Monday, January 22, 2018

SPX and COMPQ: Inflection Point

For the first time in months, I feel the market is unclear at the moment.  The past few months have really been pretty easy -- every day we've looked at the market and determined that it was "still pointed higher," even for the near-term, but today's outcome is rather clouded.

If bulls can power back over the all-time high and maintain trade north of that level, then that could put them in the clear (again) for the near-term, but there is the potential of a completed higher-degree waveform, something we haven't seen in a while.  A complete higher-degree waveform, if that's what this is, would imply that a larger correction is due.  How much larger will have to be determined based on the length of the first impulsive decline (if we get one!).

So, the money has been easy for the past few months, but it's a little harder at the moment.  I don't have any projections here, because a little more input is needed from the market, but the chart below shows some potential inflection zones if we did reverse lower:

It's again worth mentioning that COMPQ has reached a significant large degree inflection point.  Though I'm not ready to say "that's it!" for the rally, the possibility is there.

Take the chart below with a grain of salt for the moment, and view it as a "possibility" more than a "prediction."

In conclusion, this is the haziest market we've seen in quite a while.  How the next couple of sessions shake out should shed some light on where we're going from here.  If we sustain a breakout over the all time high, then the first target is 2819-21 SPX, and the second is 2840-50 SPX.  Trade safe.

Friday, January 19, 2018

SPX and COMPQ: Government Shutdown Would Be Irrelevant -- but the Charts Are Interesting

Last update noted that we had three complete waves down, and that inflection point triggered a rally back to the all-time high, which leaves another option we discussed still on the table, specifically:

Bears also have options for a complex 3-3-5 correction, where SPX could rally up to retest/break the ATH, then drop back down in a larger 5-wave C-wave. 

Of note, the market has now gone 394 sessions without so much as a 5% drawdown, which is tied for the longest stretch in history.  As I've mentioned previously, this market has clearly declared itself to be an outlier.

The big news in the headlines right now is the threat of government shutdown.  This is usually spoken of in bearish tones, but such an event is not necessarily bearish.  And I'm not just saying that because the Federal Government tends to get in the way of things, but because this is what history argues.  The last government shutdown was in 2013; it lasted 16 days, and SPX gained 3.1% during that period.  The two prior shutdowns, both in 1995, were also both net gainers. 

SPX's biggest losing run during a shutdown was back in 1979, under Jimmy "I Got Attacked by a Swimming Rabbit" Carter.  That stretch lasted 11 days, and SPX lost 4.4%.  But that also occurred in the context of a larger bear market, so there's that.

Nevertheless, the chart has left options for bears as of this moment.  SPX currently has a three wave rally off the low, so if it wants that 3-3-5 correction we spoke of, it is technically possible from the current inflection point.  If the market REALLY wants to mess with everyone, the government shutdown could be averted and the market could correct on the news that it's NOT going to shutdown.  That's not a prediction, I simply mention it because the market loves to do stuff like that, so bulls should not assume that "no shutdown" automatically equals "no correction."  Bears should likewise not assume the inverse.

Bigger picture, I do have to mention that we're finally into the margin of error for the long-term count we've been looking at.  I'd be a little surprised if this began immediately without at least one more all-time high (and might be surprised if this begins at all, the way this market has been!), but it has to be mentioned anyway:

In conclusion, we have reached a near-term inflection point, and are within the margin of error for a larger inflection point as well.  There are still no clear sell signals, but if bears wanted to take a little shot this close to the all-time-high, you could hardly fault them for trying.  Trade safe.

Tuesday, January 16, 2018

SPX and INDU: Time to Break Out Some 38-Year Charts...

A couple weeks ago, I noted that if SPX was able to sustain a breakout over the red trend line on the chart below, then it was likely to get "nutty parabolic, as the market imagines itself temporarily free from all restraints."  I think we can all agree that's not a bad description of the rally we've seen since then. 

This "I'm free, I'm free!" behavior continued until yesterday's session, when the market finally encountered resistance just north of 2800 SPX.

The structure of the rally means that sorting the second and fourth waves, as well as sorting the third and fifth waves, is like (as my good friend used to say) "trying to sort fly dung from pepper."  (Although, he never used the word "dung" -- he used the more colorful word with the same number of letters.)

