SPX Update: Is Your 401(k) Ready for a 70% Haircut?

If you knew with pretty good certainty that the market was within a few percentage points of a long-term top, how would you behave?  Would you warn your friends and family?  I would... and have. 

Could I be wrong about what's coming?  Absolutely.  But here's how I lay out the logic:

1)  If my long-term technical work is correct, the market will lose more than half its value over the coming two years. 
2)  A rally that breaks the 2011 high would prove my current outlook wrong. 
3)  At present, the Dow is only 4.5% below its 2011 high. 

From my point of view, that's a potential risk of more than 50% loss vs. a potential gain of less than 5% --  define "no brainer."  And in actuality, my technical work suggests the market could lose much more than this, likely in the neighborhood of 70%.  Investors sometimes forget that if one's portfolio suffers a 50% loss, one then needs a 100% gain just to break even.  In other words, your portfolio has to perform twice as well to earn money as it does to lose money.  Bear markets can be hazardous to one's wealth.

Let's take another quick look at my long-term chart.  This chart is drawn using a technique called Elliott Wave Theory.  Elliott Wave was derived from decades of back-testing; during which R.N. Elliott discovered that the market's price movements create patterns in the form of repeating fractals.  Market prices are of course shaped by investor psychology; and people tend to respond to situations in similar and consistent ways, which is what forms the patterns.  In other words: history repeats itself.

A key factor on this long term chart is the wave which lasted from 2007 to 2009, labeled with the big red A.  This structure is called a "motive" or impulse wave, meaning its fractal consists of a structure formed by five smaller waves (see chart).  Under Elliott Wave Theory, this particular motive wave must be paired with another five-wave structure of similar size, shape, and direction.  However, there is currently no wave to pair this A-wave with -- so the implication is that its "mate" has not yet arrived.  This type of understanding is what gives Elliott Wave Theory its predictive value.

The current wave, blue Wave (2) could end anywhere within the turquoise target box, and may in fact have already ended.

 
The chart above represents the 10,000 foot view.  Moving into the shorter time-frames, the hunt is still on for the exact top of Wave (2).  The market appears to be in the process of completing this top, but there are still numerous paths it could take over the short term. 

Yesterday really didn't help much in eliminating any short-term possibilities, and in fact formed an inside compression day -- meaning prices never traded outside the range of the previous day.  The implication of this type of day is that buyers will show up at prices above Wednesday's highs, and sellers at prices below Wednesday's lows. 

My short-term target box was hit, and the expectation now is for Friday's session to end in the red.  An interesting seasonal fact is that the last trading day of the year has ended in the negative on 9 of the previous 11 years.  The lower blue box represents the next short-term target; however, this target would be invalidated with trade above 1269.37.

The market is still living within the black trendchannel on the chart above and that suggests the possibility that wave 4 of the black alternate count was completed on Wednesday.  I don't believe that's the case, but that's what KO's and stop losses are for.

The next chart I'd like to share is a sentiment indicator, in the form of the ISEE put/call level.  ISEE excludes the options purchases of market makers and big firms, so their numbers are specifically indicative of small ("retail") investors -- the investors who, more often than not, are the ones getting burned at the casino.  When ma-and-pop investors become heavily bullish, the smart money knows it's time to start betting the other way.  After all, Wall Street pros make their livings taking money from the little guys.  Oh, you thought their goal was to "help" you invest?  Sure it is!  And someday trained antelopes will pilot the Space Shuttle. 

This chart below illustrates the last 3 times ISEE sentiment reached these levels.  In two of the cases, it was at the July top, right before the mini-crash.  The third case was in September, when the market bounced, then made a new low. 

AAII sentiment numbers were also released yesterday, and bullish investors came in slightly above the long-term average (40+%).  Both of these sentiment indicators are at levels which have been consistent with bear market tops.

In conclusion, my long-term view for this market is quite bearish.  Given the fundamental stresses, such as international debt levels, LIBOR rates, the economic slowdowns in Europe and China, and the overarching threat of sovereign default, it appears to me that the charts are once again leading the news.  The TED spread has been at "financial crisis" levels for over a month, and is still rising -- so the stock market's continued elevation appears to represent some degree of suspended disbelief in all the real-world problems.  It seems to me that something has to give; and given the fact that the world's problems aren't likely to be cured overnight, that "something" is much more likely to be the stock market.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com 

SPX and RUT Update: Are We There Yet?

In studying the charts tonight, one conclusion is certain:  the market has no intention of making this one easy right now.  I can see at least half a dozen viable short term counts in the charts tonight.  And then, just as I was about to publish this article, I caught something which is potentially very revealing in the Russell 2000 chart... so this article has a lot of charts, and a fair number of short-term possibilities are reflected herein. 

I simply need more price information at the moment.  The next couple sessions should let me weed some of them out.

Let's start with something I'm reasonably confident of at the moment:  Wednesday's low won't hold.  The very short term counts are suggesting a possible bounce, and then further declines.  That's my favored view of the very short term.  The slightly bigger picture is sloppier, though.

The hunt for the Minor Wave (2) top is still on.  The earlier technical breakouts have now whipsawed, and the market is currently set at a potentially important pivot point.  Significant follow through to lower prices could lead this market into a deep and extended decline -- more on this later.  Conversely, if the bulls can reverse the SPX higher before it breaks 1229.51, the projection up to (as high as) 1310 will remain on the table.  The one-minute chart shown below highlights the key KO levels for the bull and bear counts shown on this chart.  The blue target box represents the expected rebound level for both of these counts.

I want to expand a little on the short-term alternate count shown in passing on the chart above.  I have no way of knowing for sure what the market will do tomorrow, so if the recent highs are broken, the chart below shows how the alternate count could unfold.

The reason I'm favoring the count shown above verses the alternate count below revolves around the technical breakouts on low volume and the subsequent whipsaws during Wednesday's session.  Usually, whipsaws lead to strong moves in the opposite direction.  Nevertheless, there is no confirmation of either count yet, so I thought readers might find this illustration helpful.  The blue wave 2 bottom is the knockout level for this scenario.

