Is Liquidity Drying Up for World Markets?

There's an interesting fundamental change that's been taking shape in the financial landscape recently.  In the U.S., QE-Infinity is still flowing strong, despite talk of tapering.  The Bank of Japan is also still fueling the liquidity picture.  However, there are some other major players working at cross-currents to the Fed and BoJ's liquidity.

Many investors are probably convinced that the recent market shake-up was simply the result of Bernanke's talk of "tapering" the QE program -- after all, that's what the media largely reported.  But the reality runs far deeper than that, and is an order of magnitude more serious.  For better or for worse, the U.S. financial system no longer exists in a vacuum, and world markets have reached the point where virtually everything is interconnected.  And what's going on overseas is starting to shake things up here.

The world's four largest central banks are: (of course, our very own, let's have a big Las Vegas welcome for) the Federal Reserve, the European Central Bank (ECB), the Bank of Japan (BoJ), and the People's Bank of China (PBoC).  The first three (Fed, ECB, and BoJ), as well as the BoE (Bank of England), are all deeply intertwined in the sense of liquidity, since they all deal with the same institutions and dealers, if not always directly, then through counterparty.  In fact, fourteen of the Fed's twenty-one primary dealers are located in other countries, with only seven being US-based.  It's become one great big happy Universal Liquidity Pool party, and the actions of one nation's central bank no longer simply impact that particular nation. 

The PBoC isn't fully integrated into the world financial machine yet, but their actions still impact the world financial system because many of the institutions they service are big players on the world stage.  So while they're not quite swimming in this pool and playing "Marco Polo" with Bernanke, the way Western central banks are, they're still very much a presence at the pool party.

And they're not following the script. 

While Bernanke keeps dumping fresh water into the pool, and the BoJ is doing the same, the PBoC has tightened policy and aims to force institutions to deleverage, thereby draining the pool.  And while the Fed and ECB bail/bailed out every bank they can get their hands on, the PBoC has decided it's had enough.  This means the institutions it services are faced with trillions in bad debt, which requires them to sell whatever liquid assets they can in order to raise cash.  Much of these liquid assets are in the form of U.S. Treasuries, equities, precious metals, etc..  

Many have speculated, myself included, that the final endgame to the massive bubble unwind would be forced liquidation, and it seems we're now beginning to see some cracks appearing in the foundation.  The problem in a massively leveraged financial system, such as ours, is that when enough selling occurs and drives down prices, that action creates margin calls for other leveraged players, which then requires them to sell assets as well.  This creates more margin calls for still other players, which then requires more selling -- etc. ad infinitum.  It can snowball and feed on itself rapidly, ultimately becoming an unruly beast which consumes everything in its path, not unlike John Goodman.

A week ago, the PBoC flat out refused to do reverse repos, thus stopping the flow of cash.  Traders and institutions in China panicked, and we saw the results of that action almost immediately, as forced deleveraging hit the marketplace and spread to US stocks and treasuries.  Below is quoted from a piece published by Reuters on June 19:

 

  "The central bank appears to be determined to force banks and other financial institutions, such as funds, brokerages and asset managers, to de-leverage," said a trader at a major Chinese state-owned bank in Shanghai. "That hardline stance suits the recent government policy of clamping down on non-essential businesses by financial institutions, such as shadow banking, wealth management, trust
operations and even arbitrage."

Panic prevails in some parts of the money markets, in particular among some small financial institutions, which have conducted lots of leverage businesses, traders said.

According to some reports, the PBoC later relented somewhat and began providing targeted liquidity.  Markets stabilized. 

Compounding the liquidity situation is what's going in Europe.  When the ECB gave out loans via LTRO, it also forced loans on institutions which didn't need or want those loans.  The theory was that forcing everyone to take LTRO loans created a "cover up" so that no one could figure out which banks were in truly bad shape, and which banks were just in bad shape.  Many of those institutions put a portion of the LTRO money into US Treasuries, which drove yields to record lows in the summer of 2012. 

While LTRO was a three-year loan plan, it provided an option for banks to repay those loans after a year, and many of the banks who didn't originally want those loans are now paying them back -- by selling the Treasuries they purchased a year ago.  And as that carry trade unwinds, the Treasury market is coming under pressure. 

Below is a chart of the 30 year bond, which looks to be in bad shape:

The LTRO situation is deflationary, since that money is now being pulled away the market and vanishing back into the ether from whence it came.  And of course, falling treasury prices also have the potential to create further margin calls and leveraging issues. 

Precious metals are continuing to come under pressure as well -- in fact, in the overnight Comex session last night, gold reached the upper edge of my long-standing target from April 17 (1080-1180).  This may also lead to further forced liquidations.

So now we have a situation where the Fed and BoJ are furiously pumping liquidity, and the PBoC and ECB (as well as the BoE) are effectively draining it.  The machine is complicated and there are a lot of moving parts these days, and the impact is global.  As the old saying goes:  This is not your father's market.

