SPX Update: This is Still the Bulls' Battle to Lose

Before I get into the market update, my heart goes out to all those impacted by the super-storm on the East Coast.  Those affected are in my thoughts and prayers, and I wish you all the best in recovering.

Despite two days of storm-related market closures, there's been no material change in the outlook since Friday.  It is still anticipated that the market is likely to find a bottom in this zone and head toward 1480 -- though if for some reason it doesn't, then things could get very bearish.  

The S&P 500 (SPX) chart below outlines the preferred path, as well as the short-term (ST) alternate path (which allows the margin-of-error of a marginal new low), and the intermediate-term (IT) alternate path (which allows for a major trend change at 1474).  It's obviously too early to confirm a bottom here, especially since the short-term trend is still down -- so we'll watch how it unfolds going forward.  (continued, next page)

SPX, INDU: Bulls Need to Find Support Soon

I'm going to use an analogy I've used before, because I believe the current market fits:  The market is like a rubber band stretched to its breaking point -- either it will snap back and begin a strong rally over the next few sessions (quite possibly as soon as today's session) or it could break.

As we look at the options, it's important to remember that QE-Infinity hasn't actually started yet.  Some bears are calling QE-Infinity a "failure," and even the mainstream media (who should know better) has been guilty of this.  The effects of the QE MBS (Mortgage-Backed Securities) purchases won't be seen until the Fed cash actually makes its way into the Primary Dealer accounts -- there was no liquidity flood released when the media announcement happened.  And no liquidity added even once the first purchases were made, as MBS settlements are done on a forward basis.  The first MBS purchases aren't scheduled to settle until November 14, so that's roughly when we'll finally begin seeing the "real" effects of QE-Infinity, which is anticipated to be inflationary (i.e.- rising equities and commodities prices).  

The old adage of "don't fight the Fed" sticks in my mind going forward.

Yesterday's preferred short-term count played perfectly, as the market rallied up to my wave 4 label and reversed immediately to a new low.  So, the short-term count was correct -- but what about the intermediate-term counts? 


The predictive power behind Elliott Wave analysis is underpinned by two key strategies:

1.  Using the available price action to attempt to anticipate the pattern that will unfold going forward.
2.  Understanding the key levels where that anticipated pattern becomes invalidated and mutates into something else.

This is why I usually give both a preferred and alternate count.  The preferred count is "here's what looks most likely, given the price pattern that's currently visible"; the alternate count is the "okay, that fell apart, so this might be unfolding instead."

This task can be quite difficult in certain markets, because some patterns start off looking like a specific high-probability pattern, but then turn into something else entirely.  This happened near the recent peak.  The Dow Industrials (INDU) in particular looked like a nice clean pattern called an "expanded flat," but then went on to mutate into something much more extended.  The upshot of Elliott Wave, even during such predictive failures, is that it does provide clear levels where we can recognize that the first predicted pattern was wrong -- and sometimes the short-term work can still get you a winning trade even when the larger pattern fails.

To stick with the example of INDU, on October 19, I suggested it was due a correction to roughly the 13400 zone -- and also noted that "sustained trade beneath 13398 would open up more bearish intermediate prospects."  Even though the larger pattern failed, Elliott Wave allowed the patient trader to locate a low-risk entry-point, and further allowed the patient and nimble trader to bailout with minimum damage when the trade didn't work (as we know, patience isn't the only skill required of successful traders).  A really nimble trader could even have played the decline on the short-side and made a profit along the way. As an aside, this drives home a big part of what trading is all about: managing risk.

So, here we are in today's market -- trying to put the puzzles pieces together into a "most likely scenario," while at the same time looking for key levels that will suggest the preferred scenario is failing and "something else is going on."  I realize things can get a bit confusing to readers at times, because I'm working on several different time frames, and sometimes the five-minute (or one-minute) chart looks crystal-clear, while the daily or hourly is more of a toss-up, or vice-versa.  As best I can, I try to fit them together into something readers can understand.

And sometimes, it seems like detailing the alternate prospects is a ridiculously-complicated task which will only confuse everyone -- and to some degree this market fits that bill.  During these times, I try to note a few key levels where it's time to capitulate or reverse position.

There's been zero change in the INDU preferred count -- in fact, this count performed perfectly yesterday, accurately predicting the pop and drop reversal to within a few points.  The $64,000 question is whether we should anticipate the blue "4?" rally and reversal.  Hopefully, we'll be able to determine whether that's probable as the action unfolds.

