SPX Update: 9-29-11

In my 10+ years of charting Elliott Wave, I have rarely encountered a market as challenging as this one. Fourth waves are notoriously difficult trading environments, and I know many Elliotticians who simply refuse to trade at all during a fourth wave.  While the true intentions of this market on the larger time frames remain somewhat veiled, we can take heart from the fact that we have thus far called virtually all of the turns accurately using shorter time frames and kept our readers on the right side of the trade since early August (even before we started this blog, we were posting accurate turn forecasts on other sites).

Yesterday's action followed our 1-minute chart very well, however it created a situation where the potential first and fourth waves overlapped.  This has caused us to shift the preferred labeling from a simple wave (ii) to a complex a-b-c wave (ii); specifically, a running flat (blue labels).  If this view is correct, it should complete anytime within the red target circle (meaning it may already be complete, or nearly so), and turn down sharply from there.

The price action has also unleashed a flurry of other potentials, the front-runner being that we just saw a leading diagonal first wave (gray labels). 

I am not going to address all the other possibilities until the market gives us more reason to, however the move needs to begin accelerating downward very soon for the blue nested 1-2 count to maintain viability.  If the 1-2 count is occuring, that would put the target destination for the third wave in the 1090 neighborhood.  Sustained trade above the blue channel on the 1-minute chart would be our first clue that the 1-2 count has likely been negated, and preference would shift to the gray count, which would have us forming a larger rally into the 1175 area before resumption of the downtrend.  Sustained trade above that area would give warning that one of the other myriad possibilities still present in this clusterf*dge market is likely to unfold... but as I said earlier, we'll burn that bridge only if we come to it.

I, for one, am looking forward to the larger wave finally ending, and the return of clarity to the market structure. ;)

SPX Update: 9-28-11

There's not much to add on top of last night's update.  We did get the brief pop and continuation down we were looking for; as posted in last night's 9-27-11 update:

It looks likely that we made the newest top to the straight up/straight down moves that have defined the range since the 1101 low, because yesterday's move down appears impulsive -- which means it should continue lower after a bounce or two. 

This continues to hold true for the market: as yet, there is still no way to count the move down as complete.  The current waves on the smallest timeframes indicate the market is now trending down.  Futures are basically flat right now, but I am expecting another brief pop tomorrow, likely in the morning, and then further downside (see 1-minute chart).  Since there is no way to count the waveform as completed, further downside from this level is virtually guaranteed -- whether it comes tomorrow or Friday/Monday.

We are still favoring the ending diagonal here for wave v, as discussed yesterday.  I have added a 1-minute chart to illustrate what is currently the most reasonable interpretation, and expectation, for the next few days.  Please note that the blue lines I have drawn in to represent the future moves are not intended to be time accurate; I am simply working to illustrate within the available chart space.  These moves could all happen tomorrow, or (more likely) stretch out over a few days. 

Oh, we have also made it easier for readers to post comments.  Feel free to comment or ask questions at any time!  Trade safe!

9-27-11 Update: The Clusterf*dge Market

Charting this market has been an exercise in patience lately.  Remember way back in August when wave iv was obviously a triangle?  And then it wasn't.  Remember the head and shoulders pattern that whipsawed?  TWICE? 

It has finally become apparent that the market has formed the rare but reliable WTF is This Crap? pattern.  Edwards and Magee describe the pattern thusly:

WTF is This Crap? Pattern:  This pattern occasionally shows up as a consolidation after a mini-crash.  It is recognizable by the fact that it is largely indistinguishable from utter chaos.  The main defining characteristics of this pattern are that it trades within a broad range, and all other patterns formed within the WTF is This Crap? Pattern are utterly meaningless and will ultimately fail.  If you find yourself staring at a chart for hours, after which you finally remark, "WTF is this crap?" you have probably just come into contact with this pattern.

I drew the following chart to help highlight the obvious lines of support and resistance:

Ha ha, just a little Technical Analysis humor there, designed to elicit angry responses from everyone.  Anyway, on to what I may have actually uncovered after staring at the charts for literally hours today and saying to myself, "WTF is this crap?!"

The SPX is truly a challenge to count right now.  It looks likely that we made the newest top to the straight up/straight down moves that have defined the range since the 1101 low, because yesterday's move down appears impulsive -- which means it should continue lower after a bounce or two.  It also looks reasonable to assume that the market will form the ending diagonal we hypothesized previously. But it's a very garbled pattern since the 1101 low. So after staring at a multitude of SPX charts in various timeframes for an hour or two, I finally said to myself, "Screw this."  And I went and charted the Wilshire, Dow, and NYA.

Unfortunately, the other indices aren't crystal clear either.  The Dow and NYA both made new lows last week, while the SPX and Wilshire haven't. 

I decided to focus on the NYA to check for possible alternates.  The first interesting note is the way the NYA has honored the down-sloping trendchannel.  It has traded almost perfectly within its channel, and for the entire month has bounced between the top line of the channel and the median line.  I decided to try an "experimental" count to reconcile the NYA as a way to search for other potentials.  I call the count experimental because it requires the use of two unusual waveforms (infrequent patterns) to fill in the blanks.  However, this market has been nothing if not unusual (consider the failed technical patterns of the triangle and h/s), so perhaps unusual waveforms are appropriate.  

