Tuesday, October 18, 2011

SPX and Apple Updates: Is Apple Finally Ripe to Fall?

By now, most traders know that Apple had its tree shaken yesterday.  It missed earnings and disappointed analysts, largely due to iPhone sales coming in much lower than expected.  After hitting a new all-time closing high on Tuesday, the stock was hammered in after-hours trade, dropping just over $28 per share.  It's been exactly a month since I updated my chart and count for Apple, and with the earnings miss yesterday, now seems like a good time to bring everything current. 

I will also be updating the S&P 500 (SPX) in the latter portion of this article.

The last time I updated Apple's chart, it had closed at 411.63, and I suggested that it was getting very close to a significant top.  If Tuesday's close of 422.24 ends up being "the" top, I'll be pretty satisfied to have called it within 2.6%. 

The topping formation I am currently favoring for Apple is an expanding ending diagonal fifth wave.  Tuesday, we may have completed wave e, the final wave of that formation.  However, the potential exists for one more down-up move to a marginal new high to complete the pattern.  Either way, if this interpretation is correct, Tuesday's high should be within a couple percentage points of either an intermediate top (likely to last a couple years -- my preferred view), or a long-term top (potentially lasting much longer).  The charts seem to argue that the greater risk in Apple is now on the long side of the trade.

 On the chart above, my preferred count is shown in red, and argues that Apple just completed a massive third wave rally off the 2009 lows (or is currently completing the third wave -- it could form two more legs to the e-wave, as shown in gray).  I believe Apple's next move, starting now and running through 2012, is a trip to the lower trendchannel boundary in the 270's.  After a touch of the lower channel, Apple will again see a large rally, which should take it up into the $600's. 

However, the alternate count is more bearish.

The alternate count is shown in brown and suggests that Primary Wave 4 completed already, and we are now in Wave 5 (or just completed Wave 5), which would mean Apple is currently completing a long-term top.  I don't like this count as much, because Primary Wave 2 (red) took over a year to complete.  As shown in this alternate count, Primary Wave 4 completed in only a few months.  In Elliott terms, Primary Wave 2 was a straightforward "simple" zigzag correction.  This argues that Wave 4 should be a more complex correction, implying that it could potentially last longer than Wave 2.  It seems unlikely that it would instead be much shorter, as the alternate count shows. 

As a result, I would assign the alternate count roughly a 20% probability; assign roughly 70% to the preferred count; and the remaining 10% would be left for various other interpretations.

Regarding the S&P 500, there simply isn't much to add over what was discussed in yesterday's article.  If you're new to the discussion, it would be helpful to read yesterday's article, which focusses more on the intermediate and long-term.  Over the short term, there are numerous potential resolutions to the current structure, and the market has yet to reveal which one it has chosen.  I have updated the ending diagonal chart I suggested yesterday as one potential resolution.  The market behaved in accordance with the projection as shown in yesterday's chart, although it reached the target a bit faster than anticipated:

 I continue to believe that the market is not going significantly higher until it experiences more of a correction.  If this ending diagonal is the correct interpretation, we should finally breakdown beneath the 1190 support zone.  However, caution is warranted, as discussed below.

The first new possibility that Tuesday's action has opened up is the potential that the sideways correction the market just experienced was actually the 4th wave.  I view this as a very reasonable possibility, and sustained trade above Tuesday's high would shift my preference to this count.  The chart below shows how it might play out:

A second potential I want to call your attention to would be another formation unfavorable to bears, at least over the short-term.  It is possible that the market is already in the B-wave.  As I stated in a prior article:

B-waves are tricky and somewhat unpredictable.   B-waves can actually retrace up to 138.2% of the prior move, and still be within acceptable guidelines.  They often form triangles or other difficult-to-predict patterns.  B-waves are the Claus von Bulows of the Elliott world. 

Another thing a B-wave can do is actually exceed the top of the A-wave; in those cases, the market moves sideways-to-higher while it's correcting.  For example, if this is a B-wave triangle, the market may trade sideways above 1190 +/- throughout the entire correction, then end with a fake-out beneath 1190 which whipsaws (much like we saw at the recent 1074 bottom), and from there launch directly into the C-wave.

There is some logic to this possibility:  I don't feel this rally has been driven by bulls so much as it's been driven by short-covering.  I base this opinion on the fact that there simply isn't much liquidity present in the system; and bulls need liquidity to sustain rallies.  Trapping the bears above 1190 would provide another burst of fuel for the rally if/when the market finally breaks out and triggers the many stop-loss buy orders which are surely lurking somewhere above the recent highs.

