As I study the charts this weekend, I can't shake the view that the wave structure looks close to wrapping up blue wave 3 and embarking on a decent fourth wave correction. And yet, there are two things bothering me.
The first revolves around the fact that, for the first time in a while, I decided to check out a few random articles across the web to get a brief pulse on sentiment. Maybe I just read the wrong articles, but it seemed like just about everything I read was bearish and looking for a top. As I skimmed through, I got to wondering: when did it become so popular to be bearish in the midst of a powerful rally? Is it contrarian to be bullish now? I mean, I get it -- and I have as much of an "issue" with the QE rallies as the next thinking man: since 2009, the market seems to have been driven largely by the printing press, not by fundamentals. As I talked about in my recent article detailing the long-term potentials, this offends my sense of "market morality."
After all, we all know that equities "should" correlate with fundamentals to at least some degree -- that's the way the Good Lord intended it, and by golly, that's how we did things when I was a boy! Back in my day, we didn't sit around on our new-fangled iPhones checking the internet to find out how much more QE was forthcoming. Cell phones were only for ludicrously rich celebrities -- plus they weren't exactly convenient, since they weighed slightly more than your average watermelon, but were markedly more awkward to carry around (cell phones, not celebrities). Nobody had ever even heard of Quantitative Easing (or "Quesing" for short). And don't even get me started on the internet!
As John Houseman would say if he were still around, "We made our money the old-fashioned way: we earned it. And we spit on people who used the printing press." Or something like that.
But seriously, I agree with the bears here, on a moral level. But being "morally correct" as a trader doesn't pay my bills; being on the right side of the trade does. And who knows, maybe the whole “printing the world into oblivion” thing will end up actually working. I tend to think it will end badly, but then, I’m not Fed Chairman of the most powerful country in the world (I’m the Fed Chairman of Yugoslavia).
I think it's wise to consider that this is pretty much how sentiment behaves in bull markets: they call it "climbing the wall of worry." There are always a million reasons not to buy and there are a million reasons why the market will finally top tomorrow... but it just keeps going up anyway. Bear markets work in reverse -- once everyone is convinced that every single decline should be bought with both fists, then we'll keep dropping. I'm not smart enough to know if we're there yet, but it's occurred to me that maybe we'll get there when the bearish voices are the lone nuts in the wilderness again, like they were in 2000 and 2006-2007.
One thing that bothers me on an anecdotal level: I have noticed for some time that my more bearish articles are quite a bit more popular than my bullish articles. So maybe, just maybe, there's still a bit too much bearishness out there.
On those lines, I present the monthly chart of the S&P 500 (SPX). There are a couple things that jump out on this chart, and the first is the pending back-test of the long-term trend line; this should be watched carefully. The second is the pattern that looks like a bearish rising wedge (please see the long-term update of February 7 for more detail on this pattern, and two interpretations of what it may mean).
As we see on the chart above, from a long-term perspective, it would be a bit unusual to see a dramatic reversal of trend just yet. From a less distant view, the wave structure has yet to form an impulsive five-wave move in the downward direction, so that tells us the trend is still up. I have detailed a few charts of interest, though, and while I simply can't recommend front-running against a wave like this, the SPX is now within 2 points of the target zone. The structure is also in a position where blue wave 3 can be viewed as a nearly-complete waveform, and looks ready to reach into my 1520-1530 target zone on Monday. Whether a correction is indeed forthcoming immediately afterwards remains to be seen.
On the SPX chart above, I've detailed my preferred count in blue. The question I simply can't answer is whether wave (5) will morph into an extended wave or not, however the NYSE Composite (NYA) chart which follows may help answer that question.
NYA seems to suggest that downside risk for equities is increasing over the near-term. In a perfect world, when I examine these two charts together, I'm left with the reasonably probable conclusion that SPX will reach the target zone early in the week, and then reverse into the blue wave 4 correction. NYA would be helpful to watch throughout the coming session or two, as sustained trade above 8970 would cast doubt on the count shown below, and thus cast doubt on my present conclusions for SPX. (continued, next page)
Finally, a chart detailing the very-short-term SPX wave count:
In conclusion, there are some hints (but no confirmation) that blue wave 3 may be nearing completion, and the market looks poised to at last capture the 1520-1530 target zone of January 10. In my perfect world, I'd like to see this wave take a stab up into the target zone, and then reverse into a larger correction. The NYA should help with near-term clues. Trade safe.