Friday, March 7, 2014

Decision Time for SPX -- and RUT Captures 2012 Target

Friday is a non-farm payroll day, which usually leads to a wild pre-open.  The recent history of NFP days is bullish, with 14 of the last 15 ending in the green.  What's happened in the recent past with some regularity is that futures sell-off immediately on the bad payroll number, then everyone suddenly remembers: "Hey, bad payroll is good for continued QE!  And continued QE is good for equities!" At which point the futures rally to recover all their losses and then some.  It will be interesting to see if a good jobs number leads to the reverse effect or not.

There's really no significant change in the outlook, and the S&P 500 (SPX) remains poised at an inflection point.  Not to overstate the obvious, but I think the biggest challenge for bears is the fact that we're still in a bull market, and bull market surprises are almost always to the upside.

In the last update, I discussed the details of the market's inflection point, so today's first chart is an interesting look at how inflection points work.  The chart below is the Russell 2000 (RUT), and it was originally published (exactly as reprinted here) on December 19, 2012 (See:  SPX, NDX, RUT:  November's Targets Captured, and a Look at the Long-Term).  This chart illustrates the value of identifying, and respecting, inflection points.

I'm also republishing this chart because an interesting thing has happened since that 2012 inflection point:  On March 4, 2014, RUT finally captured its 1200 target, with an intraday high of 1212.82.  By virtue of the wave structure, the 1200 target was identified as an "if/then" equation in the event RUT exceeded 902.30.  Needless to say, 1200 represented a 25% gain from that level -- which sounded incredible and unbelievable at the time.

This was one of those "unpopular" bull articles I referenced recently -- a grand total of four people shared that 1200 projection on Twitter in 2012.  I use this stuff as my personal, admittedly anecdotal, gauge of sentiment, because we all have a tendency toward confirmation bias.  We surround ourselves with information that matches our beliefs; we like people who agree with us; and we usually only share articles that support our views.  In fact, an Ohio State University study concluded that we'll spend 36% more time reading an essay if it agrees with our opinions (more on this after the chart).

For this reason, I sometimes get nervous when my projections seem to be in line with the majority of analysts and readers.  This is probably one of my personal challenges this late in the bull market.  Being bullish when most were bearish suited me fine -- but now it seems "everybody" is bullish, and that makes me uncomfortable.  I get uncomfortable not because I'm a crazy rebel, but because the market often likes to disappoint the majority.  I have to keep reminding myself that the latter stages of bull markets can be the exception to that rule, and the majority are "allowed" to get on board for a while.

Anyone who was trading back in the late-90's knows exactly what I mean:  In 1999, stocks were so universally loved that books titled Dow 800,000,000! were flying off the shelves; teenage fry cooks at McDonald's frequently offered hot, unsolicited stock picks which later turned out to be winners; and even my grandmother's dog had a profitable portfolio (of stocks the dog had chosen himself, up 12% in 1999) -- and yet the market just kept running higher and higher anyway.

It took a long time for that sentiment to see judgement day; much longer than many thought possible.  So while the wave structure supports the idea of a turn, we can't simply blindly ignore the possibility that a similar "endless rally" endgame could occur this time around, too.

I think if we want to be better traders, we have to rigorously and continually challenge our own assumptions, lest we develop tunnel vision.  Our tendency as humans is to come up with a hypothesis and then work to prove ourselves right.  We sometimes ignore or gloss over information that contradicts our hypothesis -- but that type of "ignorance is bliss" approach can be deadly for traders.  I think one of the best ways we can judge a good hypothesis is to work to prove it wrong.  If it still holds up to that kind of hard scrutiny, then it's probably solid.

So here we are again, at another inflection point.  Not quite the same magnitude as the aforementioned 2012 inflection point, but significant nonetheless.  We can count five waves up; RUT has reached its long-term target; and there are negative momentum divergences across multiple time frames.  Basically, bears have everything working for them -- except the actual trend.  And that's the most important factor.

Bears need to make a stand directly to wrap this wave up, or risk watching a subdividing rally extend toward 2000.  1895+/- remains the pivot zone for this inflection point, so in the event bulls can sustain trade above that zone, then we'll simply have to keep playing the "everybody knows it's a bull market" trend game.

Near term, SPX has formed five complete waves -- but I've learned over the years that these can be (for lack of a better term) "traps" for fractal-based systems like Elliott Wave.  Five waves marks a complete wave, but it does not tell us if that wave will subdivide into five still-larger waves.  It's a probability play, and it's one of the reasons that identifying key levels and watching other indicators in conjunction with the wave counts is important.

In conclusion, the market remains poised at the inflection point discussed in Wednesday's update, and no key levels have yet been claimed by either side.  The market has ground around in an upward-sloping range for long enough that a decision should be close at hand, likely within the next couple sessions.  In the event bears are going to force a turn, then now's the time.  Trade safe.

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Reprinted by permission; Copyright 2014 Minyanville Media, Inc.

1 comment:

  1. This market is certainly not disappointing the bulls. Even if there is another pullback I just don't see a Bear scenario yet. Although Mike Ditka would probably disagree with me (Da Bears!!!).