SPX and INDU: Europe Adds a Wave to the Outlook

Yesterday's outlook expected lower prices, which happened.  The market then launched a strong bounce from the lower end of the trading range -- and then, after the cash market closed, Europe announced that they've solved the majority of the world's problems.  When it was further revealed that, during the course of the summit, Merkel had developed a cure for cancer and a viable Unified Field Theory, futures shot higher. 

If you're feeling frustrated with this market at all, you're probably not alone -- and that's a pretty normal function of a trading range.  It now appears likely that Minute wave ii is becoming more complex than initially suspected.  Unfortunately, this type of development often can't be predicted in advance.  Sometimes a corrective wave will form a complete ABC fractal, then decide to add a couple more ABC fractals (or similar).  This appears to be happening now.

The S&P 500 (SPX) did not make a new low yesterday, but the Dow Industrials (INDU) did, and that opens up the potential of an expanded flat developing in INDU.  The typical target for such a wave is 12720-12775.

Moving on to SPX: After studying the overall structure, and a number of other indices, I've decided it is probably appropriate to label the decline from 1320 to 1310 as a failed fifth wave.  A fifth wave is considered a "failure" when it fails to make a new price low beneath the bottom of the third wave, and when it's unable to hold down a steady job.  (Sorry, just a bit of bad Elliott Wave humor there!) 

Anyway, the targets here are 1337 or 1352, give or take a couple points.  The black alternate count targets are listed, but the basic structure of that count is detailed on the next chart.

Now, because 1306 has not been traded under, the alternate count is still alive.  I continue to give this count lower odds, because the retracement level of 1363 was 61.8% of the prior decline, and that's wholly appropriate for a Minor wave (ii) -- but the market is always the final authority.  We'll see how excited investors are about Europe, because this alternate count is still technically possible.  I think if the trendline connecting 1422 and 1363 is materially broken, then at that point, we should probably give strong consideration to this potential.

The chart below shows the preferred count, big picture targets, and some things to watch.  Keep in mind that red Minor wave (iii) should take several weeks to months to unfold -- targets won't be reached tomorrow and there will be rallies along the way.

In conclusion, the short term expects higher prices, and a reversal to follow -- but the more bullish alternate count cannot be ruled out yet, and traders should stay alert to it if the upper trendline is broken.  Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX Update: Short-Term Picture Clarifying Again

Yesterday, I had a lot of doubt, and a number of questions, about where we were in the short-term picture, and the good news is that most of them have now been answered. The bad news is that yesterday I ended up leaning slightly toward the view that the market would head down for the short-term, and that turned out to be a complete miss.

It now appears that the original outlook (which projected a low beneath 1310 and then a rally to 1335) published on Friday and Monday was correct, and that Minute wave i bottomed at 1309.

What appeared yesterday to be a small fourth wave turned out to have more legs than was readily apparent, and the SPX rallied 11 points and change, which, judging by the bear reaction, was the largest one day rally in history.  Honestly, this is the type of sentiment one wants to see near a second wave peak.

I remain of the view that Minor wave (ii) peaked at 1363, largely because the 61.8% retracement it obtained is just about perfect for a second wave. However, until the market trades beneath 1306, the option of another a-b-c rally remains on the table. Accordingly, I've prepared a short-term chart with some levels to watch in case my outlook is wrong and there's another large a-b-c rally coming.

The question on everyone's mind is whether the current Minute wave ii rally is complete, and the answer is a resounding "probably."  It's a bit of a messy chart, but the rally has reached a number of resistance levels, and appears to count as a complete abc structure.  Trade beneath 1320 would add confidence to this view.

I worked out a count on the one-minute chart, using the Dow Jones Industrials (INDU) for form, and while it counts differently than SPX, it also appears reasonably likely the structure is complete.  A slightly higher high would be within the margin of error, but again, the key levels on the first chart should not be materially exceeded or this will have to be re-examined.

Finally, a big picture SPX chart which shows some of the key long-term support and resistance levels.  Note the "alt: (y)" label,, which shows the approximate area the market would be expected to top if the more bullish double-zigzag unfolds.  Again, I am handicapping that as low-probability, but I'm not arrogant enough to completely ignore the possibility. 

In conclusion, the bounce from 1309 to 1334 again fits the pattern at this stage, and unless the market throws a curveball here, we should soon see a strong decline (which breaks the 1266 low) begin in the very near future.  Trade safe. 

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX Update: Questions for the Short-Term, but Long-Term Bearish

Let's recap what we know for sure:  Monday hit my anticipated target perfectly, and there are now five waves down on the S&P 500 (SPX), which satisfies the minimum expectation for Minute Wave-i -- as such, the larger expected wave-ii rally might be underway.  After Minute Wave ii completes, it is expected that Minute Wave iii-down will travel beneath the 1266 swing low.  Ultimately, the larger degree Minor Wave (iii) should travel into the 1100's. 

