so we have to continue to presume the larger trend remains up unless and until the market gives us reason not to.  Trade safe.

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Wednesday, August 20, 2014

SPX, INDU, COMPQ: It's an FOMC Day; Do You Know Where Your Chairman Is?

The big event today, of course, is the FOMC minutes.  FOMC minutes are always a big event for the market, since the Fed controls liquidity, and liquidity drives risk assets.  I've been a part of the trader subculture for so long now that I almost forget that the average person doesn't really care about the Fed -- and doesn't see them as connected to the stock market in any tangible way.  They think stocks go up or down based on superfluous irrelevancies like the economy and news.

By way of example, the other day, I had a relative point at a picture of someone who bore a vague resemblance to Ben Bernanke and ask me (and I quote):  "Isn't that guy the head of something?"

"You mean Ben Bernanke?"  I asked.  She nodded.  "Well, that's not him -- but he was Fed Chairman," I replied, "Now Janet Yellen runs the show."  That drew a blank stare.  I guess Yellen hasn't been in charge long enough to have made it into the mainstream yet.  We can thus surmise it'll probably be a few more years before the kids are carrying around Janet Yellen lunchboxes, and every pre-teen fan-girl is sporting the stylish Janet Yellen "white bowl filled with sour grapes" haircut.

Anyway, that doesn't have much to do with anything, but it's interesting to consider that while we'll be cued in to everything in the minutes tomorrow, the average person couldn't care less; doesn't recognize any relevancy; and will simply keep sending in their mutual fund contributions every month -- probably regardless of what happens at the Fed.

But for traders, FOMC days are often a wild ride.  Accordingly, I usually put up at least one long-term chart on FOMC days, because it sometimes helps to step back from the ticks, for purposes of maintaining more level emotions in trading.  We'll start off with the long-term SPX daily chart.

The near-term SPX chart has continued developing a somewhat odd-looking wave structure.  Afterwards we'll take a look at INDU and COMPQ for a couple interesting options.

COMPQ made new highs already, and thus validated last month's preferred IT count for that index.  One can conceivably count the rally there as five complete waves, but it's far from traditional to do so.  In blue is the more "expected" way to count this structure.

INDU's chart calls an interesting confluence to attention, and brings a little "fair and balanced" charting for the bears in our audience:

The old key resistance zones on INDU are now the first important support zones.

In conclusion, the market is near a minor inflection point, which seems appropriate for a Fed day.  SPX is only 10 points from the all-time high, and the zone around previous swing highs is often good for at least some degree of resistance, so this is an area in which longs should stay alert.  The near-term charts have continued developing into less-than-predictable waveforms, so trading support and resistance here may be the best option at the moment.  Trade safe. 

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Tuesday, August 19, 2014

Quick SPX Update

Just a brief update today, since it's Tuesday.

Yesterday, SPX broke above 1964 as if nothing had happened on Friday.  That's not particularly bearish price action.  NYA overlapped its wave A low at 10,880 (though barely), but that in itself suggests the bull count was correct all along, and I was silly to even consider the possibility that the near-term waves were suggesting anything other than SPX 35,000 by the end of the year.

I never turned bearish after my SPX target of 1899-1907 was hit, but I did get a little concerned about the bull case, because the near-term waves were mimicking some bearish patterns.  That's not completely unheard of near major pivots, which is why I wrote on on August 13 that "SPX would maintain a bullish bias above 1944," and on August 15 added:

"Be aware that wave counts are not always apparent in real-time, and this is NOT a particularly clear structure to draw from.  SPX could (for example) be in a smaller nested third wave rally, which is why I suggested (on 8/13) that bears exercise caution above 1944."

At this point, there's nothing bearish going on in the charts, and I see no reason to continue doubting the original wave count, which anticipated that 1899-1907 SPX would mark the bottom of a higher-degree fourth wave, and culminate with new all-time highs.

Assuming a traditional third wave rally for "bull (3)," the classic target would be 2032-2042. 

In conclusion, bulls have overcome every hurdle they've reached so far -- so unless and until something happens to break the up-facing wave structures, bulls should probably continue to be given the benefit of the doubt.  On the SPX chart above, as long as bulls maintain 1964 first, and the up-sloping channel second, there's nothing in the price action that even hints at weakness.

Keep an eye on 1976-81 as potential resistance and the next bull hurdle.  Trade safe.

Monday, August 18, 2014

SPX, NYA, INDU: Friday's Action Helps the Picture Gain Clarity

In the last update, we talked about the market reaching an inflection point, and I noted that my preferred near-term count had SPX very close to completing an extended fifth wave.  Friday's sudden drop validated my near-term count, as extended fifth waves almost always see rapid retracements.

