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Friday, November 21, 2014

SPX Update, and How the Market is Similar to a Hurricane

If you're a fundamental bull, you can skip the first few paragraphs, which are written primarily for fundamental bears.  I've noted below in caps where fundamental bulls should pick up again.

I think bears face a psychological challenge that bulls do not.  Bears tend to see what's wrong with the world -- and this can sometimes lead to a sort of righteous anger over perceived wrongdoing by the Powers That Be.  The problem is, while this anger might, in some cases, be completely justified, that kind of emotion just doesn't help a trader.

I think bears need to try and unplug from the bear emotions as best they can.  I've gone through a long arc as a trader, so I've been searching my own experiences for ways to help them do that.  Basically, for me, I started as a fundamental bull (back in the 90's).  At some point in the year 2000, I started waking up to some of the colder realities, and by 2001, I had become a fundamental bear.  At one point, I had a sort of righteous anger, too.  But over the years, I came to realize that emotion was hurting me as a trader, and eventually I unplugged from it.  I'm a fundamental bear, but that's not what I trade.  I try to think and trade like a bull when conditions dictate.

I realize it may be an uphill battle to convince my readers to put their emotions aside, because emotion sells.  Some subscription services even seem to encourage negative emotions, packaging fundamental bearishness with an almost-religious zeal.  I really feel this is hurting people more than it's helping.  It's one thing to be aware of what's going on; but it's entirely another to get emotional about, and/or pass judgment upon, the market.  I've written before about how there is no such thing as market morality.  In other words:  The market does what it does, there is no such thing as what it "should" or "should not" do.

Whatever the market does is what it should do.  What we think it should do is, in actuality, only right when it's right.

Think of it this way:  while the people behind the scenes may or may not be immoral, the market itself is never immoral -- it is amoral.  It's like a computer:  garbage in, garbage out.

As a human, sure: get emotional if you like, and take action about the injustices you feel strongly about:  Elect new leaders, seek to educate your friends, take whatever actions your conscience dictates.  But as a trader, the only goal is to try and figure out what the market is doing and play accordingly.  Removing judgment about what it "should" do helps one do that.  The market itself doesn't understand right or wrong, after all.  It's not a conscious entity that can be held accountable for its actions, it's more like a force of nature.

And if a hurricane is barreling down upon you, it does no good to stand on the beach and scream at the heavens that: "It's just not right that this hurricane will destroy so many homes!  This hurricane should die down soon, that would be the right thing for it to do!"  If you attempt this tactic, most likely you'll become another casualty of the hurricane.  If you think the hurricane is senseless, how much more senseless are your actions in the face of it?

If you think the market is senseless, how much more senseless to fight it?  Especially with judgments of what is "should" or "should not" do?  The market will do whatever it does.  We can either choose to try and profit from that, or we can stand on the beach screaming how "It just ain't right!" until we're swept out to sea by storm surge.

FUNDAMENTAL BULLS START READING HERE:

Everything is great!  And getting better all the time!  Look on the bright side: the glass isn't half empty, it's completely empty!  And that means we can fill it up with something great.  Like lemonade that we made from the lemons life handed us!  That would be just swell!  The central banks sure are wonderful, aren't they?  They're really showing us that there's absolutely nothing to worry about, which is why they're continuing all sorts of radical and unprecedented action right now.

Speaking of, I think it's interesting how we're seeing a massive coordinated effort by the world's central banks at the moment.  What's strangely "coincidental" about all the coordinated CB activity that keeps making headlines, almost daily now, is how I noted, back in October, that the October 2014 decline felt (to me) like the November 2011 decline. And of course, I noted shortly thereafter that the subsequent (current) rally also felt like the rally out of the November 2011 bottom.

I think this is extremely interesting because it now appears that November 2011 was the last time we saw this level of coordinated CB activity. I actually find this encouraging, because it tells me that the CB's are leaving some kind of tell on the charts. I haven't been able to consciously identify exactly what that tell was yet, but I know it has to be there, because I made my observations about the feel of the market well before all the central banks made their intentions public -- so it's apparent that I was picking up on something subconsciously.

Last update noted that the market appeared to be reaching an intermediate inflection zone.  The jury is still out on the intermediate term:


Near-term, futures are indicating that bears get the hose again (putting the lotion on their skin would probably not have prevented this, despite Buffalo Bill's claims to the contrary).