I have some questions over the short-term, though, and the only one capable of answering these questions is the market -- hopefully in the next session or three.  Here are my short-term questions:

1. Is the current rally Minute Wave ii, or the lower degree Minuette Wave (4)? (I'm favoring the Wave (4) interpretation.)
2. Is the current rally over?  (I suspect it is -- though it could have one more slightly higher high.)
3. If the rally is Wave (4), will Wave (5)-down extend and blow through the lower target zone?

I'm favoring the idea that this corrective rally has about run its course, that it's Minute Wave (4), and that the market will make a new low beneath 1309.  I'm split on the idea of an extended fifth wave here, and there's really no way for me to know in advance. 

For the intermediate term, I strongly suspect that Minor third wave down is now underway, but the caveat is that the market needs to confirm with a print beneath 1306.62.

If my preferred intermediate outlook is correct, and we are now in the early stages of a Minor degree third wave decline, then there are some things to be aware of.   Third waves are powerful, especially third wave declines, and bounces will be muted and sometimes fall short of targets.  Third waves gain their power from the fact that the majority have been caught wrong-footed.  If you're on the wrong side of the trade, expect this wave will not let you out without damage -- because everyone else will be trying to get out too, and that will keep the bounces muted. (This is relative to the time-frame of course -- Minor degree waves last weeks to months, so I'm not talking about day trades.)

So, third wave declines require the majority to head into them positioned long.  Here's the funny thing about sentiment: I suspect that the majority of people wouldn't really believe my projections, because if they did, then we couldn't have an extended decline.  People who think the market is headed significantly lower aren't holding equities; they are either short or flat.  And people who are short or flat have nothing to sell to drive the market lower in the first place -- so if I'm right, the majority are still long right now: it's something of a requirement. 

Right around the time the majority turn bearish, it will be time for a large bounce.

Let's move onto the charts, and take a quick look at the intermediate picture.  The questions I outlined above are reflected on this chart (as well as the next one).  If Minute ii-up is underway, then just move all the blue lines over to the left.

 

Next, the short-term chart, and the expectations of the wave (4) count.  After re-examining the first stage of the decline, I have moved the Minor (ii) high to match the price high at 1363.  I now suspect that the move from 1363 to 1346 was, in fact, the first wave... though it looks a bit odd because it had an extended fifth.  This also matches the strength of the recent decline into the 1309 low, since that would still be a portion of the Minuette wave (3). 

The alternate black count may or may not have more rally left in it.  If the market does more than a very marginal new high, suspect the black wave ii count.  Conversely, if the move starts to accelerate lower from here, suspect either the extended fifth or the alternate count, and we should start looking for lower targets.  If this is a standard fifth wave decline, it should make a new price low, but there should be numerous bullish divergences on the indicators when it does.

In conclusion, the short-term was dead-on clear last week and I hit the last 3 turns almost to the penny, but things just aren't always that clear, unfortunately, and the short term is now a bit hazy.  It will clarify again soon enough.  Regardless of the market's short-term path, the intermediate term appears decidely bearish.  Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX Update: ST Clarification Needed from the Market

Well, the last several days of projections have been dead-on hits at every turn, and now the market has broken the 1310 level I suggested.  There are now five clear waves of decline, and the decline has accomplished the minimum expected/required.  As such, a snap back rally could occur at any time.   

Here it gets a bit muddy:  I've looked at a lot of charts tonight, but I just can't see around the next bend right now.  The preferred count has peformed flawlessly so far -- but now we're going to have to see how the market responds to a few levels and hopefully the picture will clarify a bit during today's session.

The first chart I'd like to share shows the preferred count in blue/red and an alternate in black.  So far, yesterday's small rally appears corrective, and if the 1309 swing low is claimed, I would expect the decline to reach 1298-1302.  However, there are enough squiggles to count the wave as complete and the decline reached my minimum target, so 1309 may have been it for wave i.  Note that an extended fifth wave could easily reach the 1260-1265 zone.

As I stated, we'll have to see how the market responds here: the second chart will show a few key levels and trendlines to watch.

Here's a chart that might help tell the story as it unfolds.  Notice how the rally reached a confluence of two resistance levels (the median line of the blue channel, and the upper line of the red channel).  A breakout above the median line would suggest a run toward the upper line of the channel.

Finally, I hesitate to publish the next count... but after studying the charts, I can't get it out of my head.  I would be remiss not to mention it, but let's consider the count below as "speculative" for the moment.  I'm bothered by the apparent acceleration of the decline on Monday, and it suggests the market may be weaker than expected.   We'll see what happens over the next couple sessions to add confidence to, or rule out, this spec count.

Note the new pending bearish sell trigger.