Unless the ECB and PBoC loosen up again, the easy money bull leg is almost certainly over.  What's always amazing to me is how this move was (yet again) telegraphed by the charts in advance, and it became instantly apparent that there was some type of trouble on the horizon.  I'm still not certain if the entire bull market is over, though.  I've been long-term bullish since the first trading day of the year, but recently I've moved the odds of a long-term top up to 50%, and I'm now equally split on the idea of one more leg up, or the top being in.  Given the indicator readings at the peak, we'd normally expect to see another leg up.  But both the long-term charts and the current decline are fuzzy enough to allow either option.  That question is simply going to have to be worked out heading forward.

On the hourly chart, I'm inclined to believe that the current rally either peaked in yesterday's session, or will do so after a marginal new high.  I also believe the market will feel obligated to test the noted rising trend line, which currently crosses the 1565-70 zone (and rising). 

The hourly trend line chart may help provide clues.  It would seem a shame for the market to have come this far without filling the gap in the mid 1620's.

SPX Update: An Ambiguous Market

The market has moved into something of a no-man's-land for the moment. Because there’s ambiguity at multiple degrees of trend, it becomes extremely challenging to interpret exactly what the market's next move is -- and there isn't much in the way of key levels to tell us what's coming next.

The S&P 500 (SPX) has reclaimed 1598, which really isn't what the bears wanted to see.  The fact that it failed to act as any kind of resistance this time around indicates sellers may be exhausted, and bears need to reclaim it directly.  Next resistance is 1608 +/-.  Above that, and probably the next key informational level is the rising intermediate uptrend line.  If bears can't mount a defense there, they may be in trouble; but first things first. 

There's a really off-the-wall wave count which has us forming the bottom of wave C (or iii) at the recent 1560 low.  So as we examine the potentials, keep in mind that it's entirely possible that wave iv is over and the market will rally to new highs directly.  I'm not favoring that view, however, for reasons I'll cover in a moment.

Strangely, the index which has kept me from becoming super-bearish previously is now the same index that suggests to me that there's more selling ahead.  The Philadelphia Bank Index (BKX) appears to be forming an expanded flat, which is one of the potential patterns I've noted over the past few updates.  An expanded flat is a waveform that's brutal on traders, because it whipsaws buyers out at the bottom, then whipsaws sellers out at the top.  I've suspected this waveform for a while, because the decline lacked any clear structure or acceleration, but there was no way to really verify it.  As I have it labeled, the expanded flat could even exceed 62 before reversing.  I'm uncertain if it will do so (though I suspect it will) and BKX is in the potential topping zone now. 

If this pattern is correct, then the decline should resume fairly soon.  Of course, the bullish possibility is that the decline to this point was a double zigzag correction, which has found a bottom at 58.73.  Above 62.92, and the market is cleared to rally toward the mid-65's.  I think the pattern fits better as an expanded flat, but I've been wrong before.

On June 24, I noted that the Dow Jones Industrials was approaching a support zone, and it found support after a near-perfect tag of the noted trend line.  Bears are going to need to break that support level to get anything going.

There are two main potentials I'm watching on SPX, and the one I'm favoring is a bit unorthodox.  In fact, I suspect most Elliotticians would take issue with my preferred wave count, but then they often do.  Nevertheless, the count I'm favoring is that wave iii or C has bottomed with a massive fifth wave extension -- which also opens up the possibility that there is no fourth wave up and fifth wave down coming, and wave C of red iv may be complete.  It all depends on whether the market is going to form an impulsive decline or not, and since we have no downward impulse waves on the chart at this degree yet, we genuinely can't know which outcome to expect. 

Based on my read of BKX, I think there's probably another wave down still in store for SPX.  What would be most interesting here is if we see another fifth wave extension -- but this time for blue v.  That would place the target well below my blue box -- but I simply can't predict that in advance.  If my BKX count is correct, then it's a good possibility, since BKX would need to move considerably to "get 'er done."  Of course, there's no law that says my BKX count is correct at all -- so I have to at least stay open to the option that all of wave C is complete and the bottom of wave iv may be in place, especially given the fake-out breakdown of the red base channel.  That's often what you see at the end of a C-wave.

One Technical Argument for a Long-Term Top in Equities

In this article, as promised, I'm going to talk about the potential that 1687 was a long-term top.  Over the past few months, I've occasionally alluded to the fact that I was tracking the current rally as a potential extended fifth wave.  In layman's terms, extended fifth waves are generally called "blow-off tops."  I've felt a number of markets have shown the characteristics of such a wave. 

On and off for several months, I've toyed around with extended fifth wave counts for the S&P 500 (SPX), though I haven't published any of them, since I didn't feel they were near completion previously -- and thus a moot point.  In this update, we're going to look at the long-term wave count for SPX which details an extended fifth.

One thing I've always enjoyed about Elliott Wave Theory is the psychological component which underpins each wave.  Extended fifth waves serve a purpose in mass sentiment, and they function to pull the last of the disbelievers into a move -- just before reversing.  When extended fifths reverse, they often do so quite dramatically, and this serves to trap unwary traders on the wrong side of the trade, which gives the subsequent decline steam.  Extended fifths can be extremely difficult to spot in real-time, because they don't die off slowly, the way a normal rally does.  They die at near-peak readings, which lulls bulls into a complacent sense that there's still more upside left, due to the momentum of the move. 