I'd also like to republish a chart that I published on November 3, because this rally could simply keep grinding higher against all apparent odds.  In my opinion, quick stabs continue to be the only attempts bears should make against a move like this, since counter-trend traders can very easily end up stranded in this type of market.  INDU chart not shown, but I have one still-viable count that targets 18,500 +/- for the current wave, so the potential for a move similar to the one below remains alive.



In conclusion, we have an intermediate inflection zone, but still have nothing in the way of a topping pattern, and the world's central banks seem to be committed to pumping the world full of liquidity.  And really, what else is there to say?  Have a great weekend, and trade safe.


Wednesday, November 19, 2014

SPX, INDU Updates -- and Trader Psychology: How to Overcome "Fear of Missing Out"


At the end of this update, we're going to discuss a bit about trader psychology -- but first, the charts.  Last update maintained no material change in the near-term outlook from Friday, and that outlook ultimately proved to be correct:



In the bigger picture view, SPX is now in the vicinity of long-term resistance:



INDU is starting to look a bit tired, and needs to break out, and cleanly away, past the recent high to negate that look:



In conclusion, the rally has reached an inflection point in the form of long-term resistance.  Another small wave up isn't out of the question, and would, in fact, fit the micro pattern in SPX a bit better (though INDU is clearly questionable) -- however, on a larger basis, the risk/reward equation may finally be on the verge of tilting toward the bears.   Hopefully, bears have been patient enough to wait for this moment -- patience, after all, is a key virtue of successful trading.  Of course, patience doesn't always pay off -- after, all, not every inflection point will generate a reversal (or else they'd be called "reversal points"!).  Inflection points are simply zones where reversals become higher-probability.

However, despite the fact that patience doesn't always pay off, impatience does the reverse, and almost always loses capital.  Bears who have been impatient during this rally can probably vouch for the veracity of that statement -- and learn from it and consider it the cost of tuition.  The market can be a harsh teacher.  

In my experience, impatience is usually the result of anxiety.  Anxiety in trading usually results from fear of missing out on a move.  And fear of missing out is actually the result of an internal imbalance, because it is, at its root, a symptom of desperation.  We'll come back to this thought in a moment.

When I was a boy, my father used to tell me:  

Most people overestimate what they can accomplish in a year, but underestimate what they could accomplish in a decade. 

I believe this wisdom applies to trading in a very significant way.  If you can truly take the long view (and believe me, I know that's easier said than done!) on your trading, then you realize that over a decade there will be hundreds -- even thousands -- of potentially profitable moves.  And that knowledge makes it easier to accept that you're going to miss some of them.  At least, if you're a good trader, you'll miss some of them.  Bad traders will probably have a stake in every one of those moves (until they lose everything, anyway).

Why?

Because not every move is predictable.  Not every trade offers good risk/reward.  Not every market is tradeable.  Part of being a good trader is learning to come to terms with that, and being strong enough to say: "I'm not taking this trade, because it's garbage." 

This may be easier to truly drive home if we analogize it into terms other than trading.  Imagine you were a home-builder who built only custom homes.  As a home-builder, your livelihood doesn't depend simply on finding clients; it depends on finding qualified clients.  If you start building custom homes for every random person who walks in off the street and slaps $20 on the table, then you'll quickly find yourself bankrupt.  A key part of your success comes from your ability to properly qualify your clients -- so you have a lengthy set of criteria which determine whether you'll accept someone's business or not.  And you always determine this well-before you start building.

As a home-builder, you simply cannot afford to act purely out of anxiety over the future, because if you build houses for everyone who asks, then your capital will soon be entirely tied up.  And, of course, after those homes are completed, you'll find that many of your clients aren't paying off -- so you're not recouping your investment.  This could have been prevented by qualifying in advance and not building out of a sense of desperation.  Trading is no different.

Good traders will not have a stake in every move the market makes, because they are not entering random or long-shot trades based on anxiety and fear of missing out.  They are entering trades based on signals, patterns, risk/reward ratio, etc..  In other words, they are qualifying their trades in some meaningful way, just as a home-builder must qualify his clients.  And, ultimately, for the exact same reasons.

So, to go back to our talk of decades:  There are thousands of profitable moves coming.  Some of them will be tradeable; some of them will not.  Put analogically:  There are thousands of people lining up to buy one of your custom homes.  Some of them can afford your homes, some of them cannot.

Qualify them before you invest even one cent of your precious capital.

Dump the "fear of missing out," which stems from anxiety and desperation.  It's completely counter-productive and -- given the sheer unimaginable scope of pending future opportunity -- it's unrealistic anyway.  Trade safe.

