Friday, June 15, 2012

SPX, INDU, COMPQ, RUT: Waiting for the Market to Decide

I've studied a lot of charts since Thursday's close -- everything from SPX to INDU to TRAN to NDX to AAPL to RUT and more.  The challenge is that for the past 7 trading days, the market has done nothing but run back and forth in a narrow range, which provides little information.  I may have uncovered some clues, but I was still unable to find a definitive answer to the question of short-term direction -- we're simply going to have to wait for the market to answer a few questions before getting too confident.

Yesterday, the SPX elected its bullish buy trigger, but I'm not yet completely sold on it reaching fruition, for a number of reasons, which I'll discuss shortly.  Nevertheless, this bullish potential cannot be ignored and a close above 1336 would add confidence to the idea that the bulls presently have some strength.

First let's look at the SPX chart, though my confidence in this count is marginal at this stage.  After that, we'll look at some additional evidence to see if we can get an idea of what the bulls may be facing as their next challenges if they can break to a new high here.

I still slightly favor the idea that this rally will die on the vine -- but I only favor that slightly, and I'm more than ready to shift my footing to something more short-term bullish if the market dictates.

Let's consider another potential for SPX over the short term -- one that allows for a new high, but doesn't see the market running up strongly thereafter.  The challenge here is that this developing pattern (below) could be an ending diagonal, which is bearish -- or it could be interpreted as potentially bullish, since there's no way to invalidate a nest of waves 1 and 2 getting ready to launch a third wave higher.  There's simply nothing in the SPX chart to clearly sort one possiblity from the other, though I'd have to give a slight edge to the diagonal. 

If this pattern is a bullish 1/2 nest, then it should launch rapidly and decisively higher if 1336 is broken, and cleanly break out above the upper blue trendline.  If it doesn't, then the diagonal becomes more likely.

Since SPX is ambiguous, I went to some other charts.  First let's look at the INDU daily chart, which shows several overhead resistance levels.  Traders sometimes get focused on the micro picture and ignore the larger view.  Many times, I've seen short-term bullish (or bearish) patterns break out and look like they're going to run, only to smack into a bigger support/resistance level soon after and get quashed.  Will that happen here?  I simply don't know -- but it pays to be aware of the challenges a move faces, and then watch to see how the market reacts to those challenges.

Let's also look at the Nasdaq Composite (COMP), which appears to need a new low to complete an impulse wave down (five waves).  The invalidation level is noted on the chart, and an invalidation here would actually slightly shake my faith in the intermediate bear case, because that would give the entire decline a three-wave appearance.  The blue channel also bears watching.

Further, let's look at the short-term chart of the Russell 2000 (RUT).  The best interpretation here seems to be that the rally since June 12 is corrective, meaning there "should" be further downside over the short-term.  Again, though, it's not a terribly clear-cut pattern.

Finally, a bit more on the big picture view, and another reason I believe that the market has changed trend at intermediate degree.  Below is a chart of the Dow Jones Industrial Bullish Percent Index (BPINDU), which is a breadth indicator that measures the percentage of stocks on point-and-figure buy signals.  We can see that there has been a strong move down since the high, and that after these types of strong moves the price lows are retested and broken more often than not (dashed lines, paired in the lower panel circles).

In conclusion, based on what I've seen, I remain marginally in favor of the idea that this rally is nearly over -- but there's enough ambiguity in the charts to give me pause, and I'm certainly not married to that view.  This is a great example of a time to let the market dictate what's next, and once we have a more clear answer, we'll be able to react appropriately.  As I've said many times before: cash is a position too.  The good news is that it appears the market is coiled and ready to spring out of this range in the very near future. Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

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