Thursday, February 20, 2014

SPX and TRAN Updates, while US Bonds Try to Build a Base

In the last update, I noted it was do or die time for the bear count, and yesterday the bears managed to turn the market where they needed to in order to keep hope alive -- for the time being.

Before we look at equities, I'd like to update the chart of the US 30-year Treasury bond (USB).  I haven't updated this chart in about 6 months, because there's been no reason to -- back in June and July of 2013, I was bearish on the long bond and remained so until recently.  However, the wave structure here has now reached an inflection point which could have long-term implications.  The long bond has formed a nice ABC decline into 127, and is trying to build a base.

The inverse correlation between stocks and bonds has been reasonable for the past few years (stocks up/bonds down), so if the long bond is successful at building a base here, this could also have intermediate implications for equities.  If the long bond was forming a simple ABC correction, that would mean new highs are in store -- and in that event, there are potentially long-term implications for equities.  We'll burn that bridge when we come to it, and the first thing is for bonds to complete this base-building attempt.  The pattern does suggest higher prices for bonds after the current correction completes, and next key resistance is near 135.  The only way I can see this pattern as a complete bearish wave is if the market formed a somewhat-uncommon running flat; I've noted the levels to watch.

Looking at the S&P 500 (SPX) at the intermediate level, I continue to have a difficult time envisioning the market heading much higher.  In the event we reclaim the all-time high, the most probable count still appears to be that SPX is completing a fifth wave -- meaning that another correction will follow on the heels of new highs. 

I should note "Target 1" is only in the event that the all-time highs are reclaimed -- i.e., the alternate bullish count.

I've outlined a few zones to watch on the SPX 30-minute chart:

One of the gross laggards recently has been the Dow Jones Transportation Average (TRAN), which has continued to behave like its in a corrective rally.  TRAN performed in line with the expectations of the preferred count (an ending diagonal) as outlined on February 14.

Not shown is the head and shoulders topping pattern that's formed on TRAN's daily chart, and which projects down to 6500 if 7000 fails.  If TRAN can instead break out here, I may be forced to become more bullish on the broad market.

In conclusion, given what's in the charts as of this exact moment, I'm still having difficulty finding any patterns that would make me mega-bullish on an intermediate basis.  I ran into this same issue at the beginning of the year.  Certainly things can change heading forward, though, so I'm keeping an open mind to the idea that the patterns could shift into something more promising.  As one example: The usd/jpy currency pair also seems to be trying to build a base (chart not shown) -- if that's successful, equities could see more a sustainable rally. 

The bottom line is that there is a degree of fracturing among markets right now, and I'd prefer to see more agreement before committing to an intermediate bull case. Trade safe.

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