The bottom line is: I would give a 70% probability to the ending diagonal... but there are definitely other possibilities, which should be clarified in the next few sessions. 

I've posted the SPX chart to reflect the preferred view that an ending diagonal is forming.  I've labeled an alternate count, but the wave formations on the labeled alternate count would be appropriate only if the market is gearing up for a big, swift move down of 20% or more. So the alternate labeling becomes hard to justify in the context of wave v of Minor (1).  Wave v could support a swift move down, but it's unlikely to be a move much greater than 10%.  The big move becomes possible to justify if what we're seeing isn't part of Minor (1) at all, but is instead Minor (3) down beginning to unfold -- so I've labeled that as an alternate on the NYA chart.

 

On the NYA chart, I've posted the "experimental" wave labels, which don't violate any rules, but do take a bit of creative license with the structure.  The alternate count on the NYA chart says we've seen Minor (1) AND Minor (2) up already, and we are now starting Minor (3) down.  Minor (3) will knock 20% or more off the indices, so that would make far more sense in terms of viewing the recent waves as a 1-2 structure.   

We'll have our answer in the next few sessions.  Sorry if your head wants to explode after looking at the alternate counts.  If your head actually DOES explode, you'll have an idea of how I felt earlier this evening.  But don't worry too much about the alternates right now; instead keep your eye peeled for the ending diagonal, as that seems most likely, and should spark a multi-month rally.  Trade safe!

 

SPX Update: 9-26-11

The market rallied today, right into our target range of 1155-1170, as we projected in the Weekend Update -- despite Dennis Miller's continued insistence that the market would decline because it was "acting worse than Kim Cattrall in Big Trouble in Little China."

The corrective movement of the rally is making the squiggles a bit difficult to label, but it looks like it may actually be targeting the gap fill at 1182.  As I said, though, it is difficult to count.  The rally has fulfilled its minimum requirements, so it is our view that the rally could end any time between now and 1182.   

After this rally ends, we should move down to at least test the 1101 low.  Sustained trade below 1150 should indicate that the move to 1101 and beyond is underway.  As the wave unfolds, we will start to get some indications, based on the form it takes, as to whether the market will make an ending diagonal or continue down toward SPX 1000.  I have updated the chart to reflect both possibilities, and I will keep you posted as the waves start to clarify which route the market has chosen.

But What of the NASDAQ?

[Note: weekend SPX update is posted immediately below this post]

We don't spend a lot of time talking about the NASDAQ Composite here, largely because the NASDAQ has sometimes been cruel to us.  When we were children, the NASDAQ used to sit behind us in math class and give us wet-willies constantly, and we will never forgive it.

However, we are making an exception tonight, and have drawn up a long-term chart of the NASTY.  This chart is extremely bearish and largely self-explanatory.  The only thing I have to add is for those not well-versed in Elliott Theory.  Under our preferred count shown here, we are currently in wave C-down, and the worst part of the wave has only just started.  We should see a bit more downside before we get a nice relief rally, but then it's Look Out Below.  Our long-term target for a bottom is around 500.

Take that, NASDAQ!

Weekend Update with(out) Dennis Miller! SPX: 9-24-11

At the request of a reader, I have updated the charts to reflect the two possible conclusions for wave v-down of Minor (1)-down (for further clarification, see the 9-22 update) .  Once Minor (1) concludes, we should see a multi-month rally ensue.  I believe this rally will be a fantastic opportunity to accumulate heavy short positions, as the wave which follows will be Minor (3) down, which should be faster and more furious than Minor (1) by an order of magnitude.  Quite frankly, wave (3) will probably be somewhat frightening (think 2008 crash).  Once Minor (1) completes, we will begin projecting targets for Minor (2) and eventually Minor (3).

The two charts are annotated slightly differently to reflect the two possible waveforms v-down may take.  The price targets are quite different as well, with the ending diagonal having a target in the 1060 range, and the other waveform reaching all the way down toward 1000, and possibly even lower.  We are favoring the view that the current corrective wave still needs wave c-up to be complete, although the outside possibility exists that we have seen the entire rally.  A move above the recent high of 1142 would indicate that wave c is unfolding, with a target of 1155-1170 to complete the current rally.  If our preferred count is correct, the market should then turn down from that range and make a new low.

When looking at the charts, keep in mind that the ending diagonal (the wedge on the first chart) is purely speculative at this point, and mainly shown to alert our readers to the possibility, and help keep our readers on their toes.  Unless the current rally starts showing more strength, we will continue favoring the more bearish count with a target of 1000 +/- (note, we did have to revise this target lower after wave v-down actually started -- older charts show 1060, but that was from before wave iv-up had even ended). 

Trade safe!
 

Elliott Wave Update: 9-22-11

The market continues to vindicate our views, and probably owes us a cookie.  We're happy to keep on being right... until we're wrong, anyway.  ;)  Bound to happen sooner or later.

For tonight's post, we're going to put on our edumacationalistic capz, and help folks understand some of the basics of Elliott Wave Theory, as well as exactly where we believe this market is positioned in relation.

