Is the Rally Nearing a Peak?

Yesterday's preferred wave count outlined a small fourth wave correction as the most likely outcome for the session, and the market performed very much in line with that expectation.  Odds are reasonably good that there's still a small degree fifth wave-up left to come, ideally peaking into my 1520-1530 target zone -- however, we're now within the margin of error for that wave count.

On the chart below, note that the market may have completed all of red wave (iv), but fourth waves are notoriously ugly and unpredictable, and quite frankly, I hate trading them.  In a perfect world, red wave (iv) is roughly complete as a simple ABC and would move more or less directly into wave (v) to complete blue 3, but there are no guarantees of this and there's no rule that says this fourth wave can't chop around for another session or five.

Blue 3 is expected to be followed by blue 4 (I know: duh) -- in other words, a high degree fourth wave, which could chop around in a sideways/down manner for several weeks.

The 3-minute SPX chart contains additional detail:

I'd also like to dust off the trusty Philadelphia Bank Index (BKX) chart once again.  On January 15, I noted that BKX still needed a fourth wave decline and fifth wave rally, and it has since fulfilled the minimum expectations of that.  This opens the possibility that the entire wave at higher degree is now complete, which would suggest a deeper correction is in the wings.

While both SPX and BKX suggest another small wave up is reasonably likely, at higher degree, SPX suggests a fourth wave correction (blue 4 on the hourly), while BKX suggests a second wave correction (red wave ii on the chart below).  Second waves are typically deeper, sharper, and more frightening than fourth waves.  Second waves are likely to turn everyone bearish again, while fourth waves are likely to be more "ho-hum, just a consolidation."  Presently, I am uncertain how to reconcile the wave counts of SPX and BKX with one another.

Warning: SPX May Be Approaching a Chop Zone

Monday's update noted: "Odds favor a continued run higher, with 1510 as the next near-term target."  On Tuesday, the SPX came within pennies of 1510, and is now within spitting distance of my next target zone of 1520-1530.

Wednesday should be an interesting session, since it's FOMC rate announcement day, which sometimes makes for a volatile market, though the trend of the past 4 years has been for an up-day.  Of the past 33 rate announcement days, SPX has closed higher on exactly two-thirds (22) of those days.  Bespoke Investment Group reports that since the beginning of ZIRP (12/16/08, the last rate cut), the S&P 500 has averaged gains of .66% on FOMC announcement days.

1500 is now the first meaningful support zone to watch.  The last wave, which chopped around beneath the 1503 level, could be a running triangle fourth wave, but the structure was ambiguous enough to leave more bullish options on the table.  The count shown in blue on the 3-minute chart below represents the conservative running triangle option; the alternate count in black notes the more bullish option.

Note we may be entering a near-term chop zone, represented by blue wave (4). 

 
The SPX hourly chart continues to show a trending market.  We're currently sitting on 50+ points of profit for January, which has been fairly "easy money" (virtually no draw-down) so far, so be sure to continue protecting it -- especially since we've reached the 1510 target and are now approaching my third intermediate target zone.  If that zone represents all of blue wave 3, then we will soon enter a higher-degree and longer-duration chop zone in blue wave 4. 
 

In conclusion, this remains the type of market for which the phrase "the trend is your friend" was coined.  There are no signs of a turn yet, but the preferred wave count suggests that we may be approaching an intermediate chop zone -- once blue wave 3 completes, the market can be expected to enter a fourth wave chop zone of several weeks duration.

I've also been working on some long-term charts to help locate the market's "you are here" position within the much bigger picture, so keep an eye out for those charts to be released over the next few updates.  In the meantime: trade safe.

Reprinted by Permission; Copyright 2012, Minyanville Media, Inc.

SPX Update: 1503 Acting as Resistance

The S&P 500 (SPX) may be in the process of forming a complex corrective wave, as the entire move since 1491 presently appears corrective.  For the bigger picture, this suggests it should ultimately resolve higher, but it could chop around a bit first.  The wave has considerable overlap, which makes it quite difficult to determine the exact short-term structure, and thus the market's exact short-term intentions.  1503 has proven to be resistance for the time being, and that shouldn't go unnoticed.

I've outlined the preferred count for the rally from 1451 to 1502 on the 3-minute chart below.  Blue wave (iv) was assumed complete at 1491, but I've also noted the possibility that blue (iv) may be unfolding as a complex flat (shown in black).  The expectations of the black count would be for the market to revisit 1490 +/- zone, which corresponds nicely with the rising red trend line, followed by a continuation higher.  Note that there are more directly bullish possibilities, though, so a retest of 1490 isn't a foregone conclusion.  Trade below 1485 would open up more bearish potentials.

