Friday, June 29, 2012

SPX and INDU: Europe Adds a Wave to the Outlook

Yesterday's outlook expected lower prices, which happened.  The market then launched a strong bounce from the lower end of the trading range -- and then, after the cash market closed, Europe announced that they've solved the majority of the world's problems.  When it was further revealed that, during the course of the summit, Merkel had developed a cure for cancer and a viable Unified Field Theory, futures shot higher. 

If you're feeling frustrated with this market at all, you're probably not alone -- and that's a pretty normal function of a trading range.  It now appears likely that Minute wave ii is becoming more complex than initially suspected.  Unfortunately, this type of development often can't be predicted in advance.  Sometimes a corrective wave will form a complete ABC fractal, then decide to add a couple more ABC fractals (or similar).  This appears to be happening now.

The S&P 500 (SPX) did not make a new low yesterday, but the Dow Industrials (INDU) did, and that opens up the potential of an expanded flat developing in INDU.  The typical target for such a wave is 12720-12775.

Moving on to SPX: After studying the overall structure, and a number of other indices, I've decided it is probably appropriate to label the decline from 1320 to 1310 as a failed fifth wave.  A fifth wave is considered a "failure" when it fails to make a new price low beneath the bottom of the third wave, and when it's unable to hold down a steady job.  (Sorry, just a bit of bad Elliott Wave humor there!) 

Anyway, the targets here are 1337 or 1352, give or take a couple points.  The black alternate count targets are listed, but the basic structure of that count is detailed on the next chart.

Now, because 1306 has not been traded under, the alternate count is still alive.  I continue to give this count lower odds, because the retracement level of 1363 was 61.8% of the prior decline, and that's wholly appropriate for a Minor wave (ii) -- but the market is always the final authority.  We'll see how excited investors are about Europe, because this alternate count is still technically possible.  I think if the trendline connecting 1422 and 1363 is materially broken, then at that point, we should probably give strong consideration to this potential.

The chart below shows the preferred count, big picture targets, and some things to watch.  Keep in mind that red Minor wave (iii) should take several weeks to months to unfold -- targets won't be reached tomorrow and there will be rallies along the way.

In conclusion, the short term expects higher prices, and a reversal to follow -- but the more bullish alternate count cannot be ruled out yet, and traders should stay alert to it if the upper trendline is broken.  Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.


  1. PL, IMO your writing style and charts have obtained a real clarity recently. Mucho respeto, as they don't say around my parts.

  2. At what point is the upper trend line broken and you become bullish? Allowing for a false break. please quantify. thanks

  3. Pretzel, I have an account request in as Rustoleum. I donated back on June 12 with my MasterCard. My initials are RH. Is there an e-mail I can contact you at. How do I get my account approved?

  4. I don't "add counts" -- the market does.  What I do is try to understand the potentials present in a given situation.  All any analysis can reveal is what is possible from the current vantage point.  As the market changes, the vantage point changes, and the outlook changes accordingly -- that's how the market works.  The market isn't a watch that keeps ticking along on a smooth and predictable path where it does the same thing each time "like clockwork" -- it is a dynamic mechanism that reveals potentials and probabilities with each key reversal or confirmation. 

    There are no easy answers, though it's human nature to want to pretend things are as simple as possible.  We like our answers quick and easy -- it allows us to go back to watching TV.  Unfortunately, the market, and life in general, don't work that way.  You can criticize me for this simple fact, or you can try to understand the reality.

    Further, please be careful to read the entire text -- often folks "hear what they want to hear" to justify their desire to "get rich quick." It's not that easy, there's no get rich quick solution in trading or anything else.   I have warned repeatedly that the, as you put it, "super crash," is not confirmed yet.  The most recent time I published the bearish big picture chart, I said this:

    The projection shown below is what I believe is unfolding, but this big picture count is by no means a "done deal" yet, and bears have a few things left to accomplish to add some more confidence to this projection. One key confidence builder would be a break of the red uptrend line from the March 2009 lows; and the next confidence builder would be to see the current (assumed) third wave down knock out the December 2011 lows. Then we'd like to see wave (1) knock out the October 2011 lows...

    Assuming bears break the uptrend lines, it appears quite likely that the market is in for an extended decline. 

    And the time before (May), I said this:

    And finally, the bearish potential present in the very big picture. It's far too early to confirm if this will unfold at this juncture. The potential is definitely there, however. Bear in mind that this chart represents a general guideline of how things could unfold -- it's not intended to be an exact prediction, but more of a broad overview.

  5. Thanks, RolfT -- happy to hear from you!  You should join us at the new forum, I always enjoyed your news items and input.  :)

  6. I'll cover this in the next update.

  7. PretzelLogic - Your blog is one of the few I track nearly every day. I always look forward to your insightful comments. It will be interesting to see what happens this holiday week after last Friday's melt-up.