In conclusion, the decline has accomplished the minimum target I projected for this wave, and though I am favoring the idea that it will make another swing low beneath 1309, a larger snap-back rally could develop at any time.  Trade safe.

SPX, CVX, and US Dollar Updates: Long-term Projections and Market Outlook

Friday's outlook expected a small rally, and the market traded right into Friday's rally target zone.  But before I get too much into the short term, let's see where we are in the big picture. 

Long Term Outlook

The projection shown below is what I believe is unfolding, but this big picture count is by no means a "done deal" yet, and bears have a few things left to accomplish to add some more confidence to this projection.  One key confidence builder would be a break of the red uptrend line from the March 2009 lows; and the next confidence builder would be to see the current (assumed) third wave down knock out the December 2011 lows.  Then we'd like to see wave (1) knock out the October 2011 lows. 

The last time I published this chart was May 11 -- when I also departed from the charts a bit and outlined some of the fundamental challenges facing the world.  Anyway, as they say, "so far, so good” – at least in terms of the projections; not so much in terms of the world.

 

Let's look at this chart another way, without the projections -- and then let's ask ourselves, is the type of severe long-term decline I'm projecting even possible?  The charts say: absolutely. 

Long-time readers will recall several times I've pointed to trading ranges in the past, and projected the market to move through them rapidly -- which it usually does.  The simple theory here is that the more often the market trades through a particular price point, the weaker support and resistance become at that price point.  The chart below discusses the rest.

Here's another quick glance at a chart (the NYSE Composite/NYA) that says an extended decline is quite possible -- again: provided bears can break the uptrend off the 2009 lows (which I believe they will).

To sum up the long-term outlook:  I believe bears are now in control for the long haul.  Assuming bears break the uptrend lines, it appears quite likely that the market is in for an extended decline.  Of course, the bulls can still do some things to cast doubt upon it: Trade back above 1422 SPX would require this outlook to be re-examined. 

Intermediate Term Outlook

Let's zoom in a bit and take a look at what's likely to occur on a slightly smaller scale.  The market still has two main options here, but based on the retracement levels hit (61.8%), I am favoring the first outcome by a 75% margin.

As mentioned, the onset of wave (iii) hasn't been confirmed yet, and there are still some options for bulls over the near term.  The first key is for the B-wave low of 1306 to get knocked out.  That would rule out the alternate (x)-wave count shown below, which I'm currently handicapping at 25% odds.  Note the 190 point bearish trade trigger.

Let's also take a look at a key related market: the US dollar.  My dollar projections have played out well recently; below is the chart I published on April 15.  My confidence at that moment was only medium -- but confidence grew after the red e-wave bottom. 

This chart has evolved a bit over time, and in early May, when my confidence in this projection increased, I added additional price targets. It really is uncanny how well the chart above has played out -- note how it's followed the blue line projection perfectly since April 15, and also came within 6 cents of reaching the first target (mentioned in the chart above) for a breakout move of 3.68.  If you bought near the e-wave bottom, you captured a profit of $4000-$5000 per DX futures contract.

I feel the dollar is in a major bull market (as I have since I called a long-term bottom in September 2011), and that continued dollar rallies will likely keep the lid on equities.

Below, a look at the Dollar's monthly chart (although technically this belongs in the long-term outlook section, I wanted to keep all the Dollar charts together). 

Short Term Outlook

The short-term is never as "easy" for these updates to contend with as the bigger picture.  Short-term trading requires far more in the sense of real-time market reads, and what looks likely at the close of one day can suddenly appear completely out of the question five minutes after the next day's open.  Nevertheless, I make a go of it every day, and Friday's short-term outlook was a dead-on hit.

The charts below outline the outcome which seems most probable over the short-term, along with some things to watch.  There are two alternate potentials over the short term, both of which are plausible.  The first is that the complete ABC pattern is simply wave A of (4).  The second is that this is a higher degree wave (2) rally, and could stretch on a bit longer than anticipated, or lead to a deeper decline than anticipated.

I suspect that wave 4 is probably correct and that it completed right where I projected it would, at 1337.  If so, then new lows should now follow directly.  Obviously, trade back above the 1337 highs would indicate one of the alternate short-term counts was playing out.

Below is the one-minute SPX chart.

Finally, a number of readers have asked where a good level to get back into a Chevron (CVX) short would be, so I have outlined a bearish sell trigger on the CVX chart below.  I believe CVX just completed an ABC rally for a nested second wave.  If this outlook is correct, it's in for a rapid decline in the near future.

In conclusion, it appears likely that Minor wave (iii)-down of Intermediate wave (1)-down is now underway.  We'll continue to watch key levels, to either build confidence in this view or to rule it out.  The market has stayed on track with my overall projections for the past several months, so there's little reason for me to doubt this outlook at the moment.  Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX Update: Rally Likely Over -- Ready for the 1100's?

