Wednesday, January 15, 2014

Bears Fumble, Bulls Recover -- But the Game is Still Deadlocked

(NOTE:  There was something weird going on with Blogger that it wouldn't let me publish this... I've been trying to publish for at least 40 minutes now...)

Every now and then, the market catches me completely off-guard; frankly, the strength of yesterday's rally surprised me.  While I noted in passing that the potential existed for a fairly direct bottom, I actually expected the market would rally only briefly, then decline to new lows, even if only marginally lower.  The silver lining is that yesterday's action probably couldn't have done a better job driving home the point I was trying to make about trades vs. projections when I wrote:

The point is, on several occasions last week I mentioned that selling retests of the S&P 500 (SPX) 1849 high appeared to be a solid trade to me -- but now that we've seen a decline and selling actually looks like a "good" trade to our linear-thinking minds, it's much more dangerous.  Don't get me wrong, I think the odds are good for at least some continuation to the downside -- but every projection doesn't make for a good trade, because entries, risk/reward, stops, etc. must all be considered.     

So if you're bearish but missed the boat last week, be very careful about where you try to hop on going forward.  The reality is, the market hasn't yet done anything but form a three-wave corrective decline.  No key intermediate levels have been broken, and the pattern has not yet formed an impulsive five-wave decline to suggest a larger trend change.  While there have been intermediate warning signals, price and pattern trump everything -- and practically speaking, the pattern at intermediate degree has not yet ruled out the potential for another wave up.  Speculate accordingly.

The interesting thing about all this is that bears who missed the boat are now being presented another opportunity to take a crack at a retest of the all-time high.  That trade looked a bit better to me last week, but as we'll cover in a moment, I can't say it doesn't still appeal to me for technical reasons (these days I'm not really a bull or a bear; I have no bias beyond whatever the charts give me each day, and simply try to project and trade what I see.).

Let's jump right to the chart which suggests bears aren't completely out of the running just yet.

Sometimes the market gives us straightforward patterns to work with, and sometimes it gives us patterns which would force Stephen Hawking to break out a calculator and start cussing.  Right now, we're in the latter type of pattern.  People who've followed my work for a while know I analyze portions of the wave structure which are often "skipped-over" in popular Elliott Wave analysis.  Some of my best calls historically have come from the results of this micro-work, but...

The obvious count here is a simple ABC decline in SPX, shown in black below.  The thing is, when I look at this chart with zero bias and no opinion of what the market "should" do next, I come up with the count shown in blue below.  The challenge with the blue count is that the inherent complexity of the structure creates a higher probability for error -- just like most things in life: the more moving parts, the more opportunities for something to break or go off-track.  So I can't say that count is high probability, because that's simply the nature of the beast.  The end result is this "here's what I see" micro count is keeping me from jumping on the bull bandwagon just yet.   

As I've noted previously, no key levels have been broken yet in either direction.  Traders sometimes let their imaginations run wild during these types of noise-filled ranges, but it's often better to sit back as patiently as possible and wait for the market declare its intentions.

The Dow Jones Industrial Average (INDU) has not yet invalidated the possibility of a fourth wave.  While SPX has simply expanded its trading range (and is running within that range), INDU is still trading below its most recent consolidation -- a potential resistance zone.


In conclusion, bears put in a good showing on Monday and bulls put in a good showing on Tuesday, but neither side has actually accomplished anything of intermediate significance yet.  As I mentioned yesterday, the action over upcoming sessions will have implications for the bigger picture -- but we're not "there" just yet.  Trade safe.

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