The expectation of a large sustained decline is starting to sound like a pipe dream to some bears, but I believe that's exactly how it needs to be.  At several points in the past, I've mentioned that if the market is roughly following the 2008 script (which I believe it is), it needed to start throwing some curveballs.  The repeat trips back up into the mid-1200's have certainly thrown many bears off, and have made the counts challenging at times.  It sometimes pays to remember that bear markets try to take everybody's money -- even the bears. 

Let's see what else we can discern of the market's intentions.

The indicator below is one I've shared before.  It's a combination of the TRIN and down-volume to up-volume ratio (high levels in this ratio indicate heavy distribution).  When the two indicators fire off a signal simultaneously, there are extremely good odds that the market will make a lower low over the coming sessions.  On Wednesday, this signal was triggered again (below):

The next chart shows an interesting potential on the Russell 2000 (RUT).  The information on this Russell chart is potentially explosive, because it argues that the C-wave many Elliotticians think we're in the midst of hasn't even started yet.  The Russell counts fairly well as a triple zigzag off the October lows, but argues that the market is forming a b-wave flat in b of (z).  This means we'll have a retest of the December lows, which will fool everyone into going short again, and then launch back up one more time to finally complete Minor (2). 

Below is how the SPX will look if this situation unfolds. It's a bit premature to worry about, since the market hasn't broken any key levels yet... but this is going to be one to watch very closely if Wednesday's decline continues. 

Just in case this isn't enough charts for everyone, I also want to touch on an alternate count which several readers have asked about.  This alternate has the same intermediate-term impact as my preferred big picture count -- namely it takes the SPX down below the October lows.  But this alternate triangle count wouldn't entail the devastating drop I ultimately foresee down into the SPX 400's.  I'm not too concerned about this count at this point, because as I see it, we need to see where the exact top comes in first, and see the SPX break the October lows -- so I feel this is putting the cart before the horse.  But nevertheless, I'm presenting it due to popular demand.

One factor which does fit the count above is that volume has been steadily decreasing since October, but let's see what happens over the next few sessions before we get too invested in this count.

My conclusion is that the top, if not already in, is much closer than the bottom.  We're trying to sift through the pennies here to nail it down exactly, but my view is that we're dealing with limited upside potential at these levels (low 1300's) and major downside potential (below 1000).  The rally is starting to look a bit worn overall, and buyers may be reaching exhaustion.  Let's see what information the market gives us over the next few sessions to help eliminate some of these short-term possibilities, and to confirm or deny the potential that the top is already in.  Either way, longer-term, I currently see little hope for an extended rally which reaches much beyond the 1310 area.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX and XLE Update: Light Volume Breakout is Highly Suspect

There's been no material change in the counts since yesterday.  The expectation remains that a top will form sometime over the next week or two.  Bear market bottoms tend to be V-shaped, but bear market tops are affairs that generally last several sessions as a balance is reached between buyers and sellers.  They sometimes take the form of a drop followed by a retest of the high, but very rarely form as immediate reversals. 

The volume on Tuesday was even lower than Friday, which creates a bit of a problem for bulls.  The SPX has made a technical breakout above a significant trendline and its 200 dma, but true technical breakouts are supposed to occur on increasing volume, not diminishing volume.  This bearish volume divergence adds corroborating evidence to my preferred Elliott Wave count which suggests the breakout is merely a head-fake.

On Tuesday, the market reached the target zone for the current count.  Despite this, while an immediate reversal is always possible, probabilities argue for fresh highs for the move -- and the corresponding, more typical, price action which usually forms a top.  The implication of the short-term counts is that the market is due a bit of sideways/down action before moving back up to make another new high. 

Along those lines, the first chart I'd like to share is the one-minute SPX chart (below).  This chart shows a potential trendchannel projected from two different lows, and the knockout level for the bulls.

The next chart is a daily chart of the SPX, and shows several resistance and support lines which are in the vicinity of current prices.  It also notes the low volume of the breakout.

On the chart above, I have also shown my expectations for the market when Minor Wave (2) finally completes.   Apparently some readers were confused on this point:  I'm not expecting a huge drop immediately.  I have on occasion referred to the next wave (Minor Wave (3)) as "the crash wave," which is probably what created the confusion -- but I have never expected an immediate crash off the Minor (2) top.  I would expect the next move to start as a persistent march lower, possibly in the form of a waterfall (my first target is SPX 1000-1050), then a decent bounce, then the crash.  This entire process would unfold over the span of several months.  All of this, of course, is predicated on the idea that the market is indeed forming the Minor (2) top.

The next chart is presented in support of that theory.  Some bears are beginning to undergo an identity crisis, given the persistent hovering of the market, and the recent technical breakout.  The chart I'd like to highlight is the SPDR Energy Sector ETF (XLE), which consists of holdings such as Exxon, Chevron, ConocoPhillips, and similar companies.  One reason I like to track this index is that it's often used as an inflation hedge and thus could give leading indications if the market had impending inflation expectations.  Since money printing is one of the fears bears are expressing, this seems an ideal time to share this chart.

On the chart below, what strikes me as important is the fact that the October rally is virtually impossible to count as an impulse wave.  Due to the numerous cases of overlap, it can only be counted as a corrective structure... and this implies that the October lows will be revisited and eventually broken.  This chart is a particularly good example of a triple-zigzag, because it conveys not one, but three meaningful Fibonacci relationships in each wave a and c pair of the triple-zigzag off the October lows.  These are highlighted in the callout boxes.

It also bears mention that this ETF is currently lagging the Dow and SPX in performance, as it has not yet bested its December highs.  This isn't what I'd expect to see if there was a lot of money flowing through the inflation pipes.

Although the recent structure is a bit less clear-cut than October, the expectation is that the XLE either topped in early December, or is very close to doing so.

In conclusion, I'm still a bear.  I'm not a permabear, though, and if the market gives me some reason to change my stance, you'll be the first to know about it.  But so far, it's given me no reason to do so.  The bullishness which is now in the air is to be expected if the market is topping -- in fact, it's a prerequisite that traders are bullish near tops.  Usually, the market gets the majority to flip at just the wrong time.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX, Euro, and Dollar Update: Are the Bulls for Real?