With Thursday's solid decline, it's likely that wave (ii) ended at 1363.46, about a point and a half shy of my target zone.  In my defense, it appears that the final fifth wave up most likely failed, which accounts for the target short-fall.  There is one last short-term hope remaining for bulls, but it's lower probability at this stage -- I'll cover that option in a few moments, but first, let's take a look at how my Elliott Wave analysis is doing overall for the intermediate picture.

Below is the preferred count I published on June 1.  The decline fell 6 points shy of my target zone (and the red wave (ii) illustration here was never meant to be anything other than a rough guideline) -- but overall, it's probably safe to say, "not too shabby."  This is one reason I stick with Elliott Wave as my go-to analytical tool:  I simply know of nothing else that can call two intermediate turns this accurately before the first turn has even happened.

 

Let's update that hourly chart, add in some more clutter, and see where we are now in the intermediate picture.  My wave (iii) targets have been slightly adjusted from the June 1 chart.  Bear in mind that the market is a living, breathing, dynamic environment -- so further adjustments will likely need to be made on the fly.

Next, let's zoom in a bit to the 15-minute chart.  I am uncertain if wave 3 has bottomed or not, so don't bank on that wave 4 bounce -- instead watch the red dashed trendline in the one-minute chart (shown next).  My best guess is that 3 has reached a possible very short-term bottom (or nearly so), based on the one-minute chart, but it's not entirely clear.  Yesterday's 18 point bearish trade trigger target (which I've removed from the chart) was easily reached during the session.

Below is the one minute chart.  These can be extremely tricky to interpret and my confidence in this particular instance is only medium.  The chart does note the invalidation level for the bearish wave (4) interpretation (1347.39). 

Again, don't necessarily bank on that wave 4 bounce here.  As long as the market stays below the dashed red trendline, bears have no reason to fear anything; breaking that trendline is the first step for bulls to get something going.

Next is an indicator chart I haven't had the opportunity to share since late last year.  This indicator combines the readings of TRIN (a breadth indicator) with the down volume to up volume ratio (which indicates selling pressure), and shows that when the two indicators reach the signal line in concert, it becomes extremely high probability that there will be lower lows made in the near future.  This fits with my interpretation of the wave structure, but it's always nice to have some additional confirmation.

By the way, the last time I referenced this indicator (December 2012), it failed to work!  I don't think that will be the case this time, though -- the odds are definitely against a second failure here, so there should be lower lows in the market's near-term future.

Finally, I do want to outline an alternate intermediate possibility.  This potential is lower probability, but there's no way to rule it out yet.  The strength of the decline was fully appropriate to kick off the assumed third wave, so there's currently no reason to to think a double-zigzag will develop here -- but we'll stay alert to this going forward.

The main purpose of the chart is actually to outline the very bearish 190 point sell trigger which will be activated with a breach of the lower dashed blue trendline, but I figured I'd save space and annotate the alternate count onto this chart too.  The bearish sell trigger also jives with the idea of a third wave down.  My preliminary target zone for the larger third wave is 1120-1130, but that would not mark the entire wave down -- there would still be a fourth and fifth wave, which, if correct, should allow the market to reach the trigger target in the high 1000's.

In conclusion, it appears reasonably likely that the market has begun the expected third wave decline.  Third waves represent a "point of recognition" for the masses, and they tend to be strong and unrelenting.  Discounting the alternate potential for a moment: if this is indeed now wave (iii) down, then bounces will often come late; upside targets for bounces will frequently fail; oversold indicators will reach deeply oversold conditions and stay pegged there; and declines will run deeper and faster than most think they should.  Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX, NYA Updates: Short-Term Potentials, and Key Levels to Watch

No change in the intermediate picture: new lows are still expected when this wave completes.  There's not a ton to add in that regard, but I'm going to put forth a few short-term options/ideas anyway, along with some near-term levels to watch. 

I still tend to favor the idea that there will be a new high made for this wave.  Yesterday was basically a choppy sideways day, which has something of a triangular appearance to it -- so it's entirely possible for a fourth wave triangle to be under formation here.  If so, it might head up and back down one more time before breaking out.  The chart below outlines that potential, and cites a bearish trade trigger.  I've also outlined some near-term support and resitance zones. 

Trade beneath 1346.45 rules out the triangle.

The next chart outlines a more straightforward bullish ST (short term) count, which has the same practical result as the triangle shown above.  Both the count above and the one below are invalidated with trade beneath the 1346.45 level.  Trade above 1363.46 would add confidence.  The bearish count, which allows the possibility that 1363 was the high for wave (ii), is shown as the alternate.

And finally, here's one for the ST bears who want their decline immediately with no more screwing around, using the NYA for form.  This interpretation requires a bit of outside the box thinking, but it's plausible.  That spike high on June 14 throws a bit of a curve into the ST wave structure; this count attempts to integrate it in a way that makes a bit of sense. 