The market has struggled a bit with the 1503 level, but do note the potential of an ascending triangle formation.  A clean breakout through 1504 would suggest a move to 1511-1515.

On the SPX hourly, RSI has registered a bearish divergence, and MACD is on a slight bearish crossover.  Presently, this is expected to result in nothing worse than a sideways/down correction, but these are warning signs that traders should stay on their toes.  It's conceivable that red wave (iii) has completed in its entirety, but with the recent action, it's simply too early to tell.  Regardless of the exact short-term outcome, the wave still appears to need further upside for the bigger picture.  

In conclusion, there are a few signs that the rally may take a breather, though that isn't a given yet -- sometimes an overlapping wave is simply winding up to move higher.  Presently it's expected that any further chop will resolve higher.  The first more serious warning sign for bulls would be sustained trade beneath the rising red trend line shown on the 3-minute chart; the second would be trade beneath 1485.  Trade safe. 

Bulls Still Have the Ball, but Here's a Bearish Pattern that Can't Be Ignored

While I've been giving bulls most of the air time for the past few months, in this article, I'm going to touch briefly on an interesting pattern that "bears" watching.

Before I get into a bearish hypothetical though, the reality is that there's just no sign of a reversal yet.  Going back several weeks, my expectation was that this was to be a third wave rally.  The third wave of a move is typically the longest and strongest, and third waves are notoriously unrelenting.  R.N. Elliott (for whom Elliott Wave Theory is named) called third waves "a wonder to behold."  There's a psychology to third waves, and the essence of that can be summed up as "a point of recognition for the masses."  This awakening is what gives a third wave its strength.

Generally, the majority of traders are positioned wrong headed into a third wave, and the wave thus generates a strong feedback loop.  As prices rise, more traders are forced to cover shorts, which in turn drives prices higher, which then causes some traders to reverse long, which drives prices even higher, which causes some of the traders who sold early to chase back in long, which drives prices higher again, and so on.

The price action has matched my expectations, and presently momentum continues to remain strong.  Obviously, and without a doubt, the wave will certainly end at some point, and some top-hunter will seem like a genius when it does -- but if I've tried to impress anything on readers all month, it's that I would not try to front-run a turn during a third wave.  The market will let us know when it's ready, and while we might miss the exact turn by a few points, during third waves, the turns usually come from so much higher than expected that one ends up doing better with the more passive approach of riding the trend.

Below is the preferred wave count, which has evolved slightly to keep up with the action, but is little changed over the past month.  SPX has modestly broken out above the black base channel, and if this breakout holds, there is (amazingly) the potential for further upside acceleration, as unlikely as that sounds.  Keep a close eye on things here.

As tempting as it is to become complacent at times like this, it always bothers me to be too bullish when it seems "easy" to do so -- so let's talk a little bit about the bear hypotheticals.

The market still has some major price hurdles to overcome from an intermediate and long-term perspective, so I am remaining very cognizant of the proximity of critical long-term resistance.  One of the things markets love to do is get you incredibly bullish or bearish as they approach key levels, in order to make you forget all about those levels.  Ever gone long at resistance, right before the market started dropping?  How about going short at support, right before a huge bounce?  Yeah, I've done it too.  Then you back out your time frame (when I'm scalping, I trade off the 1-5 minute charts) and say, "Doh!  What the heck was I thinking?"

So in the midst of all the bull celebrations, let's not forget that the 2000 top was 1553 SPX, and the 2007 top was 1576 -- and these were major market tops.  If you draw a trend line connecting the two, you come up with a figure just north of 1590.  Now, that said, we're not there yet -- and it would be unusual for the market to top immediately here. I'm not "looking for a top" at the moment, given the present readings of several indicators, and the market seems reasonably intent on making a run at the levels just listed -- but there are a few hurdles along the way.

I've detailed a number of rising support and resistance levels on the chart below, as well as one argument against a top forming yet.

The next chart is one for the bears, as promised in the title. (continued, next page)

SPX, HYG: HYG Signals Further Intermediate Upside for Equities

Yesterday, the S&P 500 (SPX) briefly reclaimed the important psychological level of 1500, a level it hasn't seen since Bob Barker quit hosting The Price is Right.  Apparently, back in 2007, Barker quit out of moral obligation, because he knew the SPX price was wrong (insert rim-shot and favorite Happy Gilmore quotes here).