So, before I get into the charts too much: As a refresher, our preferred view has been that we are beginning wave C-down of  what will likely become the most devastating bear market of our generation.  It is our view that we are currently in Minor (1) down of what will become a larger five-wave impulse move down (for those not well-versed: please familiarize yourself with "The Big Picture" long-term count and chart, link posted to the right).  Within that Minor (1), we believe we have completed i-down, ii-up, iii-down, iv-up, and are now in the process of forming v-down.   

Wave v-down cannot be fully confirmed until the 1101 low is breached.  However, it is our belief that this will happen soon, likely after a brief snap-back rally.  Assuming our analysis of the charts has been accurate, and we are in wave v of minor (1), then the question becomes, what form is wave v likely to take? 

There are two distinct possibilities forming in the charts: 

The first is that wave v-down will take the form of a traditional "stair-step" impulse down, as follows: wave 1 (see chart below) started the move; wave 2 snapped back to correct a portion of that; wave 3 moves the market lower than wave 1 did (note, the view is this is only part of wave 3 so far), and is generally longer and faster (wave 3 is typically the strongest wave; psychologically, 3rd waves are the moment of "recognition" for the masses, when they realize things are either going better or -- in this case -- worse than has been previously recognized); wave 4 then corrects a portion of wave 3, however it never crosses up into the territory of wave 1; and then wave 5 completes the move and the fractal.  That series of five waves is called a "motive wave" and those waves together complete one wave of a still larger wave which may be either a motive (five wave) or corrective wave (three wave), and so on and so on (see diagram at right, which shows up if you click on that black rectangular void -- at least, that's what I see on my screen).  So once wave-v down is complete, that will complete Minor (1) and we'll get a larger correction that is free to move all the way up to where wave Minor (1) began.  Anyway, the traditional stair-step is one possible form for the current wave v.

The second possibility is that wave v will form what's called an "ending diagonal."  In traditional technical analysis, this is often called a wedge.  An ending diagonal does not follow the usual rules for wave creation: for example, in a diagonal, wave 4 is allowed to cross into the territory of wave 1, and often does.  I don't want to get too in-depth here on when diagonals are appropriate in the formation and so forth, there's already books for that -- but suffice to say that this is a prime set-up for one to form.  It especially fits very well with our Minor (1) target, which was arrived at based on the larger wave form.  If the current wave v takes the more traditional waveform discussed previously, we are going to need to lower our target.

I have illustrated the possibility of an ending diagonal with the gray count and lines.

So those are the two preferred possibilities.  By the way, since we're being edumacational, "preferred" means the view favored by that particular analyst.  Elliott Wave is as much an art as a science, and there are often different interpretations and possibilities available.  No analyst can be right 100% of the time, just as no head and shoulders breakdown is 100% guarantee.  One of the things that makes Elliott Theory unusual is that it's not nearly as simple as most technical analysis.  There's a great deal of information that must be parsed before a count is decided upon -- and since understanding the big picture is critical to understanding the present picture, good analysts often dig back decades, or even hundreds of years, to analyze the charts at different degrees of trend.  This process can take days or even weeks, which is one reason you see so many very bad calls being made by dilettantes claiming to be under the Elliott umbrella.  You can't just waltz in and start calling the market based on what happened yesterday, or last month, or even last year -- not until you understand where today, last month, and last year fit in with the last hundred years. 

Anyway, this concludes our edumacation presentation, and we promise to go back to being smart-asses tomorrow.  ;)

C'mon Bennie, Let's Do the Twist...

So the Fed honored our prediction from last night and gave no indication of launching QE3 in 3D: The Revenge, but today announced "Operation Twist."  Under Operation Twist, future Fed market actions will be decided over a friendly game of Twister, to be held in Ben's basement on alternate Tuesdays.  If things get really bad for the economy, they have left open the option to stretch the game out over two days, although some of the Fed governors will then play using pre-designated "stand-ins."  Under the "Loser Buys Drinks" provision, Jello shots will be provided by the taxpayers.

Or if you want to read what it's really about, you can do that here.  Quite frankly, I don't have time to read it: I'm too busy preparing Jello shots for the Boyz.  Besides, when I read stuff like that, my eyes start to itch excessively whenever I get to phrases like: "the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less."

After a few paragraphs, it starts to seem like the words (and the ideas behind them) would make about the same amount of sense no matter which order they were in:  "The Committee decided today to extend the average holding of its mature securities." or "The Committee decided today to average the extended maturity of its securities of holding." or "The Committee decided today to extend the average maturity of its members by 6 to 30 years."  After reading a whole page of that crap, I'm ready for a beer.  I get the same feeling whenever I read the fine print in product warranties.

The bottom line appears to be more of the same from the Fed... and it seems to me that "more of the same" won't be nearly enough to keep this market elevated in bubble-mode.  Which, as I said last night, is pretty much what I see in the charts.

The market sold off heavily into the close, which most traders are probably looking at as "big deal, we're still in the range."  If I'm reading the charts right, I think this is the move where we finally breakdown.  The recent rally and preceding moves count very, very well as an a-b-c (see chart).  So well, in fact, that in the context of the moves which preceded that, any other labeling is a stretch.  Is it possible something else is going on?  Sure, it always is.  But my best analysis, and my gut, says the preferred count we've stuck with for several weeks is going to emerge victorious in the end here.