On this chart, we can rule out the alternate wave (4) count if the "(D)/alt: (1)" price high is broken.  SPX also has similar options as the two shown below on NYA.  Trade above 7800.62 would tend to confirm the alternate count shown here. 

So, there's still a few potentials on the table, but the levels are straighforward.  Trade below 1346.45 would eliminate the first two counts shown, and basically leave the NYA chart as the last (high probability) option.  Trade above the recent high would tend to confirm the bull counts and should lead the SPX at least into the 1370's.  Trade safe.

SPX Update: Rally Now Solidly Overbought

Well, yesterday's preferred very short-term interpretation of an ending pattern was a miss, but I hope I at least conveyed my trepidation over that interpretation.  As I wrote yesterday:

There's no clear third wave in this mess (the third wave is almost always the longest and strongest wave) -- and that tells me it's either an ending pattern, or a wind-up to launch (meaning the strong third wave is yet to come). I realize one could look at the chart and say, "But you have red (iii) labeled, and it's the longest and strongest!" Yes, it is. But it's not a "proper" third wave -- there's too much price overlap. And it's bothering me.

It now appears that it was, in fact, the potential wind-up pattern I was worried about, and the 2nd tier targets (1365-1375) were very nearly reached.  The good news is that yesterday's action has finally eliminated some of the potentials, which makes things at least a bit easier -- for example, the possibility of a higher degree fourth wave is now firmly off the table.  We are therefore most likely dealing with a second wave rally.  I say "most likely" because we can never completely rule out anything in trading; we are always working solely with probabilities... so it's always possible this rally is the start of something bigger.  But these two options should be relatively easy to sort from each other going forward. 

To do so, we'll watch the key levels, and we'll watch out for an impulsive wave structure (a five wave form) in the upwards direction.  If we see an impulse wave develop here, we can then shift footing and assume we're dealing with a new uptrend -- and buy the next dip.  But if the rally maintains its present corrective structure (it's currently 3-waves), we can have high confidence that the trend remains down.  Based on the form of the decline and the key overlap at 1292, I continue to believe this is the case, unless and until the market proves otherwise.

Of course, if Ben "the Beard" Bernanke announces QE3, we can probably pretty much just assume the market is going to infinity (possibly higher).

So, let's look at some of the signals and some key price levels. 

The first signal of note is the McClellan Oscillator (NYMO), which is a breadth indicator, and one of my favorites.  Readers will recall I have cited this indicator's buy signals twice in recent months, and both came at bottoms which led to solid rallies (on May 18 and April 11).  NYMO has now reached overbought levels, which is a sell signal.  We can see on the chart that sell signals tend to lead tops, but all five prior instances have still been been profitable sells.

Moving on to the short-term SPX chart, it's not inconceivable that 1363 was the peak, but my best guess is that there's still new highs lurking out there for this wave.  This would tend to be supported by the past behavior of NYMO mentioned above.  Third tier targets (1400-1410) will open if the market can sustain trade over 1375.

 

No change yet to the intermediate picture: the strength of this rally is not unexpected from an intermediate perspective.  It's been a challenge figuring out some of the short-term structures (as it usually is), but so far the rally fits the intermediate expectations for wave (ii) perfectly. 

In conclusion, wave (ii) may be nearing completion -- but it wouldn't be out of the question for it to make a run at the higher targets.  As mentioned on several previous occasions, bulls continue to have the ball until the bears can break the lower boundary of the red trendchannel.  Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX Update: 1348 Target Hit, but Some New Signals Call for Caution

Yesterday's short-term outlook was anticipating a tag of 1348 and possible reversal; the high yesterday was 1348.22.  It appears reasonably likely that there is now a complete A-B-C correction in place, though the 1-minute charts allow the potential of a slightly higher high, along with some other potentials I'll discuss in a moment.

The market is a dynamic environment, and one won't last long as a trader if one is unwilling or unable to recognize and adjust to changing signals as frequently as the market dictates. 

I want to be as brutally straightforward as possible in this update, because I have a number of unanswered questions about the overall outlook right now.  Be aware that some mid-term targets may need to be adjusted on the fly.  I've been trying to keep things simple for the sake of my readers, and mainly focus on direction and short-term targets (those which apply more universally), and that has worked out well so far, as the short-term targets have been reached.  But I want to convey a sense of caution in this update, because I'm seeing some new signals that are giving me pause.  I'll discuss these signals in a moment.