The third wave rally has now fulfilled its prediction of an upside surprise, though I'm not sure we can qualify it as a "surprise" anymore, since we were largely expecting it, as noted on the chart below on January 10.

Anyway, the wave structure presently appears to support a reasonably direct trip into my third target zone of 1520-1530, and sustained trade beneath 1485 is now required to cast suspicion on that outcome.

There is some potential of a bit more backing and filling -- it's difficult to determine if the impulse wave downward (which began around noon yesterday) represents the end of a wave or the start of one.  I've noted a few keys to watch on the chart below.

I continue to feel that the Philadelphia Bank Index (BKX) offers helpful clues here:
(continued)

SPX and INDU: Are the Bulls Bored Yet?

Yesterday, the Dow Jones Industrial Average (INDU) effectively reached my target of January 3.  The preferred and alternate intermediate counts are still both bullish -- though there's one small bear hope still remaining (an ending diagonal, not shown) since the key long-term pivots haven't been crossed yet.  Bears would basically have to turn the market more or less immediately in order to pull out a stunning upset, but currently that appears to be low probability.

As it turns out, my observation on October 8 of a three-wave rally into the 2012 high, and subsequent expectation that the market would make new highs after the correction, proved to be accurate.

The long-term chart of INDU notes the next resistance levels.  If bulls can keep pushing a bit farther, they give themselves a shot to run toward the black dashed median line, and potentially as high as the top of the black channel.

 

Still no material change in the S&P 500 (SPX), though I presently have some slight concern about the rally from the 1470's being part of an extended fifth wave (black alt: 3 and 4), and INDU has now been added to the markets which have reached my targets, so I continue to feel it's prudent to protect profits.  Beyond that, the market is starting to lull all of us into a bullish stupor -- and when complacency sets in, the market becomes ripe for unexpected corrections.  The blue trend lines would be the first warnings.  (continued, next page)

SPX, BKX, RUT: Russell 2000 Approaches Key Long-Term Pivot

The rally has, so far, continued largely unabated, which is what I expected on January 2.  As I warned at the beginning of the year, this rally appeared to fall in the third wave position, which meant to watch for upside surprises and little in the way of downward corrections.  Third waves are powerful trending waves which, as obvious as it sounds, are simply "done when they're done."  The key to trading them is to accurately recognize their potential ahead of time (which we did) and trade accordingly -- and not fall into the trap of calling tops the whole way up (or bottoms on the way down).

So with this wave, I'll continue to look upwards until the wave structure actually turns and suggests we shouldn't (our first warnings will be a five-wave impulsive decline and some key trend line breaks).

The S&P 500 (SPX) is in an interesting position, as it's broken-out ever so slightly above the black trend channel.  This could indicate the current wave is close to exhausting its thrust -- or it could indicate renewed energy... time will tell.  The first key that would suggest at least a near-term correction would be breaks of the two lower blue trend lines.

The Russell 2000 (RUT) is in a very interesting position for the long term.  It's rallied to within a few points of the invalidation level of the most immediately bearish long-term count, and a break above 902.30 will suggest the bulls have at least several months-worth of firepower left, if not a great deal more.  The problem here for bears is that if 902.30 is exceeded, then that would make red wave iii the shortest wave -- and the third wave can never be the shortest, so that would invalidate the most bearish count.  A further breakout over the upper blue trend line could see the rally extend by 15% or more.

To help with anticipation of the short-term, I've prepared a chart of the Philadelphia Bank Index (BKX), which is either still forming a complex fourth wave correction, to be followed by another fifth wave up (black alternate count), or is about to extend the rally directly by another 2% or more (blue).  The two counts appear to pivot on 53.05. (continued, next page)

SPX Finally Captures Long-Standing Target of 1480-1490

Wednesday's update noted that SPX 1467.56 should serve as a dividing line between a deeper correction and a trip directly into my long-standing target zone of 1480-1490.  Amazingly, the market found a bottom at 1467.60 , then proceeded to rally up to 1485 (somebody out there nailed a perfect risk/reward trade entry!).

Note the 32 point trade trigger of December 20 was also finally captured in the process (1448 to 1480).  Going back to November's updates, there was one big scare along the way (when 1411 broke) which switched my public stance to neutral, but all the blue target boxes since November have now been reached.  Even before the fiscal cliff scare, my "safe" target of 1445-1455 had already been captured; so all told we've captured a bit over 100 points of the rally since November 19, 2012.