So, if my analysis is correct, we may finally see a breakdown from the bear flag/head and shoulders in the very near future.  What happens tomorrow may give us our answer, because the move down still hasn't formed a complete impulse wave yet.  Futures are flat as I type this.  If it doesn't go on to form a complete impulse, we'll have an immediate clue that the preferred count may be in question... and I'll be eating crow and/or Jello shots in tomorrow's post.

Market Waits on Bailout Ben

The Fed has kept the market in a holding pattern for several weeks now, but the moment of truth is finally here.  Bulls are anxiously awaiting Word of Liquidity to be handed down from On High tomorrow when The Great Wizard speaks.  The bears are betting, of course, that Bernanke will emerge from the meeting and see his shadow, which, legend has it, predicts we'll have six more quarters of bear market.

It will be interesting to see what happens, especially in light of recent developments such as The Strongly-Worded Letter from the GOP, in which they urge Bernanke to refrain from turning the dollar into a competitive brand of toilet paper.

Personally, I don't believe that more quantitative easing is forthcoming, at least not in the immediate future (I've been wrong before, though).  I think what we'll get instead is something more along the lines of a Strong Statement from the Fed, reaffirming their commitment to keep doing a bang-up job of ruining our children's futures as much as possible with their Keynesian policies without actually printing any more money... just yet.  This is what the charts are telling me, anyway.  Although there are other possibilities, such as the possibility that the recent crash was just the b-wave of a 3-3-5 correction off the March '09 bottom, and we have one more intermediate-term rally waiting in the wings.  But again, based on the charts, I view that as a long shot. 

No, I think the bear has started, and even if Ben does something more dramatic, I believe it will only generate a short-term rally at best.  So I'm going on the record here; and if I'm wrong, well, then frankly it's your fault for not donating enough to allow me to devote more of my time to this.  ;) 

Contrary to my view, the market is hanging its hope on the idea that Emperor Ben will announce QE3: In 3D Coming Soon to a Primary Dealer Near You, so we can get enough liquidity sloshing around to prop this pig up for another few months.  It's pretty bad when the bulls last and only hope rests on the continuation of the QE bubble: forget the real economy, or housing, or jobs, or production, or anything else with any basis in reality, such as Europe.  It never ceases to amaze me the ability people have, both individually and collectively, to lie to themselves.  What got us into this mess in the first place was loose monetary policy and the series of bubbles it created.  Only a delusional person -- or nation -- would believe that a lasting solution is imminent if only we keep applying more of the same policies.

"We can't solve problems by using the same kind of thinking we used when we created them."

- Albert Einstein 

Below is a great comic strip I came across recently, which very succinctly sums up my opinion of our monetary policy:   

    

I have a chart, but honestly I think the reason the last couple weeks have been so difficult to count is because the market hasn't quite made up its mind yet, so it's keeping its options open to several possibilities.  It seems very likely that this stalemate will finally come to an end -- and we will again gain clarity to the market's intentions -- after we get word from Bailout Ben.

 

Apple's New All Time High, and What It May Mean for Bears

There's been no material change in the counts since the weekend update, so I decided to investigate and write about something else...

Some of you may have noticed that Apple made a new ATH today.  I was curious if this development should challenge those who believe we are starting a new bear market -- so I went back and looked at some charts.  

In 2007, the SPX made its ATH in early October, however Apple still went on to make a new ATH in late December -- two and a half months after the bear market had already started in the broad indices.

The other thing I discovered is that Apple is tracing out a completely different wave count (see chart) than the SPX -- or any of the major averages for that matter.  Apple appears to be in the process of completing a 3rd wave up, which likely means that it will hold up considerably better than the SPX, etc., during any coming declines.  Apple appears to still be in the process of completing a third wave up at Primary degree.  Thus, when Apple corrects lower, it should be correcting in a Primary fourth down.

What this means, price wise, is that Apple should not fall below its Primary first wave high of 202.96.  It could theoretically still take a 50% haircut from here, although that's drastic for a fourth wave down.  It would be more likely for it to take aim at the bottom of the gray trend channel.  It should ultimately make a three-wave move down toward the 250-280 range.  This is still a healthy adjustment, but not what I anticipate for the SPX.

It also means that after any bear move is over, Apple should then go on to make even higher highs in a Primary fifth wave up... in other words, on any significant decline, going long Apple will probably be a great play.  

Anyway, here's the long-term count for Apple, followed by the analog charts (2007 on the left, 2011 on the right; SPX on top):

 

 

Weekend Update: NDX Count

The NDX is looking a bit different than the SPX.  The NDX appears to have already completed a textbook-perfect first wave down.  It is possible that the NDX has also finished, or is close to finishing, its second wave retracement... however, there is a need to reconcile the NDX count with the SPX count.  This leads me to believe that the NDX will form a more complex second wave, likely a larger A-B-C expanded flat. 

Note the current perfect back-kiss of the old rising trendline.

An interesting side note: you can see the bearish rising wedge formed on the NDX, yet this formation would not be considered a wedge or triangle from an Elliott perspective.  This is due to the fact that it does not count well as its own wave, especially relative to the preceding action; it is instead the end of wave (1) and (wave A of?) wave (2) combining to form what traditional TA would classify as a bearish wedge.

