Thursday, January 9, 2014

Wave Counts for US Equities Beginning to Diverge Markedly

Some markets make you want to give up trading and take up something that requires less focus and concentration, like working in the "customer service" department at Kmart, or being President of the United States.  The market has continued to form an ambiguous pattern, which leaves a lot to interpretation.

Sometimes Elliott Wave provides (what I feel) is an unbeatable edge, such as when the two highest-probability counts agree on intermediate direction -- for example, as they did in the Transportation Average back in early/mid November, when both the bull and "bear" count pointed to higher prices.  When that happens, I'm a little more lenient on my entries and play wider on my stops.

Other times, we end up with two seemingly-equal probability counts which are diametrically opposed:  In those cases, we have to refer to key price levels and allow the market to dictate in real-time.  And at such times, I'll generally enter trades only when provided a low-risk entry, and usually keep tighter stops.  This is where we are at the moment, at least for the very near-term.  At the next higher time frame, though, both the bull and bear counts suggest a top is nearby.  Then the counts diverge again, so the long-term significance of said top will need to be determined in real-time.

For a closer look at the intermediate view, let's start off with the Dow Transportation Average (TRAN), which reached the lowest target zone I published on November 14 (7400-7500).  Back then, the bull and bear counts both agreed that prices were headed higher into year end; however, those two paths are beginning to diverge, with the potential for this to be a marked divergence.  And, just like famous poet and investment advisor Robert Frost, we'll probably want to take the "Trade Less Traveled," since crowded trades usually stink.

On the chart below, I would refer to gray wave iv as an "intermediate" trade (for lack of a better term), and from that perspective we should be close to a peak for both the bull and bear counts, so they both agree on that.  From a near-term perspective, the structure allows for another smallish wave up without any issue.  But from a long-term perspective, the bull and bear counts are significantly different, as gray wave iv (bull count) would mark only a mild correction, whereas the bear count would lead to a protracted decline.  A sustained breakout with multiple closes above the red channel would force a reexamination of the bear thesis.

Moving on to the S&P 500 (SPX), we have two near-term potentials in the making, and for the near-term I'm about 50/50 split on the odds.  This is the type of position where bears might consider a crack at shorts if price moves a bit higher, since that would provide an entry with clear, nearby stops.  That is, of course, certainly not trading advice, and you should consult your broker, your spouse, and a Tarot spread before making any investment decisions.

Based on the length of the existing waves, I'm making an assumption on this chart that if 1823 fails, then the blue wave 1 peak will be broken.  The blue 1 peak is relevant because fourth waves are not allowed into the price territory of first waves (except during patterns known as "diagonals"), so a break there would leave the bulls with fewer options.

In conclusion, from an intermediate perspective, the bull and bear counts both seem to agree that a top is close (as noted, a sustained breakout would call that into question, of course).  From a near-term perspective, the structure does allow for another small wave up -- and it's worth mentioning that if SPX makes a new high and thus validates the fourth wave triangle count, then we have good odds for a decline to follow directly, since triangles virtually always appear as the penultimate wave in a structure.  The market should be close to clearing its way out of the sideways chop of the past few sessions, so I'm hoping for better near-term clarity by next update.  Trade safe.

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