Which brings me to a thought I'd like to share with readers:  My biggest complaint with myself from the recent past is that I didn't stick to my bullish guns in the updates during the fiscal cliff scare... and I'll tell ya' exactly why I didn't, too: simply because I'm not so arrogant as to think I'm never wrong. With the market in that position, with a big third wave decline as a very real potential, I worried about "convincing" anyone to go long and possibly having my readers get caught on the wrong side (if I was wrong). So I switched myself to neutral publicly, because that was a dangerous position for the market, and especially dangerous for cash traders. Privately, I remained bullish.  In retrospect, obviously, I wish I had stayed more publicly bullish.

It's a tough gig. Losing your own money is one thing, and I view that as part of the game... but feeling like you "lost" someone else money is almost unbearable at times. I've lost sleep on many nights over this -- and not just when I'm wrong. Sometimes just when I'm bold and worried about being wrong and misdirecting someone. 

Respect to the brokers in our audience -- you know who you are!

In any case, the question now, of course, is: what next?  Well, I don't get 'em all right, so I can't promise anything, but it does appear that SPX still needs a higher-degree fourth wave correction and fifth wave up, at the minimum.

As always, once a target zone is reached, reversals become a bit higher probability.  There are some indications that the rally could be nearing a turn, but as I've been noting all month, this is a third wave rally, and third waves love to blow up everyone's favorite indicators (this is actually why I haven't been publishing much lately about divergent sell signals and such -- those types of technical indicators rarely work during third waves). 

The traditional count is outlined in red, but the alternate count is not at all unreasonable and would be suggested with trade beneath the red wave (i) high.

The Philadelphia Bank Index (BKX) is also hinting at more upside after the next correction.  Note the pattern here, and an upside breakout over the dashed blue line should lead to 54.80-55.

In conclusion, as I've mentioned since the beginning of the year, I have no intention of trying to call a top in this wave until I see the first impulsive decline.  That said, a long-standing target zone has been reached, so it's time for traders to decide whether to take profits or chase the move higher with stops.  Trade safe.

Reprinted by permission; Copyright 2012 Minyanville Media, Inc.

Euro Update: Yesterday's Call Blown, Targets Postponed or Negated

I was going to take today off, but I felt obligated to update Euro.  In yesterday's update, I discussed the fact that Euro appeared ready for a deeper correction; however the wave I was anticipating fell well short of my expectations, and Euro found strong support right where it needed to.  It's now formed an incredibly symmetrical reversal pattern, and is almost certainly headed to retest or (more likely) best the previous high.

In real-time, this pattern became apparent as it unfolded, but that doesn't do readers any good, and I apologize for blowing this one.

Note the bear hope that still remains is depicted by the alternate count.  If this is the alternate count unfolding, that count is quite bearish, but I'm not going to pretend it's what I was expecting yesterday.  The alternate count is, in fact, considerably more bearish than the count I had posted.   

The white ABC forms a complete fractal, and that suggests the alternate count is lower probability -- but because these are fractals, a complete fractal sometimes only marks the first wave of an even larger fractal.  A triangle would also not be entirely out of the question here, so be on alert for that pattern if the rally falls short of the previous highs and embarks on a deep correction.

It pays to be aware that if the Wave C low is broken in the near future, an extremely sharp decline is almost certain to ensue, and yesterday's targets will become active once again -- so if one is bullishly inclined, the stop-and-reverse (SAR) level is clear.  On the other side of that coin, a break of the wave B high should lock-in the corrective nature of the decline. 

My apologies again for reading this one wrong yesterday and I'll return with the equities updates tomorrow.  Trade safe.

SPX and Euro: Euro Ready for a Correction

In yesterday's update, the preferred short-term count expected the S&P 500 to decline to 1461 +/-, then reverse to new highs.  The market found a bottom two points shy, at 1463, then moved up to make a very marginal new high.  Normally, we'd now expect a standard five-wave impulsive rally to unfold over the near-term, but I've outlined a second potential path because the option's still open, and I have a suspicion about what the market may be planning here for the short-term.  Targets for the two most-likely near-term paths, and levels to watch to differentiate the two, are listed on the chart below.

Note that both short-term counts presently expect this move to resolve higher, this is simply an option to be aware of, because expanded flats (the green path outlined above) often get traders on the wrong footing, since they almost always kick out the last swing low before reversing higher -- in other words, they behave just like the move I predicted yesterday.  This is basically a larger fractal of the same type of structure.

The hourly SPX chart is shown below, and there's nothing in the charts yet to suggest that November/December's upside target zone won't be reached -- though the market has now come within 7 points, and sometimes "within a few points" is as good as it gets in this business, especially for long-standing targets.