If this market has told us nothing else, it has clearly told us that it wants to be an outlier that flies in the face of all conventional systems and methods.  Thus I think we have to continue to be very careful about how much we think we know, and I'm likewise going to continue deemphasizing wave counts for the time being (since that's what the market environment has called for recently) -- but I will offer some if/then potentials in the "in conclusion" section at the end.

When markets get into this kind of nosebleed rally territory, it's a good idea to break out the very long term charts, so below is a chart of SPX going back to 1980:

INDU's very long-term chart is similar, but with some observable differences:

In conclusion, as I've been saying for several months in many different ways:  This rally has clearly told us that it is an outlier.  And that means it has no intention of behaving in accordance with past markets, or in accordance with "the usual" systems.  This is why anyone who's been treating this market as "the same old same old" has been repeatedly steamrolled, while we haven't.

That said, here's what we've got regarding the near-term:  Yesterday's drop can be counted as a complete 3-wave decline -- so far.  That means that 2768 could mark the bottom of a fourth wave, but it could also simply be an incomplete wave.  If SPX breaks below 2768 before it rallies above 2794, then the decline is probably impulsive, which would signal a larger two-legged correction underway.  Bears also have options for a complex 3-3-5 correction, where SPX could rally up to retest/break the ATH, then drop back down in a larger 5-wave C-wave.  We'll simply have to spot that in real-time if it unfolds, and I'll update with additional inflection points (besides the ATH) as and if they occur.  Trade safe.

Friday, January 12, 2018

SPX and COMPQ: Why There's No Such Thing as an "Overextended" Market

Before we get to the charts, let's talk about the concept of "overextended" as it relates to moves within a market, because this is a term we've been hearing from the talking heads with increasing frequency (as in: "This rally is getting really overextended.").

"Overextended" is one of those terms that sounds meaningful, but which is actually somewhat arbitrary in the grand scheme of things. Terms like this can be misleading to traders, because they really can only be used subjectively, but they are often portrayed as being objective measures.  More on this in a moment.

First, let's define the term:  Typically when someone says a move is “overextended,” they mean it has run beyond what an “average” move would, and they may or may not factor in standard deviations in those calculations.  Thus what is NOT said is that: “the move is overextended in their opinion, according to the rather arbitrary metric of mean or ‘average’ movements and/or standard deviations.”

While “average” movement seems wholly reasonable on a superficial level, one glance at a long-term chart will show you that stocks rarely move in an “average” manner. Instead, they tend to move in somewhat violent fits and starts.

A $10 stock, for example, might rally to $14 in a month, then trade sideways for 3 months. You would be completely correct to look at that sample and say that the “average” gain of that stock over the past 4 months has been $1 per month.  That's true -- but it's irrelevant.  And misleading.  Because in actuality, virtually no stock moves in a steady upwards or downwards manner for long -- so it’s a mistake to look at an average and then judge that anything that falls outside of that average is "unusual" (i.e. — “overextended”).

One only needs to look backwards to understand why: Using our hypothetical stock, our trader has correctly determined that the “average” move of this stock is $1 per month. Let’s rewind him, though, and put him in the real-world past, attempting to actually use his correct average while trading:

We're four months in the past, and the stock is still $10.  Our trader goes long, and the $10 stock starts rallying. It hits $11 in a week. Our trader says, “Well, that’s the ‘average’ move for this whole month already, so I’m getting out of my longs!” He exits.

The stock continues to rally to $12 the next week. Now our trader says, “Whoa, this move is overextended! The average move is only $1/month, and it’s moved twice that much in only two weeks! I’m going short!”  He goes short.

The stock rallies to $13 the next week.  Now our trader says, "Holy cow, this stock has moved TRIPLE its average month already!  This move is now REALLY overextended."  He adds to his underwater shorts.  But now he's rather nervous, so he sets a tight stop (which he probably should have done earlier).

The stock rallies to $14 the next week and our trader is stopped out for a decent loss.  At that point, the stock finally starts correcting.  After a month, it's back to $12.50.  Our trader now realizes that the recent "average" gain of this issue (recency bias) is $1/month, so he "buys the first dip," expecting to see $13.50 next month.  Instead, the correction continues and he is stopped out of those longs for another loss.