On the exceptionally light volume of Friday's session, the SPX staged a breakout over its 200 dma and a major resistance line.  The Dow Jones Industrial Average also knocked out my preferred count, which had held its ground since October.  The SPX did not KO its count, however the assumption now should be that it will.  This has shifted preference to the short-term bullish alternate count, which sees everything since August as an ongoing correction to the first leg of a major bear market.

Now we find out if the dip buyers are serious about driving this market higher.  From the standpoint of the global economy, it seems that China and Europe are in worse condition than they were back in July of 2011.  However, any trader worth his salt will tell you that the stock market sometimes has little in common with the real economy.  So the question now is: are the bulls for real?

The first thing I'd like to address is the shift in preference from the preferred count to the first alternate.  While this rally was anticipated by the alternate count, I can't claim victory in that regard; clearly I was in error selecting the more bearish count ahead of the alternate.  My analysis was based in part on the fact that several markets (such as the dollar and Euro) seemed to be indicating that equities were due for lower prices.  This is one challenge with market correlations: sometimes they work, and other times they don't.  Clearly, this is one case where they didn't work -- since August, the dollar is up more than 8% while the Euro is down more than 10%.  In the past, these situations which have often led to lower equity prices, but despite that, the SPX is up 15% from its August lows.  My analysis on the Dollar and Euro has been spot-on, but perhaps I gave the currencies too much weight in my equities analysis.  Or perhaps it's just the market's nature to keep everyone guessing sometimes.

One reason equities and the dollar have correlated fairly well in the recent past is that equities were being purchased as an inflation hedge against the QE printing.  Whether equities can sustain an uptrend in a deflationary environment remains to be seen. 

Along those lines, the first chart I'd like to share is the US Dollar, which has performed according to my projections since early September.  The chart below is an update to an article posted on October 29, and so far it has tracked perfectly.  If it continues to do so, the current equity breakouts are likely to prove to be nothing more than light-volume hope and hot air.

  The Euro has also tracked well, hitting and exceeding my most recent published target.  The current move in the Euro appears corrective and is suggestive of new lows to come.  I have not listed the target on the chart, because it is still possible for this to be the b-wave of an a-b-c correction.  However, if the preferred count on the Euro is correct, it suggests prices will ultimately fall toward the 1.10-1.15 range, and potentially even lower.

Moving on to equities, I want to focus on the Dow chart first, since the Dow has now made a new high above October 27.  The Dow chart shows a possible target, if it follows a similar path as it did in October.  There is no requirement that it does so.  The dashed red line indicates the knockout level which needs to be held by the bulls over the short term.  A trip back through that price territory in the near future could be devastating to the bull case.

The next chart is a one minute chart of the SPX, and is an attempt to gain a handle on the micro structure of the waves.  This chart suggests the rally is nearing completion.

If the micro-labeling above is correct, it implies a cap of 1295.42 for the rally.  If it's not, the larger structure suggests a target of 1269-1310, as shown on the intermediate term chart below.  The next two weeks are seasonally bullish, and the week between Christmas and New Year's is another low-volume week.  That could allow the market to drift higher into the target zone before the Big Boyz come back from vacation.  Note how light the volume was on Friday's breakout (below).

In conclusion, I remain bearish.  If the current count is correct, the market is trying to lure the last of the buyers on board before turning south in a big way.  My current view is that the technical breakout being staged is likely a head-fake, paving the way for a nasty reversal.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX Update: 'Twas the Top Before Christmas?

There's been no material change in the counts since yesterday.  The primary occurrence of note on Thursday was the SPX reached the 1254.50 target. 

If this is a corrective second wave, as the bearish count sees it, then a top is forming.  Currently, the move off the December lows is a three-wave form, meaning it has not yet completed an impulsive pattern and could very well fit the bill.  Regarding the short-term counts shown on the chart below:  the bear count needs to stay below 1267.06 on the S&P 500 (SPX) to remain valid.  The bull count needs to stay above 1229.51.  That pretty much sums up the situation, and the key levels to watch now.

There are two other charts of interest to share.  The first is the NYSE Composite Index (NYA), which is a much larger index than the SPX, and therefore more representative of the broad market.  I mentioned a potential triangle in the NYA on December 18, and suggested that the lower boundary would be tested.  That boundary has been tested, and the NYA has now nearly hit the upper boundary of the triangle.  A breakout/breakdown from the triangle suggests a move of about 20% in the direction of the break.  As the larger Elliott counts suggest that the market has not yet bottomed, I would expect if the market did make an upside breakout, it would ultimately whipsaw.

The red line is another overhead resistance level for the market to contend with, if the upper triangle boundary is broken.

Next is Wilshire 5000 chart I first published on December 4.  It continues to track well, so it's worth updating at this point.  (Thanks to Arnie for reminding me to update it.)  :)

The last trading day before Christmas is generally a light volume holiday session, which typically favors the bulls, since the large funds realize they can't do too much selling into light volume without cracking the market.  The same was true of the Thanksgiving holiday, though, so light volume doesn't automatically guarantee higher prices.

In any case, since it's my favorite time of year, here's a little Christmas poem to close out the holiday week:

'Twas the last trading day before Christmas, and all through the land,
Everyone was still hoping Europe didn’t get out of hand.
The loans had been readied by the old ECB,
and nations lined up to get money for free.

The bulls were all nestled, all smug in their beds,
while visions of QE3 danced in their heads.
With ma in her kerchief and I in my cap,
we’d had about all we could take of this crap.

Then on CNBC there arose such a clatter,
I sprang from the couch to see what was the matter,
Ben Benanke was talking, he was building more bubbles! 
He just didn’t care about any debt troubles.

He said he could print; that the Fed had more tools,
He said, “We’re not breaking, just bending the rules.”
“When there’s crisis,” he said, “The Fed is your man.”
“No it’s not,” I replied, “You’re just kicking the can!”