The main thing bothering me right now for equities has nothing to do with the equities charts:  I've been trading the euro/US dollar currency pair all night, and I suspect euro is on the verge of a steep decline toward 1.312-1.314 in the next few sessions.  Although there's no guarantee this will impact equities, it's a factor to remain alert to.

Below is a chart of the FXE currency shares euro trust.  While the numbers here vary slightly from the actual Forex market, the wave count is the same.  The retrace target is listed using the actual Forex rates -- if the most recent rally was all of wave (5), then an even deeper correction will ensue.

NOTE:  Intraday real-time adjustment on Euro -- I reworked my micro count in Euro/USD and it is entirely possible that an ABC completed at last night's low.  It all comes down to key support now: as long as 1.32559 holds as support, it may move to new highs from here... and bears probably don't want to see it back above 1.33471 at this point, or it could easily go back into launch mode.  Below 1.32559 and the target becomes active.

(continued, next page)

Time for Caution, Though No Reason to Be Bearish Yet

The updates have been suggesting higher prices all month, and the waves are still pointed upwards for the moment -- but I do want to show a few charts that act as caveats and suggest some degree of caution is in order.  The equities markets have remained a bit fractured, in the sense that related markets often seem to be suggesting completely different things -- and this is still making it difficult to predict exactly where we are in the larger picture.  I continue to lean bullish, but a little caution is now in order.

To illustrate the fractured nature of things: the S&P 500 (SPX) is suggesting a smallish correction that holds above 1451, then on to new highs.  But the NYSE Composite and Philadelphia Bank Index (BKX) are hinting that a larger correction may ensue.  There's simply no way to know for sure which it will be at this phase: we're too close to the recent highs to project much to the downside. 

Let's start with the short-term SPX chart.  This chart shows what is almost-certainly a three-wave rally into the 1472 print high, which suggests an expanded flat is unfolding (or already complete).  The expanded flat seems to connect the rally from 1451 to the wave that is unfolding now, which suggests the first part of the rally is simply wave (1) of (5) of the larger wave 3.

Note that the corrective fractal could be complete at the red wave A/alt: (4) label, in which case higher prices are due directly; this appears less likely, but trade beneath 1465.69 is required to confirm the 1461 target.  The only way to eliminate the bullish (1)/(2) potential of this chart is for the market to break below 1451.  Compounding the issue is the fact that the waveform from 1451 is exceptionally weird.

Moving out to the 30-minute SPX chart, we see how this wave fits into the bigger picture (labeled as red (i) (ii) and (iii) on this chart).  Note the alternate count that ALL OF wave 3 has completed.

There are no meaningful signs of a turn yet, but both NYA and the Philadelphia Bank Index (BKX) are sporting the potential of complete rallies.  The challenge here, though, is that the same structure discussed in SPX is entirely possible, and the wave labeled as "v?" may only be wave (1) of v.  There's simply no way to tell this early, but I would be remiss not to warn. (continued, next page)

A Survival Guide for Bears in a Bull's World

Ah, it's open season here my friend.
It always is; it always has been.
Welcome, welcome to the U.S.A.
We're partying fools in the autumn of our heyday.

And though we're running out of everything,
we can't afford to quit.
Before this binge is over,
we've got to squeeze off one more hit:
We're workin' it.
.....

We got the short-term gain, the long-term mess,
we got the suffocating, quarterly consciousness.
(Yes man, run like a thief.)

New York to Hollywood, hype and glory,
special effects, but no story.
(Yes man, run like a thief.)

- Don Henley, Working It

There's been no material change in the market outlook, so today I'm going to focus on discussing the world's fundamental debt problems, and how those problems may impact investor psychology.

Let's imagine you found yourself in an H.G. Wells novel, and used his famous machine to time-travel into the future to a random, unknown year.  As fate would have it, you just happen to land in the exact year when there's a worldwide financial meltdown -- but before you can find out what year it actually is, your time-machine whisks you back to the present, and then ceases functioning.

You are now in possession of powerful, and somewhat frightening, information.  You know this financial meltdown will happen at some point in the future, but the problem is: you don't know when.  It could be in two weeks, it could be in two decades.

You are an investor and a trader, so suddenly you look at the market and wonder:  "What if this future I experienced happens tomorrow?"  You react emotionally, rightfully worried, and you immediately pull all of your investments out of the market.  Then the market starts going up, and you wonder again:  "Hmm.  What if this future happens many, many years from now and I miss out on everything in-between?"  You have powerful knowledge of the future -- but how can you profit from knowing something will happen, if you have no actual time frame for knowing when it will happen?