The current rally fits these characteristics, though it also fits the characteristics of a third wave, which would in fact have more upside left -- and this is what makes it so difficult to sort out the two options.  Let's discuss some of the merits of this count.

The chart below shows that SPX actually counts quite well as a fifth wave extension.  I haven't seen this wave count anywhere else (though that really isn't saying much, since I generally entirely avoid looking at other people's technical work.  I find I do my best work "in a vacuum" so to speak, and other people's work tends to bias me).

This count has several features which I find quite appealing, and which actually fit the structure better than most of the wave counts for SPX (including my own long-term count); we'll discuss the appeal in a moment.  First the chart:

(Note the typo: "blue v" should read "red v.")

Here's what I like about the extended fifth wave count:

1.  The October rally in 2011 was almost certainly a three-wave rally.  Every Elliottician on the planet knew it at the time, and we all expected it was a corrective wave.  After the October peak was exceeded, we all scratched our heads and tried to figure out where we went wrong.  The count shown above explains this quite well:  We didn't go wrong in counting that wave; it was indeed three waves.  We went wrong in not realizing it was part of a triangle.  (I actually hypothesized this via NYA back in late 2011, but the expectations of that count got a bit fuzzy as the rally continued, and I eventually put it on the back burner).

2.  The same is true of the rally in the middle of 2012.  Also note how well this count explains the rest of the move throughout that same time frame.  This is the only count I've ever seen that fits that entire wave this well.

3.  This count eliminates the need for endlessly nested first and second waves at the beginning of the move, because all the waves are sub-waves of the extended fifth, and thus there is no technical issue created from the price overlap at the beginning of the structure.

4.  This makes the rally from 2009 a simple, common ABC rally, without reaching into extremely rare triple zigzags and such.  Personally, I don't feel the triple zigzag counts fit very well anyway, since, in my opinion, the waves are too disproportionate to each other.

5.  The RSI readings are perfect for the count.  In fact, RSI fits this count better than it fits any other count I've developed or seen.  Peak RSI during the third wave, second highest during (3) of v, third highest during the blow-off fifth.

Given the signs we're seeing in the credit markets, bonds, et al; and the strength of the sell-off so far, I'm going to give the extended fifth wave even long-term odds with the fourth wave corrective count I've previously detailed -- for the time being.  The market of course reserves the right to cause me to adjust these odds going forward (it's foolish not to adjust to the market's future input).

For the near-term, the count below details the least bearish potential.  The wave may be considerably more bearish than shown, but I'm still not seeing the strength of the sell-off echoed in certain key markets, which is making me hesitant about the mega-bear counts.  Play it safe for the time being though, because there is definite waterfall potential here.

One market which has continued to refuse to commit to the bear case is the Philadelphia Bank Index (BKX).  BKX finally broke key support yesterday, but it did nothing afterwards.  This leaves a few possibilities, and I've detailed one bullish option, as well as the more bearish option, on the chart below.  Both options suggest lower prices still to come, but the ending diagonal is a bear trap.

In conclusion, the decline has been playing out strongly, and that necessitates consideration that things may be more long-term bearish than I originally anticipated.  BKX is still hesitating to commit, however, and we'll simply have to see how this plays out over the next few sessions to begin connecting the long-term dots more decisively.  Trade safe.

How Bearish Should We Get?

The market's job is to get you looking the wrong way, and to try to get you to do the exact wrong thing at the exact wrong time.  It wants you to short when you should go long, and it wants you to go long when you should be shorting.  Back in November, I began leaning bullish, but hesitated to commit to a long-term bull outlook until January, when I became exceptionally bullish -- probability the most intermediate bullish I've ever been publicly.  My updates were all about the rally continuing to new highs -- and the signs of strength I was seeing.  Nobody read the darn things. 

I started trying to throw in some bearish stuff so as not to lose readers completely, since most everyone thought I was nuts talking about the S&P 500 rocketing upwards in a "nested third wave rally" to the 1500's and 1600's, and possibly even the 1700's. "What are ya, stupid?  The world is a mess, dontchaknow."  Believe me, I know.  I've been fundamentally bearish for years.  But I don't trade my fundamental bias -- my fundamental bias underpins my understanding, but it doesn't help me time the market.

Near the end of May, after the SPX had rallied more than 200 points from January's prices, the mass psychology has reversed.  Everyone "knew" it was stupid to ever take on a short position, just like everyone "knew" it was stupid to go long back in January.  I assume most thought I was nuts when, on May 28, I suggested it might be Time to Sell the Bounce.  I myself thought I might be nuts (and I said as much), especially after the SPX had reversed directly in the middle of May's target zone of 1680-1690.  Unlike most people who become more confident after a string of good calls, I become more cautious and start challenging my assumptions all the more rigorously. 

I take this approach because the market will eventually rip your face off if you start assuming you are way smarter than it is.  I learned that the hard way -- in fact, I'm not ashamed to admit that a bit more than a decade ago, I all but completely wiped out my trading account by going "max leverage short" at exactly the wrong time, after a string of good calls.  I started thinking I had it all figured out, and decided (since I could do no wrong!) that it was time to knock one out of the park with a massive put options trade.  When the trade started going against me, I stubbornly held to my previous views in the face of evidence to the contrary... and I clung to the trade until it was too late.  It was an incredibly painful experience.  This taught me that we always have to see both sides of the trade -- at least, if we want to survive.