But he couldn’t hear me, there on the TV,
Even so, I still added, “Ain’t nothing for free.”
When what to my wondering eyes should appear,
But the eight-hundredth bailout we’ve seen in four years,

Ben sprang to his press, to his team gave a whistle,
And the money flew out like the down of a thistle.
Then I heard him exclaim, as oil started to spike,
“Merry Christmas to all! And to all a good night!”

Here's to hoping everyone -- bulls and bears alike -- has a wonderful holiday with their loved ones.  There are much more important things in this world than markets.  Trade safe. 

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX and VIX Update: Indications this Rally Won't Last

This market is a mixed bag of messy charts right now.  But many of the indicators I'm looking at are now suggesting the market is within 2% of a top -- potentially an extremely major top. 

From an Elliott Wave perspective, it remains difficult to nail this count down, largely because the October rally leaves itself open to a lot of interpretation, as does the December decline.  I first suggested that October 27 was a major top back on October 28, and so far, that's been a winning stance for almost two months.  The lingering doubts of alternate counts have never resolved, however, and here we sit in short term limbo. 

Let's see what we can find to help resolve that.

We're going to look at a couple indicators before we get to the counts.  The first one I'd like to share is the Volatility Index (VIX) to VXV ratio.  VXV is the three-month implied volatility index and tends to be more stable than VIX.  Comparing the two can yield insights... however it's worth mentioning that the VXV has only existed since November of 2007, and thus allows limited back-testing.  The chart below is self-explanatory and shows the S&P 500 (SPX) in the top panel, the VIX:VXV in the middle, and the VIX in the bottom.  There's a red dashed horizontal signal line toward the bottom of the VIX:VXV panel.

This chart suggests the SPX may be approaching a top, and strongly suggests the VIX is approaching a bottom.

The next chart is a very simple chart of the SPX and Nasdaq 100 (NDX).  Yesterday, the NDX was down more than 1%, while the SPX closed in the positive.  This is a pretty rare occurrence, and since 2008 has only happened one other time... at the end of September 2011.  Prior to 2008, one has to go all the way back to 2004 to find another example.  The chart shows what happened most recently.

The three times this happened in 2008, it was early on in the bear market; two of those times led to lower prices almost immediately; one of those times the market hit lower prices about a week later, then rallied for another couple weeks... and then it started crashing.  It would seem this indicator is not only confirmation of lower prices soon, but almost a confirmation of the bear market itself.

The last chart is the preferred count, which suggests a major top is coming quite soon.  The perfect world target is 1254.50, but it's not a requirement that the market hit that level and reverse.  Anywhere between here and 1267.06 would do.  Also note that the count has already hit its blue target box. 

Above 1267.06, and the alternate count is playing out.  There's no solid evidence of the alternate count yet -- currently it can neither be confirmed nor denied, much like an Elvis sighting.  I'm favoring the preferred count over the alternate by a margin of 65%.

[Editorial note: yesterday, there was a clerical error in this chart's labeling.  It's been corrected.]

In conclusion, I remain long-term bearish.  The short term is a mixed bag -- but due to the preponderance of evidence, I favor a bearish resolution.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX Update: A Discussion of Trading Strategy, and the Rally's Potential

Yesterday the market knocked out my preferred count, in a brutal rally which further demonstrated that this is not a market for the faint of heart.  This remains a trader's market.

For any inexperienced traders, this is a very tough market right now.  During clear trends, the market favors trading against larger time frames: swing trading, and buy and hold (or short and hold) are strategies that work.  During range-bound markets, the best strategy is often quick trades and day-trades.  Holding and hoping simply doesn't work during such times, as the recent large overnight gaps are serving to emphasize.  A market which seems like it's about to trend is very different than a market that is actually trending.  It's important to learn to recognize the difference between an established trend and a potential trend... and it's even more important to understand the limitations of the strategy you're using.

Having a system to anticipate market direction is only one piece of the puzzle.  In addition to a system which helps guide you on direction, there are two key strategies which every new trader must develop:

1) A method of risk management, and
2) an exit strategy. 

When do you close a profitable trade?  Do you take partial profits or full profits?  When do you cut your losses and bail on a losing trade?  I have said this many times, but when it comes to stop-losses, you should know your exit before you enter the trade.  Once you've entered the trade, your emotions take control and you will compound any and all of your mistakes.

Think of it like a poker table.  When you've got $1000 in "profit," but you're still at the tables, it's not real profit until you cash out your chips.  As long as you are still placing those bets, the potential exists of giving it all back and more.  There's an old trader adage: "You'll never go broke taking profits."  I would add my own adage to this:  "If you never take profits, you'll eventually go broke."  Especially in this type of market. 

A trending market is a different animal than this range-bound market; but even then, management of profit and loss is key.  Let's take this point to its logical conclusion to drive it home.  Imagine you were a bear heading into 2008, and you made a killing on your shorts during the long downtrend, but you never took profits.  You would have had to endure the drawdown from 2009 to 2011, and by now you'd be back to even, or in the negative. How about if you were a bull in 2006?  Same thing.  What's your strategy to protect profits?

Trading is always a risk/reward proposition.   How much are you risking, and what's the potential reward?  Are you holding out to try and gain an extra 2% while risking 10% or more?  Does that make any sense?  Is the market approaching an inflection point -- i.e.- a potential reversal zone? If it is, your risk is increasing, and it's important to understand that in your decision process on what to do with your profits.  If the market is approaching support in a downtrend, how much are you risking to hold on to your positions, hoping for a break?  Can't you always get short again if support fails, or short again from higher levels if it holds?  The reverse is true in an uptrend.

These are a few of the questions you need to ask yourself to be a successful trader.  Being able to anticipate direction is only part of the equation; if you don't develop a system and know how to manage your trades -- and when to take profits and when to take losses -- then knowing direction won't actually help you much... and you'll eventually go broke, as 95% of traders do.

Conversely, a winning strategy can make even a losing system somewhat profitable.  If your system is wrong 60% of the time, but you only lose 5% each time it's wrong and you gain 10% each time it's right, you will make money in the long run.  If you have a system that's right 80% of the time but you never take profits or you consistently make bad entries, you will bankrupt yourself through poor management.  The system can't save you -- just like in the rest of life. 