Bigger picture, the bull count has had some questions to answer, and we've been watching for further confirmation (or rejection) from the market.  Friday's action was actually quite good for the charts, and my instinct is that Monday or Tuesday's action will clear up the entire picture.  I'm not going to discuss all the options I'm still seeing at this moment because it would get extremely confusing for readers.  Thus I'm only going to discuss the most basic options today -- but I feel like I see what the market needs to do from here; so, depending on what happens today, I may pop in on Tuesday with a quick update

First off, let's take a look at NYA, which was the chart that "started it all," so to speak, and let us know to short the all-time-high in SPX and to cover in the 1899-1907 zone.  NYA remains an excellent canary in this situation, because it formed a clear 3-wave decline into the lows, which was what we'd anticipated from the beginning.  If it can now overlap its wave (A)/1 low, then we'll have early confirmation that odds are indeed favoring new highs across the board.

This is due to one of the most basic principles of Elliott Wave, which states that wave 1 and wave 4 cannot overlap the same price territory.  Therefore, overlap of the wave (A)/1 low would tell us that the rally is not a fourth wave, and that would leave two options:

1.  That the low was indeed the bottom of wave C, and the rally is indeed the anticipated larger fifth wave to new highs.
2.  That the rally was another second wave, which would lead to a decline of monstrous proportions on a break of the last swing low.

Given the broader picture, option 2 would be the underdog in this situation.  Thus trade into that key wave (A)/1 zone would suggest bulls remain in control of the big picture until proven otherwise.

SPX essentially validated my near-term extended fifth wave count.  It's unknown to me if Friday's low marked the end of the entire retrace of that wave, but trade north of 1964 from here would suggest several possibilities:

1.  We're launching directly into a larger third wave of the rally off the low.
2.  A complex "double retrace" back to 1930-35 via an expanded flat (which would play out as new highs north of 1964, then a fairly direct reversal to new lows beneath 1942).  In that event, the dip would be a buying op.
3.  A potential ending diagonal motive wave off the low.  This is currently an underdog.  For this option to gain traction, I would need to see "more of the same" in the shape of the price structure over the next day or two.  Suffice to say there should be advance warning if this is unfolding.

If there are no new highs above 1964, then bears would have a shot to turn everything over here.  If there are new highs, then their chances continue diminishing. 

On August 13, I suggested bears "exercise extreme caution" if SPX sustained trade north of the 1944 +/- pivot, and the market has since bounced from that zone twice, including on Friday -- so that zone has served bears well.  At this point, the pattern has now shifted, and 1929 +/- becomes the key pivot for intermediate bears.  (I'm assuming the market's use of 1929 as the new bear zone is purely coincidental, and of no relation to that infamous year.)

Finally, another look at the long-term INDU chart.  It's always amusing to me how the media ascribes so much weight to news events as drivers of the market.  Note that on Friday, INDU was rejected directly at the blue dashed line that I suggested (a week ago) would be important resistance.  In my experience, the market often leads the news, not the other way around.

In conclusion (perhaps counter-intuitively) Friday's big drop may actually aid in solidifying the bull case, depending on how things unfold over the next session or two -- and depending on how things shake out today, I may update again on Tuesday.  Trade safe.

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Friday, August 15, 2014

SPX, RUT, INDU: Big Picture Inflection Point

I have to admit, I've been really torn on this market since the bottom at 1904.

On the one hand, the market reached my target zone and rallied, which was the expectation I'd had all along.  On the other hand, I'm not keen on the wave structure near the lows.  A few markets, such as RUT, still have big questions to answer.  I would have really like to have seen a much cleaner wave structure at the bottom, so I could be gung-ho about buying the dips now.

Last update, I presented some of the holes I'm seeing in the bull case, but because of my prior expectation for a bottom at SPX 1899-1907 and the potential of new highs, I still have not shifted to the bear camp.  As I've wrote on Monday:  "While I am not entirely sold on the bull case just yet, that's a whole different animal than 'being bearish.'"

The challenge right now is this:  On a two-hour chart, everything looks fine for the anticipated fourth wave bottom at 1904 and straight on to new highs (that's a turn of phrase; don't take it literally) in a fifth wave.  But when we break everything down at the micro level, the pieces don't seem to fit together quite right.

So I'm remaining open to both potentials for the moment -- and fairly evenly-split on the two.  There's times I can look at the market and feel very confident about where it's heading (such as the last few weeks); but there are other times that all I can do is try to react to the price action in real-time in an appropriate manner.  Nobody's right all the time, and nobody needs to be -- one just has to have a reasonable idea of when and where to act, and when to sit still.

Let's look at some big picture charts.  Several markets have reached inflection points, including SPX, which closed yesterday at a rare quadruple confluence of resistance.  I have the bear count shown as the alternate on this chart, but as noted, I'm fairly evenly split on the two as of this exact instant.

INDU has cleared first important resistance:

RUT has not:

BKX rallied up to its next inflection point, where I had red (4) drawn on the chart:

Finally, the SPX 15-minute chart reveals that the near-term wave structure isn't terribly clear right now:

In conclusion, there's nothing in the charts that's screaming of a clear pattern, so the bull and bear options are pretty well in balance at this time.  I generally take action as a trader when the patterns are clear to me, or when I can get low-risk entries that strike me as a roughly 50-50 shot, but with significantly better than a 1:1 risk:reward ratio.  This is the type of market where I'm watching for the latter.  Trade safe.