Friday, January 4, 2013

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)

Finally, I do briefly want to share a chart that illustrates a point which I believe is important.  All of us are guilty of some degree of confirmation bias -- in other words, we sometimes see what we want to see.  It's human nature.  If you're quail hunting, suddenly everything looks like a quail, even Dick Cheney's friends. 

If you're bearish, everything looks like the end of the world; if you're bullish, everything looks like a buying opportunity.  It's difficult each day to unplug from whatever we were convinced of the day before, but I think it's important to look at the charts with fresh eyes every day.

I'm bringing this up because there is a pattern called an "ending diagonal" (in classic technical analysis, it's called a "bearish rising wedge") that is cropping up all over the place in charts right now.  It can be a very bearish pattern, and the fact is, there really isn't anything yet that can definitively say it's not going to play out bearishly.  But I do want to warn that the appearance of these patterns is not always a bearish signal -- in fact, sometimes these patterns can lead to very bullish resolutions.  Since a picture is worth a thousand words, I present the chart of Pfizer (PFE) as an example below:

In conclusion, I remain bullish for the time being, though would like to note the market is reaching an inflection point, and thus I would suggest bulls stay a little more alert than the last couple days have required.  Complacency is never a good idea in trading, and it's very tempting for bulls to become complacent after a massive rally.  Usually just about the time you start feeling invincible is when the market starts heading the other direction.  While I presently view them as less likely, there are still some options for bears to get fed here, and I will cover those in more detail in the weekend update.  In the meantime, trade safe.   

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

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