Thursday, February 7, 2013

Charts Detailing the Long-term Bull vs. Bear Outlooks

It goes without saying that the market is a dynamic environment.  In order to keep up, we have to recognize when outlooks are changing, and then actively change with the changes.

Along those lines, Minyanville's founder, Todd Harrison, has put together an excellent list of 10 Trading Commandments.  The second item on the list is "discipline trumps conviction."  To paraphrase, he espouses that no matter how strongly we feel about a given position, we must defer to the principles of discipline and realize we are not "smarter than the market."

I wholeheartedly agree with that philosophy.  Humans tend to cling vehemently to their belief systems, and while this can be an admirable trait in everyday life, it can make for difficulties when trading.  Sometimes our beliefs lead us to condemn or praise the market's movements, as we assign judgments of right and wrong to the price action using our own arbitrary versions of "market morality" (i.e.- "It's just wrong for the market to keep going up here!").

The market has no morality (much like some of its big players!), and ultimately it's going to do whatever it's going to do, regardless of how strongly we believe in what it "should" do.  It's somewhat like a wild animal -- if you get attacked by a wolf, the wolf isn't morally wrong for trying to eat you, it's just doing its thing.   

With that in mind, in this article, I'm going to outline my interpretation of both the bull and bear cases, as defined through Elliott Wave analysis of the long-term charts.

I've mentioned this next subject a few times over the past couple months: the market is still in a long-term inflection zone, due to the fact that we're quite close to the price highs of two very important long-term tops (2000 and 2007).  Most interestingly, the pattern which has now formed could be interpreted in two fashions, and those interpretations are essentially diametrically opposed.  Sometimes, the highest-probability interpretations will point the same direction, but in this instance, they do not.  Thus the pattern is either a wind-up to another sustained launch, or an ending pattern, and I will explain this dichotomy in more detail below.

One sees this type of pattern with some frequency across all time frames, and the good news about this setup is that it will be reasonably clear to interpret as it begins breaking.

If I forget everything I think I know about the world's problems and just study the charts, the most obvious wave count is the bullish one.  During 2008, I formed the opinion that we would experience a two-stage crash.  I anticipated a cyclical bull market would follow the bottom of 2009, but I also expected an "eye of the hurricane" effect.  That bias stuck with me and colored my interpretation of the charts through roughly mid-2012, at which point the market's price patterns began challenging my view.

And now, at this point, the pattern has evolved into one that suggests the "second stage" of any pending crisis could be forestalled for many years.  It all hinges on the current inflection point.

The first chart is the long-term bull case for the S&P 500 (SPX), along with two potential targets.  The bullish interpretation of the pattern is that a series of high-degree first-wave advances and second-wave corrections has formed.  This would put the market within the belly of a third wave at Minor degree, and third waves are extremely powerful -- the rally we've experienced since the beginning of the year has undoubtedly been a third wave advance (though there remains some question on where to locate that rally within the long-term count, hence today's discussion).

The chart below outlines, in broad strokes, the expected result if this is indeed the middle of a high degree third wave rally.  There are two ways to view the current structure bullishly, and they are noted in the middle breakout box (blue), and the lower black box.  Either of these interpretations has a minimum expected target in the 1700's.

Note the series of 1's and 2's leading into the present wave.  This count probably has to be given the edge, unless and until the market begins to indicate otherwise -- but, going back to our earlier discussion, I would avoid too much "conviction" here, as we won't know with high certainty until the market clears this inflection zone.

(NOTE:  To bring the charts up at full-size, right click and select "Open in New Window")

The bear interpretation outlines an ending diagonal C-wave, which would complete the larger (B) wave at Cycle degree.  Due to the scale of these waves, we wouldn't know this count was playing out immediately, but relative to the big picture, we would have a great deal of advanced warning.  Key overlap of the last swing low would be a huge red flag to the bulls -- in fact, at this point, we probably don't want to see the market sustain trade beneath the 1450 area. 

This wave count is exceedingly bearish from a long-term perspective, as it suggests the entire rally since 2009 will be retraced.

Finally, a quick update to the SPX hourly chart.  On January 30, I warned that SPX was due to enter a chop zone, and the market has since lived up to that expectation.  We're still within the chop zone, and it's simply unclear to me at the moment if blue wave 3 has completed a few points shy of the target zone, or if it still has farther to run.  The wave count has gotten us this far and performed quite admirable for the entire year, but every system reaches pivot moments when things become a bit fuzzy until the market clarifies its next move.  This is one of those pivotal moments and at times like this, trend lines become high value. (continued, next page)

In conclusion, the market is balanced at pivots across several time frames.  For the near-term, the market remains in a chop zone.  For the intermediate and long-term (assuming I forget what I think I know about the world), I have to continue favoring the bulls -- though the gravity of this inflection point tells us this is no time for complacency.  As a trader, all I can do is work with what I see in the present, but we all know that things can turn on a dime in this market -- so I'll update the long-term outlook periodically if odds seem to be shifting into the bears favor.  Trade safe.

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.


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  2. Terrific analysis again, Pretzel.

  3. sounds like you've gotten yourself into a pickle...why can't we have both? both all time new highs and a large correction?

    how about a inverted widening triangle? 2002-a, 2007-b, 2009-c, 2013-d, 2014-e...then a multiyear rally, again but fueled by *massive* inflation as the fed overreacts to the 2014 E correction. the 2014-E winds up as (A). i think may/june 2013 will be the all-time high - but could be feb favoring a double top to finish the head and shoulders pattern and down into 2014.

  4. The labels on this chart are inscrutable. Is it really too much trouble to put the bull counts on one chart and bear counts on another? Seriously, these charts are virtually useless.

  5. Outstanding!!  Thanks for sharing this!

  6.  lol.  Right click with your mouse and select "open in new window."  btw, I did put the bull count on one and the bear count on another.  ;)

  7. Hi Pretzel,
         Below please find a link to some of my own longer term work.  But I count the Dow.  According to the Dow, we're clearly moving through a decades long correction at a wave above even what you've presented here (your bear count).   According to the S&P, it looks like we're about to break out of the top of that correction channel, which would be EXTREMELY long term bullish. 

    Kind regards,