Monday, February 10, 2014

Bulls Finally Get a Turn in US Equities

Trading requires us to have a both a shorter memory than we want to and a longer memory than we want to.  I've spoken about this before, but often at roughly the same moment the market convinces everyone it's headed one direction and one direction only, it reverses.  Markets rarely head straight up or straight down, so getting bullish or bearish based on the immediate past is exactly what the market "wants" you to do -- it wants you to buy when you should be selling, and it wants you to sell when you should be buying.    

Remember way back when it was the End of the World?  I had trouble remembering the exact dates myself, so I referenced an online historical calendar, but it looked like too many days to count -- so I broke out the calculator, and using a few esoteric formulas (calculating for leap years and such), I was able to figure out that it's been almost a whole week since then.  Yet I've already heard a great deal of talk about how the market's headed "straight to new highs."

And maybe it is, who knows for certain?  But one can't help but be amused by how quickly we go from complacency to omg panic!!! to complacency again.

VIX fell 23% over the span of Thursday and Friday, which represents a massive shift in sentiment, from fear toward hope (and complacency).  From a technical standpoint, historically a drop of this magnitude in such a short time in VIX suggests the equities market will encounter a pullback within the next one to two sessions.  

Along the lines of sentiment:  Even after roughly two decades of charting, one of the things that sometimes still "gets" me about Elliott Wave is that it's so often counterintuitive -- yet it works.  On Thursday night, as I was working on Friday's update, the wave counts gave me a first target of 1788 for the S&P 500 (SPX).  At the time, futures were trading slightly red.  I looked at the cash chart and saw gobs of resistance between Thursday's close and 1788, and I thought, "How on earth is this market going to get to 1788?"  But I went ahead and annotated the chart -- then later (after a wacky whipsaw pre-open) the cash market gapped higher through resistance, hit 1788, and reversed.  By the close, it even went on to best that level.  The the moral of the story is that Elliott Wave pointed the way higher through resistance, despite the fact that such an outcome seemed counterintuitive at the time.

In my opinion, the most probable wave count is still pointed toward lower prices over the intermediate term.  And that probably seems counterintuitive after Friday's strong rally.

In other news -- from the standpoint of potential market-moving events -- on Tuesday, in what is sure to become an exciting semiannual tradition, Fed Chairperson Janet "Gellin' Like Janet" Yellen gives her first semiannual testimony on monetary policy.  It's expected she will reassure Congress that she's planning on bringing QE in for a soft landing with a gentle slowing of stimulus, as opposed to suddenly abandoning ship and throwing bankers overboard into the frigid waters of a tighter Fed.  Be sure to bring the whole family to D.C. for this "can't miss" Winter event; hot dogs will be served, and there will be free balloons for the kids! 

The first chart I'd like to share is a ratio chart, of SPX to the Proshares Short S&P 500 fund (SH).  Notice the difference between the most recent bottom, and every other bottom of the past two years:  Price broke the last swing low.  You will see this same theme repeated across the charts in most major markets, and this type of occurrence is usually a warning to bulls that the party is ending.

Next is the long-term monthly chart of the Dow Jones Industrials (INDU).  To say MACD is a little overbought is like saying Miley Cyrus has "a few" emotional problems.

It's also time to revisit our canary, the NYSE Composite (NYA).  NYA counts best as an impulsive decline, and while there are bullish options in the form of a similar expanded flat as was discussed for SPX on Friday (an expanded flat is an irregular waveform where the B-wave high exceeds the start of the A-wave -- it's one of the only patterns in which you will find an isolated five-wave structure that isn't followed by another similar wave), the probabilities currently still favor another leg down.

NYA has retraced 50% of the decline; the 50% retrace is frequently a resistance zone.

Finally, the SPDR S&P 500 Trust (SPY), which is effectively a 1/10th scale version of SPX.  There is only one thing bothering me for bears here, and that's the fact that my preferred count has us presently retracing an extended fifth.  Extended fifths frequently form impressive "double" retrace patterns -- if that happens here, the current rally will retest the all-time high before dropping to new lows (shown as "alt: (B)").  Note the chart is a little smaller than usual -- this is because Stockcharts was giving me grief and wouldn't let me save the edited chart, so I had to take a screenshot of my work-in-progress.

In conclusion, a snap-back rally was expected upon completion of wave (5), and that's what we've gotten.  While there are a few early signs of encouragement for bulls, the rally has not yet done any significant technical damage to the intermediate bear case, and there is thus no reason to abandon the preferred count.  In a way, becoming bullish here would be the "easy" trade; and more often than not, the easy trade is the wrong trade.  Trade safe.

Follow me on Twitter while I try to figure out how to make practical use of Twitter: @PretzelLogic

Reprinted by permission; Copyright 2014 Minyanville Media, Inc.

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