Thursday, October 18, 2012

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...)

A look at the 5-minute SPX chart suggests that there's still room to run over the short-term, though it's a bit unclear if the entire blue wave (4) is complete or not, which could lead to a small downward correction first.  The alternate count considers that the final wave up ("or (5)?") may have completed in its entirety, which would suggest a larger correction toward the 1439-1450 level before the rally resumes.

And finally, the Dow Jones Industrials (INDU) are currently presenting what appears to be an incomplete five-wave rally.  If bears could somehow reverse things immediately and reclaim 13398, they would have a shot at taking control on an intermediate level -- but intermediate-term control simply looks unlikely for bears at the moment.

In conclusion, unless bears can reclaim the 1425 level, the odds are good that the anticipated turn off 1425 will end up marking an important cyclical low.  This would put the bulls in a good position to control the intermediate term.  And while there are still things that can happen to change all this, there are now some early warning signs developing that indicate bulls might be taking control of the longer-term as well.  We'll see how the structure develops going forward.  Trade safe.

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