Monday, November 17, 2014

SPX and INDU: Going Out on a Limb for the Long-Term


As I looked over the charts this weekend, the one theme that kept repeating is that the total market is rather odd.  Maybe it's just impatience, but after a while, I felt like jumping up and shouting, "I've seen enough!  Squire, lock this market away in the dungeon!"  Then I realized that I have no squire, no dungeon, and no authority to lock this market away -- so I guess I'm stuck with continuing to try and interpret it.  (But I think I finally have my Christmas wish-list figured out!)

Anyway, I've decided I'm going to go out on a limb in today's update.  Some weeks ago, I referenced the possibility that the market had not yet seen the higher-degree fourth wave, but was instead in the midst of a smaller fifth wave rally.  This will be easier to understand if seen on a chart, so let's start there -- the count I just referenced is shown as black "or 3/4/5."  I'll continue climbing out on the limb after this chart.



 
The limb I'm going out on makes that the long-term preferred count.  Part of the reason I've decided that is discussed on the chart below:


What I keep coming back to is that this rally is probably too strong to be a first wave.  Therefore, it's either a third wave or a fifth wave -- and, wouldn't you know it, there's one count that just happens to fit that character perfectly.  In fact, the black count interprets it as the fifth wave of a third wave; and to me, that seems to best fit the nature of this rally.

No material change to the near-term, except to note that Friday's bounce exceeded Thursday's high, and that means that in the event 2030 breaks now, the downside expectation has to be adjusted to match a potential ABC where wave C could equal wave A (see red annotation below). 




INDU:


And finally, BKX came close to making the new low I was anticipating here, but has thus far fallen short by two pennies:


In conclusion, this market remains challenging for anyone who's not a "just buy every dip!" bull.  It's overbought on a number of metrics, but has thus far only undergone a sideways-up phase in response.  As I stated weeks ago, this is not the type of market where one can make reversal calls with high-probability, so I'm continuing to abstain from even attempting to do so.

In the bigger picture, I suspect what we've been seeing is too strong to be only a first wave, and thus suspect we're currently unwinding ALL OF wave 5 in one relentless bear-crushing wave.  So far, anyway, there have been no clear signs that it's over yet.  And that doesn't worry me:  I suspect we'll have a reasonable sense in real-time if and when that starts happening.  Trade safe.

Friday, November 14, 2014

SPX, BKX, NYMO: Market Continues Unusual Behavior



How strong has this rally been?  Weirdly-strong, that's how strong.  Take a look at the McClellan Oscillator (NYMO).  Current behavior does not match the behavior over the prior 3 years of bull market:



But, at least we can't be terribly surprised, as we identified the unusual nature of this rally relatively early, and its strength was written on the charts weeks ago.  Back on October 29, I wrote:

...this rally has already clearly shown it's not a "typical" rally; therefore, we would be foolish to ignore that and attempt to treat it as we would a typical wave... this rally has shown us that most anything's possible.  

And on October 31:

...as I noted previously, this move has not behaved in the usual fashion, which means this is not the type of wave where you can make reversal calls with high probability

Technical analysis is based on the idea that the market will perform in a similar fashion to the way it's performed in the past -- but when you encounter extraordinary moves, they perform almost according to their own rules, and thus do not lend themselves terribly well to anticipation.  Recognizing and acknowledging that, as I covered in Wednesday's update, has value in its own right. 




To which I'll add:  Treating an extraordinary market like it's an ordinary market would be akin to encountering a dog that's the size of a house, then arbitrarily assuming that humongous dog will behave just like any other dog, and trying to engage it in a game of fetch.  Maybe it will play fetch... or maybe it will just eat you.  There's really no way to know in advance -- but, personally, I'd rather not feed my capital to the dogs on moves that have already warned in advance that the usual high-probability-type plays are not likely to work.  There are plenty of times throughout any given year that the market behaves in a perfectly reasonable fashion, all it takes is the patience to wait for them. 

Anyway, in the last update I published a preferred count target for INDU of 17535-50, and INDU bottomed at 17536.17, then went on to make new highs.  For SPX, I published the target of 2029-31, and SPX found support at 2031.95.  I speculated that there was a chance wave (2) might begin, but the support at the c-wave targets prevented that option from going beyond the speculative stage.

I'm somewhat conflicted over the charts at the moment, partially because yesterday SPX did reach my next published upside target zone (the rising red trend line), and encountered at least some resistance there.  Please note the annotation in blue near the middle-right side of the chart.  As I've been stating since October, I really don't want readers to get too focused on the wave labels, because this entire wave remains borderline "uncountable."