Ultimately, you have to develop a clear strategy, clear goals, and learn to bite the bullet a lot.  Trading is almost always about doing the exact opposite of what your emotions want you to do.  You have to short when the rally looks like it's going to the moon; and you have to buy when there's blood in the streets. 

And many times, you just have to stand aside and wait.  This one is especially tough for Western society; the concept of non-action being something productive is difficult for our culture to swallow.  Complicating the matter is the fact that, as a trader, you often have to act on uncertainty; and you also have to not act on uncertainty... and somewhere along the way, you have to learn the difference between which type of uncertainty is which.  A lot of that goes back to the risk/reward equation and understanding probabilities.  If you chase a Royal Flush on every hand you play, you'll go broke long before you hit your cards.

The good news about patience is that the market's not going anywhere -- there are always trades to be made tomorrow.  The other good news is: if you can survive this market, you can probably survive any market.  The market for the past few months has been as tough as any I've seen.

Alright, on to the charts.  Tuesday has opened up a lot of possibilities.  The question everyone wants answered is how big will the rally be?  With the preferred count out, the two counts which stand now as the most likely options are the bullish alternate count and the Wave 2 rebound count.  A one-day move does not a trend make, so it's difficult to predict which will unfold at this point.  Let's look at some secondary evidence.

The first chart I'd like to share is an old indicator that every trader on the planet looks at from time to time: the options put/call ratio.  The theory here is that this is a contrarian indicator: the more calls are being purchased, the more bullish traders are.  And the more bullish they are, the more likely they are to be wrong.  To be honest, sometimes I hate this indicator -- but it seems to be functioning reasonably well lately, as you'll see from the chart. 

Put/call has now reached an area which, over the past few months, has often been synonymous with at least a short term top.  I have marked the signal line ("Sell Zone") and used dashed horizontal lines to line up the signals with the S&P 500 (SPX) in the bottom panel.  This signal has worked in favor of the bears 69% of the time since late June.

There are two big issues I see for bears right now. The first is that the bulls simply look stronger.  If you look at the daily chart above, you can see that the market retraced about 61% of the whole move down in only one day.  The second is the ubiquitously talked-about seasonality factor of the famed Santa rally -- this is just not traditionally a good time of year to be a bear.  The Dow Jones Industrial Average (DJIA) has closed in the green this week 78% of the time. 

There is another factor arguing for the bears right now, though.  I have previously published charts showing down volume/up volume ratios... in the interest of space, this time I'm not going to publish the chart, but yesterday was a big accumulation day.  Conversely, Monday was a major distribution day.  Historically, when these two types of days follow in that order, it argues that the lows will be revisited.

So how about a wave count that matches all the available data?  Interestingly, there is one, which I first proposed on December 15.  It's a version of the bullish alternate count which has the market working on a triangle.  This count would suggest a reversal lower on Wednesday, possibly after a little more upside.  If we get a reversal, there is no predicting what Wave e of a triangle will do.  Usually, Wave e's perform a false breakdown below the triangle, and then whipsaw back into it.  However, Elliott guidelines state that the only rule for Wave e is that it must end within the price territory of Wave a.  Not terribly helpful for projection purposes.  The updated SPX chart is shown below, with a sketched-in potential path -- but it's really just a potential more than a projection.

If the bullish alternate count is in play, the suggested final target for red Wave C is 1270-1310 (I swear it's red -- Stockcharts is doing some bizarre glitch where it turns black when I upload it to my chartbook).

The count shown above would suggest a reversal lower at some point today, in Wave e.

The final chart is the count which suggested the decline was a complete first wave down, and which now has the market forming a second wave retracement rally.  The market already traded into the target retracement zone for this rally... in one day, which is quite a bit faster than I would have expected.  This count would foresee new lows following this rally in the not-too-distant future.  Given the seasonality factor, this second wave could play out as a flat correction.  In other words: a trip from the top, back to the lows, back to the top -- before finally heading decisively lower.  If this count is in play, the top is near.

I wish there was something more I could give you, analytically.  There are a lot of cross-currents at play in the market right now, and it remains difficult to anticipate the market's intentions beyond the next day or two.  A one-day explosive buying panic simply throws more flies in the ointment.  The evidence suggests the lows will be retested at some point, and there is further evidence of some type of top forming. 

Beyond that, I remain long-term bearish -- and, given all the evidence, bearish about the very short term as well.  Next solid resistance comes in around 1250, so we'll see how the market does at that level.  Even under the terms of the bullish alternate count, a trip back toward 1225 SPX would be fairly normal here.  Of course, this market has been behaving anything but normal lately.  Trade safe.  

The original article, and many more, can be found at http://PretzelCharts.blogspot.com   

SPX and NDX Update: A Rally, or Just a Blip?

Yesterday, the market again traded right down into my target zone, but, as mentioned yesterday, there are now two solid reasons for shorts to be cautious at these levels:

1)  The alternate count suggested a bottom right in the target zone (as described yesterday).
2)  The wave down could also count as a complete impulse, or first wave (charts to follow).

Now, that said, the count I favor here doesn't believe the decline is done just yet.  It does, however, believe a corrective rally is due pretty much immediately.  Let's take a look at that chart (below)... the chart's a bit cluttered, but the move has reached a stage where I felt I needed to detail several points.

   
Let me stress here that this is a very, very difficult structure to label, and there are a lot of different ways to interpret the price action since early December.  I'm favoring this interpretation, but every system of analysis runs into limitations at times -- and that should be taken into consideration when placing trades.

This interpretation of the count can be knocked out with trade above 1231.48.  It should be noted again that the alternate count may very well have found a bottom on Monday, since the move off the December highs now counts very well as a complete a-b-c.  I don't favor that count at this stage -- but it remains a possibility to be cautious of, now more than ever since the structure no longer looks like it needs lower prices under that alternate interpretation.

