Friday, May 24, 2013
There's not much to add to yesterday's update. For the near-term, I've attempted to break down SPX -- but quite frankly, it's impossible to say for sure what we're looking at. The chart below shows the conundrum: the rally from the 1635 looks like a correction, but can actually be counted impulsively.
Further complicating the matter is the fact that it's not entirely clear whether we're looking at wave ii/B, or wave (4). The rally retraced almost exactly 38% of the decline, which is more typical of a fourth wave than a second wave. My advice here: keep it simple. Trade the trend lines and the noted support/resistance levels. The wave counts will work themselves out soon enough.
The hourly chart is unchanged from earlier in the week.
In conclusion, there's no material change in the outlook, and I still feel there's more downside coming. With a little luck, the near-term will clarify during this session. Have a great long weekend! And trade safe.
Posted by PretzelLogic at 3:08 AM
Thursday, May 23, 2013
Wednesday's session saw some fireworks, which we'll talk about in a moment -- but before we get into that, let's recap the recent past, since this has been an interesting and important week for a number of reasons:
1. The Russell 2000 (RUT) reached my long-standing target of 1000 (intraday high 1008.23).
2. The NYSE Composite (NYA) came within 1% of January's target (9695.46).
3. The S&P 500 (SPX) reached May's target of 1680-1690 (1687.18).
Long-time readers know I believe it's important to take at least partial profits and/or tighten stops in target zones, and then watch how the market reacts -- and react it did. These captured targets are thus made much more noteworthy by the dramatic intraday reversals that occurred afterwards. SPX plummeted 38 points intraday (as bears once again took the elevator almost straight down). In fact, just yesterday I wrote:
The only thing I'd warn here is that this is the type of market that can lull bulls into a deep complacency, and markets like this can become ripe for "an event." Always remember the old market adage: "Bears take the elevator; bulls take the stairs."
So, is this the end of the road for bulls, or just a healthy correction?
We'll cover the expectations of the wave counts in more detail momentarily, but there are at least three important factors that bear mention right now. First are the tandem facts that SPX captured May's target zone and reversed hard, and RUT captured my long-term target zone (for a 10% gain, I might add), then reversed hard. The second is the insane sell-off just experienced in Japan, as the Nikkei dropped more than 1100 points last night. And the third comes from Minyanville's own Todd Harrison:
"Morgan Stanley (NYSE:MS) explains that among its equity long-short fund activity, the short activity (the net of shorts added and shorts covered) reached a minus-2 Z-score, indicating massive covering over the past 20 days.
"The last three times this occurred were April 2010 (S&P (INDEXSP:.INX) then fell 13% in eight days), July 2011 (S&P then fell 19% in 23 days), and Oct 2011 (S&P then fell 10.5% in 20 days)."
(See: Random Thoughts: A Signal that Bears Watching)
Normally, we would expect a high degree fourth wave correction to begin in this zone, and if that has indeed begun, it would be par for the course to see a trip into the mid-to-high 1500's. There is room within the wave structure for even lower prices. This market has defied gravity for a long time, which is going to make bears scared to short -- and ironically, that's exactly what the market needs to experience a decent sell-off.
We'll cover the preferred long-term count first, then we'll take a look at an alternate, more bearish possibility. We haven't quite reached the long-term price expectation of the mid-1700's, and given the fact that it's far too early to confirm yesterday's sell off as any kind of major turn, I'm left favoring the view that we're finally going to have an intermediate correction, but the market is likely to see another wave up afterwards. That said, SPX tacked on 176 points since I first published this chart -- so at this point the market reserves the right to do something unexpected. I think it's a mistake to assume any system can see "too far" down the road; nothing is fool-proof.
The SPX hourly chart is unchanged from yesterday. Yesterday's chart expected the 1680-90 target to be reached, and the position of the wave indicated it was likely to mark the end of blue 5/red iii.
So we're in a position where the market appears ready to correct, and we have a reversal from a key price zone. What we don't have yet is an impulsive decline which will allow us to refine targets, but the normal expectations would be for red iv to decline into the price territory of blue 4. Due to the length of wave iii, there is room for red iv to move lower.
The 65-35 margin refers to the near-term. The big picture chart above, and the big picture chart beneath this one must be considered at slightly different odds, which I will cover.