The short-term support level which has formed around 1190 is therefore becoming critical for the bears.  In the upcoming sessions, pay close attention to the way the market behaves around this level; sustained trade below 1190 would rule out the B-wave triangle and lend credence to the ending diagonal shown in the chart above.  Conversely, another solid bounce off that level would increase the odds that a triangle is forming.

So, over the short-term anyway, the market is still in the "no crystal ball" zone.  Trade safe!

The original article, and many more, can be found at


  1. A quick shout-out to Vincent for his generous donation earlier. Thanks so much, Vincent, your support is greatly appreciated! :)

  2. Pretzel - I'm really enjoying your posts. You write with clarity and your posts are nothing but consistent quality. I especially like that you explain the count and not just the surrounding TA - form is paramount and I enjoy seeing your interpretation of the charts. I hope you'll keep it up as we're approaching some of the most interesting action in the history of the markets!


  3. Hi Pretzel,

    Great work as always! Let me try to see if I am understanding this correctly. From the last couple updates it seems that we are either i) at the end of the topping process - ending diagonals of wave A; or ii) in the beginning of an ambiguous wave B; Correct?

    Your other "less" probable scenario is that this big move up from Oct 4 is "the" wave C and a ferocious bear is around the corner to strike back with vengence? Since the quality of this big move up is so bullish (with all the bullishness heard from the media and the situation getting resolved in Europe) making this powerful move up a wave C possible.

    Am I interpreting all this correctly?



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  5. I reckon the "media talk" is just that "talk". Face it, they don't have a clue. When the markets rise, they put it down to some obscure result or statistic, but when it drops, they always shout “Europe”.
    “Hellooooo”, Europe/Greece/PIIGS had been in the news since the days of Lehman, so it should surely have been "discounted" by now. Or everyone in the market should at the very least be aware of it?! Fact is, "a solution” to the “European crisis” - built up over decades - is not going to be found any time soon.
    To me it seems pretty clear that NO Talking Head has any clue as to where the market is heading next. But while they cannot predict “tomorrow’s” moves they inevitably offer lame explanations for “yesterday’s” ones. But as these “predictions” are always in hindsight, it leaves these commentators with little more than entertainment value.
    Not that I imply that I have any clue, but at least I know is that the only possibility for getting any kind of grip on the market is through old fashioned TA – and definitely not the 8 o'clock news.
    So, thanks for keeping us in the loop with your excellent technical market analysis! (Btw, we just broke below 1210, so for someone 300% short, the day turned out OK so far ;-)

    Jaco Strauss
    Cape Town

  6. Pretzel, is there a typical quantity of bounces within an ending diagonal? You have it currently labeled as a complete 5-wave and the next move would be a break below 1190. If it bounces off that support again, does that mean we discard the the ending diagonal option and look to one of the alternatives?

  7. Jason - thanks! I appreciate the encouragement!

  8. Frank - yes, you have it correct. :)

  9. Jaco- I agree: news is noise. I actually laugh at some of the headlines on Marketwatch:

    "Stocks Rise on New Hope for Better Fall Comedies on CBS"

    "Stocks Fall as Investors Learn that Pop-Tarts Will No Longer Be Sold Eight to a Box"

    300% short? You have nerves of steel Glad today worked out for both of us. :)

  10. Spiker- Another bounce off the line is possible, but should remain beneath the recent high. If it exceeds the recent high before heading lower, I will need to look for other possibilities.

    Today looked very promising, though.

  11. Yes, I went in a bit big, but currently down to "only" around 250% short ;-) Covered MND on the JSE this morning for a 40% ROI. Almost flogged KIO as well, came within a whisker of my price. But if the NYSE tank early or close down solidly today, I'll hopefully get most of my target exits later today or tomorrow.

    I agree, these headlines are funny and sometimes really as capricious as your sample spoofs. But these stupid market headlines serves at least one purpose beyond entertainment... it tells you at a glance what the markets are doing, without a need to actually check the graphs.

    When, for e.g., this morning (CET), I saw "French president pours cold water on rescue plan" I knew the European markets must have opened Red. If it had not, the headline would've been more like yesterday's (real) examples:

    "Europe stocks add to gains after U.S. data"
    "Europe stocks gain on bailout fund hopes"

    I see the latest one for today reads:
    "Europe stocks drop; earnings, debt crisis in focus"

    In a way I really feel sorry for these guys who have to make a living out of pretending to make sense out of market movements based on fundamentals and news reports...

    (PS: I wrote this post, this a.m. European time, but couldn't sign in to post it. Since then of course the NYSE did tank during our late trade so I did get my KIO exit. Now "only" 150% short :)