This is why I offer my preferred interpretation, but also try to see the other possibilities and provide levels which hopefully act as waypoints to indicate when the market is breaking from my projections and onto one of the alternate routes.  I probably tend to caveat too much sometimes, but I feel this is a better approach than the alternative.  People who've read me for a while eventually learn my language and grasp where I feel we're headed through all my "but watch out for this and that" warnings.  I don't present alternate counts so that the outlook is "always right" -- in my mind when an alternate plays out over the preferred count, then that means I assigned my probabilities wrong -- I present alternate counts so readers can adjust on the fly and protect themselves where appropriate. 

A few times over the past couple months, I've talked in brief about the fact that the recent rally has shown some of the characteristics of an extended fifth wave.  I haven't focused on that option however, because up until May 23, the larger wave structure had (in my opinion) remained pointed upwards for the most part.  Sometimes it's hard to sort out the options too far in advance, which is one reason I'm a firm believer in staying nimble, and recognizing when the environment may be changing.  For reasons discussed above, getting married to a long-term outlook can be an account killer.  Everyone can see how the "let's marry our convictions" approach has killed the bears this year, as many kept shorting all the way up, convinced that the rally was "just about to end!"

In tomorrow's article, I'll talk a little bit about extended fifth waves, since they can be big money-makers for traders and we may be unraveling one now. 

One approach I take is to build a thesis in stages.  I look at the near-term, and try to determine what's likely, then I project that out to the intermediate-term.  From there, I envision how the charts will look if both projections play out, and I begin building a long-term thesis.  Sometimes I can see how things will play directionally to a point, but there's an inflection zone at that point and I can't see in advance how the market will react to it.  The high 1590's marked one such zone.  Other times, the market begins to form patterns which suggest that the move will be stronger or weaker than I originally projected, and I have to adjust on the fly to what I'm seeing.  This is what's happening now, which is one of the reasons I wrote, on May 23 (See:  The End of the Road for Bulls, or Just a Healthy Correction?):

In conclusion, the long term presently remains pointed higher, but that may be irrelevant at the moment. We can't see around every bend in the market, but most times we don't need to: The near term appears to be pointed downwards, and the intermediate term, while too early to confirm, also looks likely for further downside. This is not a bad time to behave defensively.

Let's start off with the near-term and build from there.  I completed this chart after the close on Friday and posted it in the forums, and the futures action this morning has left both options still on the table.

The biggest question in my mind is whether we're seeing the smaller wave (2) of the larger black (3) (on the hourly chart) or if this is a fourth wave correction with wave (5) of black (3) underway.  I'm leaning toward the latter.
 

With that thesis in mind, here's the hourly chart.  Not shown on this chart is what happens if the more bearish count is underway.

If the rally we just witnessed was actually blue wave (2) of black (3), then the next black (3) target zone is 1470-1480, with a final target in the low 1400's.  I'm holding off judgment until I see how some other markets begin to shape up, specifically the Philadelphia Bank Index (BKX) and the Russell 2000 (RUT).  I'll firm up my opinion on the above matter over the next few sessions.

Be aware that markets often become very whippy around important levels, and the intermediate uptrend line on the chart below is one such level.  That trend line has held every decline since November, so the market may not be ready to let it go so easily, and may return to test it before moving much lower -- not shown on the chart below is what happens if wave (5) simply makes a marginal new low and then retraces 38-62% of the prior decline, perhaps to back-test the aforementioned trend line. 

The long-term chart of the Dow Jones (INDU) shows support in the 14,400-14,600 zone.  If the market is unraveling the most bearish count imaginable (the deeply nested third wave discussed above), then forget about support.  There's just no way to know for certain yet -- as I said, I want to see how some other markets react to the pattern in the next session or two.

SPX Update: A Dangerous Market for Dip Buyers

The market finally broke the 1598 low, which I've been slightly favoring would be the intermediate outcome for this wave.  In fact, while the last wave felt very whippy, it appears I had the preferred count dead right all along.  Below is the "best guess" market path I published on June 12, and this is one of the reasons I love Elliott Wave theory.  When properly applied, there is simply no other system that matches it. 

We can see on the current chart that the market couldn't have followed this projection much better than it did.  Now we hold our collective breath and see if T3 is reached.  Again, please keep in mind that if this count is correct at intermediate degree, this is a nested third wave decline.  Third waves can be tricky, because the smaller waves are usually compressed, which means bounces should be muted.  

During third waves, I usually stay short (or long) until I start seeing impulsive moves to the upside (or downside) -- I've found that otherwise I often cover way too soon and the market runs away from me.  Draw your trend lines and use those as guides.   Keep in mind that the idea of a third wave decline is to punish the dip buyers. It punishes them by not letting them out and not giving them any bounces to allow them to get back to even on. It will keep punishing them until they stop and go curl up in a corner... or until they decide to go short -- then it bounces.  This doesn't mean bears should get complacent, and there is an alternate count which could find a bottom directly -- but I wouldn't suggest front running anything during a third wave.  Until there are signs of a turn, this is a dangerous market for dip buying.