When I become conflicted on one market, I look at others.  And while doing so, BKX was one chart that jumped out at me last night:



SPX's near-term chart doesn't necessarily agree with BKX, though.  As noted, the bear count shown in gray should probably be viewed as the underdog, given the prior trend.



In conclusion, 2030 appears to be the first important level for bulls to hold.  To the upside, the rising red trend line remains the first important resistance zone.  Trade safe.

Wednesday, November 12, 2014

SPX and INDU: Preferred Target Capture Results in Small Impulsive Decline


On Tuesday, SPX finally captured the preferred target zone of 2035-42, and formed a small impulsive decline down from 2041.  This suggests there should be at least one more leg down in store.

If all of wave red (5) of blue (1) has completed, then we may finally see a bit deeper correction.  At present, it also remains possible that red (5) will subdivide, shown below in gray -- this seems modestly less likely, but cannot yet be ruled out.



On the near-term chart, the targets which can be drawn from the micro structure (so far) are noted:




INDU also shows an apparent impulsive decline:


There's also an outside shot that the rally has completed a larger 5th wave, and will correct much deeper than shown, however, as yet, we have nothing to draw from to support that potential.  The first step would be a larger impulsive decline -- so until that forms, we're only going to keep that option in the back of our heads.

In conclusion, at the very least, one more small leg down is expected.  Ideally, I'd like to see a trip toward the 2001-2010 zone, but the market reserves the right to create a subdividing fifth wave as noted.  Regarding the intermediate term, there are two options open:

1.  The market is completing wave (1) of a much larger upleg.  This would make any pending decline wave (2) down, and lead to a strong rally in wave (3).
2.  The market is completing a fifth wave at higher degree.  This would result in a much deeper correction.

The best we can do at this stage is watch for a larger impulsive decline as the first warning that option 2 may be in play.  If that occurs, then we can determine odds on whether the market is embarking on something more than a second wave correction.  Trade safe.

Monday, November 10, 2014

SPX and INDU: Why There's No Need to Front-Run Tops


"In theory, there's no difference between theory and practice.  But in practice, there is."  -- Yogi Berra

In today's update, we're going to focus on one difference between theory and practice.  As an analyst, my job is to talk about what I see as possible or likely.  As a trader, my job is to protect and grow my capital.  Often those two disciplines find harmony -- but sometimes they are very different things.

I'm going to reprint a few things I've written in the forum recently (with a few minor edits):

My main thought is that we are in uncharted market waters right now... i.e. -- there are no clear levels to act against. You are correct that we could just as easily run up another 100 points.

The last few important tops have announced themselves rather clearly in advance, in my opinion. I suspect the next one will as well. Until then, shorts (for me, anyway) continue to be spec trades and I'm quick to exit for a profit if I can (which has been most of the time, luckily!).

Basically, the way I view it is this: If you're a bear against a market like this, then simply treat every decline like an ABC until proven otherwise. Sure, you might miss the 5th wave down if that decline turns into a 5-wave impulse... but then you can get short again on the larger 2/B wave rally -- and you can then enter that trade with more conviction. Missing a fifth wave decline beats the heck out of taking continual losses all the way up, hoping to front-run that first impulsive decline, which, for all anyone knows, might not begin until 2170 SPX.

I don't know where this market will top right now. There are some inflection points on deck, but right now, we can't give those better than 50/50 odds. And I do know this: Since 2011, whenever I have had any doubt as to the wave count, the bulls have won every time. The tops, on the other hand, have been pretty clear. So, if that same thing holds true now, then "no clear top" means the bull run may well continue until such a time as there is a clear top. 


Along with those thoughts, I'd like to share a chart that underscores the above points:



This is one area where there's a difference between theory and practice.  In theory, we can try to anticipate exactly where an intermediate wave will end.  In practice, there is really no need to. (I assume it goes without saying that I'm focusing on intermediate tops here.  Short-term trades and scalps are approached differently.)

As we can see on the above chart, there's really no practical need to even attempt to front-run intermediate tops.  There's an old trader expression:  "They don't ring a bell at the top."  Of course, that's true (they actually use a buzzer), but in my experience, few tops occur without at least some some hints and signals that there's a decent possibility that a top is forming.  For example, all the decent tops of the entire year have led me to state publicly that I believed a top was forming, well-before the declines kicked into gear.  And a key accompanying point is:  All these tops have given me multiple opportunities to talk about them while they were forming -- so it wasn't like it happened overnight and took anyone by surprise.

