Wednesday, March 5, 2014

SPX Reaches Critical Inflection Point: A Look at the Bull/Bear Battle Lines

Well, we have an interesting market now.  I don't trade news, but everyone who does has had a bad news event to sell, followed by a good news event to buy, both within the prior few sessions.  And both basically the same event.

So, those bulls who were waiting for a "good news event" as the signal to go long have gotten it, and should now be long. (The really good news, of course, is the fact that Taco Bell has finally resurrected their Chili Cheese Burrito.  Do not let me get started on this topic...).  Other bulls have been waiting for a breakout to new highs as the signal to go long, and they've gotten that, too.

The question now is: How many buyers are still left to chase the market higher here?  It's decision time.

One of the things that bothered me about the turn at 1867 was the bad news event that came with it.  I'm always suspicious of "bad news" tops -- the best tops are made on good news, in order to pull in the last buyers and trick everyone into continuing to look upwards.  A good top isn't one where people are shorting the bounces afterwards -- it's one where people are buying the dips.  In other words:  "bad news" tops are usually too obvious to work, and they're too easy as a contrarian play.  The exception to this is tops which are marked by incredibly major, world-altering events -- but, interestingly, those events usually seem to come weeks or months into a turn, after the market has already topped on a good news event.

Back to the present (no relation to the direct-to-DVD sequel, starring a much-older Michael J. Fox):  I can see both sides of the trade here, and they strike me as pretty even at this exact moment.  Bulls have a breakout and back-test of falling support in their favor; but at the same time, so far there's been a bit of "failure to launch" -- each prior breakout has been turned back rather directly and the breakout levels have failed to act as support.  That behavior needs to change for bulls to gain momentum. 

The upside for traders is that this has turned into a massive inflection point for the market.  I discussed this in passing at the end of last month, but the near-term charts are now helping to clarify some of the key levels.  So today we'll look at the bull/bear battle levels -- and the targets which are suggested for the victor of those battles.

First up is the S&P 500 (SPX).  The two highest-probability wave counts here (and minor variations thereof) are 180 degrees reversed from each other.  The bear count has the market within a topping process (bottoms are often "an event," but tops take time).  The bull count has the market on the verge of a third wave rocket launch.  1895ish appears to be the dividing line between the two options.

For more perspective, let's refer back to the long-term SPX chart I published on February 28.  The chart below is materially unchanged since then -- but as outlined above, the near-term chart is now helping to point the way in identifying the key levels.

A related signal chart, which I've posted a few times in the distant past, is the ratio of high yield corporate bonds to the 20+ year treasury bond fund (HYG:TLT).  This ratio serves as an effective barometer of the market's current appetite for risk.

In conclusion, the market has bent and stretched the wave structure a bit recently, and this has created a nice inflection point for traders.  The market now appears to be on the verge of a big move, and the noted key levels should help point the way.  Trade safe.

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