If my preferred intermediate wave count continues to track, we now have to give a bit more credence to the idea that 1687 may mark a long-term top.  I last published the count shown below back in May, and I'm still considering it a marginal underdog -- however, if the current decline continues to play out as expected, then this more bearish count may gain additional traction.  The long-term expectations for this wave count would be new lows beneath the 2009 low.

New Lows on Deck?

Yesterday, Bernanke let the market know that good news is bad, as continued economic improvement would mean the Fed is likely to start tapering asset purchases later this year, and could end purchases entirely by the middle of next year.  This is exactly what the equities market did not want to hear, since without the Fed's inflationary money printing, the actual cash value of the S&P 500 (SPX) is approximately twelve dollars and fifty-eight cents.

The dollar, on the other hand, was quite excited by this news, and rallied straight up in a rocket launch.

Interestingly, I suspect this scare will be the push needed to drive equities to the lower low I've felt the charts were suggesting was more likely to mark the wave iv bottom.  I think this press conference will embolden bears to step out of their caves for a bit, but the bottom line with Bullnanke's statements is that the QE money will still be flowing (for the time being), and that means continued liquidity for equities. 

Greed is a powerful emotion though, and I think it's more likely that the dip will still be bought, as there is yet no definite end in sight for the QE program.  There are hints it "may" end "if and when" the economy improves.  Of course, anything's possible, and maybe just the thought of QE ending will cause a rush for the exit, since no one wants to be the last one holding the bag.  But in my opinion, the charts still suggest the final long-term high isn't in yet.

But they do suggest that the much anticipated wave (2) high is.  I've seen a lot of confusion over how to label the recent rally, and I believe it represents another extended fifth wave, with a compressed (iv) and (v).  (When you trade Forex as much as I do, you learn to look for and recognize extended fifths.)

This wave looks like a textbook expanded flat with an ending diagonal c-wave in NQ (Nasdaq Futures).  In fact, in the private forums, I alerted everyone to this likelihood all the way back on Thursday, with the following statement:  "I think the new Globex lows in NQ in particular mark our ticket for a VERY high probability short after the market completely retraces the prior decline. Should make a marginal new high and then reverse to new lows."

The hourly chart continues to track well:

Updates to the Long-term SPX Projections

The SPX has reached the target zone, but the near-term is still a bit unclear in regards to what the market has planned from here.  Accordingly, I'm going to update the long-term charts.

It's always helpful to check how a count is tracking, so before we look at the current chart, let's take a look at my preferred count projection chart from back on February 7 and see how it's performed so far.

Below is the projection I published on February 7 (though for some reason I dated it "2/8/13" in the annotations -- though I'm reasonably proficient at tracking the market, apparently I have trouble using a calendar.).

Note: Right mouse click the chart and select "open in new window" to bring it up at full size.

If we compare that with the actual performance of the market, we can see that projection has tracked exceptionally well for the past four and a half months.  Note that for purposes of aligning charts across time frames, I've changed a few of the labels on the chart below (red 3 became red iii, for example).  I've also zoomed in a bit on the current price action:

The question in my mind is still whether red iv has completed or not.  I remain slightly in favor of the idea that it is not complete, and will become more complex, ultimately correcting lower before finding a bottom.

SPX Update: Unraveling the Near-term Potentials

The charts remain messy, but amazingly, despite the feel of hanging on the edges of our seats, the market has performed very much in line with the preferred count from June 12.  The pattern now can be viewed in a couple ways.  Bulls will look at it as a basing pattern, which projects to a retest of the all-time high.  This is entirely possible.  I have another way of looking at it, which I'll share in a moment.

First is the hourly chart, and the best-guess projection of June 12 has so far performed admirably.  I continue to marginally favor the bears on an intermediate basis, but it remains an exceptionally difficult call, which is typical of a fourth wave.  It remains possible that all of wave iv has completed at 1598, and I still feel that the bulls have the ball on a long-term basis. 

For the near-term, the pattern I suspect may be unfolding is shown below.  The other option is more straightforward, and is shown on the 10 minute charts which follows after the chart below.

Granted, the pattern I'm showing above isn't the "trade what you see" approach from a classic technical analysis standpoint.  One of the reasons I'm favoring the ending diagonal is the Philadelphia Bank Index (BKX) below:

The Charts Are Still a Mess...

I'm going to remain short on words again today, because there is still too much clutter in the charts to get a high-probability near-term read.  Intermediate term, I remain marginally in favor of the bears and do not believe the 1598 low will hold.  There's also no guarantee we reach the black (2) target, as there's potential of a nest of first and second waves lower.

One of the charts that bothers me for the bulls -- barring the fourth wave triangle in black.  Above the ii/B high and the triangle becomes very viable.

RUT is also a mess.  I'm having trouble buying into the bullish buy trigger... but I can't ignore it either.  992/993 is first resistance.

CVX is another chart suggesting there may be trouble brewing for bulls.  Not shown below is the fact that hourly RSI confirmed the low a week ago:

In conclusion, there are two places we find charts this confusing:  during fourth waves, and at important tops.  It remains to be seen which this is, and because of the sloppiness of the prior decline and the waves since, the near-term is exceptionally challenging to sort out.  I remain slightly in favor of the bears on an intermediate basis.  Trade safe.