I use this analogy because I think many bears have fallen into a very similar trap for years.  Bears tend to be smart, free-thinking individuals, who are a bit contrarian in nature.  This feeling of being contrarian isn't really by choice; it comes from the fact that bullishness is packaged as the "American Way," and the mainstream media often mocks bears openly with a variety of semi-demeaning nicknames.  These names run a wide gamut, from Nouriel Roubini's media-dubbed nickname of "Doctor Doom" all the way to Peter Schiff's media-dubbed nickname of -- you guessed it -- "Doctor Doom" (nobody ever accused the media of being creative).  The mainstream media's propensity to nickname anyone who's bearish as "Doctor Doom" (also: "Professor Doom," "Mister Doom," "Cousin Doom," "Big Daddy Doom," etc.), understandably makes bears feel they are ostracized and outcasts.

The funny thing is: many bears started off as bulls, and then felt they had some type of catharsis -- some type of "informational awakening" -- which converted them into bears.

I had this fundamental conversion experience in the late 90's, and yet I have been very bullish on the market at several points since.  I'll explain why in a moment.  In my heart, I'm bearish on the fundamentals, because I believe the massive debt that the world has accumulated is completely unsustainable.  We have reached levels of public and private debt that are wholly unprecedented, to the point where the term "record levels" is an understatement.

According to the Bank for International Settlements, the debt of governments, private households, and non-financial companies rose from 160% of GDP in 1980, to 321% of GDP in 2010.  After the figures are adjusted for inflation, the world's governments have more than four times the debt levels of 1980, and private households have more than six times the debt.

(continued, next page)

The Pattern Repeats: Is It Really This Simple?

Last update noted that new highs were expected directly, and the market has obliged and now kicked out some key intermediate levels to the upside, suggesting the rally will continue.  There's really not much to add to the bullish expectations and projections of the last couple weeks-worth of updates, and the market continues to perform in line with my preferred bullish wave counts.  I'm anxious to see if my intermediate target of 1490 +/- from November will be reached on this leg, as it's something of a long wait between the time an intermediate projection is published and the time the market actually reaches it (or doesn't). 

There's still nothing in the charts that's screaming "sell!"  When looking at a long-term chart of the S&P 500 (SPX), we can see obvious similarities between the current pattern and the last two rallies.  While the market always reserves the right to create confusion or to have a pattern fail, the present pattern is quite bullish, and a trip into the mid-high 1500's would be an entirely reasonable result.

I'm also reprinting the zoomed-in December 2011 fractal, because I do think it's relevant.

The updated 30-minute SPX chart is shown below.  Assuming the recent rally off 1451 doesn't mutate into something more complex or unusual, it appears ready to move higher.
(continued, next page)

Is the Rally a December 2011 Redux?

In yesterday's update, I noted that I believed the downward correction had ended at 1451, and expected higher prices directly.  The market headed up a few points yesterday, and continues to appear poised to reach new highs.  Due to the position of this wave in the big picture, it is quite possible that my short-term upside targets are too conservative, though a "standard" wave would be nearing a turn and deeper correction.  As I noted on January 2:

...this is not a rally I would look to short anytime soon.  There is massive pent-up energy in the charts, and nested third waves are not to be trifled with.  Third waves are the "point of recognition" for the masses, and tend to be strong trending waves that rarely let up for very long.  Third waves tend to peg indicators at extreme readings and stay there for much longer than seems reasonable.

I do want to briefly call attention to the similarities between the current wave and the intermediate bottom which formed in November/December 2011.  I recall that rally as being one which defied gravity, and which bears kept trying to short (myself included at times) -- and yet it ran on and on for months.  The present rally has similar hallmarks; the difference is the present rally falls in the third wave position at higher degree, and that suggests it should actually be faster and stronger than the previous wave.

In conclusion, there's little changed in the outlook of late.  So far, there are no indications of any kind of significant top.  Trade safe.

Reprinted by Permission; Copyright 2012, Minyanville Media, Inc.

SPX, NYA, RUT: Market Consolidates Recent Gains

Yesterday the market spent some time consolidating its recent gains.  So far, there's nothing to indicate this is anything other than a correction before the rally continues, though as discussed in prior updates, we should remain cognizant that several markets are approaching (or have reached) long-term resistance.  I’m trying to weigh that fact against the indications that this is a third wave rally -- and that means I'm unwilling to attempt to front-run a turn, and will wait for the market to lead in that regard.