So, what happened?  Well, our trader was 100% correct about the $1/month average, yet he still closed his longs far too early, entered short way too soon, went long again at the wrong time, and ultimately exited the total trade for a significant loss.  Why?

Because, as I said at the start:  Stocks don't move in "average" ways; they move in fits and starts.  Indictors often also use standard deviations, but using standard deviations on a mean doesn't eliminate the problems inherent in the base thinking that causes one to arrive at a conclusion of "overextended" in the first place. Standard deviations are still based around a mean.  If means and averages don't work for timing the market (which they don't), then standard deviations above or below these means will likewise not work. 

Indicators such as RSI can move deep into overbought territory and stay pegged there for weeks or months.  If the calculations that underpin these indicators actually worked to tell you when a market was truly "overextended," then that type of thing would never happen.  This is why indicators such as RSI are often more useful during oscillating moves than they are during trending moves.

In truth, moves that fall outside the average are the norm, not the exception.  And that means there really is no such thing as a move that is "overextended."  Except in our minds. 

We can bring in the concept of revisions to the mean over time, but that doesn't help you trade tomorrow.  It may hurt you, in fact, because it can lead to looking down when you should be looking up, and vice-versa.  I myself am even guilty of occasionally using variations of the "overextended" term, but I do understand their relevant priority when I use them -- which is why I have never written anything such as, "This move is due to correct because it's overextended."  I may note it for other reasons (typically I note it in terms of relative strength of a move, and that strong moves tend to beget more strong moves), but I've never once attempt to predict a reversal based on this metric. 

This is why I say that "overextended" is more of a subjective term than an objective one.  Because, really, the measure is rather worthless objectively, at least in terms of how it's so often used, which is to say the move is "due" to reverseThus what's truly being said when someone says, "This rally can't run much farther because it's overextended," is instead more akin to: "I feel this move has run long enough, therefore I will label it 'overextended.'"

As I've said before: "Overbought can always become 'more overbought.'"

I've made the next statement previously many times over the years, but perhaps the explanation above finally sheds light on why I've often said:  There is no such thing as "oversold" in a bear market, and there is no such thing as "overbought" in a bull market.  In other words:  There really is no such thing as objectively "overextended" -- so the sooner you stop prioritizing that concept, the better you'll be equipped to ride a trend for the appropriate amount of time (which is: until the market says you shouldn't).

Anyway, I felt that might be a helpful discussion to have, in light of how often we're hearing the term recently, and how the very concept can be a thorn in people's sides, as opposed to being helpful.

Moving on:  Last update discussed the speculative potential of a correction, but emphasized that unless and until we saw an impulsive decline, we had no reason to actually turn bearish yet.  As it turned out, the decline developed into a clean ABC down, indicating that the rally would continue.

I would like to reiterate that this does not mean we won't, at some point this year, see a larger double-retrace correction as shown in that update, but we simply have to await an impulsive decline before we try to game such a correction.  I tend to think we will see such a correction at some point in 2018 -- but I am aware that such a move could begin from higher prices, potentially from much higher prices.  The reason I'm alert to such a move is because it's in the nature of extended fifths to produce such moves -- but one has to await confirmation, because it's also in the nature of extended fifths to tack on extensions upon extensions beforehand.

As I've tried to assure bears previously, the upshot of this is that there should be a clean retest of the high prior to the BIG leg of any such correction.  So there's really no reason at all to front-run a move like that, because almost nothing good can come of it.  We will likely know it when it's actually here, and I will not be calling it "speculative" after a clean impulse down, I will be calling it "probable."

There's not much to add, chart-wise, as I'm simply taking this as it comes at this point, which I think is the only rational approach.  So far, we've yet to see anything that points the market in the downwards direction for more than a near-term correction -- which is why I've remained "bullish until the market says we shouldn't be" for a long time now.

We'll take a look at COMPQ, because this is the only chart that's worth looking at right now.  COMPQ is continuing to close in on its next upside target.  Even if/when we reach this target, we're going to have to await an impulsive decline before getting too bearish, though -- because that's what this environment dictates.

In conclusion, bears never received confirmation of a pending correction, so it's back to "watch and wait" mode for them.  There is presently potential for another extension (if the market wants one) to reach as high as SPX 2870-90, so we will continue awaiting an impulsive decline before shifting footing.  Trade safe.