(Ignore this next thing:  Added only for purposes of image hosting)

SPX Update: Outlook Clarifying Again?

The picture again seems to have clarified a bit, though sometimes this sense of clarity is illusory during a fourth wave.  As I've mentioned previously, fourth waves are essentially impossible to predict -- we basically have to take this wave session by session.  Despite the difficulty inherent in the wave itself, Wednesday's best-guess blue path projection (shown on the hourly SPX chart that same day) now appears to have been suspiciously prescient.

Since the options are myriad, as opposed to overwhelming everyone by covering them all in detail, I will cover them in brief, and then we're going to zero in on the path I presently feel is most likely.  We'll cover the other potentials in more detail as it becomes appropriate.

The most common fourth wave options are outlined in broad strokes on the hourly chart below of the S&P 500 (SPX), but I'm continuing to favor the same projected path I depicted on Wednesday -- especially since it has played out perfectly to this point.  Of course, that doesn't guarantee it will do so going forward -- but as the old saying goes: "If it ain't broke, don't count your chickens until the cows come home to roost."  Or something like that. 

Assuming this projection continues to play out, the next decline is anticipated to be strong.

The five-minute chart notes an interesting confluence of targets at 1658.  1674 is the next key upside level where things get hazy again.  It goes without saying that 1608 is now an important downside level for the bulls.

In conclusion, it presently appears likely the market will rally back above 1648 -- and my perfect world target for that rally is 1658 +/-.  It should also be noted that the importance of 1598 on the downside cannot be overstated at the moment -- any reversal beneath that level would be quite bearish and could lead to a small waterfall decline.  Trade safe.

SPX and BKX: No Material Change

The market remains in the ambiguous zone.  I remain marginally in favor of the bears, but am limiting myself to low risk trades, given the ambiguity. 

Let's take a look at the Philadelphia Bank Index (BKX) first, as the pattern here seems a bit cleaner than the S&P 500 (SPX).   

On the daily chart, we can see BKX may be due a larger correction.

SPX is unchanged.  I've outlined one potential path in blue, but there's really nothing to give me much confidence in that path.  I've broken down the options in a bit more detail on the chart which follows this one.

This chart outlines the two basic counts, with one variation in green (the variation is what's depicted on the SPX chart above).

In conclusion, the market remains ambiguous, but I'm continuing to give bears the slight edge heading forward.  Trade safe.

Bears May Have the Slight Edge

Let me start off by saying:  I don't know.  The market did exactly what I expected in Wednesday's update, but it still hasn't answered the big question.  On Wednesday, at least I felt I knew where it was headed over the near-term -- but now it's not so clear.  As I wrote then:

...fourth waves rarely follow the "most obvious" pattern.  They usually turn infinitely frustrating at some point, and become all but impossible to predict.

And as I warned back on June 3:

If this is a fourth wave at minor degree, it will probably get ugly and confusing at some point, and leave bulls and bears alike scratching their heads trying to figure out what the market's going to do next.  The market tends to alternate between trending waves and cycling waves, and fourth wave corrections in a bull move usually cycle in a sideways-down fashion.  They trend near-term, but then stop and grind around just when you think they're going somewhere, chewing up accounts and driving all but the nimblest traders nuts. From my perspective, we haven't reached that point just yet, so enjoy the clarity while it lasts.

I've had a great run since May 6, when I switched footing and set my S&P 500 (SPX) targets at 1640-50 and 1680-90 -- then adjusted on the fly and called the 1680-90 zone "almost a given," for a total of  about 70 points of captured upside.  From there, I hit the turn off the big reaction rally on May 28 and captured 40+ points of downside into the first target zone of 1620-29; then hit the next turn at 1647 for another 40 points into the second target of 1600-1614.  That's about 150 points of profit in a (supposed) "buy and hold" market which, as of yesterday, closed only 28 points higher than it was on May 6 when this run started.

Since I simply can't see a way to top the performance of the past 30+ days, I was thinking maybe I should go out on a high note, and retire to Maui immediately.  Then I remembered: Wait a minute, I already live on Maui!  So instead, I considered retiring to some dank inner-city apartment with noisy plumbing in a high-crime area.  That didn't sound appealing at all, though... so in the end I decided I'd keep trading and writing updates.  I'll have to put off my dreams for another day! 

And I'd better, because as of right this minute: I don't know.  I've been staring at charts a lot over the last few days, and they haven't gotten much clearer.

I'm basically split roughly 55/45 in favor of the bears, but it's almost too close to call.  Let's start off with one of the charts that seems to be saying bears have a slight edge over the intermediate term:

 
The S&P 500 has all the required ingredients for a completed fourth wave, but I'm more inclined to believe it's incomplete.  Bulls must hold the 1598 low, since trade beneath that level would suggest a strong third wave decline.

Charlie Sheen is Winning... but are the Bulls or the Bears?

I'm going to do an update short on words today, because I'm pretty equally split on whether the bottom of wave iv is in place, or if there is more down still to come.  BKX may be the clearest index at the moment.

NYA performed almost too perfectly for the bull option shown on Wednesday.

