Wednesday, October 24, 2012

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).

In a further attempt to fit everything together, we have the Russell 2000 (RUT), which also has enough waves to form a complete correction.  RUT really makes me wonder about SPX and INDU, because if the recent low breaks in a material fashion, it will be hard to see that as a short-lived event, given the present pattern.

The market has so far been unable to hold support -- and the fact that 1474 has held keeps the mega-bear count alive.  If it weren't for INDU's final high on a three-wave rally, I would be favoring this count... especially since it's the only wave count that seems to connect the whole structure from March 2009 into a cohesive form.  This count suggests that the market has seen a major trend change, so we'll keep watching this count for confirming signals -- but until there is some confirmation, we'll assume the long-term trend is still up.

Note the buy signal in the lower panel.

I also want to point out the stark contrast between a couple markets, to illustrate how it's difficult to find an over-arching theme.  First is the NYSE Composite (NYA), which (so far anyway) looks like nothing more than your average healthy correction.

For contrast, we have the Nasdaq 100 (NDX), which has now retraced 50% of the rally off the June lows.

In conclusion, the short-term trend is currently down across markets; the intermediate trend has shifted to down in several, but not all, markets; and the long-term trend remains up.  INDU, RUT, and SPX could be counted as complete waves down, but it is unclear whether we should anticipate a fourth wave higher followed by a fifth wave down, or whether the pattern is roughly complete.

I remain of the opinion that the final high isn't in yet (for INDU and SPX), but bears certainly aren't going quietly into the night.  A small bounce here which was followed by lower lows that held key support would be acceptable for the intermediate bull case, but a large bounce that fails to reclaim 1464, and which then subsequently broke the recent lows, would suggest a very bearish longer-term outcome.  Trade safe.

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