The alternate intermediate count that isn't shown is morbidly bearish -- so if the market markedly fails target support, then bulls who didn't heed my Monday warning might want to consider that failure as a second chance at taking a vacation.

For SPX wave counts, I'm only going to focus on the daily chart today, since the questions and potential outcomes are essentially the same as for INDU. (continued, next page)

SPX, NDX, INDU, VIX: Signals Suggest a Bounce is Due

There's not much to add to yesterday's update, so I'll simply let the charts do most of the talking.  The first chart worth noting is the Volatility Index (VIX), also known as the "Fear Index" since it substitutes as a good indicator for investor sentiment (high VIX means investors are fearful; low VIX means complacency).  VIX has closed outside its upper Bollinger band the last two days in a row .  This is often the precursor to at least a short-term rally in equities.

Next is the S&P 500 (SPX) daily chart.  As yet, still no material change here. 

The SPX hourly chart is showing some early bullish signals in RSI and MACD.

The Dow Jones Industrials (INDU) probably still needs at least one more fourth wave rally and fifth wave decline -- though yesterday's little rally and decline could theoretically qualify, which would mean the decline is complete.  The strength of any forthcoming rally should narrow the options. (continued, next page)

SPX, INDU, NYA, RUT: Market Wants a Debate

In keeping with the spirit of election season, the bears have decided it's time to open a debate.

On Tuesday, bears broke the market down through some key trendlines in several markets.  The analytical challenge I'm running into remains the same as mentioned last update: there are a lot of mixed messages being conveyed by different markets, and it's difficult to find a pattern that holds across all of them.

The one market that has largely convinced me that higher prices are still ultimately coming is the Dow Jones Industrial Average (INDU).  I can't get past the three-wave rally into the new high, which suggests the final high isn't in yet -- and this is a pattern I've learned to never ignore.  It doesn't work 100% of the time -- nothing does -- but it does work the vast majority of the time.  The main question has become how deep the correction will run, and as I suggested on Monday, wise bulls probably wanted to get out of the way once that lower red trendline broke.

I can now count five clean waves down into the recent low.  Where I'm most unsure is whether those five waves form wave 3 of c, or ALL OF wave c.  On the chart below, I've drawn-in the potential for wave 3 of c, with a fourth and fifth wave still to come -- but there really isn't a clear answer. 

An interesting fractal study I want to share is General Electric's (GE) pattern of March-June 2012 in comparison to the current S&P 500 (SPX).

SPX below.  The beginning of the structure looks remarkably similar to GE, but they diverged recently, as SPX has materially exceeded the lower support line -- and has done so on a confirming MACD reading.  This is the signature of a third wave decline (c-waves are third waves), the question for SPX is the same as INDU -- whether this is ALL OF (c) or whether there is a correction to come, followed by new lows.

The simple SPX chart below still outlines the key intermediate pivots (continued, next page).

SPX, BKX, RUT, VIX, TRAN, NYA, IBM: Market Refuses to Leave the Intermediate Chop Zone

Last update expected that the market was due to turn lower for at least a minor top, and turn lower it did -- however it moved a bit lower than expected, and this has now thrown the intermediate outlook back into the ambiguous zone.  This weekend, I've charted more markets than I can count, and wrestled with what to present to readers to try and keep the whole thing reasonably understandable.  I finally decided to boil it all down to a simple chart of the S&P 500 (SPX) to avoid confusion.  Don't worry, there are plenty more charts coming in this update, but I think it's easiest for readers to focus on the simple message in this chart:

The bottom line is: this is still the intermediate "chop zone" and until the market break down or breaks out, there are multiple options still open -- and the problem I've been running into this weekend is there are simply a lot of mixed messages being thrown off by different markets.  I'm going to present a few charts that convey the case for each side -- and maybe the best assumption from this data is that the market may just continue chopping around for a bit longer.

If it does cleanly break through this zone, the losing side might just want to get out of the way until things clarify again.

One of the more bullish charts I studied is the Philadelphia Bank Index (BKX), which, at the moment, sure looks like a fourth wave triangle -- and it's right where you'd expect to find one.  Sustained trade beneath the (C) wave low would open up more bearish prospects.

Also still looking bullish is the NYSE Composite (NYA) (continued, next page)

SPX and INDU: Key Levels and Next Targets

The intermediate outlook is materially unchanged and continues its bullish bias.  The short-term outlook has become slightly ambiguous, but suggests a minor top may be near.  It is currently expected that this will only be a short-term top, and that new swing highs will follow.