If my speculative A-B-C count is correct, wave (3) may be delayed for a time... although the chance exists that it is just around the corner.  Either scenario bodes poorly for NDX bulls; wave (3) should ultimately take us to, and likely below, the July '10 lows. We'll look to the price action to alert us to the more concrete potentials as the move develops, and I will periodically update this chart to keep you posted. 

Weekend Update: SPX Count

The short term possibilities for this market are spiralling toward infinity at this stage, so we're going to wait for clarity from the price action before getting too attached to the short term wave counts.  For now, we're sticking with the preferred count, since it did us solid for so long.  As long as the market does not move above the labeled high of wave iv (blue KO line), the preferred count remains viable. 

Although the micro picture has become temporarily hazy, the macro picture hasn't changed and continues to remain fairly clear in our opinion:  This is either the complete first leg of a new bear, or most of the first leg, with wave v-down still to come. 

Tomorrow, I'm going to see about posting some charts of the NDX, and possibly the Dow, if I have time.

9-15 Update, with Bonus! Chart

No material change from yesterday.  The preferred count is still in business, and the wave labeled ii actually counts very well as an a-b-c.  If that is the case, wave ii should be very close to completion, and we should see the market turn back down soon.  Wave iii should see powerful selling, although it may start off tame as it rolls over. 

If we instead begin to consolidate around this area, it is likely that one of our alternate counts is in play.

I have also posted a more traditional chart I was playing with, at no additional charge.  The additional chart is yours to keep, even if you return the set of steak knives!  Operators are standing by, because we haven't sold enough steak knives yet to afford chairs.  Order yours today!

9-14 Update: Challenging the Chart

The market has finally challenged our preferred count to either step up or be eliminated.  The preferred count would view this most recent rally as wave c-up of an a-b-c wave ii.  It is make or break time for this count, which, we must admit, has had a very good run so far.  10 days of solid, on-the-money calls should certainly allow for a target to be overshot every now and then. 

Fourth waves are very challenging trading environments, because they almost always move back and forth over the same territory many times before making a decisive break and, due to their corrective nature, they can be very difficult to accurately count.  This has certainly been the case so far... although if the market breaks down from here, our preferred count will have passed the challenges presented with flying colors. 

Be that as it may, it is time to give more consideration to some alternate possibilities.  I have labeled three potential counts on this chart, and annotated some things to watch for. 

The preferred count has taken its first hit, but is still standing and is represented in red. 

Our first alternate would be a fourth wave triangle, shown in green. 

Our second alternate would be that Minor (1) down already completed, and we are now in Minor (2). It is shown in gray.

The market should allow us to start eliminating one or more of these counts in the near future.  The one virtual certainty we can stand on is that this entire move since early August is clearly corrective in nature, and should ultimately resolve to the downside.  Trade safe! 

Update as of 9-13 Close

Wave (2) has reached our minimum target projection, however there is some question in my mind as to whether that was ALL OF wave (2), or only wave a of (2) up with b-down unfolding now.  The possibility exists that my labeling of the bottom as "b" is incorrect, since that cluster of waves is very difficult to count cleanly.  If the (1) label were moved over to where the "b" label is currently: then we completed a-up of (2) today, and now are in b-down, with the larger c-up of (2) still to come.  This alternate possibility is represented by the gray dashed line.  If the alternate were to play out, I would watch for a "drop and pop" move tomorrow.

If we have seen ALL OF wave (2), which is still my preferred count, then we should see a strong move down start pretty much immediately.  That said, the market has great potential to close with both the preferred count and alternate count in limbo tomorrow: it could make a nice 5-wave decline, which could either be a motive wave of the preferred count, or wave c of b down of the alternate -- then bounce and close at a point where the bounce could either be counted as the countertrend to the motive wave, or the start of c-up of (2).  I may be referring back to this comment in tomorrow's update...

Beyond that, a break below the (b) wave low will likely indicate wave (3) is underway, and at that point we should see the selling intensify -- although I'd be surprised if that break happened tomorrow.  Trade safe!

9-13-11 Pre-Market Update

The preferred short term count is still looking golden.  I do have a slight concern about the failed breakdown, because this can sometimes generate large moves in the opposite direction -- however, at this time, there's no reason to think that will be the case.  It looks to me like the failed breakdown was the b wave of sub-minuette (2), with c of (2) unfolding now.  The target for preferred sub-minuette (2) is 1173-1187, but if the count is correct, the top target range is probably unreachable.  If it was reached, that might be cause for concern as it would violate the falling trendline connecting the head with the right shoulder of the now-complete head and shoulders pattern.

I have included an alternate possibility that the three prior waves down were a-b-c (not labeled) of an (x) wave.  If this alternate count were playing out, we would be on our way to new marginal new highs, probably at the top of the rising trendchannel.  Again, there is currently no reason to doubt our preferred count, but I do think it's helpful to be aware of the possibilities as part of an exit strategy, if the preferred count seems to be failing.

A break below the recent b wave low will likely confirm that wave 3 is underway.

Not much to add beyond that.  Trade safe!

Intra-day Update, Short Term SPX Count

It looks like I was a tad premature in marking the end of sub-minuette 1 down.  The fourth wave at micro degree was a "running" fourth and initially looked like waves 4 and 5.  A running fourth is characteristic of an unusually strong or, in this case, weak market.  Interestingly, the market broke right through the rising trendchannel that's been support since the wave iii low, and it found support instead at the head and shoulders neckline. 