I wrestle daily with trying to convey the potentials in such a way as to not overwhelm folks, since I realize that for most people, Elliott Wave can quickly become confusing.  Even when I attempt to present things as simply as possible, I find some readers still become confused. Reading certain feedback lets me know I still have work to do when it comes to communication -- though some degree of deconstruction always comes into play when communicating, and I have no control over each individual's subjective interpretation of words.  I once had a reader take time out from his busy schedule of (I assume) burning ants with a magnifying glass to write an entire paragraph criticizing me for using the phrase "last gasp higher." (?)  It's a thankless job some days.

Anyway, to give you a glimpse into one of the issues I'm presently wrestling with: it is still possible that this rally is a higher degree fourth wave, and not the second wave as labeled.  It's somewhat irrelevant at this point, from an actionable perspective -- if we can hit the end of the rally, we'll be positioned properly for either of those outcomes, since both would expect new lows.  But here comes the caveat:

The above paragraph is, of course, assuming that there are new lows coming at all.  With the Fed meeting coming up, one always needs to remain cynically cautious.  Which brings up a recent development that's bothering me about the charts (though I'm not showing this in the charts I've drawn) -- and that's the potential of a much larger rally than I'm anticipating.  The structure that's developed since June 12 is either an ending pattern, or the wind-up to a big launch higher.  This is one reason why I've suggested that bears pay attention to the trendchannels.  As long as the market remains within the red trendchannel (2nd chart), the potential for the bulls to wreak havoc remains.

Let me see if I can help this make sense to a non-Elliottician, with the aid of the short-term chart below.  I have only labeled the bearish potential here, but it is still conceivable that some of the waves labeled as "a-b" are actually additional 1's and 2's.  There's no clear third wave in this mess (the third wave is almost always the longest and strongest wave) -- and that tells me it's either an ending pattern, or a wind-up to launch (meaning the strong third wave is yet to come).  I realize one could look at the chart and say, "But you have red (iii) labeled, and it's the longest and strongest!"  Yes, it is.  But it's not a "proper" third wave -- there's too much price overlap.  And it's bothering me.  

So please remain nimble and cautious if you are shorting this market.   The majority of my readers rode the big wave down from 1400ish to the high 1200's -- things were much clearer then, and they will become clear again.  If you established shorts yesterday when the 1348 target was hit: great, you're in the black already.  But please maintain stops and don't be afraid to exit those positions if the move goes against you.

If the market starts a solid decline in the next couple sessions, then my preferred interpretation (shown in the following charts) is probably correct, and my caution is unfounded.  But it would be remiss and irresponsible not to warn of other potentials which have developed recently.

The next chart gives perspective to the chart above, and shows how it fits into the larger view of an ABC correction.

And stepping out one more time-frame, on the chart below I've annotated another caution.  If this is a second wave and my short-term count is correct, then it's a bit too short, and sentiment probably hasn't turned bullish enough yet.  There is a pattern for such occasions, called a "double zigzag" (also referenced on the first chart) which is two a-b-c's connected together.  I've drawn in a rough sketch of this pattern in black.  Unfortunately, there's no way to predict that pattern in advance, it can only be addressed as it unfolds.  But again: I do want to at least warn traders of this possibility.

Finally, another indicator screaming for attention is the Volatility Index (VIX).  VIX generally moves opposite to the market (when VIX goes down, the market is usually rallying).  VIX is sitting right on a support zone, and additionally, it closed outside its lower Bollinger band on the daily chart (not shown).  Usually, one could expect a bounce from VIX in this situation (along with the corresponding decline in SPX) -- but again, the market is dynamic and we have to be aware that things don't always perform the way they do "most" of the time.  If for some reason VIX doesn't bounce here, it could be another warning sign to bears. 

The chart also notes the head and shoulders pattern on VIX (neckline shown in red).  I currently don't expect this pattern to reach its target of roughly 12, but that target is active as long as VIX is below the red neckline.

In conclusion, my 1348 target was hit, the market reversed, and things may well be right on track... but I don't want readers to become complacent here, because this market is not cut-and-dried at the moment -- so I've done my best to outline the alternate possibilities.  A fair number of these questions should be answered in the next couple sessions. 

It's always great to take low-risk trades (such as the shorts when a target is hit) -- but I would caution against getting married to positions right now.  Don't be afraid to exit to the sidelines if the market isn't performing as expected.   In other words: Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

To QE3 or Not to QE3? How to Predict Fed Response, and the IT Market Update

Let’s get one thing straight:  I can’t always predict the market with 100% accuracy.  I do a reasonably good job most of the time, but sometimes I miss by a little, and sometimes I miss by more.  I publish these updates pretty much daily, and it’s just not humanly possible to get every day right. 

