Friday, July 6, 2012

SPX and INDU Updates: Choppy Market Expected

NOTE: Since this was published, ES has dropped 10 points.  If this holds through the open, we can rule out the ending diagonal and the triangle.  This would leave the option of a flat, or the option that the top is in, as discussed yesterday.

There's been no material change in the outlook since yesterday (please see yesterday's article for the big picture options).   Nevertheless, I have wracked (or possibly "racked") my brain -- or what's left of it anyway -- and scoured the charts in an attempt to find some indications of short term direction.  I found some clues in the Dow Jones Industrials (INDU), and I've diagrammed a couple options and some levels so readers can have some idea of what to watch for after the open on Friday.

I believe the key clue in INDU is the new price high on Thursday, which was made by what appears to be a 3-wave rally.  This is highly suggestive that the final high isn't in yet (no guarantees, of course, but odds favor this), though there are a couple paths the market might take to get there.  I've sketched the two most likely short-term paths into the chart below.  Both suggest the final high isn't in yet. 

Note the perfect mini-fractal of an expanded flat (in the red box). 

The S&P 500 (SPX) is trickier, because it's left the option of a triangle on the table -- however, the INDU suggests the triangle is less likely, since the two usually track in a similar fashion.  Thus, the two most likley paths for SPX are the same as INDU.

I've diagrammed the SPX diagonal on a separate chart (below).  The ending diagonal may have one, or two, more swing highs left in it: it's a bit unclear, but the pattern suggests two.

In conclusion, it appears that we may be in for some sideways chop for the next session or three.  There are suggestions that the final highs are not in yet, but also suggestions that the rally is nearing a top of some kind, and a forthcoming larger correction.  If this short-term outlook is correct, this is the type of market that can ground up short-term traders who are looking for a trending wave, and this can be very damaging to one's account.  Hopefully, the options outlined will help keep readers from getting ground up in the expected chop.  Trade safe.

Reprinted by permission, copyright 2012 Minyanville Media, Inc.

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