The head and shoulders pattern is now complete.  Ideally, we do not want to see the market break above the falling black trendline which connects the head and the right shoulder.  Probably not coincidentally, that trendline crosses right through our wave 2 target box.  I would expect a brief rally here, though we may test the neckline once more before moving toward the target retracement.

If the market fails to rally and instead breaks down from here, it is likely that the previously suggested scenario of nested 1-2's is playing out.

A More Immediate Bearish Perspective

As I write this, ES futures are down about 19 points, which does not in any way invalidate my preferred count; however it likely means I was early in marking sub-minuette wave i as complete.  This opens up the potential that all we've seen so far is a nested series of 1-2's -- and depending on where wave i bottoms, there may finally be cause to lower our 1060 target.  We'll have to see what the open brings.  If you read my Weekend Update, you'll recall that I said I don't trade counter-trend during nested 3rd waves... this is another reason why.  The waves are often so forcefully skewed in the direction of the trend that the minuette waves and smaller become hard to count, so trying to trade the small squiggles can be very hazardous to your wealth.

Anyway, this article is to present another alternate count, one which I've hinted at a few times, but have never expanded on.  Of all the potential counts outlined, this one is the most immediately bearish.  This count hinges on the idea that Minor (1) based at 1121, in a truncated 5th wave.  I've explored this count on my own several times, and decided against it as my preferred count for several reasons:

1)  The current wave structure has stayed almost perfectly contained by the i-iii trendchannel (the large turquiose colored channel), which argues that it is all the same wave-form.

2)  In this alternate count, wave iv would be a sharp correction and a simple a-b-c structure.  You can see that wave ii was also a sharp a-b-c.  This violates Elliott's Rule of Alteration, which states that corrections tend to alternate between simple and complex forms.  This rule is not intended to be set in stone -- it is more of a very strong guideling -- so it can be violated without ripping apart the space-time continuum, but it is unusual nonetheless.

3)  The physical time taken up by wave (2) is very short relative to the preceding wave.  Wave (1) took 3 and a half months under this count; wave (2) would be about 2 weeks (although: the timeline would work better under the alternate count (on this chart) of w-x-y, which would stretch out the correction).  Again, not a concrete rule, but another clue.

4)  The preferred wave iv stays perfectly within the red channel, again arguing that it is all part of the same wave, as opposed to this alternate count which would have the red channel contain waves iv and v of minor (1), as well as all of minor (2). 

Those are some of the reasons that, in my preferred count, I've chosen to view the current decline as being a continuation of minor (1).  So what would be the arguments in favor of this being minor (2)?  Here they are:

1)  The wave labeled (1) in the chart counts very well as a five wave move.  In fact, when it unfolded, my initial reaction was that it was a truncated fifth and that minor (1) had completed.  

2)  The decline off the high so far has been quite powerful.  This is characteristic of a higher degree 3rd wave, much more so than it would be of a low-degree fifth wave (of 1).  The trick here is that if my preferred master-count is correct, and this is a Supercycle C wave, then (I assume, anyway) none of us have ever traded in an environment this bearish, and moves are likely to surprise to the downside over and over again.  Indicators which worked in prior bear markets as "buy" signals are likely to fail repeatedly.  It wouldn't surprise me if a "Supercycle Minor (1) of C" is as powerful as a Minor 3rd wave in a "normal" bear market.

3)  As I've pointed out in several previous posts, a large number of big-cap stocks look like they are completing, or have completed, 2nd wave retracements (Apple, for example).  If Apple starts crashing in a minor 3rd wave, it's pretty hard to imagine that the SPX, Dow, and NDX are going to be trading in the green.

4)  One word: "Plastics!"  No, sorry, just a little Graduate humor there.  Three words, actually:  "Black Swan Event."  In this environment, there lurk many potential crash-inducing events which could change alternate counts into preferred counts in the blink of an eye. 

So there you have it: both sides have been given equal airtime and the same number of bullet points.  Ultimately, interpreting market moves is always up to the technician, and all good Elliotticians must weigh similar arguments many times each week to decide which count has the highest potential.  Nobody can be right 100% of the time; but the successful technicians are humble and light on their feet, and able to evolve their counts as the market dictates.

So... if there seem to be reasons to start favoring this count over my preferred count, I'll alert my readers immediately.

Weekend Update to Short Term Elliott Count

Last week played out almost too perfectly, as the market almost seemed to be following my chart, instead of vice versa. 

There are only a few things to add over what's already been said in prior posts.  My preferred count is still that we are in v-down of minor (1), with 1-down, 2-up complete.  The move appears to be subdividing for the 3rd wave down, as anticipated.  At this point, I would expect a wave (2) rally to take us back up to test resistance in the 1174 area, and possibly as high as the gap at 1187.  After that, I would expect a strong reversal; wave 3 should see stronger selling pressure than wave 1 did. 

I would be very cautious about holding longs overnight in this environment since the market is likely to gap down one or more times during the 3rd wave, which could start at any time.  Personally, I don't trade counter-trend during nested 3rd waves, as they can be very unforgiving to people on the wrong side of the trade.