So my recommendation (which is NOT trading advice, of course) is:  If you're a bear looking for an intermediate trade, then at least wait until there are some signs of a top.  Once some of the precursors start falling into place, then you can place your bets -- and possibly still lose money, because the precursors of a top do not, or course, guarantee a top.

Think of it this way:  If you want to catch fish, then you first go to a body of water where there are fish... then, if it looks promising once you get there, you cast your line in.  Maybe you'll catch some fish, maybe you won't.  But you don't try casting your line into random places, like into your bathtub, or into a tree, or into an Ethan Allen furniture store.  If you just randomly cast your line every single time you think of fish, you'll only end up with a lot of broken and/or lost equipment.  Yes, I know -- maybe there's a fish in that furniture store.  A huge fish!  Maybe even... oh my goodness... maybe even the new world record for Largest Fish Ever Caught in a Furniture Store!  Anything's possible!

But, still... it probably would be more productive to at least wait until there is a reasonable possibility of catching fish before casting one's line.  And in the case of intermediate tops, we can even take it one step further (I can't stop my brain now, it's still running with this analogy):  We can identify a possible "fish location" ahead of time ("X price level"), and then we can even scout the waters once we get there, because tops take time.  So, once the market starts to give off topping patterns and signals, it's the equivalent of visually confirming that there, indeed, are fish present in the water.  That still doesn't guarantee that we'll catch one, but the odds are a heckuva lot better than they would be casting our lines randomly.

From a practical standpoint, here's what it sounds like when I think there's a good chance there are fish in the water for bears (this is a real-life example, reprinted from September 22, 2014):

In conclusion, everything appears to be in place for bears to have a shot at taking over the market for a while (except for the all-important trend, of course).  Basically, bears have the precursors, and the market has effectively reached most of the intermediate upside target zones.  Near-term, Friday's decline appeared impulsive, so for the near-term at least, I'm expecting lower prices.  As the pattern develops, we'll begin to get a clearer picture as to whether a more significant turn has indeed occurred.

Notice there were multiple signals at that time, such as: completed five-wave rallies, upside target captures, and at least one impulsive decline.  No trend breaks yet, but still a good spot for bears to take a shot.

Anyway, I hope I've conveyed the gist of what I'm trying to convey here.  If you're a counter-trend trader, there's really no need to get too far ahead of the market.

And I hope that was of some value to readers, because I just realized I spent way too much time on it!  So I'm going to have to let the charts and annotations speak for themselves for the remainder of this article.

First, INDU's long-term weekly chart shows bears may be in "last stand" territory:



INDU's daily chart:


INDU's near-term chart:


And SPX's near-term chart, which shows that we've fallen less than a point shy of the preferred target zone of 2035-42, but we do have a trend line break.


In conclusion, we may be wrapping up five-waves of rally, but this market continues to remain less-than-clear in that regard.  SPX did break its red trend line, but closed right on the back-test, so we don't know if that break will stick or not.  I do have to note that the rally from Friday's low does appear impulsive, so a new high wouldn't surprise me at all.  Either way, if there's any sort of significant reversal lurking in the cards soon, then, as discussed, we'll likely receive ample warning.  Trade safe.

Friday, November 7, 2014

SPX, INDU: SPX Targets Reached, INDU Targets Exceeded


During yesterday's session, SPX reached its next target zone (2028-31), so we'll see if that generates anything by way of reaction.  So far during this rally, there have been minor reversals at the pivot zones and targets I've noted along the way, but there still has been nothing in the way of a clear impulsive decline for bears to take seriously.  I keep hearing bears talk about how they're short, and I cringe a bit when I hear this, because, since this rally started, there has been nothing in the way of a concrete signal to short this market for more than a near-term trade.

Maybe that will change after today's session, who knows.  But there are times it's a high-probability trade to short a market, and there are times to either go long or stand aside -- and it's important to respect the difference.  Personally, I haven't been the World's Greatest Bull during this rally, but I certainly haven't been anything approaching bearish during the majority of this run-up.

So, for awareness sake, I have illustrated one bull count in a bit more detail on the chart below:



Near-term, the next targets were hit, and the count has two interpretations.  There are potentially enough waves in place for a complete five-wave structure.



INDU reached, and exceeded, its next target:


INDU's near-term chart below.  In the event the rising wedge has any validity, a breakdown could lead INDU a couple hundred points lower.



In conclusion, there has still been nothing in the way of a clear impulsive decline to indicate that bears are gaining control.  Maybe today will be the session that changes that -- but until it happens, we have to continue to respect the trend.  Trade safe.