Wednesday, January 10, 2018

INDU Update: INDU Captures Next Target and Asks, "Does 2018 Rhyme with 1987?"

It's been an interesting year so far.  SPX has not notched 6 consecutive records this year, something it hasn't done since 1964.  There is also some present similarity to 1987 -- a year which saw a crash, but saw that crash come within the context of a larger bull market.  Most interestingly, the blue chips have created the perfect setup for a very similar situation this year. 

And it might not be too far off, relatively speaking.

Let's focus on just one chart today, but we need to caveat that we do not yet have impulsive declines in any major index, so this must be considered as purely speculative until we do.  As we've seen so many times already, fifth wave extensions love to tack on more fifth wave extensions, so we need to see an impulsive decline to finally signal at least a temporary cap to that trend.

So for right now, let's just mull over the possibilities in the chart below:

If you're wondering where the captured target came from, it was published on 12/29 via the chart below:

Referring back to the first chart (weekly), there would be a certain beauty to an extended fifth wave and a double retrace here, inasmuch as the textbook retrace would almost perfectly back-test the breakout over the long-term trend channel.  That gives the potential some harmony in my mind, and the fact that it fits the wave count to the letter makes me think there's a real possibility for this outcome to occur.

Again, I don't want to get too excited until we see an impulsive decline, but it sure is tantalizing to consider.

Back above the all-time high, of course, and bear possibilities for the first impulsive decline will be dead for the moment.  Amazingly, the last time I spotted an impulsive decline in SPX was back at the very end of November, so it's somewhat mind-boggling that we've gone this long without another one.  Do keep in mind that another new high here would rule out the options for an immediate impulsive decline, but would not entirely negate the potential of the larger correction.

In conclusion, we've reached a big inflection point with some significant bearish potential if (and I cannot overstress the "if/then" nature of this equation) the market forms an impulsive decline here.  For the moment, all we can do from a predictive standpoint is tread water while we await confirmation or negation.  Trade safe.

Monday, January 8, 2018

SPX and RUT: Near-term Inflection Point

Bears want to know "Are we there yet?"  The problem now is, the beginning of this year has been so strong that it historically suggests the odds are quite good for 2018 to end on a high note.  Of course, history is littered with "broken market rules," which is why brokers love to tell you that Past Performance is No Guarantee of Future Results

Accordingly, I never make decisions or predictions based solely on "historical rules."  But by the same token, we'd be idiots to completely ignore historical signals that seem to point strongly in one direction or other.

From a structural standpoint, SPX has reached at least a near-term inflection point, but one that does not currently lend itself to being predictable.  There is potential for a correction to begin here, but we've been avoiding front-running for a reason, so we'll just have to see how the market reacts next:

RUT may actually be more helpful in terms of pending clues, because it has reached a more clearly-defined inflection point than SPX has:

In conclusion, we've reached at least a near-term inflection point in several markets -- but I'm quite pleased with the results of "not front-running" against a potential extended fifth, and that approach has served us very well.  In fact, the only "top" I've called unequivocally in the past few months was at the beginning of December, on the same day that SPX dropped 45 points in an hour, and I called that top only after we saw our first impulsive leg down.  Thus, we'll continue awaiting a similar setup before getting to married to anything bearish, even over the near term.  Trade safe.

Friday, January 5, 2018

SPX and COMPQ Updates

Last update we looked at a detailed micro count, and I very slightly leaned toward the interpretation that we might have a more complex flat (ultimately still due to resolve higher), but while the micro count was correct, the interpretation of it as a flat was not.  It was instead the noted WXY.  Luckily, that was obvious immediately upon the open (as I noted live in our forums).

On the bright side, I'm happy that I did have the micro count correct, which was no easy task in itself.  WXY's are always a pain, because the double-three nature means they can mimic many other patterns:

Bigger picture, we're getting closer to the long-term target in COMPQ, and again, we'd expect all markets to (more or less) "rally together" or "decline together."

SPX is about to tag another channel line:

In conclusion, the larger wave structure is finally reaching the inflection point of a potentially complete fractal, but -- due to the potential for continued fifth wave extensions -- we will continue awaiting a larger impulsive decline before trying to call a top, which is an approach that has served us well for a while.  Trade safe.