Monday, December 24, 2012

Is Santa Bringing Coal for the Bulls or the Bears?

Christmas Eve has arrived, and now the question is: who's going to get coal in their stockings?  The bulls and the bears have both held the key levels they needed to, in order to create maximum confusion over who will own the longer-term.  I have remained intermediate bullish since November -- and still continue to slightly favor the bulls for the time being -- but this is an important inflection point, and I'm prepared to switch footing if the market dictates.

The first key levels I'm watching are 1411 in the S&P 500 (SPX) and 13010 in the Dow Jones Industrials (INDU).  Sustained trade beneath those levels would leave the market vulnerable to a larger decline.

I've drawn up a lot of charts for this update, so we're going to get right into it.

The first chart I'd like to share compares the SPX, the German DAX, and the London FTSE.  These European markets are one of several reasons I continue to give a slight edge to the bulls on this side of the pond.

Next is the SPX bull count, which is facing a test, since my mid-term target of 1445-1455 was reached and the market immediately reversed lower.  Bulls need to claim that resistance zone in order to clear the way for new multi-year highs.  At this point in the wave structure, trade above 1448 should lead to a very bullish resolution.

Below is the 30-minute view of the same count.  Note MACD is in the process of a bullish crossover.

As noted, this remains an inflection point for the larger picture, which means the structure hasn't closed itself to the bearish potential.  Below is the bearish interpretation of the fractal.  The bulls will become more vulnerable if the market sustains trade beneath 1411. (continued, next page)

Next, a breakdown of the SPX one-minute chart, which illustrates that -- at this exact moment -- even the very short-term is up for grabs.  A new high would give bulls an impulse wave up, and suggest at least a short-term continuation higher, along with the possibility of a positive trend change.  Without at least a marginal new high, though, this is a corrective rally and we would expect to see it fully retraced.

The key underlying thesis behind Elliott Wave Theory is that the market moves in five waves (called "motive" or "impulse" waves) when it's traveling in the direction of the larger trend, and in three waves (called "corrective" waves) when it's moving against the larger trend. The Dow Jones Industrials show a pattern that's slightly different than SPX, and a little more clear-cut as either a large ABC corrective rally, or wave 4 of an impulse with wave five-up still to come.  A new swing high here would give bulls a serious edge for the long-term, while trade beneath 13010 would be the first key toward giving bears control.

Finally, I want to wrap up this update with an updated Nasdaq 100 (NDX) chart.  While the rally since November does count best as a five-wave impulsive form (suggesting the larger trend is up), I rigorously challenged my own assumptions during the weekend in order to see if the bears had any hopes for another outcome.  

Indeed, at times it stretches one as an Elliottician to see the wave structures that fall far-off the beaten path -- but with a little outside-the-box thinking, there are, in fact, two potentials which would be favorable to bears.  The first is near-term bearish, but intermediate bullish (black); the second is intermediate bearish (green).  I've outlined the key levels which would open up each respective potential.

In conclusion, I continue to give the slight edge to the bulls until proven otherwise, but the rally is in a vulnerable position.  What happens over the next few sessions is likely to have ramifications for at least several weeks into the future, and possibly much, much longer.  In the meantime, have a wonderful Christmas -- and trade safe.


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