SPX appears to have put in an extended fifth wave decline, which either marks ALL OF wave C, or wave (1) of C -- it's simply unclear at this stage.  One thing I don't like for the bull case is the fact that RSI confirmed the lows on several different charts.  I originally published this chart in the forum only, several hours before the open on Friday.

In conclusion, there is nothing presently giving me high confidence in either the bull or the bear case here; and we'll simply have to see how the market responds over the next few sessions to gain a bit more clarity.  At times like this, I buy and sell the edges and largely avoid the middle of the range.  Trade safe.

Bulls and Bears Squaring Off at a Major Battle Line

Yesterday's outlook gave 55% odds to the idea of a wave (2) top for the S&P 500 (SPX), marked on the chart as either 1643 or 1647, and the market reversed strongly off the 1647 level, then declined all the way back to retest Monday's low.  For the near and intermediate term, this is now a potentially dangerous setup for the market.  I'm continuing to favor the bears for the foreseeable future, but since I'm not a perma-bear, I'm also looking for signals which could indicate a bottom.  In this update, we'll discuss both arguments in detail.

There's an upward market bias inherent with the QE-Infinity program, and the market has rallied virtually nonstop since that cash started hitting the Primary Dealer accounts in November.  The notable exception to this endless rally was the weeks leading into the fiscal cliff dilemma (late last year).  As it turned out, during the end of 2012 the Primary Dealers were withholding that cash from the market, due to their discomfort with the entire situation.  Keep in mind that a similar thing could happen at any point, so QE-Infinity in itself does not guarantee a market without corrections.  Further, if liquidity is being destroyed (somewhere down the chain) faster than the central banks are creating it, then the market environment becomes deflationary. 

All that said, I still don't favor the idea of 1687 being a long-term top, but as I wrote on May 23:

In conclusion, the long-term presently remains pointed higher, but that may be irrelevant at the moment.  We can't see around every bend in the market, but most times we don't need to: the near-term appears to be pointed downwards, and the intermediate-term, while too early to confirm, also looks likely for further downside.  This is not a bad time to behave defensively.

Though I've been bearish since 1687, my long-term bias remains bullish, and this leads to an interesting cognitive situation.  I'm not sure how to put it into words exactly, but I'll try:  I "want" to find a reason for this market to bottom, but I'm not seeing it yet.  In fact, my work suggests that if the 1622 level fails, we could actually see a significant sell-off.  Right now, the bull patterns I'm finding (from an Elliott Wave perspective) are obscure patterns that are generally low-odds, while the high-odds patterns continue to favor the bears, as they have ever since the reversal at the all-time high.

Long-time readers know that I attempt a feat many believe is "impossible" with these updates:  I try to predict the market across virtually every time frame (short, intermediate, and long), three to four times each and every week.  I'm bound to get some calls wrong, and I absolutely do -- but since early May, I haven't missed many and that puts me in a good psychological position right now as an analyst.  I'm not talking about ego in this sense, although this may be something that only another public analyst can probably really understand.  Basically, when you hit a top as well as I hit this one (my May target-2 for SPX was 1680-1690), then you have a lot of psychological wiggle room to really see what's going on afterwards, because you're not trapped by your prior bias/analysis.  When you get caught looking the wrong way, you tend to try and find ways for the market to prove you right in the end (in order to justify the fact that you were screaming to buy at much higher prices, or to sell at lower prices). 

It can be a pretty tough gig actually, and analysts don't get enough credit for the painful crises of conscience that (I assume) we all endure at times after a missed call.  If you've ever wondered why analysts love to toot their own horns when they get a call right, it's not because they want everyone to think they "get every call right," it's because they're trying to compensate for the incredible guilt they feel over the calls they blew.  A small handful of readers love to remind analysts of their bad calls -- but believe me, nobody needs to.  We know our bad calls better than anyone, because those mistakes take up residence in our memories, especially late at night when the house is quiet and still.  In fact, many of us remember our bad calls much better than we remember our good ones.

Moving from independent trader to public analyst over the past couple years wasn't an easy adjustment for me -- the challenges of each role are actually quite different.  But I digress.    

I think the market's in an interesting position here, from a number of different standpoints.  In terms of sentiment, bearishness has increased recently, but the BTFD ("buy the friggin' dip!") mentality is still reflexively strong, and we've been hearing a lot of "buy the dip" talk the whole way down so far.  This in itself bothers me, because I feel like the long trade has become almost too reflexive and easy at this point.  I know that during last week, I was one of the few lone nuts suggesting we sell the bounces, and many were suggesting the opposite.  Anecdotally, that tells me there are probably a lot of bulls now trapped north of 1650.  What's most interesting is that even many bears seem afraid to sell into this rally.  And why wouldn't they be, after being beaten to death since January?  Maybe a better question is:  could they, even if they wanted to?  I know there are several popular bear subscription services who've recommended heavy short positions all the way up (some with stops I consider outrageous), and I can only imagine that many of their subscribers are dead broke by now.