It's been a while since I've considered the possibility of a long-term top in this market, as to me it appeared that the long-cycle waves have been pointed up (and they have). At this juncture, though, there is finally some room for this to be a major top. Though that isn't presently my preferred expectation, (as I mentioned) no system is fool-proof. Beyond that, this is a bizarre market environment, and I would suggest keeping arrogance and complacency to a minimum.
The chart below shows a long-term bear count that I can finally consider as reasonable enough to be complete. At the moment, I still have to continue favoring the long-term count which points toward the mid-1700's, because we don't reverse long-term counts after one day's price action. But we do have to stay alert to this as a potential. I'd presently put the odds for eventual higher prices at 60%, but be aware that the near-term and intermediate-term now both seem to be pointed down.
Posted by PretzelLogic at 3:23 AM
Wednesday, May 22, 2013
“In reading The History of Nations, we find that, like individuals, they have their whims and their peculiarities, their seasons of excitement and recklessness, when they care not what they do.
We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit;
that millions of people become simultaneously impressed with one delusion, and run after it,
'til their attention is caught by some new folly more captivating than the first.”
― Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds
Apple (AAPL), once the darling stock of the investment world, is down more than 35% since reaching its peak of $693.21 in September 2012. Interestingly, this price peak came about a year after the fundamentals started indicating things were headed in the wrong direction: Apple's iPhone and iPad profit margins actually peaked in the second and third quarters of 2011, respectively -- in fact, iPad margins are now less than half of what they were at that peak. And while some investors bought Apple because they genuinely loved and believed in the company, more and more fund managers began buying it simply because the price seemed invincible and destined to head higher forever. I even seem to recall seeing an interview about Apple in the heyday, where the analyst said, "Apple is a bargain at $1000." I wonder if he still feels that way? Essentially, despite the falling margins, the stock fell victim to its own momentum and entered a blow-off parabolic rally in early 2012.
It wasn't too long ago that it was still fun to say "Apple is the market," but that saying no longer applies. Since autumn of 2012, the S&P 500 (SPX) has been in nonstop rally mode; but Apple's been on the outs. And as is so often the case with parabolic rallies, the stock gave back all those late gains with equally-blinding speed.
In the chart below, we can see that Apple and the SPX used to be fairly well-correlated, but recently they've been moving in completely opposite directions. Note the chart is logarithmic scale, so the recent decline in AAPL doesn't look nearly as devastating as it's actually been for investors, most of whom do not have the benefit of being able to spend "logarithmic money."
I didn't call attention to Apple simply to illustrate how quickly "darling" can turn to "ugly" in the investment world (though there is a broader lesson to be learned here); I called attention to it because Apple looks like it finally has an opportunity to put together a more meaningful bounce.
I'm not certain it will, of course, but I've put together a couple charts which should help us figure out where it's headed. Let's start off with the daily: I'm inclined to think it has more bounce left in it because the rally from 382 appears to be cleanly impulsive (meaning it has five waves). There is only one way a five wave rally could fit in this position and not have prices ultimately head higher, and that would be if this pattern is a somewhat rare "running flat" correction -- so I have to favor the odds that the rare beast isn't the one who's shown up at the party this time.
Now, there are two ways we can get to higher prices: the first is fairly direct, and is shown in blue below. The second heads a bit lower first, but should remain above 382 (shown in black); if AAPL sustains trade beneath 382, then all bets are off. I've noted the trigger levels to watch, and a series of corresponding trigger targets, on the chart below.
NOTE: I just checked another data source, which has 385.10 as the 52-week low for Apple. Apparently Stockcharts.com is giving a bad quote on Apple. As you can see on the chart below, Stockcharts shows 382.57 as the low.
Zooming in on a five minute chart of AAPL, I'm unable to rule out either path until the market makes its next move. Sustained trade below 430 would hint at the black path above, while trade below 418 would largely confirm it. Sustained trade above 446 in the near future would suggest the blue path.
Posted by PretzelLogic at 1:45 AM
Monday, May 20, 2013
With Friday's trade, the S&P 500 has now added a clean 1000 points to the March 2009 bottom, so the Fed can pat themselves on their collective back and declare "mission accomplished" at reflating the equities bubble. Stocks have no doubt now reached a "permanently high plateau" in our "new paradigm" since, after all, "a new economic equilibrium is emerging." Or something like that. Ironically, one thing that never seems to change is the human expectation that "this time is different."
I think what's strange about this bubble is that most people actually seem to realize it's a bubble, probably because folks have seen enough of 'em over the past couple decades to recognize the hallmarks. Sure, there's a handful of Fed apologists out there, plus the occasional person insisting that the economy is in good shape and getting better every minute -- but even the majority of retail investors seem to recognize the rally is being fed by the Fed. Don't get me wrong, I'm still bullish as long as the charts point upwards and the Fed keeps feeding -- as I've said for months, there's no point fighting it -- but I don't believe the Fed has found the magical road to free money, or effected a fundamental change in the way the world works which will allow this to continue forever without consequences. Obviously, there's no way I can know if my assumptions are right or wrong; but either way, I call it as I see it.
Later in this article, I'll update two long term-charts I haven't updated in quite some time: HYG and NDX, which I believe are both worth watching here. But first: In the prior update, I noted the Philadelphia Bank Index (BKX) chart seemed to contain a critical clue, and if that index was able to break out over 61.06, then we should expect the rally to continue. Of course, that doesn't necessarily mean the rally will continue immediately, and there will no doubt be corrections and pauses along the way, but presently it does appear likely SPX will ultimately find the 1680-90 target zone.
Let's take a look at BKX first. As long as support holds, it's hard to find anything to be long-term bearish about in this chart.
The hourly BKX chart suggests at least one more fourth wave correction and new fifth high before a chance at any sort of meaningful top. Of course, there are always bear potentials extant in even the most bullish-looking chart (and vice-versa), so statements like that are based on what presently appears most probable. Trade below the "red 1" peak would cause us to more seriously examine the bear potentials.
I'd like to revisit HYG, which I haven't updated at all since January 25, 2013 (See: SPX and HYG: HYG Signals Further Intermediate Upside for Equities). On that date, I wrote:
Finally, a long-term chart of HYG, the i-Shares High-Yield Corporate Bond Fund. Junk bonds tend to be an excellent barometer for equities, and this chart suggests that there is still more upside to come for equities over the intermediate term, because it's virtually impossible to count the rally as five complete waves. Depending on what happens to prices here over the near-term, there could be signals suggesting a considerable amount of upside remaining.
HYG, which I've always facetiously imagined stands for "High Yield Garbage," has captured January's target zone. Four months ago, I couldn't see any bear counts which I felt were high enough probability to merit attention, so at that time I only published two counts: "bullish" and "even more bullish." However, the potential does now exist for the wave structure here to be complete or nearly so -- so we'll keep an eye on this going forward.
November 28, when I wrote:
Next is an attempt to decipher the Nasdaq 100 (INDEXNASDAQ:NDX) long-term chart. Note that daily MACD has now crossed over onto a buy signal (this is true on several other indices as well, including SPX), and is rising from an oversold position. Also of note, it is difficult to count the rally since 2009 as a complete wave structure, which suggests at least one more wave up is due before a long-term top.
NDX is another one worth keeping an eye on. It has made the new high I thought it would, and the "most obvious" count here is still pointed higher. But this chart does have the potential for a series of 3-wave rallies into an ending diagonal, so I wouldn't suggest any level of complacency. If the dashed red key overlap is crossed, then it will be time to get bearish on the bigger picture.
Posted by PretzelLogic at 3:17 AM
Thursday, May 16, 2013
Before I even begin this article, I feel obliged to engage in a bit of a tangential rant which actually relates to my charts. If you're on the hurry-up, or if you find my sense of humor to be confusing and mentally frustrating, then you can skip right to the section titled "Market Update."
My story begins like this: A couple months ago, I purchased a new PC. I'll pause here while we wait for the Mac users to stop laughing, since they already know there is now no possibility of a good ending to this story. Anyway, like so many others who've bought new PC's recently, I had no choice but to "upgrade" to the latest mutant version of Windows, which is called simply Windows 8 (an inside joke at Microsoft, code for: "Windows ate my desktop!"). As every PC user knows, every so often Microsoft's Crack Team of Windows Engineers feels it's their God-given red-blooded patriotic American duty to cram some new version of Windows down our throats. They refer to this as "progress," because that sounds better than "a way to continue justifying our expense accounts."
For those of you fortunate enough to have avoided Windows Ate, basically the iconic "Start" button is gone, and the desktop has been replaced with a series of apps pinned to a home screen. I was already familiar with the Windows Ate concept, since I've had a Windows phone for years -- and while I think the whole "app" concept is fine for phones, or tablets, or anything smaller than, say, a PC -- I think it stinks for PC's.
I believe the majority of us who do not presently earn our livings by developing software for Microsoft were entirely satisfied with Windows 7 as a stable, user-friendly OS. In fact, within two days of having Windows Ate inflicted upon me, I had already installed a program that forced it to emulate the Windows 7 navigation style. Apparently Microsoft had forgotten that a handful of us still use our computers for something other than watching South Park's take on central bank policy on YouTube all day.
But even with this productivity upgrade, Windows Ate still does not emulate Windows 7 in terms of reliability. And the point I'm getting at (if I remember correctly) is that ever since "upgrading" to Windows Ate, my charts act screwy. When I use Adobe Flash for annotations, the lines and numbers demonstrate all the orderliness of a preschool fire drill, and show no regard whatsoever for remaining in their assigned locations. Numbers seem to move around of their own freewill, often vanishing from the charts entirely at random -- sometimes magically appearing later on a completely different chart, as if they'd traveled through an inter-cyberspace wormhole. In fact, the numbers behave in such an incredibly random fashion that I'm fairly convinced I've secretly stumbled onto the exact same algorithm Bernanke is using to set Fed monetary policy.
Interestingly, when I use Java instead of Flash, almost everything works exactly as it's supposed to, except for one "minor" detail: with Java, I can only work on the charts at one-half normal size. Attempting to annotate these diminutive charts requires me to practically press my face directly onto the computer screen, while at the same time squinting really hard -- which makes me feel like some kind of Peeping Tom technical analyst, and I keep expecting to hear tiny screams of "Cad!" emanating from my computer.
These issues are a complete nightmare for someone who's as much of a perfectionist about charts as I am. So if you've noticed lately that my charts aren't quite as pretty as they used to be, it's not because I've gotten lazy, it's because Windows Ate them. I'm working to resolve this issue, with a hammer if necessary, and I'm sure eventually I'll get it all figured out... no doubt just in time for Microsoft to cram Windows? Nein! down our throats.
Market UpdateYesterday we discussed the possibilities for a whipsaw vs. a melt-up, and today I have a chart to share which should go a long way toward providing an early warning if the melt-up is underway.
One of the cardinal technical rules of Elliott Wave Theory is that wave three cannot be the shortest wave. If the wave we find in the third wave position is the shortest, then that tells us the pattern isn't what we think it is. The Philadelphia Bank Index (BKX) is currently providing us with an excellent tell in this regard.
The hourly chart of BKX below. The nice thing with the BKX pattern is it's telling us "either the rally ends here, or it's got a lot farther to run." There probably isn't much in-between.
SPX hourly below:
Posted by PretzelLogic at 3:09 AM
Wednesday, May 15, 2013
In the last update, I noted that the market looked poised to move higher into the May 6 target zone of SPX 1640-1650, and the market staged a strong rally right from the open, ultimately reaching the upper range of the target zone with ease. I also discussed that the Philadelphia Bank Index (BKX) should tag 60 or beyond, and it experienced a blistering 2% rally and came within pennies of 60 during that very same session.
So what now? Well, whenever targets are reached, some order of caution is called for, so let's take a look at the charts and see what's going on.
Let's start off with the big picture, and a weekly chart of the NYSE Composite (NYA). For many years, I've been a fan of tracking this index, because it's a much better representation of the broad market than the indices which typically steal all the news coverage (like the SPX and INDU). It's interesting to look back now and see how well NYA has been pointing the way for the past 8 months.
On September 20, 2012, I wrote:
Moving on to equities, and starting with the New York Composite Index (NYA) weekly chart, there are two things that jump out from a price perspective:
1. The recent breakout above a 5-year resistance zone (bullish).
2. 8718 is still intact (not bullish -- not really bearish either, but important).
If you just take a "trade what you see" approach here, then this breakout can't be viewed as anything but bullish.
I tackled this exact same chart again in January 31, 2013, and my observations were as follows:
Finally, I'd like to revisit the long-term NYSE Composite (NYA) chart, which is one of the charts that's kept me largely in favor of the bull case ever since the key breakout of September 2012. Note that weekly RSI is again overbought, and again has confirmed the rally to this point. This behavior typically implies a correction, followed by new highs.
The correction and new highs have both since happened, which brings us to the present. NYA's weekly RSI has reached the overbought zone again, and although in and of itself this doesn't guarantee a correction, it is something to be cautious of as one precursor. It is worth noting that the last two times I mentioned this indicator (same dates as above, see chart), the market corrected almost immediately thereafter. Doesn't mean that's going to happen this time, but we should stay alert for any signs of said correction (there are none so far).
In either case, there's still no reason to be anything but bullish about this chart from a longer-term perspective.
The Dow Jones Industrials (INDU) have broken out slightly over the upper boundary of the intermediate channel. In a moment, we'll see that the S&P 500 (SPX) has done the same.
The SPX hourly chart shows a similar breakout. This is an inflection point, and if bulls can hold the breakout, they have melt-up potential. Bears will need to whipsaw this breakout if they are to get anything going -- and I do think they have a shot at doing exactly that, based on the 5-minute chart which follows (after this chart; SPX hourly below).
Posted by PretzelLogic at 2:52 AM
Tuesday, May 14, 2013
The big news over the weekend came from the Wall Street Journal's report that the Fed is mapping out an exit strategy from their $85 billion per month bond buying programs. However, it seems concrete details on such a strategy are a bit vague or nonexistent at this point. This got a lot of play over the past few days -- but in reality, I sincerely doubt anyone was expecting massive Fed stimulus would continue completely unabated for the rest of eternity, so this news was hardly a huge surprise. And given the vagueness of the details, it seems to be the Fed simply trying to remind us of something we already knew -- undoubtedly at least partially in an effort to forestall inflation. The Fed is fully aware that inflation has a strong psychological component, and can be compounded or decreased by managing the public's future price expectations.
And, if the Fed wants to continue printing money with abandon, the one thing it can ill-afford is high inflation showing up within the metrics they track. So, counter-intuitively, I am of the opinion that these types of statements from the Fed are actually efforts to continue their programs as long as possible. This Fed seems well aware of the PR game involved in monetary policy, and has engaged in misdirection before.
Along the lines of mass psychology, I actually found yesterday's headline on MarketWatch somewhat comical:
U.S. stocks start week in red as investors consider Fed policy shift
If you just looked at this headline, you could be forgiven for thinking the market reacted in panic to the weekend news. Instead, the S&P 500 (SPX) actually closed marginally green yesterday, notching a new all-time record closing high; and the Nasdaq Composite (COMPQ) also closed green. Hmm, where did this "stocks start week in red" thing come from, anyway? Oh, here we go: The Dow Jones Industrial Average (INDU) closed down a whopping 26.81 points (-0.18%), which, these days, practically qualifies as an outright crash. I can only imagine the sheer confusion experienced by retail bulls across the country last night, when they turned on the evening news and saw this strange "-" symbol in front of 26.81. No doubt Google was soon swamped with search queries as bulls sought to determine the meaning of "-" and whether it was a good thing. Maybe "-" meant the market went up even more than they expected!
Kidding aside, I've made it no secret that I think the Fed is a huge driver of this rally, so obviously we're going to need to keep an eye on this going forward. But I think some type of more immediately "negative-sounding" information will be needed before the market reacts overly significantly -- after all, right now the money is still flowing freely. It's not exactly "last call" from the Fed yet -- it's more like: "Hey bulls, the bar's eventually gonna have to close at some point, so... have another drink on us!"
Moving on to the charts -- one of the things I sometimes ask myself when I'm trading is, "Which side of the trade is harder to take right now?" I mention this because sometimes the market pulls a bit of reverse psychology on us. On the one hand, usually right about the time everyone figures the market will go up forever, it reverses. But there's another type of market, and that's the one that has everyone thinking exactly what I just mentioned, and thus looking for that "it can't go up forever!" reversal. That type of market does the exact opposite: it just keeps going up, because everyone is watching for a reversal and afraid to position long. It's entirely possible this is that type of market, and until we start seeing some form of sustained reversal, I would advise bears to stay very nimble.
I haven't updated the Russell 2000 (RUT) in a while. Since before Christmas, I've opined that this chart has been pointed upwards, and once it claimed 902.30, it activated an even higher target of 1000 +/-, which it's now finally approaching.
The Philadelphia Bank Index (BKX) can be counted as five complete waves, but normally we'd still expect to see it run higher before it finishes off the current wave:
SPX now looks poised to capture the preferred near-term targets from May 6. I am not ruling out the possibility that this count is too conservative, and may be more bullish than shown.
Posted by PretzelLogic at 3:22 AM