To further illustrate that point, the first chart I'd like to share is the NYSE Composite (NYA) daily chart.  The long-term resistance zone is about the only thing bears have going for them here.  Since 2011, the NYA has done nothing but muscle through resistance level after resistance level.  As I've noted on many occasions since September 2012, there is just nothing bearish about this chart.  The mirroring shared between the last few months of the current rally and the first few months of the 2011 mini-crash is interesting.

Next, I'd like to update the Russell 2000 (RUT) chart, which I last published on December 19.  I noted then that I felt the pattern was intermediate bullish no matter how you sliced it, and RUT has now reached the lower edge of my previously-published target zone.  It does still appear to have farther to run, and I've outlined one potential path in blue.  I continue to believe RUT will act as a pretty decent litmus test for the rest of the market, and if it can claim the 902 level that's mentioned on the chart, it's going to be a bit more challenging to find much in the way of long-term bearish options for this pattern.

Finally, the update for the S&P 500 (SPX), which presently looks like it completed a small ABC to wrap-up red wave 4.  Back below 1451 would open up the potential of a deeper correction, with the first target being 1440-1445.

Again, there's presently nothing to be bearish about in this chart, and this simply isn't the type of wave where I'm eager to try and front-run a turn -- third waves can run on much longer than one thinks is reasonable.  If the market gives some signs of turning lower, and starts looking impulsive to the downside, then I'll discuss more bearish potentials. (continued, next page)

The Importance of the Market's Current Inflection Point

Friday's update noted that the market was approaching an inflection point, but expected that the S&P 500 (SPX) had at least one more fourth wave correction and fifth wave higher still to come, which the market fulfilled.  The short-term charts are in a bit of flux at the moment; so I'll discuss the short-term later, but want to focus on the long-term in this update.  In most recent updates, I've focused on the long-term bull potential, which I'm still favoring.  I should probably make it clear that I'm not suddenly flipping to the bear side here, but nevertheless, I do want to bring a bit more balance to that discussion.

I want to start off with a chart that does a reasonable job of highlighting the long-term importance of the current inflection point.  The Philadelphia Bank Index (BKX) has broken out and back-tested a bullish basing pattern, and is now in a critical long-term resistance inflection zone.

The problem for bears is that this chart simply isn't bearish -- it has bearish potential; but it's important to understand the difference. 

The chart below zooms in a bit on BKX and discusses the likely wave structures and targets.  While BKX has loved blow-off tops of late, I have to favor the more traditional market pattern, which is that the strongest waves usually fall closer to the middle of the pattern -- thus suggesting further upside is still out there after the next correction.

The Nasdaq 100 (NDX) also continues to highlight how critical the current zone is for bears to defend. (continued, next page)

Do Not Feed the Bears

Last update expected higher prices, and the SPX rallied up to break 1464, which puts a big dent in the straightforward bear counts (which, for new readers, I have not favored) -- nevertheless, this weekend, I'm going to cover the bear case in more detail.

First, a quick picture of my new favorite t-shirt.  I've been bullish on the market for the last few months, because that's where the technical picture took me.  But I'm still a bear at heart.

I'll briefly touch upon the bear case today, starting with a chart of the Nasdaq 100 (NDX), which features a much cleaner structure than many other indices, and does suggest that the market is approaching another inflection point.  Inflection points are not necessarily bad news, but they are areas where trend changes have a higher probability than usual.  The NDX chart notes some details, including a typo -- it should read "2598 is critical support"(!).

Next is the S&P 500 (SPX) preferred count, which still sees higher prices -- though, here as well, a correction may be drawing near.  Note there are two different bullish ways to view the rally structure.  My preferred interpretation is shown below, another option is shown on the hourly SPX chart.  Of course, the bearish ABC can't be fully ruled out yet (noted below). 





It's also possible to view the rally as a deeper nest of first and second waves.  The entire correction is quite unorthodox, and thus it's pretty open how you want to view it.  It's something of a moot point at this moment, as both interpretations ultimately point higher. (continued, next page)

SPX, NDX, BKX, INDU: Charts and Fundamentals; Why the Rally Should Have Legs

Last update noted that probabilities favor that this rally leg since November is only half-way complete. I continue to favor that view. Yesterday performed as expected for a nested third wave rally, and the bear count (which I’ve discounted since October) is very close to being invalidated once and for all. Trade above SPX 1474 would accomplish that.

This market has an awful lot of bullish potential, but what can bears do to put an end to it all? In this update, we'll cover, in brief, some key signals and price points to watch going forward. There is also one important fundamental factor, which suggests more rally fuel, which I’ll cover later.