So far, there's been nothing to cause me to alter the target I set a couple weeks ago for wave v of minor (1) to bottom in the 1060 area.  We'll have to see how the 3rd wave structure unfolds, and I'll alert you as soon as possible if I feel the target might need to be adjusted.

1204 is now the key level to maintaining this count, and an upward violation there would tell us that the triple-zigzag alternate count is probably unfolding.  Given the action last week, I don't anticipate that level being broken until this wave is complete, but stranger things have happened.

Big Picture Oil: Time for Some "Crude" Comments

I know what you're thinking, but this isn't an article about Roseanne Barr: it's about crude oil. 

I'd like this post to mark the official announcement that I will be taking "chart requests" on weekends.  Please use the comments section of this post to request specific charts.  I'll try to get to at least a couple of your charts each weekend. 

Speaking of, our first chart request comes to us from little Billy in Arkansas:

Dear Mr. Logic,

Your blog has been up for a whole week now, and I have yet to see a single chart of crude oil.  Wut up wit dat, yo?

Sincerely,
Billy "Please Don't Call Me Little" Popolopogus
Arkansas, TN

Well, little Billy of Arkansas Tennessee, you're in luck, because today we're charting crude oil!

Crude is one of the few commodities that can be accurately tracked at cycle degree.  As such, I believe we topped Supercycle I back in 2008.  By the way, despite the current "peak oil" fearmongering, this argues that oil will likely be with us for a long time to come -- although it's prolly gonna get way 'spensive at some point, in Supercycle III (of course: doesn't everything), there is no reason to believe that the market will continue to tighten in the foreseeable future.  We are currently undergoing a correction in Supercycle II.  It remains to be seen if this correction will be A-B-C for ALL OF wave II, or if this will be A-B-C of a larger A-B-C... but it doesn't really matter as far as the immediate future is concerned, so we'll drive our gas guzzlers across that bridge when we come to it.

The first thing we notice about this chart is the giant parabolic of wave V and the subsequent wave A crash of 2008.  This is fairly typical of commodities as they often form extended fifth waves which retrace quickly.  Add that to the fact that this is a crash not of primary degree, but of Supercycle proportions, and you get the picture.  The second thing we notice is that wave B appears to be complete, with three farily-clean waves that count nicely in a 5-3-5 pattern.  C-down looks like it's in the early phases. 

Assuming that we are in wave C now, that leads us to a count of 1-2 complete, nesting what will likely become a smaller i-ii count.  It is important to note that we arrive at this nested count out of necessity, based on the overlap in the wave structure and the placement of the two triangles.  Now, we are operating under the presupposition that this is wave C, and our preferred 1-2 count hinges on that.  Our alternate, the potential bullish count, would have us in wave (b) now, with new highs to follow in (c) of B.  The market is currently in a state of equilibrium (since either count is viable) and is, in essense, issuing a direct challenge to Emperor Bernanke as to how far he's willing to take the destruction of the dollar.  In the alternate count, we can see that which we already know: the only thing monetary policy could create here would be another, larger bubble, since there is no true creation of wealth except through production.  The wave C crash would still follow that bubble as surely as the sun follows the rain; all the printing press could "accomplish" would be to delay the crash for a time... and ultimately the delay would only make the crash that much more painful. 

So our fate is sealed one way or the other, which appears to be the nature of choosing certain paths in life.  Once you pass the point of no-return, the road leads to a certain logical conclusion no matter what you do thereafter.  We have clearly passed the point of no-return in this particular economic experiment.

Back to the preferred count:  Wave i of the preferred count looks like it needs a slightly lower low to complete, which should then generate a month or two of snap-back rally before the wipeout phase hits.  It remains to be seen whether the Fed will decide to prolong the agony or not, and their actions could potentially shift our alternate count into the preferred role.

This Chart Has Been Gold

Anyone who's been following this chart since this week's pre-open owes me a coffee... or, depending on the size of your trades, a Lamborghini.  (Please hit the "Donate" button if you're feeling like sharing some of the spoils, although I may have to take direct shipment on all forthcoming Lamborghinis.)  ;)  This chart has been dead-on money so far.  Will it continue its win streak?

Before I fall asleep (4:40 a.m. here in HI), I wanted to update to give you an idea of what form we're looking for from this wave structure.  It should look *something like* the drawn-in grey lines.  As I type, it looks like we're in the process of forming a minuette fourth wave, which should lead to a new low.  Currently the larger wave appears as if it will end up being the 1st wave of the sub-dividing 3rd of v of minor 1.  At this point in the wave structure, bears want to see it grind sideways at times, then fall lower.  What bears don't want to see is it turn up from here and become the c wave of b of c of (z) of the alternate count ("Giving the Bulls Some Airtime" post below). 

At present, it looks like it's roughly targeting the rising trendline that's been support for this market since the 1101 print low.  Ideally, we want to see the current wave test that line or come close.  I would expect a bounce at that point, and then a strong move through it.  More later.

In case you weren't following, here's how the chart looked before the open this week:

Giving the Bulls Some Airtime

It always pays to play devil's advocate against yourself from time to time.  I decided to take another hard look at the wave structure of this rally, and see if the more bullish (short term, anyway) alternate count I suggested a few days ago could have any credence.  It does.  There are a few areas of the chart that are a clusterf*dge to count, but there's nothing that violates any rules.