However, there is one arena in which I currently maintain a 100% perfect track record -- and that's in predicting whether more QE will be coming from a given Fed meeting (we have another one coming up this week).  In this arena, I have taken on pundits who have a myriad of more “official qualifications” than I do, and yet I’ve consistently out-predicted them.  These days, not surprisingly, hardly an hour goes by when I’m not hounded by various world-class economists begging me to reveal my secrets, frequently at gunpoint.  Frankly, the burden has become a bit tedious, so I’ve decided to finally capitulate and reveal my QE-Predicting Secrets to the world -- in a format so simple that even an economist can follow it.  I am referring, of course, to a flowchart (below):

As we can see from this incredibly-serious and perhaps overly-detailed flowchart, my theory (which has served me well thus far) is that this Fed is solely reactionary to what’s going on in the market – despite all the Fed jawboning about other factors and benefits of QE, such as the “benefit” of higher gas and food prices for all Americans.

However, there is an extenuating factor not outlined in this chart... and it’s one which I’ve not had to face before, so I’m not certain how it will impact things.  That factor is the upcoming Presidential election.  This is probably the last real chance Bernanke will have to launch QE3 prior to the upcoming election, because launching it later in the year would almost certainly draw fire for appearing too politically motivated.  So, while I’ve been quite confident in my prior “no QE3” predictions (going back to when QE2 ended), in this particular instance, I’m not 100% sure.  I have no “past performance” precedent to draw from that encompasses all the current factors.  I feel perhaps 65% certainty and tend to think they probably won’t launch QE3 now, because the market’s still levitating -- though it has taken a bit of damage in recent months.  I further postulate that if they don’t launch QE3 now, they probably won’t launch it for the remainder of the year. 

That said, if there is any significant central bank action, it should be viewed with great trepidation by bears.  While I suspect the intermediate trend has changed to down, I am also basing this on a “natural” market free of central bank intervention (I know: keep dreaming).  If the Fed or EU launches something in the near future, any developing down-trend will almost certainly get reversed by their liquidity -- and the central banks have recently publicly reaffirmed their blood-pact to support the markets at any and all costs, so it will be interesting to see how the market responds to this psychological booster shot.

Short-term Market Outlook

Prior to last week’s trading range, the market performed almost exactly as anticipated going back to early May when I warned that SPX was headed into the low-1300's to mid-1200’s.  More recently, on June 5, I warned that bears should be very cautious, that a strong snap-back rally was waiting in the wings, and that trade above 1298 would be bullish.  Then, in the next update, I published a target of 1336 +/-, which the market effectively hit and reversed from (at least temporarily) -- unfortunately, particularly during corrections, sometimes I can only see a short way down the road.  At these times, I simply have to watch how the market responds to key zones before I can get a feel for what may be next. 

Long-time readers (and traders) will recognize this pattern: the market gets hazy, then it gets clear… then it gets hazy again, then it gets clear again.  This is why two important keys to successful trading are patience and discipline.  Right now, we’re still in the “hazy” zone.  Accordingly, I have outlined some short-term signals to watch which will aid in bringing clarity to the picture.  At this stage, barring an immediate market reversal, it seems fairly reasonable to assume that last week's wave iv count is probably off the table.  We'll see what Monday brings. 

In any case, hopefully the numerous breakouts I warned to watch as bullish signals (dashed blue trendline and upper green channel line) allowed bears who were holding shorts taken near the 1336 target to escape at break-even, or with a small profit.

The chart annotations below discuss some clues to watch.  At this point, it's probably ill-advised to get overly bearish until:

1.  The lower blue trendline connecting the troughs at 1310 and 1320 is broken.

2.  The lower red trend channel connecting the troughs at 1266 and 1310 is broken.

The short-term trend is up until those trendlines are broken.  One can always take stabs when targets are hit, but one should remain nimble in a hazy market like this.

Intermediate Market Outlook

Presently, I remain in favor of the view that the trend has changed at intermediate degree, and that the market has begun a new long-term downtrend.  There are a couple things which could cause me to doubt that view:

1.  Sustained trade and closes north of 1370-1375 SPX.
2.  A new QE program.

The chart below outlines some of the immediate challenges faced by the S&P 500 (SPX).

Keep in mind that if this is wave (ii) (in other words, if the market doesn't reverse back down pretty much immediately), then its job is to turn the majority bullish again.  This means it could last as long as a couple more weeks, while it blows up bears repeatedly and convinces the masses that the prior decline was just a correction to an ongoing bull market.  This is what I was warning about on June 5, when I wrote:

I do believe bears need to remember that a strong snap-back rally is expected for wave (ii) after the current decline bottoms (assuming it hasn't already). This is worth remembering, because one does not want to short the entire way up during wave (ii) and potentially give back the lion's share of one's profits.

Hopefully, readers heeded that warning (along with the warning that trade over 1298 was bullish, in the same article) and closed shorts at 1298, and then waited until the 1336 target was hit before attempting new shorts.  Those shorts should, of course, have been closed when warning levels were violated, or at the very latest, when 1336 was broken to the upside.  If you're a bear whose heeded those signs, then you have certainly protected profits well during this rally.