The next chart I'd like to share is a completely different interpretation of the pattern on the S&P 500 (SPX).  I'm not favoring this interpretation, due to the internal structure of the wave marked by the call-out box -- however, I'm unable to rule it out because the gap down in that wave does make the structure at least somewhat veiled and difficult to interpret... so I feel obligated to call attention to this possibility.  This interpretation counts the move from the December 9-13 as a structure called a "running flat."  Under this interpretation, a larger second wave rally should now unfold.

I favor the first count shown over this one, by a margin of 60%.

The next chart I'm going to share is the Nasdaq 100 (NDX), and this chart is one of the reasons I'm favoring the SPX interpretation shown in the very first chart. The NDX seems to argue that this wave is not complete (barring the alternate count), and that would indicate that the SPX still has more downside left as well.  However, if the NDX trades above 2292.15, it’s all but guaranteed that the bullish alternate count is playing out, because that would create overlap of the first and fourth waves, and lock-in a very clear a-b-c pattern on the NDX decline.

Another reason I favor the first SPX chart, and the NDX chart below (which is essentially the same count), is that Monday was a major distribution day, and declines seldom find meaningful bottoms on such action.

 
This wave has been very difficult to track (and I'm frankly a bit amazed my targets have hit non-stop going all the way back to the week prior to last) -- but maybe that's the way it needs to be at this stage, if the preferred count is correct.  The market almost never makes it easy.

In conclusion, I remain long-term bearish.  The short term is a bit of a muddy picture at the moment, but I'm favoring the view that the market will see some type of brief rally at this stage before going on to make further new lows.  It pays to be alert to the possibility that I'm wrong, though, and trade above 1231.47 SPX would indicate that my favored interpretation is incorrect -- it's been a great run, so maybe I'm due for a flub.  Trade safe. 

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX and Dow Update: Critical Week for the Short Term?

On Friday, the market again performed in accordance with the expectations of the preferred count, with the Dow and SPX hitting their targets and reversing within just a few points.  This does remain a difficult market to anticipate, however.  This week could be critical to unveiling the market's intentions.

While the preferred count has hit every single target I've published for over a week, I've been able to gauge those targets by the very short-term structures -- so the fact that they've hit doesn't tell me much about the larger count.  At present, the prices remain at an important, larger, inflection point.  I am expecting lower prices early in the week (again, based on short time frames), but what happens from there should finally tell us which count is unfolding.  The preferred count needs to see some strong downward movement in the near future, or it will become difficult to maintain.

There are several ways to label the current decline, and if it is indeed the impulse wave the preferred count thinks it is, then it needs to show some acceleration lower soon.  There are only so many first and second waves that seem "reasonable" -- after a time, one has to start considering that the whole structure may just be a corrective wave instead. 

I do feel that the market is in an area where shorts need to remain aware of a potential rally; bearish sentiment is also reaching levels that have generated rallies in the recent past.  The main clue we have which could serve as warning of a larger rally unfolding would be the trend line/channel that has formed in several markets.  A break of the upper trendline would be a signal to become very cautious of a bigger rally beginning. 

The first chart I'd like to share is one of the NYSE Composite Index (NYA).  This is a very broad index, encompassing all the common stock on the New York Stock Exchange -- and it's one I like to watch to get a more general "pulse" of the market.  The NYA shows a very clearly-defined triangle.  A breakout/breakdown from the triangle would imply a move of 20% or more in the direction of the break.

The next chart is the SPX, and it's labeled with the preferred count in blue/red, and the alternate in black.  The red/blue labels are the most bearish labeling of the decline possible, and may need to be adjusted, depending on what happens this week.  The blue "Alt: B" target zone is the safer and more conservative target. 

Do note that the wave labeled with red (1) is potentially a complete 5-wave form, and thus bears the black "Alt: c" label.  At this particular point, short term downside targets are a bit sketchy.  It's hard to count the rally on Thursday and Friday as part of an impulse -- it certainly appears corrective, and as such, suggests lower prices.  But the larger structure is so vague, it's very tricky to understand exactly what's unfolding at the moment -- there are clues here and there, but little in the way of a concrete formation.

The final chart is the Dow, and it's labeled a bit differently than the SPX, because the price structure there is actually markedly different.  It also calls attention to another potentially important support/resistance zone, in the form of the blue trendline.  This index shows a double-top, formed early this month, much more clearly than the SPX does.  The blue support/resistance line could be the key battleground which determines whether the bulls or bears emerge victorious for the next week or longer.

The NDX chart remains the same as last week, and has continued to perform in accordance with the expectations of the preferred count.

In conclusion, I remain bearish over the long term; my stance in that regard has been unchanged since May.  What we're really trying to determine now is exactly when the next big leg down will get kicked off in earnest.  It appears the market is very close to doing so, but still unclear as to whether it's already started.  Range-bound markets are exceptionally difficult to predict, even though my short-term projections have been hit quite consistently.  Hopefully, this week will provide some clear answers on the larger picture -- a decisive break lower will tell us that the decline is likely to run for a while.  Conversely, a break of the upper trendline will warn us that the market probably wants to stretch the correction a bit higher first.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

Wyndham Worldwide: Potential Short Opportunity?

In examining my chartbook this weekend, I came across this possible short opportunity.  This is Wyndham Worldwide, a resort/timeshare company. 

The stock appears to have just completed an ending diagonal.  In classic TA, this would be known as a "bearish rising wedge."  We can see that the wedge has been broken and backtested from underneath, which is also a bearish signal. 

Wyndham Worldwide was a fantastic short play in 2007-2008 when, in the span of 16 months, it dropped from $36.50 all the way down to $2.38. It subsequently rallied to its recent high of $36.60.  Besides the chart, what indicates Wyndham could be a solid short play?

For those who are interested in fundamentals: Wyndham is a spin-off of the old Cendant Corporation. Wyndham's primary sources of revenue are its vacation-related business divisions. Wyndham is the world's largest hotel franchisor, the world's largest timeshare-exchange network (the RCI division), and the world's largest vacation ownership (timeshare) company. I expect these businesses, especially timeshare, to get hit hard in the current/coming recession. During 2008, Wyndham's timeshare sales took a haircut to the tune of roughly 40%, with most of that loss coming after the mid-point in the year as the stock market deteriorated.