So, my question is:  are there even any bears left to sell short this market?  Because if the only sellers remaining are bulls, there could be a problem.  Short-selling gets a bad rap from some folks, but the reality is shorts provide an important layer of support for the market, because at some point down the line, shorts have to buy back whatever they sold.  Additionally, shorts tend to trip all over each other trying to cover their positions en masse, which is why bottoms usually have the classic V-shape -- and shorts are generally the ones who kick-start the momentum for the next rally leg.

On the other hand, bulls all by themselves make "bad sellers" because they are simply trying to get out, often in a rush, and they have no requirement to buy back in; bulls can sit in cash or government Trashuries for as long as they want.  As a result, a decline without short covering can be fast and brutal.  Remember the last time the U.S. banned short selling (of 799 financials), in 2008?  How did that work out?  (Hint: not well; prices fell more than 12% over the next 14 days.)

So my bottom line point here is:  While I've stayed bearish since the 1680-90 target was hit, I still "want" to find a reason for the market to bottom.  I think a lot of people are feeling the same way -- and that tells me we have to be extremely cautious, because when everyone's looking the same direction, the market has a tendency to do the exact opposite.  Let's take a look at the arguments for both cases.

Starting off with the bear case, we have a few patterns that aren't terribly encouraging for bulls, and which I first called attention to on May 30.  The SPX chart below should be examined in conjunction with the NYSE Composite (NYA) chart shown later.

If we look at this purely from the "trade what you see" perspective, we find the cleanest wave count is the bearish nest of first and second waves shown below.  I remain marginally in favor of this count, but I am quite alert to the fact that this is (suspected to be) a fourth wave decline, and fourth waves rarely follow the "most obvious" pattern.  They usually turn infinitely frustrating at some point, and become all but impossible to predict.

Note the black "alt: (2)" as the current wave could become more complex.  In either case, if the count shown in blue and red is correct, there should be downwards acceleration coming when 1622 is claimed.  If there is no downwards acceleration on a breakdown, then we have to give weight to the "less obvious" wave counts.  Again, I'll discuss this in a bit more detail on the NYA chart.

The hourly chart has now been updated with target 3 potential -- beyond that, there's been no change in a while.

SPX and Apple: Time for Caution

While yesterday's market found support in a zone I expected would provide it (1624 +/-), the strength of the resultant bounce has already exceeded the near-term expectations I published yesterday.  This creates a bit of murkiness in the charts for the time being, largely because I've been viewing this drop as a wave C decline, and a common target for wave C is to travel a distance equal to wave A.  Wave C equaled wave A at SPX 1622.56, which is within pennies of the recent low.  In this update, we'll look at the market's options from here, and see if we can find any additional clues to its next move.   

On a bright note: exactly one week ago, I noted my first target for the decline was 50 points from the wave ii/B high (not yet known), and all 50 points have now been captured.  At this point, it's okay to have a few questions about the market's next move -- it's simply not possible to know what it will do every day of the week (in fact, many people believe it's not possible to ever know what the market will do, though needless to say, I'm not among them).

I'm inclined to favor the idea that this is a subdividing decline, meaning that the recent five-wave declines are fractal puzzle pieces of a larger, still developing, five-wave decline.  This is shown in a bit more detail on the chart below.  The chart also discusses the potential of an expanded flat (shown in black), since right now the decline from black A to black B looks like a three-wave decline (an abc).  Another push down to new lows would change that three-wave form, but since the market is the final arbiter, it would be arrogant to simply assume that's going to happen with no consideration of an alternative. 

Zooming out a bit, we can see the market found support at the red line I highlighted on May 30, and this does create the potential of either a bottom or its opposite (a much larger topping pattern).  I'm still inclined to favor lower prices after this rally, but this wave may not be straightforward or easy to predict.  This chart discusses some of the key levels.

One index keeping me in favor of additional downside is the Philadelphia Bank Index (BKX), shown below.  The recent decline from the swing high appears to be impulsive (meaning it's a five-wave structure -- and five-wave structures point to the direction of the next-larger wave).

SPX Update: There's the Breakdown, What Next?

May was an interesting month, as the S&P 500 (SPX) reached my 1680-90 target zone and promptly reversed in an apparently impulsive decline.  That impulsive pattern led me to believe the market would continue to correct lower, so last Tuesday, I outlined the reasons I believed we should sell the bounce; and on Wednesday, I upped my odds on a breakdown from 65% to 70%.

On Friday, the S&P 500 (SPX) actually broke down, so now we can take a look at targets with additional detail, as well as revisit the bull and bear long-term wave counts.

My first target from last week was 1620-1629, and that target zone was almost reached on Friday (1630).  However, given the charts at this exact moment, it presently appears unlikely that the decline will end there.  There is a cluster of targets in the 1600-1614 zone, so with Friday's strong thrust lower, that's the target zone to which we're going to give the most weight for the moment. 

The chart below shows the most obvious counts of the near-term. Sustained trade above 1659 would invalidate many bear options, and suggest new highs.

The hourly SPX chart remains largely unchanged since May 28, but I have adjusted target 2 to reflect the discussion above.  We'll reexamine this as the wave unfolds, as the potential for a deeper decline is quite valid.

Thursday's chart is updated below, with a slight bit of fine-tuning.  An option mentioned but not shown is the possibility that Friday's drop was wave (1) of C, thrusting out of a triangle, but that's a very tough call.