SPX, RUT, INDU, BKX: Can Bears Take Control Here?

For several weeks, my target of 1390-1405 has been out there, and despite Friday's sell-off, it has not quite been negated.  However, the bulls need to hold the market above 1357 to maintain that target zone.  Another day like Friday would negate that target, but ironically, would actually increase the bullish potential of the pattern if the recent highs are subsequently broken after another sell-off.

This 6-week trading range has wreaked absolute havoc with the charts, and while a lot of different potentials have developed (some of them bullish, which were discussed last week), as I've stated, I'm going to remain in favor of the bearish intermediate count until the market proves otherwise. 

Neither the bulls nor bears have been able to get much accomplished lately, at least for more than a week or two at a time.  I suspect that picture is getting close to changing, and that a sustained move is at last getting ready to unfold.

As I see it, there are really two main options from here, however, I want to clearly state that I think it's a mistake to get too married to either expectation at this point.  In other words, be cautious and protect profits until the market breaks out of this range. 

The two options I'm seeing are diametrically opposed.  We'll discuss the bear option in more detail, but the bull option needs to be watched carefully.  The contrarian in me actually wants to favor the bull option, but I'm not ready to shift footing because the charts have played out well for the bear view, and haven't yet screamed for the bull option to play out. 

And, as I explained clearly, as recently as Thursday:  "before we go further, let me state for the record that I am not turning bullish -- yet."  This still applies.  Please don't mistake my expressions of cautiousness about the bear case as bullishness. 

Option 1, the Bear Option:  The wave (ii) rally is finally over.  After studying a number of charts, I've come to the conclusion that if that bearish count is to play out, it probably can't support a run much higher, and we can probably assume that the top is in at 1380 on that count.

Supporting evidence is what appears to be a triple zigzag on the INDU.  The recent rally counts very well as 3-waves up on INDU.  A move back above the (z) wave high -- especially one that started from below the final (a)-wave low -- would blow this count up, and turn the rally into a bullish nest of 1's and 2's.

Short-term INDU:

The RUT shows that any significant downside from here will break the uptrend that started in early June, but as warned, things can be whippy inside a trading range:

BKX did form the wave up that I was looking for to "balance" the pattern, and has now retraced so deeply that it should be considered a new wave down, as opposed to a sub-wave of the current blue C wave. 

The BKX chart offers some brilliant clues, because the pattern here is either very bearish or very bullish, and there are clearly defined lines that separate the two options.

Let's pay close attention to what happens in BKX going forward.  A break of the B-wave low is required to confirm both counts that are shown.  The chart explains the rest.

I've gone 'round and 'round with the SPX short-term chart, and it's another market that's not telegraphing very clearly.  The recent rally could be counted as a five-wave move with a disproportionately small fifth wave -- so that could be all she wrote for the C-wave.  Alternately, the peak was wave 3, and the current decline is 4.  Trade beneath the wave 1 high would rule that out.

On Friday, I was looking at the possibility of a fourth wave in progess.  While that count wasn't invalidated as of Friday, it's entirely possible I was incorrect in that assumption -- which is one of the many reasons I warned that the "easy money was over" and, especially: "I don't like banking on fifth waves." 

The black alternate count allows the possibility of a 2nd wave decline unfolding here.

If we plug that 1-minute count into the hourly chart, we end up with the chart below, and it suggests that wave (ii) may indeed have ended.  Blue wave C did make a new swing high above A, and that's all it was required to do.

The chart also shows Option 2: the bullish alternate count that this is a nest of 1's and 2's.  That count would require a powerful and accelerating breakout to occur at some point going forward, and that could be triggered on a break above the 1380 high -- these halting little breakouts we've seen so far don't qualify. 

Option 3-20 are that something else entirely is going on, but the two options shown appear to be the most likely.

In conclusion:  At this point, bears probably have the best chances they've had in a while.  I think the counts have aligned as well as they can for the bear case, at least given the unbelievable amount of noise in the charts.  Anything other than a marginal new high could very well blow up the bears' intermediate hopes, so I'm going to consider 1380.39 as the stop level where we take a hard look at reassessing the entire intermediate bear outlook.  I continue to believe the market is gearing up for a big move -- and this confusing pattern is part of the "plan."  And when I say "big move," I'm not talking about a 30 or 40 point run at the bottom of the range that gets bears salivating right before the market rips their faces off.  Bears need to remain aware that, given the current charts, that big move is not guaranteed to be down.

Barring a new high, I will continue favoring the bear count going forward -- and given INDU and BKX, if that bear count still holds any water, it should probably start performing more or less immediately. 

I think the BKX chart should be watched carefully for clues -- that chart suggests more downside short term, but also suggests it could very well be a bear fake-out.  BKX is another chart that suggests a big move is brewing -- so let's watch the levels there closely, and be on guard for a bottom forming in the target zone (which represents the expectations of the black alternate count).  Conversely, a breakdown there should give bears the all-clear for the intermediate term.  Trade safe.