I've loaded up the hourly chart of the S&P 500 (SPX -- shown below) with virtually all the relevant info, so I won't retype every data point here.  The bottom line is that a correction lower could be due as soon as today's session, though a bit more upside would be within the margin of error (the second chart may help with this).  In either case, if the next decline is indeed the expected small second wave lower (blue (ii)), then ideally it would be a bit scary and cause a fair number of traders to turn bearish.  Conversely, if it does not correct as deeply as shown, that would actually stretch the wave (iii) targets even higher.

I'm viewing 1438-1439 as the key bearish pivot, and sustained trade beneath that level would dictate that more bearish intermediate outlooks be considered.  Ideally, if this is to remain a correction to an uptrend, this wave should not break the lower black trend line that connects blue (2) and blue (4) -- so that occurrence would act as a second subsequent warning if 1438-1439 were to be broken.  Beyond that, trade beneath 1425 would put the bears in control.  The chart annotations pretty well detail everything I'm watching, and my expectations, at the moment.

The 5-minute SPX chart looks at the short-term trend-channel, which is still intact.  The short-term trend remains up as long as it holds, but a breakdown here would be the first warning that a correction was unfolding.  The chart also notes the potential of a small head and shoulders top, along with the classic measured target if prices were to break down through the dashed red neckline.

The Dow Jones Industrials (INDU) is in essentially the same position as SPX, and it's also unclear here if there's a bit more upside due before the correction.  Note that both hourly RSI (SPX chart above) and 30-minute RSI (INDU below) are showing bearish divergences.  (continued, next page...)

SPX, INDU, NYA, NDX: Bears on the Run

For several weeks, I have projected that after this correction completed, the market would make new swing highs for the intermediate term.  In the most recent update, I discussed two short-term possibilities: a short-term turn near 1444-48 SPX, or a run directly to new swing highs.  I listed 1453 as the key level to differentiate one outcome from the other, and the market both sailed through that level and also closed above it, which now causes me to favor the view that the bottom is in at 1425.  It's simply going to take a break of that level for bears to get anything going at this point. 

It's too early to say for sure and declare bulls the long-term winners, but there are some signs that this rally has the potential to pull the indices at least another 10% higher.  The first case in point is the NYSE Composite Index (NYA), which, as I've been warning since September, still looks quite bullish.  Bulls have now held the breakout level on two back-tests, and the last test resulted in a very strong bounce -- so unless that level fails, it's simply wishful thinking to view this chart as bearish in any way.

The next case in point is the Nasdaq 100 (NDX).  On September 20, I warned that NDX appeared to have formed a complete five-wave rally, which meant it was likely to correct lower.  The problem now for bears is that if the blue (2)/b high is broken, that will strongly suggest that the recent decline was a second wave lower.  This would mean that the current rally is going to be a Minor Third Wave up -- which is every bulls' dream.  Third waves are usually the longest and strongest wave, since they represent a "point of recognition" for the masses.

Again, it's too early to be certain here, but a third wave up would largely be confirmed by a break of the (2)/b high at 2846, and could put the bears on ice for months. 

On the S&P 500 (SPX), while my short-term outlook stayed bearish until 1425, my preferred intermediate outlook has remained bullish for some time.  The question that now needs to be asked is whether it was "bullish enough" -- the next swing high may mark ALL OF wave (5), or only wave (i) of (5), with (ii)-down, (iii)-up, (iv)-down, and (v)-up still to come. 

Of course, I'm getting way ahead of the game here, and the first step, of course, is for those new swing highs to occur... but it looks increasingly probable that the projected turn at 1425 was a meaningful one.  Obviously, closes back beneath that level would create problems for the bull case (continued, next page...)

SPX and INDU: Rally Poised to Capture Monday's Target

Monday's outlook captured the turn and performed about "as good as it gets," as shown on the S&P 500 (SPX) chart below.  This chart now reveals the current price action, overlaid on top of yesterday's projection:

I realize that Elliott Wave Theory can be confusing at times, so please keep in mind that I am projecting two different time frames in this update (as in most updates):

1.  On the longer time frames, the preferred view is that new swing highs north of 1480 will be made, one way or another.  There are several more bearish alternate wave counts, but currently these appear to be long-shots; thus they will be discussed in more detail only if the market dictates.
 
2.  On the shorter time frames, I'm slightly favoring the view that a new swing low (with a current target in the 1410-1420 SPX zone) will be made before the "final" low is in place and the market rallies beyond 1480.  The first alternate short-term wave count is that the low is in place already, at SPX 1425.