Timeshare is becoming a dead business model anyway, for two reasons: 1) the real estate market has collapsed, and 2) use of the internet has become widespread. It's hard to sell a "brand-new" timeshare when someone can go on eBay and buy the exact same timeshare for pennies on the dollar.

Additionally, the timeshare division ("Wyndham Vacation Ownership") writes much of their own paper. It seems probable they are holding onto a good chunk of marginal paper, plenty of which is sure to be at risk for default -- especially since the only thing people "lose" when their timeshare gets foreclosed is the right to use said timeshare. There's no repo man who shows up and rips "a week" out of the building while the wife is crying and the kids are clutching their beach towels, screaming, "But Daddy, where will we vacation now?" so it's not terribly traumatic.

(In the interest of accuracy: Wyndham uses points, not weeks, but you get the idea.)

Many owners are certain to see default as preferrable to continuing to pay their monthly loan and maintenance fees. Maintenance fees alone on the average Wyndham timeshare are about $70 per month. If you owned a mortgaged timeshare and had to prioritize where to allot your dwindling money in a depression, the timeshare would likely be the first payment to go. 

Here are the charts:

SPX, NDX, and Dow Update: Who Wants to Fade Santa?

From a technical standpoint, nothing happened yesterday.  The markets may as well have been closed.  Lots of people are talking about the bullish "inverted hammer" candlestick (so named because it looks like a candlestick) on the daily charts, but Friday's action is needed to confirm the bullish implications of this pattern. 

Next week is the last trading week before Christmas, and traditionally it's a low volume week with a bullish bias.  Of course, the week of Thanksgiving would be described the same way, and this year saw a pretty steep decline through Thanksgiving week (as predicted here). 

Another interesting seasonal fact is that the Volatility Index (VIX) often bottoms in December.  In fact, during many years, the low of the entire year (or very close) in VIX is reached shortly before Christmas (recent examples: 2003, 2004, 2006, 2009, 2010).  So who wants to fade Santa?

Frankly, I'm scared of Santa.  Always have been.  Buried away somewhere, I have a picture of me as a baby, bawling my eyes out, while I'm being held by a mall Santa who -- judging by his facial expression -- clearly felt that this particular situation hadn't been thoroughly discussed during his training at Mall Santa School.  So it's hard to get too bearish about the week before Christmas -- but I'm going to suggest it anyway.

The caveat here is that many markets are reaching levels which could generate a strong bounce soon. Yesterday, I used the analogy of a stretched rubber band:  either it snaps back forcefully (possibly right into your face), or it breaks.  This is the position the market appears to be in, and, as of yet, no key intermediate levels have been violated on the downside -- at least not in the major averages; several minor averages have already broken some key support levels.

The charts are now in a position where it's very difficult to predict which situation will actually play out.  As I said, I favor the bearish resolution, but I have annotated the next chart to illustrate both potentials. 

The preferred count shows the decline as a series of first and second waves, which, if correct, should be the prelude to a big third wave decline.  The pressure is now on this count to perform or be eliminated.  Friday should see some early upside bias under the expectations of this count, but next week the market would need to sell off strongly.  If one were so inclined, Friday could provide some short entries with manageable stops (barring a huge gap up on Monday... now where have we seen that before?) and a lot of profit potential.

The bullish alternate count suggests the market will ultimately break above the October highs (before reversing to new lows).  A sustained upside break of the red trend channel would be first warning to be alert to the bullish alternate count, and trade above the red dashed knockout level would indicate new highs are very likely. 

The chart below uses the Dow Jones Industrial Average for form.

The next chart is the daily chart of the S&P 500 (SPX), and depicts the expectations of the bearish count over the short term.  Note that the market is currently trading just above a theoretically-important support zone.  The chart is annotated with "or (2)?" to show the expectations of where the bullish alternate count could top if it unfolded.

The final chart is the Nasdaq 100 (NDX), and it's the same chart I showed yesterday.  The NDX continues to act like the weaker sister here and is actually below important support.  One of the things I'd like to call attention to regarding this chart is that the count is much less vague than the SPX.  The NDX shows a very clearly defined A-B-C pattern, and I have a really hard time imagining that NDX has not already topped its Minor (2) wave.  In my mind, this lends credence to the argument that SPX and Dow have both topped as well.

In conclusion, I remain long and medium term bearish.  Short term, my current expectation is that the market probably won't grant the much-anticipated Santa rally to new highs, which it seems everyone is waiting for.  But there isn't any real confirmation yet either way, so it's prudent to remain alert to both scenarios... especially since Santa brings huge lumps of coal to investors who don't trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX and NDX Update: Targets Hit Again; and the Long-Term Projections

As I've examined the charts tonight, I've been looking for reasons why the big nasty third wave decline isn't starting.  I'm not finding too many.  Most of the individual stock charts I've looked at are in bad shape.  The one confusing thing is the wave structure on the major indices, going back to the December top, is a mess.  It looks corrective, which would imply a move back above the December top; but so far it isn't behaving correctively.  I'm favoring the idea that the bearish counts shown below are unfolding, and that the top is in -- but the market is again reaching that "stretched rubber-band" stage, where it could snap-back violently, or it could break in dramatic fashion.

As a result, it's still a tough call on the short-to-mid term picture as to whether there'll be one last lunge above the October 27 highs or not.  As stated above, I continue to favor the more bearish resolution -- but I do want to take a minute and warn my readers that, now more than ever, please trade safely.  I say that because I've been nailing targets left and right, and that breeds a certain complacency about my targets and projections.  I'm not a crystal ball, much as I often go on hot streaks where it may seem like I am... there's simply no perfect analytical system out there, so eventually the market will hit us with a curve ball, and I don't want everyone to get burned when it happens.  Know your exit when you enter a trade, so if it goes against you, you live to fight another day.  Okay, lecture over.  :)

Before I get into the shorter term projections, I want to take a minute and update the Big Picture chart (this linked article also contains an introduction to Elliott Wave Theory).  The chart below shows my long-term projections, which assume my larger count is correct.  This has been my count since 2007, and it's the count I used to anticipate the 2009 bottom, as well as the 2011 top.  In other words, it has tracked quite well for several years.  Bear in mind that even if my count is perfect, the chart will need to be adjusted somewhat as we go along.  Unless the market proves otherwise by violating the 2011 highs, this is ultimately what I believe is coming in the not-too-distant future.