One thing that gives this count a bit more weight, in my mind, is the way that time and price will coincide with the c of (z) target to bang it right into the top trendline to finally complete wave iv.  It's almost too perfect.  After taking a close look at this chart, I am now completely on the fence as to the preferred (see preferred count a couple posts down) vs. alternate count.  Today's action should clarify things one way or the other, and by the time I write the next update, I should be able to give a better idea of where this market's headed over the short term.  I'll try to do a live update during the day if possible.

A couple things to watch for:

1)  an upward break of the 1204 high, depending on the internal structure of that wave, might indicate wave c is unfolding

2)  a break of 1121 obliterates the alternate count (I know, that's a long way down)

Sorry I can't give you much else at the moment, the market has stalled at a place that puts both counts in limbo; tomorrow could head either direction given the current wave structure... and the advanced notice of which direction has been chosen will only come from the internal structure shown in tomorrow's price action.

As an aside, usually when I decide to give a lot of credence to an alternate count, the preferred count is within hours of proving itself correct.  If that tendancy holds, the futures will start crashing almost immediately after I post this.  ;)  Trade safe!

The Confirming Indicators Who Cried, "Bear!"

Many folks are wondering if the market action of the last few months is simply a correction in an ongoing bull market, or a brand new bear market.  

Here's a snapshot of some of the confirming indicators I use periodically.  If you've looked at my long-term Elliott chart (if you haven't seen the chart, it's the link to the right titled "The Big Picture"), you already know that I believe this is not only a new bear market, but that it will likely be worse than 2008.  If I were writing an advertisement for this bear market, I might say:  "It's a New and Improved Bear Market!  Now with more bear!"  (As a totally unrelated sidenote: I've always wondered about the common advertising expression "New and Improved!"  If it's truly NEW, how can it be improved already?  It's new.  If it's been "improved," it's not new; it's refurbished.  Something can be "Old and Improved!" but I suppose that lacks the same pizzaz.  Anyway...)

So, what are these indicators telling us?  For the past 12 years, each of these indicators has stayed within a pretty well-defined range during each prior bull and bear run.  All three of them have recently jumped back into bear territory.  Not only that, but they have done so with authority; much more violently than they have at the beginning of the past two bear markets.  This may argue that this is going to be the worst bear of the three.

I've also included a couple quick charts as an addendum.  The first one shows the hyper-volatility in the recent market action.  Scanning back the past couple years, the last time we find this type of volatility was right after the last big trend change, which is what the second chart shows.  Does it prove anything?  I have no idea, but I found them interesting nonetheless.

So without further ado, here are the charts:

 

Update as of 9-7 Close

Just a quick update right at the close, as I have some errands to run this morning (yes, it's still morning here in Maui ;)  ).

The 1204 gap target looks like it may have been it for the preferred wave 2 counter-trend rally.  However, the market has not given us official confirmation yet:  so far off the 1204 high, it has formed either a 1-down 2-up 3-down; an a-down b-up c-down; or a nested 1-2, 1-2.  We need at least one more impulse lower to form a 5th wave and confirm the larger impulse move down.  It has left itself in the perfect setup for a nice gap down in the morning, especially if our preferred count is correct and this is 3 of v, but it's not required to confirm the wave. 

Even if we get the confirmation of this small impulse, it's not completely clear sailing until the 1121 low is broken, but we'll worry about that if it starts to look like this leg down is just a larger a-b-c correction.  For reference, see the "first alternate count" -- second chart down on the post immediately below this one.  So, as we say in the biz: "Don't count your waves before your chickens hatch! Or before the cows come home to roost, whichever is greater."  Or maybe I'm confusing the saying with something else.

Either way, the preferred count is looking very promising, and I'll come back and take a look at what the futures are doing later this evening.

Updated Short-Term SPX Count

Despite all the panic from bears today, thus far the wave 2 snap-back rally has been only slightly more energetic than we anticipated.  Our target of 1195 has been met and marginally exceeded.  Barring immediate reversal, our next targets would be the gap at 1204, then the .786 retracement at 1210.  Keep in mind that 2nd waves can retrace up to, but not over, 100% and still be within the guidelines.

I'm not terribly pleased with the labels on the ending formation of this wave, since it currently counts best as an expanding ending diagonal.  This is such a rare formation as to be almost non-existent, placing it in the same category with things such as pregnant virgins, government spending-restraint, and super-smart statements from Paris Hilton.  Tomorrow's action should clarify the wave currently labeled "a-b-c-d-e?" as the next few squiggles will reveal to us what the pattern actually is.

We are still unable to rule out our alternate counts, as until the key levels are broken either to the upside or downside, this could all be nothing more than noise.  Our 1st alternate count would be that we are forming a w-x-y-x-z triple zigzag for wave iv, with w-x-y-x being complete (see 2nd chart below).  This would take the current wave up to a marginal new high before we drop.  Our 2nd alternate would be that we bottomed Minor 1 at 1121 in a truncated 5th wave, and this is part of the Minor 2 rally.  We have no reason to give any credence to either alternate count at this point, but it always pays to be aware of the possibilities.

Our first alternate count below: