Friday, April 20, 2018

SPX Update: Market Reacts to Inflection Point

Last update noted that the market had reached an inflection point (a zone where a reversal has a higher probability of occurring), and the market reacted to it.

The decline from the most recent swing high is three waves so far, but a sustained breakdown at yesterday's low would at least begin to suggest an impulsive decline from 2717.  An impulsive decline would suggest that the near-term trend had shifted to down, as one impulse typically begets at least one more of equal or greater length.  It would also keep the ending diagonal very much alive.  And keep in mind that diagonals typically retrace themselves in their entirety in 1/3 to 1/2 the amount of time they took to form:

Please note the wave degrees by color and that blue "or C" could still mark the bottom of red (B).  (We'll worry about that if/when we get there, though.)

In conclusion, we correctly identified the most recent inflection point, and the market has reacted to it, which leaves both options on the table.  Since wave 5 didn't quite break 2585 on its last attempt, which it should have, I continue to think the diagonal is a reasonable possibility.  The first step for bears would be a sustained breakdown at yesterday's low.  Trade safe.

Wednesday, April 18, 2018

SPX Update: Market Reaches Inflection Zone

Last update noted that the pattern seemed to require higher prices one way or another, and offered the following clues:

1.  If we break out over the red wedge on the chart above, bears will want to watch for a whipsaw to help confirm the diagonal. 

2.  If SPX were instead to break out and hold that breakout, then that would instead suggest the bull nest (option 1) and a very strong rally. 

As we can see on the chart below, SPX did not whipsaw the breakout, which was the signal for bears to stand aside for the moment.

In conclusion, we have now reached an inflection zone, where the ending diagonal could roar back to life if it so chooses.  This does not mean that it will, only that it has the option to, since the ending diagonal remains a potential until 2740, but will be invalidated north of 2740.  While a sustained breakout over 2740 does not invalidate all near-term bear patterns, if that happens, it would suggest that we should probably continue looking for the preferred count's long-anticipated trip north of 2801, at least until proven otherwise.  Trade safe.

Sunday, April 15, 2018

SPX Update: Predicting the Unpredictability

Last Tuesday's update noted that SPX had likely cycled out of "Easy Mode" and entered a period of unpredictability:

Long-time readers know that a key tenet of my general trading thesis lies in the recognition that the market alternates between periods of predictability and periods of unpredictability.  We just cycled through a predictable phase, and now we've entered a less-predictable phase.

Since that update, SPX has been nothing but chop -- so, ironically, I suppose we can now say that we were able to "predict this pending unpredictability."  In trading, knowing when not to act (or at least when not to act aggressively) can be just as important as knowing when to act; and sometimes even more important.  After all, earning a profit is only half the challenge... protecting capital is the other half.

At the end of the day, protecting your account from a loss is really no different than earning a gain.  Imagine you have $100K in your account.  You take an ill-advised trade and lose $2000.  The next week, you make a solid trade and gain $2000.  What's the difference?  Because you're right back where you started.  And if you had never made the ill-advised trade, then you'd actually be ahead $2000.  Protecting yourself from that loss is the exact same thing as a winning trade in the end.

Trading, like most things in life, is all about balance.  There are times that are conducive to expanding one's account, and there are times that one must expect an environment of contraction.  During the times of contraction, the goal is to protect your account as much as possible, in order to give yourself the chance to be part of the next expansion phase.  There's nothing worse than seeing a great, near-sure-fire opportunity, but then having no capital free to take advantage of it.

Moving on to the charts, the market has eliminated the third option discussed last Tuesday.  It has behaved much like the second option:

Given the behavior of late, I'm somewhat inclined to think that we're either forming an ending diagonal as discussed -- though do note that black iv could, theoretically, already be complete.  If we simply drop toward 2600 immediately, then I'd be inclined to think that last week's high was probably a b-wave.  I say "if we drop... immediately" because if we're forming the diagonal, then it probably needs one more high before it drops.  Thus, ironically, bulls would have better chances would be if we dropped toward 2600 directly than if we rallied just a little higher before turning.  In that event, we would watch for an impulsive turn higher, then from there we might expect a rally back above last week's high (although this would have to be rigorously examined in real-time if/when it happens, due to the outside shot at a complete WXY rally).

In conclusion, the market still has several options, but there are clear tells to each option heading forward, as follows:

1.  If we break out over the red wedge on the chart above, bears will want to watch for a whipsaw to help confirm the diagonal. 

2.  If SPX were instead to break out and hold that breakout, then that would instead suggest the bull nest (option 1) and a very strong rally. 

3.  If we decline immediately, then our first inclination will be that last week's high is a b-wave.  That pattern would be near-term bearish, but then bullish for a break back above last week's high.

Trade safe.

Friday, April 13, 2018

Update Note

This has been an exceptionally busy week for me personally, so updates should return to normal next week.

Last update noted that it appeared we were entering a chop zone, which is what we did.  Option 3 from that update is off the table.  Beyond that, no material change.  Trade safe.

Tuesday, April 10, 2018

SPX Update: Market Shifts Out of "Easy Mode"

Last update expected that SPX would rally toward 2675, then reverse lower to 2585, then rally again.  In actuality, SPX rallied to 2672, then reversed lower to 2586, then rallied again. 

Calling two large turns in advance, both within 3 points, isn't too shabby -- but now it gets complicated again.

Long-time readers know that a key tenet of my general trading thesis lies in the recognition that the market alternates between periods of predictability and periods of unpredictability.  We just cycled through a predictable phase, and now we've entered a less-predictable phase.  There are presently no less than 3 potential patterns which could develop from here, so I've done my best to outline those options on the chart below:

Option 3 (on the chart above) will be invalidated north of 2673.  Option 2 would be invalidated with immediate sustained trade north of 2706 -- please note that 2706 is no longer the invalidation level if we follow the choppy path shown.  In an ending diagonal, wave iii is not allowed to be longer than wave i, so wave iii would need to stall shy of 2706, but wave v could later exceed that level.

Do be aware that even if both option 2 and 3 invalidate, that will not automatically guarantee that we're in red (C) -- but we'll burn that bridge if and when we come to it.

In conclusion, last update's anticipated path played out well enough, but from here we should await further info from the market before we attempt to develop a high-confidence outlook.  On the bright side, we do have two clear price levels to watch, to help narrow the options.  In all likelihood, we'll be able to narrow these down within the next few sessions.  In the meantime, trade safe.

Thursday, April 5, 2018

SPX Update: No Material Change

Today's update will be short and sweet, because it appears that the expanded flat we discussed last update is underway:

[Please note typo!  "Textbook target" should read 2675-96, not 2575-96!)

The textbook expectations for this move are as shown in the prior update: 

1.  That the rally continue to at least 2675-96;
2.  That the move then reverse and head below 2585 (traditionally below 2553, but that's not required). 

Note that the rally could run higher, and/or that the subsequent low could come at much lower prices if it so chooses, so we have to track this in real-time to see whether this will develop as a "textbook" pattern, or as some variation thereof.  Also worth a mention that there's an alternate, more bearish flat that could peak between 2662 and 2674.

Beyond that, nothing to add to the prior update.  Trade safe.

Tuesday, April 3, 2018

SPX Update: Bears to Market: "You Can Pay Us Now or You Can Pay Us Later"

Back in September, I suggested the end stage of the bull run (before a large correction) would be a fast and furious rally; a "blow-off top."  Each day after, we continued looking for higher prices, as the blow-off top unfolded -- and in so doing, we captured well over 300 points of the ensuing rally. 

But on January 31, we changed our footing from bullish to bearish, and have remained longer-term bearish ever since (though after the February lows, we turned short-term bullish until March 5).

Frankly, I don't care which direction the market moves, as long as I can make money trading it.  Being a "perma" anything is stupid, because the market does not move in straight lines -- otherwise the 2007-09 bear market would have dropped to zero, and the recent bull market would have run to infinity.  In terms of ease of trading, I actually preferred the extended fifth rally, because it was incredibly easy to make money on the long side from September into January. 

But, conversely, it was also incredibly easy to make money on the short side during the first leg of the decline, when we were among the few people who turned bearish at the right time.  (It will get harder the more people catch up with us, though.)

It was likewise fairly easy to make money over the last month, because we had two wave count options, and BOTH of them pointed toward a target of 2565-80 SPX, which was finally captured yesterday. 

More interesting than that target capture, though:  The Dow Jones (INDU) briefly broke below the February low, which is at long-last a technical confirmation of my read that the decline from the all-time high into the February low was indeed impulsive (in the direction of the larger trend).  That break does great technical damage to any and all bull counts (none of which we have favored since the all-time high), at least for the intermediate term.  Bull counts have been reset in that index.  That break also rules out a huge triangle fourth wave, which many technicians were trying to cram into this wave structure (I never felt the structure supported a triangle, which is why I never entertained that notion).

The big question now is whether bulls can pull off some sort of near-term stick save before the wheels come off.  The only approach I know to take when you're looking at a possibility that is near-term bullish but longer-term bearish vs. a possibility that is bearish across the board is to set up challenges for bulls to beat, and to maintain a bearish stance until they do.

By February 2, we knew that the intermediate-term trend had changed from bullish to bearish -- and knowing that is 9/10ths of the battle, since you know at that point that any rallies are going to be against the next-higher degree of trend, and not with it. 

It's one thing to entertain speculation, but when it comes to trading, the benefit of any doubt must always go to the next higher degree of trend.

So that's where we sit today.  We just now captured my first downside target, and although I thought last week that there was a chance (C) of B/2 may have completed at 2585, we closed at 2582 yesterday -- so bears haven't missed much.  I don't mean to imply that (C) of B/2 is off the table -- anything but.  It is still very much on the table.

However, since the pattern into the recent low is not clean, the easiest way to simplify things from here is to give the benefit of the doubt to the primary trend unless and until bulls can clear certain hurdles, discussed on the chart below:

[Note:  Typo... chart should read "before 3/C begins," not "before 2/B begins."]

In conclusion, SPX captured my standing target, and INDU made a new low for the move, which moves the odds even higher (from my previous near-90% certainty) that the intermediate picture remains bearish.  To separate the immediately bearish count from the "delayed" bearish count, we'll simply leave it to bulls to "prove" whether they can delay their day of reckoning or not.  We will give the benefit of the doubt to the larger bear trend until they do. 

One interesting thing to note is that it's entirely possible that the reason this wave has been somewhat choppy is because it's possible that we have not actually seen the meat of the decline yet.  In other words, as bad as the last month has been for bulls, it could actually get much worse over the coming weeks.

And here, this is a fairly easy pattern in that sense:  I see almost no options for any kind of lasting long-term bottom at current prices.  Trade safe.

Late addition:  It has come to my attention that a visual would be helpful, especially for those new to Elliott Wave, so I am adding this chart to further explain details I had discussed only verbally earlier in the update.  Also be aware that if SPX sustains a breakdown at yesterday's low prior to exceeding 2659, then that could be an exceptionally bearish indicator: