SPX Update: Topping Patterns Worth Watching

Since there's no material change in the outlook since I suggested selling the bounce on Tuesday, in this update we'll examine a few developing patterns and let the charts do the talking. 

I've detailed the 10-minute chart with support and resistance lines, and notes on the potential topping patterns.  Also note there is theoretical support crossing the first target zone.

The hourly chart is unchanged:

 

 



On the five-minute chart, there are some notes regarding possible near-term pivots.  Yesterday's "best guess" projected path played out quite well for the day, but that in itself doesn't guarantee another wave down immediately -- one of the things which never ceases to amuse me is how often "The They" manage to close the market at gray-levels.

SPX Update: A Fractal Comparison to May 2012

In yesterday's update (See: SPX Update: Time to Sell the Bounce?), I outlined why I believed the rally was a snap-back correction to the prior decline, and the corrective wave appears to have peaked 1 point past my target.  As a result of now knowing the (assumed) peak, today I'm able to provide some additional detail on targets. 

There's also a fractal I've had in mind since last Thursday's close, and I'd like to share it now because it's played out very well so far.  Maybe not coincidentally, this fractal is from roughly a year ago in April/May of 2012.

Compare that with the current market below.  Note the near-term wave count I've detailed is very aggressive and may or may not come to pass -- there really isn't enough info in the chart yet to have a good handle on the short-term structure.  Whether the near-term play out as shown or not doesn't alter my intermediate projection for a first target of 1620-1629 (see hourly chart).

I'd also like to add an indicator chart to my arguments for new lows, mostly for readers to benefit from in the sense of future reference.

The hourly wave count is unchanged.  I'm giving the leading alternate count 30% odds and have shown it in detail on the Dow Jones Industrials (INDU) chart which follows afterwards.  Bears should probably get out of the way if SPX can reclaim 1674 in the near future.

SPX Update: Time to Sell the Bounce?

The program for this evening is not new

you've seen this entertainment through and through,

You've seen your birth, your life and death,

you might recall all of the rest.

Did you have a good world when you died?

Enough to base a movie on?

 

-- Jim Morrison, The Movie

It feels like we've been here before.  And I think bull are expecting that we have -- and thus expecting new highs immediately.  But this time, I suspect that won't be happening just yet.  The recent decline is the cleanest downward impulse this market has seen in a long time, and that means we "should" have another leg down of at least equal length. 

There are two things keeping me from being overly confident, and which dictate the "?" behind "time to sell the bounce": 

1) This market has defied all gravity repeatedly and
2) As Madonna would say: "We're still livin' in a QE-world, and Ben is a QE-girl."

The last time we had a nice downward impulse, it turned out to be the c-wave of an expanded flat, and the market went straight on to new highs -- but I have a hard time seeing that pattern in this current wave.  Doesn't mean I'm right, of course.  The Fed and the Bank of Japan are both flooding the market with liquidity, so maybe I'm nuts to even expect a correction under these conditions.  Right or wrong, I simply have to follow what I see in the charts.

Speaking of, the first thing the charts suggest, for the short-term at least, is higher prices.  Note the market can travel all the way up to 1687 and still maintain this wave count.  I would expect 1664-1673 -- so there's about 14 points of no-man's land above the target zone where things become fuzzy.

A bit more detail on the one minute chart, and a look at an alternate near-term count.  I like the preferred count better (obviously), but I try to note the alternates mainly for the benefit of readers to be able to quickly figure out what's happening in the event my preferred count is wrong.

The hourly chart roughly outlines my expectations across three time frames.  And it's worth noting that the intermediate and long-term trends can both give a lot of ground to the downside without creating too many issues for bulls yet.  In the last update, I outlined a potential long-term bear count because we should always see both sides of the trade, but presently I expect this is simply a correction which will ultimately be followed by new highs. 

The first target for blue iii/C is 50 points against the prevailing ii/B high.  We'll refine that target if and when we get closer.

SPX Update: Short and Sweet...

There's not much to add to yesterday's update.  For the near-term, I've attempted to break down SPX -- but quite frankly, it's impossible to say for sure what we're looking at.  The chart below shows the conundrum: the rally from the 1635 looks like a correction, but can actually be counted impulsively.

Further complicating the matter is the fact that it's not entirely clear whether we're looking at wave ii/B, or wave (4). The rally retraced almost exactly 38% of the decline, which is more typical of a fourth wave than a second wave.  My advice here:  keep it simple.  Trade the trend lines and the noted support/resistance levels.  The wave counts will work themselves out soon enough.

The hourly chart is unchanged from earlier in the week.

In conclusion, there's no material change in the outlook, and I still feel there's more downside coming.  With a little luck, the near-term will clarify during this session.  Have a great long weekend!  And trade safe.

The End of the Road for Bulls, or Just a Healthy Correction?

Wednesday's session saw some fireworks, which we'll talk about in a moment -- but before we get into that, let's recap the recent past, since this has been an interesting and important week for a number of reasons:

1.  The Russell 2000 (RUT) reached my long-standing target of 1000 (intraday high 1008.23).
2.  The NYSE Composite (NYA) came within 1% of January's target (9695.46).
3.  The S&P 500 (SPX) reached May's target of 1680-1690 (1687.18).

Long-time readers know I believe it's important to take at least partial profits and/or tighten stops in target zones, and then watch how the market reacts -- and react it did.  These captured targets are thus made much more noteworthy by the dramatic intraday reversals that occurred afterwards. SPX plummeted 38 points intraday (as bears once again took the elevator almost straight down).  In fact, just yesterday I wrote:

The only thing I'd warn here is that this is the type of market that can lull bulls into a deep complacency, and markets like this can become ripe for "an event."  Always remember the old market adage:  "Bears take the elevator; bulls take the stairs."

So, is this the end of the road for bulls, or just a healthy correction?

We'll cover the expectations of the wave counts in more detail momentarily, but there are at least three important factors that bear mention right now.  First are the tandem facts that SPX captured May's target zone and reversed hard, and RUT captured my long-term target zone (for a 10% gain, I might add), then reversed hard.  The second is the insane sell-off just experienced in Japan, as the Nikkei dropped more than 1100 points last night.  And the third comes from Minyanville's own Todd Harrison:

"Morgan Stanley (NYSE:MS) explains that among its equity long-short fund activity, the short activity (the net of shorts added and shorts covered) reached a minus-2 Z-score, indicating massive covering over the past 20 days.

"The last three times this occurred were April 2010 (S&P (INDEXSP:.INX) then fell 13% in eight days), July 2011 (S&P then fell 19% in 23 days), and Oct 2011 (S&P then fell 10.5% in 20 days)."

(See: Random Thoughts: A Signal that Bears Watching) 
Normally, we would expect a high degree fourth wave correction to begin in this zone, and if that has indeed begun, it would be par for the course to see a trip into the mid-to-high 1500's.  There is room within the wave structure for even lower prices.  This market has defied gravity for a long time, which is going to make bears scared to short -- and ironically, that's exactly what the market needs to experience a decent sell-off.

We'll cover the preferred long-term count first, then we'll take a look at an alternate, more bearish possibility.  We haven't quite reached the long-term price expectation of the mid-1700's, and given the fact that it's far too early to confirm yesterday's sell off as any kind of major turn, I'm left favoring the view that we're finally going to have an intermediate correction, but the market is likely to see another wave up afterwards.  That said, SPX tacked on 176 points since I first published this chart -- so at this point the market reserves the right to do something unexpected.  I think it's a mistake to assume any system can see "too far" down the road; nothing is fool-proof.

The SPX hourly chart is unchanged from yesterday.  Yesterday's chart expected the 1680-90 target to be reached, and the position of the wave indicated it was likely to mark the end of blue 5/red iii.

So we're in a position where the market appears ready to correct, and we have a reversal from a key price zone.  What we don't have yet is an impulsive decline which will allow us to refine targets, but the normal expectations would be for red iv to decline into the price territory of blue 4.  Due to the length of wave iii, there is room for red iv to move lower.

The 65-35 margin refers to the near-term.  The big picture chart above, and the big picture chart beneath this one must be considered at slightly different odds, which I will cover.

It's been a while since I've considered the possibility of a long-term top in this market, as to me it appeared that the long-cycle waves have been pointed up (and they have).  At this juncture, though, there is finally some room for this to be a major top.  Though that isn't presently my preferred expectation, (as I mentioned) no system is fool-proof.  Beyond that, this is a bizarre market environment, and I would suggest keeping arrogance and complacency to a minimum. 

The chart below shows a long-term bear count that I can finally consider as reasonable enough to be complete.  At the moment, I still have to continue favoring the long-term count which points toward the mid-1700's, because we don't reverse long-term counts after one day's price action.  But we do have to stay alert to this as a potential.  I'd presently put the odds for eventual higher prices at 60%, but be aware that the near-term and intermediate-term now both seem to be pointed down.

SPX and Apple: Is Apple Due for a Bounce?

“In reading The History of Nations, we find that, like individuals, they have their whims and their peculiarities, their seasons of excitement and recklessness, when they care not what they do. 

We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit; 

that millions of people become simultaneously impressed with one delusion, and run after it, 

'til their attention is caught by some new folly more captivating than the first.”  

 ― Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds 

Apple (AAPL), once the darling stock of the investment world, is down more than 35% since reaching its peak of $693.21 in September 2012.  Interestingly, this price peak came about a year after the fundamentals started indicating things were headed in the wrong direction: Apple's iPhone and iPad profit margins actually peaked in the second and third quarters of 2011, respectively -- in fact, iPad margins are now less than half of what they were at that peak.  And while some investors bought Apple because they genuinely loved and believed in the company, more and more fund managers began buying it simply because the price seemed invincible and destined to head higher forever.  I even seem to recall seeing an interview about Apple in the heyday, where the analyst said, "Apple is a bargain at $1000."  I wonder if he still feels that way?  Essentially, despite the falling margins, the stock fell victim to its own momentum and entered a blow-off parabolic rally in early 2012.

It wasn't too long ago that it was still fun to say "Apple is the market," but that saying no longer applies.  Since autumn of 2012, the S&P 500 (SPX) has been in nonstop rally mode; but Apple's been on the outs.  And as is so often the case with parabolic rallies, the stock gave back all those late gains with equally-blinding speed. 

In the chart below, we can see that Apple and the SPX used to be fairly well-correlated, but recently they've been moving in completely opposite directions.  Note the chart is logarithmic scale, so the recent decline in AAPL doesn't look nearly as devastating as it's actually been for investors, most of whom do not have the benefit of being able to spend "logarithmic money."

I didn't call attention to Apple simply to illustrate how quickly "darling" can turn to "ugly" in the investment world (though there is a broader lesson to be learned here); I called attention to it because Apple looks like it finally has an opportunity to put together a more meaningful bounce.

I'm not certain it will, of course, but I've put together a couple charts which should help us figure out where it's headed.  Let's start off with the daily: I'm inclined to think it has more bounce left in it because the rally from 382 appears to be cleanly impulsive (meaning it has five waves).  There is only one way a five wave rally could fit in this position and not have prices ultimately head higher, and that would be if this pattern is a somewhat rare "running flat" correction -- so I have to favor the odds that the rare beast isn't the one who's shown up at the party this time.

Now, there are two ways we can get to higher prices: the first is fairly direct, and is shown in blue below.  The second heads a bit lower first, but should remain above 382 (shown in black); if AAPL sustains trade beneath 382, then all bets are off.  I've noted the trigger levels to watch, and a series of corresponding trigger targets, on the chart below.

NOTE:  I just checked another data source, which has 385.10 as the 52-week low for Apple.  Apparently Stockcharts.com is giving a bad quote on Apple.  As you can see on the chart below, Stockcharts shows 382.57 as the low. 

Zooming in on a five minute chart of AAPL, I'm unable to rule out either path until the market makes its next move.  Sustained trade below 430 would hint at the black path above, while trade below 418 would largely confirm it.  Sustained trade above 446 in the near future would suggest the blue path.

SPX, HYG, NDX, BKX: SPX Adds 1000 Points, Courtesy of The Beard

With Friday's trade, the S&P 500 has now added a clean 1000 points to the March 2009 bottom, so the Fed can pat themselves on their collective back and declare "mission accomplished" at reflating the equities bubble.  Stocks have no doubt now reached a "permanently high plateau" in our "new paradigm" since, after all, "a new economic equilibrium is emerging."  Or something like that.  Ironically, one thing that never seems to change is the human expectation that "this time is different."

I think what's strange about this bubble is that most people actually seem to realize it's a bubble, probably because folks have seen enough of 'em over the past couple decades to recognize the hallmarks.  Sure, there's a handful of Fed apologists out there, plus the occasional person insisting that the economy is in good shape and getting better every minute -- but even the majority of retail investors seem to recognize the rally is being fed by the Fed.  Don't get me wrong, I'm still bullish as long as the charts point upwards and the Fed keeps feeding -- as I've said for months, there's no point fighting it -- but I don't believe the Fed has found the magical road to free money, or effected a fundamental change in the way the world works which will allow this to continue forever without consequences.   Obviously, there's no way I can know if my assumptions are right or wrong; but either way, I call it as I see it.

Later in this article, I'll update two long term-charts I haven't updated in quite some time: HYG and NDX, which I believe are both worth watching here.  But first: In the prior update, I noted the Philadelphia Bank Index (BKX) chart seemed to contain a critical clue, and if that index was able to break out over 61.06, then we should expect the rally to continue.  Of course, that doesn't necessarily mean the rally will continue immediately, and there will no doubt be corrections and pauses along the way, but presently it does appear likely SPX will ultimately find the 1680-90 target zone.

Let's take a look at BKX first.  As long as support holds, it's hard to find anything to be long-term bearish about in this chart.

The hourly BKX chart suggests at least one more fourth wave correction and new fifth high before a chance at any sort of meaningful top.  Of course, there are always bear potentials extant in even the most bullish-looking chart (and vice-versa), so statements like that are based on what presently appears most probable.  Trade below the "red 1" peak would cause us to more seriously examine the bear potentials.

I'd like to revisit HYG, which I haven't updated at all since January 25, 2013 (See:  SPX and HYG: HYG Signals Further Intermediate Upside for Equities).  On that date, I wrote:

Finally, a long-term chart of HYG, the i-Shares High-Yield Corporate Bond Fund.  Junk bonds tend to be an excellent barometer for equities, and this chart suggests that there is still more upside to come for equities over the intermediate term, because it's virtually impossible to count the rally as five complete waves.  Depending on what happens to prices here over the near-term, there could be signals suggesting a considerable amount of upside remaining.

HYG, which I've always facetiously imagined stands for "High Yield Garbage," has captured January's target zone.  Four months ago, I couldn't see any bear counts which I felt were high enough probability to merit attention, so at that time I only published two counts: "bullish" and "even more bullish."  However, the potential does now exist for the wave structure here to be complete or nearly so -- so we'll keep an eye on this going forward.

I'd also like to update the Nasdaq 100 (NDX), which I haven't updated since November 28, when I wrote:

Next is an attempt to decipher the Nasdaq 100 (INDEXNASDAQ:NDX) long-term chart.  Note that daily MACD has now crossed over onto a buy signal (this is true on several other indices as well, including SPX), and is rising from an oversold position. Also of note, it is difficult to count the rally since 2009 as a complete wave structure, which suggests at least one more wave up is due before a long-term top.

NDX is another one worth keeping an eye on.  It has made the new high I thought it would, and the "most obvious" count here is still pointed higher.  But this chart does have the potential for a series of 3-wave rallies into an ending diagonal, so I wouldn't suggest any level of complacency.  If the dashed red key overlap is crossed, then it will be time to get bearish on the bigger picture.

SPX and BKX: One Chart to Rule Them All

Before I even begin this article, I feel obliged to engage in a bit of a tangential rant which actually relates to my charts.  If you're on the hurry-up, or if you find my sense of humor to be confusing and mentally frustrating, then you can skip right to the section titled "Market Update."   

My story begins like this:  A couple months ago, I purchased a new PC.  I'll pause here while we wait for the Mac users to stop laughing, since they already know there is now no possibility of a good ending to this story.  Anyway, like so many others who've bought new PC's recently, I had no choice but to "upgrade" to the latest mutant version of Windows, which is called simply Windows 8 (an inside joke at Microsoft, code for: "Windows ate my desktop!").  As every PC user knows, every so often Microsoft's Crack Team of Windows Engineers feels it's their God-given red-blooded patriotic American duty to cram some new version of Windows down our throats.  They refer to this as "progress," because that sounds better than "a way to continue justifying our expense accounts." 

For those of you fortunate enough to have avoided Windows Ate, basically the iconic "Start" button is gone, and the desktop has been replaced with a series of apps pinned to a home screen.   I was already familiar with the Windows Ate concept, since I've had a Windows phone for years -- and while I think the whole "app" concept is fine for phones, or tablets, or anything smaller than, say, a PC -- I think it stinks for PC's.  

I believe the majority of us who do not presently earn our livings by developing software for Microsoft were entirely satisfied with Windows 7 as a stable, user-friendly OS.  In fact, within two days of having Windows Ate inflicted upon me, I had already installed a program that forced it to emulate the Windows 7 navigation style.  Apparently Microsoft had forgotten that a handful of us still use our computers for something other than watching South Park's take on central bank policy on YouTube all day.    

But even with this productivity upgrade, Windows Ate still does not emulate Windows 7 in terms of reliability.  And the point I'm getting at (if I remember correctly) is that ever since "upgrading" to Windows Ate, my charts act screwy.  When I use Adobe Flash for annotations, the lines and numbers demonstrate all the orderliness of a preschool fire drill, and show no regard whatsoever for remaining in their assigned locations.  Numbers seem to move around of their own freewill, often vanishing from the charts entirely at random -- sometimes magically appearing later on a completely different chart, as if they'd traveled through an inter-cyberspace wormhole.  In fact, the numbers behave in such an incredibly random fashion that I'm fairly convinced I've secretly stumbled onto the exact same algorithm Bernanke is using to set Fed monetary policy.  

Interestingly, when I use Java instead of Flash, almost everything works exactly as it's supposed to, except for one "minor" detail:  with Java, I can only work on the charts at one-half normal size.  Attempting to annotate these diminutive charts requires me to practically press my face directly onto the computer screen, while at the same time squinting really hard -- which makes me feel like some kind of Peeping Tom technical analyst, and I keep expecting to hear tiny screams of "Cad!" emanating from my computer.  

These issues are a complete nightmare for someone who's as much of a perfectionist about charts as I am.  So if you've noticed lately that my charts aren't quite as pretty as they used to be, it's not because I've gotten lazy, it's because Windows Ate them.  I'm working to resolve this issue, with a hammer if necessary, and I'm sure eventually I'll get it all figured out... no doubt just in time for Microsoft to cram Windows? Nein! down our throats.

Market Update

Yesterday we discussed the possibilities for a whipsaw vs. a melt-up, and today I have a chart to share which should go a long way toward providing an early warning if the melt-up is underway.

One of the cardinal technical rules of Elliott Wave Theory is that wave three cannot be the shortest wave.  If the wave we find in the third wave position is the shortest, then that tells us the pattern isn't what we think it is.  The Philadelphia Bank Index (BKX) is currently providing us with an excellent tell in this regard.

The hourly chart of BKX below.  The nice thing with the BKX pattern is it's telling us "either the rally ends here, or it's got a lot farther to run."  There probably isn't much in-between.

SPX hourly below:

SPX and NYA: Whipsaw or Melt-Up Coming?

In the last update, I noted that the market looked poised to move higher into the May 6 target zone of SPX 1640-1650, and the market staged a strong rally right from the open, ultimately reaching the upper range of the target zone with ease.  I also discussed that the Philadelphia Bank Index (BKX) should tag 60 or beyond, and it experienced a blistering 2% rally and came within pennies of 60 during that very same session.

So what now?  Well, whenever targets are reached, some order of caution is called for, so let's take a look at the charts and see what's going on.

Let's start off with the big picture, and a weekly chart of the NYSE Composite (NYA).  For many years, I've been a fan of tracking this index, because it's a much better representation of the broad market than the indices which typically steal all the news coverage (like the SPX and INDU).  It's interesting to look back now and see how well NYA has been pointing the way for the past 8 months.

On September 20, 2012, I wrote:

Moving on to equities, and starting with the New York Composite Index (NYA) weekly chart, there are two things that jump out from a price perspective:

1. The recent breakout above a 5-year resistance zone (bullish).
2. 8718 is still intact (not bullish -- not really bearish either, but important).

If you just take a "trade what you see" approach here, then this breakout can't be viewed as anything but bullish.

I tackled this exact same chart again in January 31, 2013, and my observations were as follows:

Finally, I'd like to revisit the long-term NYSE Composite  (NYA) chart, which is one of the charts that's kept me largely in favor of the bull case ever since the key breakout of September 2012.  Note that weekly RSI is again overbought, and again has confirmed the rally to this point.  This behavior typically implies a correction, followed by new highs.

The correction and new highs have both since happened, which brings us to the present.  NYA's weekly RSI has reached the overbought zone again, and although in and of itself this doesn't guarantee a correction, it is something to be cautious of as one precursor.  It is worth noting that the last two times I mentioned this indicator (same dates as above, see chart), the market corrected almost immediately thereafter.  Doesn't mean that's going to happen this time, but we should stay alert for any signs of said correction (there are none so far). 

In either case, there's still no reason to be anything but bullish about this chart from a longer-term perspective.

The Dow Jones Industrials (INDU) have broken out slightly over the upper boundary of the intermediate channel.  In a moment, we'll see that the S&P 500 (SPX) has done the same.

The SPX hourly chart shows a similar breakout.  This is an inflection point, and if bulls can hold the breakout, they have melt-up potential. Bears will need to whipsaw this breakout if they are to get anything going -- and I do think they have a shot at doing exactly that, based on the 5-minute chart which follows (after this chart; SPX hourly below).

SPX, RUT, BKX: Market Ignores Fed's Doublespeak

The big news over the weekend came from the Wall Street Journal's report that the Fed is mapping out an exit strategy from their $85 billion per month bond buying programs.  However, it seems concrete details on such a strategy are a bit vague or nonexistent at this point.  This got a lot of play over the past few days -- but in reality, I sincerely doubt anyone was expecting massive Fed stimulus would continue completely unabated for the rest of eternity, so this news was hardly a huge surprise.  And given the vagueness of the details, it seems to be the Fed simply trying to remind us of something we already knew -- undoubtedly at least partially in an effort to forestall inflation.  The Fed is fully aware that inflation has a strong psychological component, and can be compounded or decreased by managing the public's future price expectations. 

And, if the Fed wants to continue printing money with abandon, the one thing it can ill-afford is high inflation showing up within the metrics they track.  So, counter-intuitively, I am of the opinion that these types of statements from the Fed are actually efforts to continue their programs as long as possible. This Fed seems well aware of the PR game involved in monetary policy, and has engaged in misdirection before.

Along the lines of mass psychology, I actually found yesterday's headline on MarketWatch somewhat comical: 

U.S. stocks start week in red as investors consider Fed policy shift

If you just looked at this headline, you could be forgiven for thinking the market reacted in panic to the weekend news.  Instead, the S&P 500 (SPX) actually closed marginally green yesterday, notching a new all-time record closing high; and the Nasdaq Composite (COMPQ) also closed green.  Hmm, where did this "stocks start week in red" thing come from, anyway?  Oh, here we go: The Dow Jones Industrial Average (INDU) closed down a whopping 26.81 points (-0.18%), which, these days, practically qualifies as an outright crash.  I can only imagine the sheer confusion experienced by retail bulls across the country last night, when they turned on the evening news and saw this strange "-" symbol in front of 26.81.  No doubt Google was soon swamped with search queries as bulls sought to determine the meaning of  "-" and whether it was a good thing.  Maybe "-" meant the market went up even more than they expected!

Kidding aside, I've made it no secret that I think the Fed is a huge driver of this rally, so obviously we're going to need to keep an eye on this going forward.  But I think some type of more immediately "negative-sounding" information will be needed before the market reacts overly significantly -- after all, right now the money is still flowing freely.  It's not exactly "last call" from the Fed yet -- it's more like: "Hey bulls, the bar's eventually gonna have to close at some point, so... have another drink on us!"

Moving on to the charts -- one of the things I sometimes ask myself when I'm trading is, "Which side of the trade is harder to take right now?"  I mention this because sometimes the market pulls a bit of reverse psychology on us.  On the one hand, usually right about the time everyone figures the market will go up forever, it reverses.  But there's another type of market, and that's the one that has everyone thinking exactly what I just mentioned, and thus looking for that "it can't go up forever!" reversal.  That type of market does the exact opposite: it just keeps going up, because everyone is watching for a reversal and afraid to position long.   It's entirely possible this is that type of market, and until we start seeing some form of sustained reversal, I would advise bears to stay very nimble.

I haven't updated the Russell 2000 (RUT) in a while.  Since before Christmas, I've opined that this chart has been pointed upwards, and once it claimed 902.30, it activated an even higher target of 1000 +/-, which it's now finally approaching.

The Philadelphia Bank Index (BKX) can be counted as five complete waves, but normally we'd still expect to see it run higher before it finishes off the current wave:

SPX now looks poised to capture the preferred near-term targets from May 6.  I am not ruling out the possibility that this count is too conservative, and may be more bullish than shown.

Two Recent Indications that Long-Term Strength for Equities Should Continue

I had planned a lengthy commentary for today, but then my personal life stepped to the fore and cut short not only my trading session, but also just about everything else.  So, I have a number of charts to share, but with less words than I originally intended (some readers actually prefer the pictures anyway).  Also, there are a fair number of words on the charts themselves, which provides an ongoing cover for those who tell their spouses that they read my work "for the articles," and not just to drool over the pretty pictures. 

First up, there is some recent noteworthy behavior in the Dow Jones Bullish Percent Index (BPINDU).  I can't recall updating this chart since November 2012 (See: SPX Update: Intermediate Buy Signal Triggered), because there's really been nothing to say about it since -- at least, until now.  While the current reading is characterized as "overbought," this type of overbought reading also typically suggests a strong trending move in price which will ultimately continue higher.




Next of note is the Philadelphia Bank Index (BKX), which briefly exceeded the 2010 print high.  Earlier in the month I opined that if BKX cleared 57.6 then it was likely headed to the high 58's in fairly short order.  This event now breaks some of the potential bear waves, which further limits the bears' long-term options.  It also made for a quick easy-money trade if you played the breakout.

This is a brand-new signal that the long-term remains bullish:

The hourly BKX chart below:

SPX and US Dollar: A Great Time for "Value" Investing. (Bwahahaha!)

The S&P 500 (SPX) has continued to drift higher over the past couple sessions, as expected on Monday.  Now that the market has broken out to decisive new highs, there's nothing in the way of horizontal resistance for the market to struggle with, there's simply channel resistance and Fibonacci zones.  If bears can't reverse this fairly directly, then there's no reason to believe the market won't reach my longer-term targets from January (the mid-to-high 1600's -- and ultimately the mid-1700's).  To be fair, I didn't anticipate we'd get there this directly; I thought we'd see more backing and filling first. 

This is a strange market environment, and if you haven't been trading for a long time, you may not realize exactly how strange it really is.  Due to the Fed's bubble pumping, the market technicals are now deeply detached from the economic fundamentals.  And while the Fed points to things like the "good" jobs number last week as signs that they're doing something helpful for the fundamentals, the reality is that the growth rate in jobs has held steady at the same level it was before the QE-Infinity days.  As I wrote when QE-Infinity was first announced, there's been no statistical link to the QE programs and job creation.

Beyond that, the jobs we're actually creating in this economy are the types of jobs you might have thought were pretty cool back when you were 16 years old because of their "awesome" benefits, such as the benefit of being able to take home an unsold pizza from work, after a grueling night of delivering them.  But if you're an adult these days, you may not be as excited as the Fed is about this "new job growth" -- especially if you have to feed a family, or a particularly large dog.  But the government doesn't differentiate all that in the jobs numbers:  There's no category for "Number of new jobs created which would still leave you eating a ton of Ramen Noodles."

What I (and many other traders) find particularly flummoxing about this market is the fact that the Fed has managed to completely obfuscate the value of everything.  What are equities actually "worth" these days?  How about the dollar, or metals, or oil?  With $85 billion of Nuevo Dinero being pumped into the markets out of the raw ether each month, how on earth can anyone have the faintest clue what anything is actually worth?  It's an auction where the fat cats are playing with Monopoly money -- so the players who actually move this market don't need to be bothered with petty details like "value" anymore.  Maybe that's what the Fed wanted all along.

As long as this money flood goes on, without at least a larger crisis of confidence, bears are probably going to continue having a hard time getting anything to stick.

Speaking of value, I haven't updated the US dollar chart in a long time.  I was consistently bullish on the dollar from September 2011 until July of 2012, at which point I shifted to neutral with a slight bearish bias.  That's where I remain today.  Since July 2012, the dollar has spent those 10 months trading in a very large range.  It's an interesting pattern now -- note the similarity of the moves highlighted by the red boxes.

Last week I noted the Philadelphia Bank Index (BKX) might serve as a warning to bears, and it has now broken out to new highs.  It's now approaching 58.83, the peak of 2010; this is the first time this market has challenged that high since.  Unlike SPX, the BKX has not recovered anything approaching its nosebleed levels of 2007, when it traded at more than double its current price (the peak was 121.16).  As a result, also unlike SPX, BXK does still have lots of horizontal resistance left to contend with, and will continue to be important to keep an eye on.

No change in the SPX count at the hourly level:

SPX Update: Fed Cash Trumps the Prior Sell Signals

On Friday, the intermediate thesis I've been building for a couple weeks (of a larger fourth wave correction) was at best forestalled, or at worst completely blown up.  The signals I noted in April constituted the first serious batch of sell signals I've seen since the Fed started feeding QE-Infinity money into the Primary Dealer accounts back in 2012, and I apparently made a mistake in thinking those signals might work anyway.  Lesson learned.

There's an outside possibility Friday may have been the exhaustion gap of an unpredictable extended fifth wave -- however, there's danger at times like this for an analyst and a trader, because there's always a temptation to latch on to whatever might "prove you right in the end."  So I'm going to override my own slight hesitation and stick to the discipline of the equation: This breakout must be respected as bullish as long as it sticks.  Accordingly, I'm going to publish the "most obvious" bullish wave count until proven otherwise -- but to be fair, we won't really know one way or the other for a session or two.  In this update, I'll outline a few of the signals and key levels to watch.

Even though I've written extensively about the potential for upside surprises during third wave rallies, and about the bullishness of the unprecedented liquidity the Fed is pouring into the market, I myself sometimes forget to "expect the unexpected."  The mini-crash in precious metals during the second week of April got my attention and suggested there might be some underlying cracks in the foundation, but apparently if there were (or are), the Fed has so far been able to print over them.

One of the challenges in Elliott Wave is the fractal nature of sub-dividing waves.  Though I wasn't favoring this view, I mentioned last week that the market had formed five waves up, but it was possible those five waves only marked wave i of a larger five wave structure.  That now appears to be the case, but the even bigger surprise for bears was the extremely shallow nature of the second wave.  Normally second waves will retrace 50% or more of the previous wave -- this one barely corrected at all.

There were numerous indicators suggesting a correction was due, but as I've discussed many times previously, we must at least consider the possibility that this market may simply not behave in line with historical sell indicators until QE-Infinity begins tapering off, or until there is a larger crisis of confidence.  Speaking of, now that May is upon us, there's the historical seasonality factor for bears to ponder (the old "sell in May and go away").  Whether that type of seasonality will work in a Fed-driven market where bulls are endlessly backstopped, and "risk" is a four-letter word, is another question entirely, though.

Things always become a bit tricky this far into a strongly-trending wave, because the smaller waves we'd normally use to triangulate the pattern are compressed and harder to locate.  This is my least favorite portion of any pattern for a number of reasons.  In any case, I made it no secret that I expected more from the recent fourth wave correction, and I won't pretend I wasn't surprised by Friday's action.  But in the bigger picture, the long-term preferred wave count is materially unchanged since January/February (back when everyone thought I was complete loon for favoring it).  This will remain preferred unless the price action gives us some reason to stop favoring it, or until the Fed files for bankruptcy.

(Note: Updated the numbers, but forgot to update the annotation, which should read "BLUE wave 4.")

The near-term count I published on Thursday was invalided before the session closed, which was the only warning cash traders had before the S&P 500 (SPX) gapped open on Friday's job number.  As promised, I'm now showing the most bullish wave count as the preferred interpretation until proven otherwise.  Keep an eye on that blue trend line -- it's one of those "stealth" trend lines that the market's reacted to every time it's touched it.

Note the extreme momentum in RSI on the chart below: normally, that type of reading suggests the next dip will be bought.

No additional comments for the hourly chart:

The Trouble with Bubbles

I hope readers don't mind, but I'm diverging a bit from my usual today, because a) I spent way too much time on this article and b) I'm actually running out of ways to say the same thing over and over regarding the intermediate outlook.  The market outlook remains essentially unchanged on an intermediate basis -- it's still watch and wait at the pivotal 1600 +/- zone.  So today, I'm going to embark on a more overarching economic commentary.

The U.S. Government made big headlines recently by announcing it will pay down a portion ($35 billion) of the national debt this quarter, the first such pay-down in six years.  $35 billion sounds like a lot, until you consider that the national debt has been increasing by an average of $3.83 billion every single day since September 2007.  I guess we're making progress by reversing about 9 days of the past 2,000+ days of debt, but that means we're still left with... let's see, carry the zero... 2,000+ days of debt to go!  If Uncle Sam can maintain this strict level of discipline, we'll be completely paid off by the 23rd century.

I maintain that our policymakers are creating a massive debt-driven bubble, and in this article I'm going to outline why I feel this is a mistake by analogizing some of the unintended consequences in depth (in "debt-th"?). 

Briefly, the historical chart below is from the always-interesting Sentimentrader.com, and shows the current ratio of mutual funds and ETF assets to money market assets.  The chart suggests equities are approaching the upper range of the Bubble Zone.  We can see the current ratio of 3.31 has only been reached once before, in 2006-2007; and we can also see in that instance, equities continued to rise for a while afterwards -- so these types of signals can take time to work.  But they're hard to ignore.  As Edmund Burke said, "Those who don't know history are destined to repeat it."

The x-factor impacting all of our lives and driving the equities bubble has been the Fed's printing press and Quantitative Easing.  The majority of Americans don't even know what QE is, much less care -- but I believe there are genuine consequences awaiting the Fed's current policy, which will ultimately impact the lives of virtually all Americans.  (The fact that you're even reading this suggests you're probably more informed than the average American, and already know what QE is -- but in case you don't, here's the Wiki explanation.)

The Fed's stated goal with QE-Infinity is to improve the labor market -- and yesterday, new jobless claims came in at a five-year low, which undoubtedly has the Fed Governors secretly high-fiving each other in the restroom.  As I see it, though, there's a problem here (beyond hygiene): they are attempting to grow our economy through debt-driven consumption. 

My contention is that there can be no lasting growth though this type of debt expansion.  It will seem to work for a while, because the Fed's printing press is creating a liquidity boom, and that excess liquidity is driving an increase in certain asset prices.  This is not unlike the way they created the housing bubble.  Excess central bank liquidity sends false signals to the market -- essentially, the market sees all the extra cash floating around and incorrectly concludes that the economy is better than it actually is. 

To illustrate the impact of these false signals on the future economy, I'm going to draw an analogical story about a poor man who's suddenly (and erroneously) granted a big line of credit, which he begins using immediately and irresponsibly. Purely for sake of illustration in this story, let's give our hypothetical big spender a name: We'll call him "Benny B" ("B" stands for "Big spender"!  I have no idea who you're thinking of here.)  Benny B has no job and no assets, but he's mistakenly granted a humongous line of credit by our hypothetical credit card bank, which we'll call simply, "The U.S. Government." 

For a while, Benny B can use his line of credit to run around town spending like crazy.  People see him cruising in his limo, dressed in his new Armani suit, and eating at the finest restaurants every night.  The community naturally assumes he's rich, and in short order, Benny B gains a good reputation.  Eventually, Benny B's favorite fancy restaurant even decides to extend a very large monthly tab to him.

Never one to miss an opportunity, Benny B starts treating all his family and friends to dinner at this restaurant every single night.  He runs up his tab higher and higher.  Of course, the restaurant owner sincerely believes Benny will eventually pay his debt -- so each night after the restaurant closes, he includes Benny B's latest tab in the restaurant's asset column as "uncollected profit and revenue."  And since Benny B has an abundance of "friends" nowadays, the owner notes there's an awful lot of new business coming in, night after night.  He decides he needs to hire more chefs and waiters, and also begin an extensive remodel. 

Benny's heightened consumption is sending the restaurant false signals about the overall state of the local economy -- and with the owner now taking action based on those false signals, they have officially been sucked into the Benny B Bubble.

This all seems to be working out great for everyone, for a while anyway.  Benny is living high on the hog and local businesses seem to be benefitting.  Even when it's time for Benny B to start paying down a portion of his debt to the restaurant, there's no crisis right away, because initially Benny can pay some of that debt with his US Government Credit Card (USGCC).  By doing so, he effectively "kicks the can" on a portion of his restaurant debt straight into someone else's "uncollected profit and revenue" column.  Now the restaurant and the credit card company are both inside the Benny B Bubble -- but still, neither of them know it yet. 

For most people, the real trouble would begin when it's time to pay off the debt they kicked over to the credit card -- but not for Benny B!  He's a financial genius, so by the time the first credit card payment comes due, he's managed to finagle a loan from the -- again, purely hypothetical! -- Credit Bubble Bank of China (CBBC), which he uses to pay the interest (but not the principal) on the debt he owes to the credit card company.  He's kicked the can again, and now involved yet another company in his debt scheme.  The bubble grows larger. 

The root problem here is that Benny B isn't producing anything at all; he is only consuming, which temporarily increases demand and thus seems to be stimulating the local economy.  But because his consumption is debt-driven, it is unsustainable, which means the signals it sends to businesses are false.  And, as one example of a direct unintended result, the restaurant owner is now unwittingly doing two things which will actually hurt his business down the road:

1) He's counting Benny B's debts in his asset column.
2) He is relying on Benny's large nightly "revenue" to justify certain forward-looking expenses.

Other businesses are in a similar conundrum -- for example, Benny purchased a new Ferrari on credit, and he's having a new McMansion custom-built by a small local homebuilder (via minimum down payment, of course).  Due to Benny's debt-driven consumption, these other business also mistakenly think things are going better at the moment -- but they too will be hurt down the road. 

Without even consciously thinking in these terms, these businesses naturally assume that, somewhere up the line, Benny B is producing something, which he's exchanging for the money he will then give to them.  After all, money is simply a convenient tool which stores value from one form of production to another, and thus allows us to bypass direct barter.  If we remove its use as an indirect exchange of my goods/services for your goods/services, then money has no intrinsic value of its own.  Benny B's money isn't coming from production (current or future) in any form at all -- in fact, Benny B lacks the ability to produce anything himself -- thus his money is, in effect, completely worthless. 

Still: no one in our story realizes that just yet.

We could go on and on with the can-kicking (if Benny B obtained yet another loan), but for sake of time, let's bring this to conclusion here and assume the CBBC is Benny's lender of last resort.  It's finally time for him to pay that loan -- except he can't, because he has no income.  Thus the CBBC is the first to have Benny's bubble pop in their face.  And since Benny also has no real assets, they have no choice but to write off Benny's debt completely. 

Soon after, the USGCC learns that Benny B had been maintaining the interest on his debt to them with that now-defunct CBBC line credit.  All the money they lent to Benny is gone forever, and they too have to write off his debt.  At this point, Benny B's banks are suffering, but their suffering is not immediately driven home to the local economy.  That's about to change.   

Sadly, as Benny B's massive credit scheme falls apart, he will bring real people down with him.  The restaurant owner is one of the last to learn what's been going on, and he suddenly realizes that the $250,000 line of credit he extended to Benny B will never be repaid.  He sits down that night with the books, recalculating his balance sheet without that $250,000 "asset" (which just vanished back into the thin air from whence it came).  He realizes he can no longer afford the restaurant's new staff, they must all be fired. Worse, he realizes he's now overcommitted on his debts, because he thought he had additional assets, and -- with the restaurant packed with Benny's friends every night -- he thought his business had reached a new permanently-high plateau. 

The false signals Benny B sent caused him to conclude the business was doing much better than it actually was, and much better than is actually sustainable. 

He checks the numbers several times, but there is no way around it.  Without Benny B's nightly business, the owner realizes he is overextended to the point where he can no longer stay afloat at all.  He must close the restaurant, firing everyone.  Benny B's temporary "stimulation of the work force" has backfired in the end.

The small local home builder, who just completed Benny's McMansion, won't go bankrupt immediately, but his future hangs on whether or not he can sell the house quickly and recoup his capital.  The Ferrari dealership is able to repo the car, but it's completely thrashed and littered with empty beer cans and old beard clippings.  They take a write-off.  Not all of the businesses who acted on Benny B's false signals will go bankrupt -- but all will suffer to one degree or another.

Every one of the businesses Benny purchased things from was producing real goods and services, so his demand for those things briefly seemed to stimulate the economy -- yet because Benny's money came from debt and not production, there was no way his spending spree could have any lasting positive impact.  In fact, in the end, it hurt more than it helped.

The problem is debt does not help when used as an end in itself; debt can only stimulate the economy when it is used as the means to invest in future production.  If Benny had taken his loan and built a successful business, instead of simply consuming, this story would have a much different ending.  The same is true of our story out here in the actual world:  In the first decade of the 2000's, each dollar of new credit has produced a mere 18 cents of new GDP, which is ridiculously low from a historical standpoint (contrast that with more than 59 cents per dollar of GDP growth in the '60's), which suggests that most new debt is being used for consumption and speculation.  Debt-driven consumption always backfires in the end, for the same reason it would backfire personally if you simply ran up your own debts endlessly without increasing your income.

To drive this all home to our current situation:  the Fed and our government are "creating" money through debt and from thin air, and this will seem to work for a time.  But real money simply can’t be created from thin air, any more than we can create the tangible things money represents, like cars and houses, from thin air.  

 The market presently believes there's more demand than there actually is, and is thus expanding accordingly (or, in some cases, shrinking slower than it normally would), which makes this a bubble.  They can’t continue this debt expansion indefinitely; it must end eventually.

At some point they will be forced to stop consuming, because of fiscal problems or due to rabid inflation, or due to something presently completely unforeseen -- and this whole grand economic experiment will fall apart.  Exactly when the endgame arrives is anyone's guess.  But when we finally reach the end of the Fed's rainbow, we'll find there's no mythical pot of gold -- only a pot full of worthless IOU's, which are redeemable for nothing.  Trade safe.

 

Reprinted by permission, copyright 2013 Minyanville Media, Inc.

SPX and BKX: Will Bears Capitalize?

Tomorrow's article is going to be titled "The Trouble with Bubbles," and will be a bit longer on words, so today's article is going to focus more on charts.  Of course, I'm assuming I won't die of exhaustion between now and then -- if I don't make it through 'til tomorrow, then that article will probably be really short.

Yesterday's near-term ending diagonal count appears to have been correct, although it ended a bit abruptly, about 4 points shy of the exact "perfect world" target, and the S&P 500 (SPX) declined directly off the open.  With yesterday’s decline, bears have a good opportunity to shift the momentum, and have a defensible position at the 1600 zone -- now they have to continue to run with it.

If my intermediate thesis is correct, then we appear to be wrapping up multiple degrees of fifth waves, which should be followed by the first lasting correction of 2013.  It's too early to paint targets with anything but broad strokes -- in fact, to be fair, it's too early to confirm an intermediate correction has started at all.  This is unabashed analytical front-running, and the bullish option is that this fifth wave is sub-dividing into a larger five-wave structure, which would mean we've only seen wave i of v so far (shown in black).  I'm continuing to favor the more bearish intermediate view at present.

It's also still not impossible that yesterday's decline was simply another micro fourth wave unraveling, with one more thrust up still to come.  This is why I'm still watching the 1606 +/- zone, and depending on the shape of the next move, would probably not remain bearishly biased if the market can sustain a breakout.

SPX Update: FOMC Day

The SPX made a new all-time high yesterday, which resets the wave count at one degree, however, I continue to feel that the 1600 zone is an important inflection point and that there's good potential for a turn here.  We also have the FOMC announcement coming up today, which adds to the possibilities for an inflection point.  In my perfect world, I'd like to see the market embark on a deeper correction in the near future and begin to unravel some of the fourth waves which need to be unwound.  Since all I've talked about for the past couple weeks is the idea of a decent intermediate correction developing soon, I've also updated the big picture chart, with a focus on the bullish long-term wave count.

From a big picture standpoint, I would consider myself neutral at this exact moment.  I was bullish up until recently, but I'll be the first to admit I make a terrible bull, and the potential of a triple top here is hard for me to ignore.  Especially since I'm fundamentally bearish on the massive systemic debt the world has accumulated, and believe that the only "reason" to be bullish is because the Fed has created another bubble by pumping ridiculous amounts of liquidity into the market.     

Since I do believe this is a bubble and that it will ultimately end like every other bubble does (i.e.- POP!), I intend to watch corrections carefully to try and determine if they are only corrections, or if they are the start of the popping phase.

Unless SPX can sustain trade above 1606, I continue to feel that an intermediate correction remains likely.  The chart below also roughly outlines the longer-term bull count at this stage -- to be honest, the long-term bear counts are a bit spotty with the market in this position, hence they bear the alternate labeling (red "alt.") and are not detailed on this chart.  They would jump to the fore if any forthcoming corrections were to overlap the black wave 1 peak.

 
From a near-term perspective, my preferred interpretation of the pattern is a bearish ending diagonal (shown below).  To position this in the chart above, this wave would represent red 5 of black 3.  It's worth noting that this wave does not need to go any higher.  Fifth waves in ED's can be quite unreliable, and it has already fulfilled the minimum requirements.  

Since we have to be aware of the if/then nature of the market, this pattern would be called into question if the market were to sustain trade above 1606.  If that were to happen, there are several bullish options we'd need to consider, including the potential that this is wave i of red 5, which would target the total wave toward the mid-to-high 1600s.  From a classic technical analysis standpoint, the pattern is a cup and handle, which further argues bears should probably get out of the way on a sustained breakout.

In conclusion, the 1600 zone remains an important inflection point, and I still feel the odds are good that an intermediate correction will begin in the near future.  If the market instead sustains trade above 1606, then it will be time to re-examine that outlook.  Trade safe.

 

Reprinted by permission, Copyright 2013 Minyanville Media, Inc.