We are now getting closer to the big wave (3) decline, if it hasn't started already.  You can see the black "Alt: 2" annotation which shows how woefully anemic the bullish alternate count would be in the grand scheme of things... assuming my count is correct, of course.  Obviously, I believe it is -- and I'm favoring this count by a 90% margin at this stage.

The next chart I'd like to share is the Nasdaq 100 (NDX) projection for the upcoming weeks.  This projection assumes the bearish wave has indeed started.  Obviously, if the bullish alternate count is unfolding, then this projection would be voided for the immediate future.  The chart notes two warning signs that there may be more upside left.  Note that the sketched-in squiggles are just rough guidelines, not projections.  The actual projected target for blue wave (3) is 1920-1950.

The next chart presents a twist on the bullish alternate count, using the S&P 500 (SPX) for form.  Keep in mind that we have hit the retracement target expectations of that count, and if it's unfolding, it could bottom at any time from these levels.  Even under the terms of that count, I would expect at least a little more downside, to around 1200-1205.  But there are no guarantees of that -- as I said, the wave structures are a little screwy right now; this is one reason I'm suggesting everyone take precautions.

The last chart is my best-guess of the short-term SPX wave structures, and it's annotated with three targets, which equates to four price reversals -- so it's a bold call, but this is what looks most likely at the moment.  I'm expecting some upside to start the session today, and then a reversal off the 1215-1225 zone.  If the SPX trades above 1227.25, then something else is going on and this chart would need to be adjusted, possibly dramatically -- so trade accordingly.  The chart also notes that the market's at a good location for the bullish alternate count to bottom.

In conclusion, as you can see from the big picture chart, I'm quite bearish on the long term.  Over the very short term, I believe the market will still make at least one more new low here, although I expect we may see a decent bounce soon.  If the short term count shown above is correct, we could have quite a bit of volatility in the upcoming sessions -- so prepare for some whipsaws, and trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX and NDX Update: More Selling Still to Come?

While the market has been hitting all  my projections perfectly, every night I look at the charts lately seems harder than the night before.  There are a lot of possibilities on the table right now, and because it's been range-bound recently, the market hasn't given much relevant info for us technical analysts to work with.  So I'm going to present some "best guesses" today, along with some indicators which support them.

I'm just going to roll right into the charts here, because outside of patting myself on the back for my flawless record of "no QE3 today" predictions, there isn't much else to talk about.  The first chart I'd like to share is one which has nothing to do with Elliott Wave Theory, but is one of the confirming indicators I like to use to help point the way.

The chart below shows the Volatility Index (VIX), also known as the "fear index."  When the market goes down, the VIX usually goes up, and vice-versa.  This week, however, the VIX has been falling in concert with the market; and I mentioned yesterday that the majority of the time, this means the market will make lower lows.  There are two things I'd like to call attention to on this chart: one is that the VIX bumped into its lower Bollinger band yesterday, and the other is the fact that VIX formed a possible reversal bar on Tuesday.  The chart highlights the last six months of occurences of this bar, and shows that 70% of the time, it leads to a meaningful move up in the VIX.

 
If you compare the top panel to the S&P 500 (SPX) chart in the lower panel, you can see that 70% of the time, this signal is quite bearish for stocks.

So, now we have some probabilities to work with on the Elliott wave counts.  The first count I'd like to share is the one I'm favoring, and it's the most bearish possible count.  I'm using the Nasdaq 100 (NDX) to illustrate this count, because it shows an interesting fractal relationship between the current move and the beginning of the November decline (highlighted in yellow).

This count believes the "Santa rally" is over.  The bullish alternate count I've mentioned for over a month still cannot be ruled out, though.  I'm trying to take it day-by-day here, because the structure of the waves lately is somewhat infuriating -- and even though I've been nailing the short term moves of late, the market's larger intentions are still somewhat veiled.

On the NDX chart shown above, an upside break of the falling trendline would be first warning to be on alert for bullish potential, and trade above any of the second waves (the first level to watch is 2316.90) would be a huge red flag to that count. 

The next chart I'd like to share is at the request of several readers.  Apparently, a fair number of Elliotticians are now calling the decline an ending diagonal.  I have a problem with that interpretation, and the chart below shows why.  As the name implies, an "ending diagonal" comes at the end of a trend; and when we chart a market other than the SPX, we can see that this interpretation makes little sense.  The diagonal on this chart is the entirety of the new trend; which means it could be the start of a new trend -- i.e.- a leading diagonal -- but not the end of one.

The chart also illustrates what could happen if this is a leading diagonal.  Leading (and ending) diagonals are known in classic technical analysis as "wedges" and a breakouts often results in the market returning to the price level at the start of the pattern.  Significant new lows beneath Tuesday's should knock this count out of consideration; or conversely, an upside breakout above the red trendline would be fair warning that this was unfolding.

The final chart is my "best guess" on the short-term intentions of this market.  The tiniest waveforms are a bit sketchy, so use this however you see fit, or ignore it completely if you want.  My best guess is that yesterday's low was the bottom of the smaller internal third wave of the current wave, and the market still needs to form the fourth and fifth wave. 

The chart also shows how one could count the decline as a complete correction to fit the bullish alternate count.  The market has now traded markedly into the target zone for that count, and has fulfilled the requirements for a B-wave correction under the terms of that bullish count.

However, even if that bullish count is playing out, based on my VIX studies, the market still has a 70% probability of making new lows before forming a meaningful bottom. 

Please note that in the above chart, the 1230 target was already hit in the overnight futures session, and as such may be complete.  With this market, it's tough to say.

In conclusion, there has been nothing to change my long and medium term bearish stance, and the probabilities argue in favor of a short-term bearish stance as well.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com