The first chart I'd like to share is the Philadelphia Bank Index (BKX) which, as long-time readers know, I believe has acted as a critical "tell" over the past months. BKX has finally vindicated my view that the November low was, in fact, an intermediate bottom, and that the decline into that low was corrective. The chart below is the daily BKX and covers the two most likely wave counts.

(If you’re new to Elliott Wave Theory and don’t understand how it works, you may want to review my article on the subject: Understanding Elliott Wave Theory, Part I)

As noted on the chart, the first bearish option isn't particularly bearish, at least over the intermediate term. The first bearish option would see this as a three-wave rally, which could complete after another small leg up or two, then a large correction (50-62%), followed by another new high.

The bullish count is exceedingly bullish, and, without any present evidence to the contrary, I am left to continue favoring that count. Currently, the bullish potential is such that one probably simply wants to chase the market higher with stops, since if this is the "nested" third wave depicted, it will only correct from time-to-time on its way higher (much like yesterday's action).

The S&P 500 (SPX) outlines the preferred bullish option, and notes some key levels. The bears' final hope here is that the wave I'm viewing as wave 3 is actually wave C of an ABC correction (shown in more detail on the INDU chart which follows). Trade above 1464 would put the bear count under severe duress, and trade above 1474 would finally lay it to rest.

In my opinion, the Dow Jones Industrials (INDU) continues to make the bear count low probability. The pattern here is a bit harder to reconcile as an expanded flat and -- while there are always corrections along the way -- that suggests the rally will continue to have legs for the foreseeable future.  I have outlined the first two key levels bears need to reclaim in order to begin creating doubt.

(continued, next page)

SPX and US Dollar: Rally Likely Only Half-Way Through

Last update, the market had finally flipped me from bullish to neutral -- but I noted that the market was clearly set-up for a large directional move (in fact, I titled the article "2013 Should Come in with a Bang").  I also noted the market seemed to be waiting on the fiscal cliff resolution.

I've been pretty consistenly bullish since November, but I won't deny that by last update, the bears had shaken my faith quite a bit. They pushed the market right to the edge; however, I felt they had not yet tipped it over and that critical support had not yet been breached.

Well, now we have our resolution, and -- proving that procrastination can be a winning strategy -- Congress has managed to live up to the phrase "Necessity is the mother of invention."

There is a very bullish set-up in the charts, and it's likely that we're only about half-way through this leg of the rally (with potentially much more to come over the long-term).  November's intermediate target of 1490 +/- seems quite likely to be reached in the next few weeks or sooner. 

As I noted in the last update, the Philadelphia Bank Index (BKX) was signaling the potential that the whole decline was complete, and overnight futures are now indicating that potential is indeed the reality. 

The short-term BKX chart, which was posted as a waypoint on Monday, is updated below:

Given where the futures are trading this morning, the bear count is likely to be invalidated directly upon the open -- and a big gap up fits the pattern of a nested third wave rally (the expectations of the pattern) therefore, I'm not inclined to update the bear count at this time.  I feel the bear count will become extremely low probability once the market trades above 1448, and that break will all-but-guarantee new highs above 1474.

At this point, it will take something completely unexpected, or a break of 1398, before I consider the bears as serious players again.

It should be noted that there is extremely bullish potential in the current market.  This appears to be a third wave rally at several wave degrees (note the red ii at the November low), which opens up potential for a preliminary long-term target of 1680ish.  There is another option, called an ending diagonal, which is less bullish, but would still see a trip into the high 1400's at the minimum.  The bottom line is that the preferred intermediate counts of the past several weeks range from "pretty bullish" to "exceedingly bullish."

I do hope my warnings recently kept bears from over-committing.  I know a lot of technicians were quite bearish of late, but I felt the bears never quite clinched the deal for a number of reasons.  And every now and then in trading, just as in life, gut instinct beats everything.  As I noted on 12/27:

Bears have a definite shot at taking control, and there are a number of signals right on the cusp of rolling into their favor -- and yet I have a gut feeling that bulls will somehow manage (yet another) stick save here. 

Last update, I published the triangle potential that I had noticed in the US dollar -- and until 78.60 is broken, that potential remains for the time being.  However, I continue to favor dollar bears for the intermediate term (either directly, or after further consolidation), and below is the preferred wave count for USD.  The first alternate is the extended sideways correction (triangle; not shown), which basically just stretches out the consolidation before ultimately heading lower.  I would rethink that outlook if bulls reclaim 81.46. (continued, next page)