The next chart I'd like to share is the Nasdaq Composite (COMPQ), mainly to simply show its present approach to one key overhead resistance level.  It will be interesting to see if the bulls can sustain trade above that key breakout zone.

Finally, long-time readers know I think it's important to track indices other than those tracked by the mainstream media.  One of my favorites is the NYSE Composite (NYA), which is a very broad representation of the total NYSE market.  The NYA is also approaching a confluence of overhead resistance, shown by the falling red trendline and falling blue channel. 

I have also noted the potential of a large head and shoulders top in formation.  It's important to realize that unless and until the neckline is broken, this is only a potential.  Patterns such as head and shoulders require confirmation by a decisive break of the neckline -- but it always pays to be aware of them early.

In conclusion, I remain skeptical of this rally from an intermediate-term perspective, but the current short-term uptrend should probably be given the benefit of the doubt until proven otherwise.  The potential does exist for an immediate reversal, but barring that, we should probably assume we are facing a higher degree wave (ii) rally -- the first target for which is 1348.  Over the intermediate term, there are some levels which could shift me to a more bullish stance, but it appears the bulls have their work cut out for them. Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX, INDU, COMPQ, RUT: Waiting for the Market to Decide

I've studied a lot of charts since Thursday's close -- everything from SPX to INDU to TRAN to NDX to AAPL to RUT and more.  The challenge is that for the past 7 trading days, the market has done nothing but run back and forth in a narrow range, which provides little information.  I may have uncovered some clues, but I was still unable to find a definitive answer to the question of short-term direction -- we're simply going to have to wait for the market to answer a few questions before getting too confident.

Yesterday, the SPX elected its bullish buy trigger, but I'm not yet completely sold on it reaching fruition, for a number of reasons, which I'll discuss shortly.  Nevertheless, this bullish potential cannot be ignored and a close above 1336 would add confidence to the idea that the bulls presently have some strength.

First let's look at the SPX chart, though my confidence in this count is marginal at this stage.  After that, we'll look at some additional evidence to see if we can get an idea of what the bulls may be facing as their next challenges if they can break to a new high here.

I still slightly favor the idea that this rally will die on the vine -- but I only favor that slightly, and I'm more than ready to shift my footing to something more short-term bullish if the market dictates.

Let's consider another potential for SPX over the short term -- one that allows for a new high, but doesn't see the market running up strongly thereafter.  The challenge here is that this developing pattern (below) could be an ending diagonal, which is bearish -- or it could be interpreted as potentially bullish, since there's no way to invalidate a nest of waves 1 and 2 getting ready to launch a third wave higher.  There's simply nothing in the SPX chart to clearly sort one possiblity from the other, though I'd have to give a slight edge to the diagonal. 

If this pattern is a bullish 1/2 nest, then it should launch rapidly and decisively higher if 1336 is broken, and cleanly break out above the upper blue trendline.  If it doesn't, then the diagonal becomes more likely.

Since SPX is ambiguous, I went to some other charts.  First let's look at the INDU daily chart, which shows several overhead resistance levels.  Traders sometimes get focused on the micro picture and ignore the larger view.  Many times, I've seen short-term bullish (or bearish) patterns break out and look like they're going to run, only to smack into a bigger support/resistance level soon after and get quashed.  Will that happen here?  I simply don't know -- but it pays to be aware of the challenges a move faces, and then watch to see how the market reacts to those challenges.

Let's also look at the Nasdaq Composite (COMP), which appears to need a new low to complete an impulse wave down (five waves).  The invalidation level is noted on the chart, and an invalidation here would actually slightly shake my faith in the intermediate bear case, because that would give the entire decline a three-wave appearance.  The blue channel also bears watching.

Further, let's look at the short-term chart of the Russell 2000 (RUT).  The best interpretation here seems to be that the rally since June 12 is corrective, meaning there "should" be further downside over the short-term.  Again, though, it's not a terribly clear-cut pattern.

Finally, a bit more on the big picture view, and another reason I believe that the market has changed trend at intermediate degree.  Below is a chart of the Dow Jones Industrial Bullish Percent Index (BPINDU), which is a breadth indicator that measures the percentage of stocks on point-and-figure buy signals.  We can see that there has been a strong move down since the high, and that after these types of strong moves the price lows are retested and broken more often than not (dashed lines, paired in the lower panel circles).

In conclusion, based on what I've seen, I remain marginally in favor of the idea that this rally is nearly over -- but there's enough ambiguity in the charts to give me pause, and I'm certainly not married to that view.  This is a great example of a time to let the market dictate what's next, and once we have a more clear answer, we'll be able to react appropriately.  As I've said many times before: cash is a position too.  The good news is that it appears the market is coiled and ready to spring out of this range in the very near future. Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.