Friday, February 14, 2014

Looking at Both Sides of the Trade

Elliott Wave Theory is forward-looking, while much of classic technical analysis is backward-looking.  And as the S&P 500 (SPX) continues to power through resistance and moving averages, classic TA is giving buy signals left and right.  The final arbiter, of course, is price, and price currently still hasn't reclaimed (decisively or otherwise) the all-time high -- which thus says the market hasn't given the "all clear" just yet.

That said, bears dropped the ball during Thursday's session.  They had a chance to push through a number of key levels, but failed to even sustain the opening gap, which was quickly bought up and filled -- and SPX ultimately closed at new highs for this leg, directly inside Wednesday's 1827-1832 target zone.

Frankly, top calling in a bull market is a nightmare and possibly the toughest analytical gig there is.  Tops almost never look like tops, except in the rear-view mirror -- otherwise, who would be buying them?  As the old expression goes, "They don't ring a bell at the top."  So it can be a bit of a trap trying to call them at all, since you almost have to ignore certain bullish things.

In the last update, I promised to eat crow if the bullish signals ended up trumping the bearish wave count, and that's beginning to look like (an even more) distinct possibility.  But we're not quite there yet.  Biggest problem is, a few months ago I promised to eat crow if the near-term preferred count was wrong, and it ended up being right -- but I made the mistake of preheating that crow, then threw it back in the freezer.  Which means that now it's freezer burnt, and I'm quite certain it will be particularly bitter this time around.  I've definitely learned my lesson in that regard, and from now on plan on stocking only Mrs. Paul's Microwavable Crow.

Not too long ago, there was a lot of talk of the January Barometer -- essentially the theory that "as goes January, so goes the year" for equities.  An interesting study by Hennion & Walsh concluded that, since 1986, the January Barometer has worked 77% of the time.  The flip side of that coin is that the average total return for the 23% of "signal failure years" was 16.5%.  Something to keep an eye on.

While no one can deny that the price action has been unabashedly bullish, I'm still not entirely sold on the sustainability of a bull move here -- but I've added more detail to the bullish alternate count nonetheless.  I'm also moving it up to 49% odds from its initial appearance on the chart (on February 7).  This does call to mind one of the values of Elliott Wave, even when not everything pans out perfectly -- the wave counts accurately identified the intermediate inflection point at 1737 well before the rally had made much actual headway.

Next up is a closer look at SPX via the 30-minute chart.  This next part is a bit premature, and hopefully doesn't get too confusing:  Until the all-time high is reclaimed, the most bearish count of wave i down (which has never been my preferred count -- wave A has been my preferred count) remains alive.  Wave A does not actually invalidate at the all-time high, due to the option of a large expanded flat B-wave rally.  Just north of the all-time high sits what appears to be another important inflection point, as noted on the chart.  If we make it that far, watch that zone carefully, as it could theoretically put an end to the rally and take us back down in a C-wave to new lows.  More on this discussion will be presented in a future update if it becomes relevant. 

Near-term, 1824 is the first key zone for bears to reclaim -- and while there's no official "sell trigger" in that zone, it could certainly be used as a pivot.  Incidentally, we're finally starting to see some negative divergences in RSI.

Finally, there are a few indices racing ahead of SPX, such as the Nasdaq Composite, and still a number of indices lagging significantly, including the Dow Jones Industrials (not shown) and the Dow Transportation Average (TRAN).

In conclusion, I'm well aware of the bullish signals which have dominated the action in SPX this week, and I'm certainly not blindly ignoring them.  Again I'm left deciding between favoring the forward-looking Elliott Wave, or honoring backward-looking TA.  For the record, I'm still giving marginal odds to the bear count -- but ready to eat my bitter crow directly if necessary.  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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