Yesterday's projected turn off the low is now in place.  Since the preferred outlook is tracking very well across all time frames right now, there's no reason to alter any portion of it just yet.  The Dow Jones Industrials (INDU) shows the preferred short-term and intermediate term paths at larger scale.  If the wave counts are correct at all degrees, then SPX is expected to travel a similar route -- and again, the main question is still whether an intermediate low is now in place, or whether a new swing low will be made first.

The SPX chart below discusses the caveats and warnings which are applicable to each time frame.

The daily SPX chart shows less detail, and focuses more on the big picture outlook's projected end result (continued on next page...)

SPX and INDU: Market Approaching a Turn?

Friday's update expected further upside to follow after Thursday's expected test of 1425-1430, but the market instead made a slight new low in Friday's session.  I suspect the upside was simply delayed a day as the correction became more complex.  After studying a number of charts, I believe the odds are good that the market will rally over the short-term, and then reverse back down to make another marginal new low.  From there, I currently expect it to reverse back up and make new swing highs.

It is possible that a more meaningful bottom is in place already, but the micro wave counts suggest this is slightly less likely (see charts); it is presently expected that the next low will be significant.

(If you're new to Elliott Wave, it might help to familiarize yourself with the basics, as found in this article.)

Below shows the preferred short-term S&P 500 (SPX) path in blue.  If for some reason bulls fail to reclaim 1438.43, then all bets are off, and the short-term outcome would be more immediately bearish.  My preferred outlook is that bulls will retake the 1438 level, and 1444-1448 is my current short-term target.  Sustained trade above 1453 would suggest the alternate count of a failed fifth at 1426 -- which would mean the bottom is in, and there would be new swing highs directly (see 2nd chart).

Stepping back a bit, the larger preferred SPX view is shown below. 

On the Dow Jones Industrials (INDU), I've outlined the preferred path in more exacting detail (below).  If my micro interpretation of the structure is correct, SPX should follow a similar path.

The 3-minute INDU chart details why I've chosen that count for the short-term.  Again, the short-term alternate count considers the possibility that the bottom is in (continued, next page)...

SPX, INDU: Bulls Face Their First Real Test

Last update expected the S&P 500 to test the 1425-1430 support zone, which is what's happened since.  This is now the first real test of the intermediate bull case.  My preferred expectation has been that this decline is part of an ongoing correction, and as long as the 1425-1430 zone holds, it should resolve with new swing highs.

One more marginal new low would be okay for the bull case, but a solid breakdown of this support level is likely to lead to a 30+ point decline.

The next chart outlines some key levels for SPX.

Finally, one can't help but notice the similarity of the current fractal with the April top earlier this year.  If bulls somehow fail to hold key support here, that probably foreshadows a repeat performance.  

In conclusion, as long as the bulls hold this expected test of support, the market is likely headed to new swing highs.  This is where fractal analysis can be a bit tricky to project too far out though, because the current wave down may only mark wave i-down of a larger (c) wave down.  This is not my current expectation, but I'll watch the shape of the next rally and note the key levels as it unfolds.  Trade safe. 

SPX, TLT, INDU: Still "Just a Correction" Until Proven Otherwise

Tuesday saw continued downside -- and as I warned in the last article, bulls indeed "dropped the ball" for the near-term.  Currently, it's expected that this is only an extension of the correction from the 1474 pivot high, and that it will ultimately resolve higher over the intermediate term.  Bears do have a shot to turn the decline into something more meaningful, but will need to force a decisive breakdown of support to begin shifting intermediate prospects to their favor.

The S&P 500 (SPX) trendline chart below highlights a pivotal confluence zone, which crosses 1425-1430.  The chart should also note 1453 as a bear warning level.

It appears reasonably likely that the market will test this zone before this wave is complete.  Keep in mind, however, that bears do not particularly want to see overlap with the blue wave (1) low (chart below) in the near term, since this would imply a potential for new swing highs more directly.

We can count a clear five-wave decline, which means the decline has already completed the minimum expectations for a (c) wave, and as such isn't required to head lower.  Lower would be more "normal" though, so on the chart below, I've positioned the (3), (4), and (c) labels to reflect the roughly-expected path of a typical (c) wave.  A choppy sideways/up mess is the usual for wave (4), which could start quite soon.

 

The Dow Jones Industrials (INDU) outlines the two most likely prospects -- however, as long as the swing low of 13425 remains intact, this leaves additional bullish options (not shown) on the table, and trade above the key short-term overlap levels outlined on SPX and INDU would suggest a more directly-bullish resolution.  Larger degree prospects for SPX are essentially the same as shown on the chart below...

SPX, NDX, INDU: Did Bulls Drop the Ball on Friday?

Bulls had every opportunity to get things done on Friday, but failed to push higher on the better-than-forecast job report.  The market performed properly for the very short-term count, but not quite as-expected for the next higher degree wave count.  Certain corrective waves can only be anticipated in real-time, since they sometimes form a complete fractal (which leads one to believe they are over), but then go on to string together a couple more fractals before actually finishing.

Near-term prospects may now be shifting into the bears' favor, so I've outlined a series of key levels to watch on the S&P 500 (SPX).  Be aware that until 1450 and 1439 are claimed by the bears, we can't rule out new swing highs following directly, and trade back above 1471 from here would suggest bulls have several more sessions of strength left in them -- if not more.

Due to the fractal nature of Elliott Wave, this pattern leaves a number of potentials open at the moment, so let's take a look out across a couple more markets before coming back to SPX.

The Dow Jones Industrials (INDU) is suggesting that -- again, assuming new highs don't follow directly -- the current wave is (at worst) part of a larger correction, and new swing highs should ultimately follow.  Depending on what happens next regarding the important price levels, though, bulls may have to wait a while and endure some drawdown if they're not nimble.

As I mentioned last week, a number of markets appeared to be running at cross currents.  NDX is one such market, and has been much weaker than INDU and SPX (chart below)...

SPX and TLT Updates: Bonds Showing Signs of Trouble

Yesterday's update expected more upside, and the S&P 500 (SPX) indeed extended its rally.  I continue to favor the view that the decline completed at 1430, and that the market is headed to 1490-1500 next.  Today has the potential to make or break that view -- this is probably the bears last chance for at least a little while, and they can ill-afford further upside here.

This is the type of market I like, since there are now a number of fairly clear and actionable levels.  The two-minute chart below details those levels; I continue to feel this will end in the bulls' favor, but breaks of the key levels outlined could shift my short-term expectations.  Note yesterday's trip to the top of the black base channel.  If my preferred bullish view is off and bears are instead going to turn things around, this is the zone where they'll do so.

Stepping back just slightly to provide more perspective. 1463 and 1467 are the levels where bears run out of real estate for this wave.

Moving out to the daily chart and the next preferred target zone:

The NYSE Composite (NYA, chart below) is also not showing any real signs of weakness yet...

SPX and NDX: Trend Still Your Friend?

No material change since yesterday.  Yesterday's outlook expected higher prices, which is what happened, and I am still in favor of the view that this consolidation will resolve with new swing highs.  How much higher is a bit up in the air at the moment, so we'll have to play it by ear for now and simply try to keep pointed in the right direction.

As mentioned in prior updates, a break of the S&P 500 (SPX) level of 1430 is required to shift prospects to bearish.

Yesterday's short-term count performed properly, and as mentioned, 1430 remains the key level for bears to get anything started.  Note I have updated the pending bearish sell trigger -- applicable only if bears can claim the falling red trendline.  A 17 point bullish buy trigger has also been added.

The alternate count, depicted in gray above, is detailed on the daily chart below...

SPX and INDU: Bulls Will Stay in Control Unless Bears Take 1430

Last night I studied a great number of charts, and found that there are several markets which are running at cross-currents.  Investors seem a bit confused. 

Because of these cross currents, I'm going to keep today's update fairly simple.  The bottom line is: This is still a pattern that can go either way.  After debating a number of factors, it appears that unless bears can break SPX 1430, the bulls remain in control. 

Two short-term alternate counts for SPX are shown below:

 

The hourly chart of the Dow Jones Industrials (INDU, below) shows my big picture preferred count.

INDU, SPX, TLT

There's been no material change to the big picture outlook discussed on Thursday: the market has left its options open, but appears to be at an inflection point.  Since there's not much to add to that discussion, I'm going to focus primarily on the near-term charts for this update, with the exception of the Dow Jones Industrial (INDU -- below).

INDU looks at the key intermediate levels, and some possible Fibonacci targets.  Bears would need to force a breakdown of critical support in order to start favoring a more bearish intermediate outlook.  This is a tough wave to count, so while the invalidation level for the sub-minuette count is noted, this level wouldn't be a dagger through bulls' hearts. 

The next chart highlights some key near-term levels for the S&P 500 (SPX):