Monday, March 17, 2014

SPX, TRAN, USD/JPY: Bull Case, Bear Case, and the Key Levels

Sometimes the market presents patterns and wave structures that allow for high-odds predictions (or "high probability trades," use whatever terms you want here) of where price is headed -- other times it doesn't.  Friday, I felt that new lows were high probability, and the market indeed made new lows.  But as of the close on Friday, the situation has changed.

The market has now completed certain requirements of the wave structure, and has thus transmuted into a pattern that I believe can only be "predicted" if one makes assumptions and accepts certain presuppositions.  Personally, I don't see any reason to make assumptions here.  It appears to me that the market has reached another inflection point, and it may be a big one -- so today I'll discuss some of the things bulls and bears need to accomplish heading forward.

One of the markets I've been discussing a lot recently is the US dollar/Japanese yen Forex currency cross; not coincidentally, usd/jpy is also poised at an inflection point in conjuncture with equities.  A breakdown at the key price zone could easily lead dollar/yen to 97-98, which would suggest "risk off" was taking over, and that would be bad news for equities.  Since this is an important juncture, let's discuss what would constitute a breakdown in dollar/yen.

Traditional Elliott Wave wisdom would look at the usd/jpy chart and say that 101.201 is the key overlap to "guarantee" the last rally was a corrective ABC rally -- however, I've traded this particular Forex pair quite frequently, and I've seen usd/jpy violate this same type of "guaranteed" pattern on many prior occasions without consequence (i.e.: break below an assumed B-wave low, only to then reverse and hit new highs).  When we get to the chart, I'll illustrate the wave count which makes said violations technically possible.

After studying both sides of the trade, I would say 101.201 is the next bull warning level, and a break there would add some confidence to the bear scenario -- but, based on my prior experiences with this market, I cannot in good conscience say that level would be the end of the road for bulls.  100.756 is, in my opinion, a better "all clear" level for bears; and, as noted, a sustained break of 100.756 should likewise spell trouble for equities. 

Currently, the exact key level is a bit of a moot point, as neither of the above-mentioned levels have yet been violated.  Dollar/yen has been rallying off the recent test of 101.200, and is (as of the time of publication) approached a back-test of the yellow base channel.  Also note the potential head and shoulders pattern that's forming with 101.200 as the neck line.

The chart below illustrates both the bull count and the bear count, and shows why 101.201 could be briefly violated without creating any true technical issues for bulls.  These two counts run in diametric opposition to each other on an intermediate basis, which is one feature that helps define inflection points -- but near-term, they may be in agreement.

As long as this market doesn't sustain trade below the key 100.756 pivot, a rally back toward 102.600 +/- would be reasonable for both the bull and bear counts.  For the bear count (red), 102.600 fits the expectations of the retrace for an extended fifth wave decline, and would also make a nice right shoulder for the potential head and shoulders pattern.  For the bull count (white), the rally in usd/jpy would, of course, ultimately exceed 102.600 and head back toward 104.

Note the bull count could bottom anywhere north of 100.756.  If 100.756 is violated, then at best, bulls get a quick new low that leads to a large second wave rally before a monster third wave sell-off -- we'll discuss that in more detail as and if it becomes appropriate.  The key point is that I think this market is as important or more important to watch than equities at the moment.  Forex tends to be "smarter money," and often leads equities. 

Let's look at another market that's reached an inflection point:  the Dow Jones Transportation Average (TRAN).  TRAN has so far formed a three-wave decline, and decisive new lows are needed to start giving the decline an impulsive appearance.  I've noted the first two bull/bear pivots on the chart.

On Friday, the S&P 500 (SPX) reached the anticipated new low, but has not yet reached the (implied) target.  The 1854 level, which I noted was the key overhead pivot for Friday's session, did contain all rally attempts -- but it's valuable to mention that since new lows were achieved, that level is no longer important.  If bears are in control, that level could, of course, still act as resistance, but it's no longer a key overlap that technically damages the bear case.

SPX made two lower-lows during Friday's session, and both came with bullish RSI divergences (see red annotation box below).  This entire wave may still be part of a fourth wave, but we can't automatically make that assumption at this juncture.  If the market's intention was simply to form a correction to the prior large rally, then there are now enough waves for that correction to be complete.  And since we can't say with certainty yet what the market's intention is at intermediate degree, the bull option must be respected here.  How the market behaves at the pivots and key levels will provide the next bits of concrete information.

If we assume we're dealing with an impulsive decline, then a rally toward gray "4?" followed by a decline toward gray "5?" would be the outcome -- but I can see the bull argument here quite clearly, so I can't see how we'd be justified in making that assumption.  Better to let the market point the way.

There's an option I haven't shown on the chart above: It's technically possible the market is nesting a series of bearish first and second waves, which would mean it's setting up for a waterfall decline.  The bear count on dollar/yen supports this potential as well.  So, because that's still a very real possibility at the moment, I would be inclined toward caution and nimbleness on long positions until SPX sustains trade north of the key bullish pivot.  That's certainly not trading advice, and your personal risk tolerance may vary.

In conclusion, early in March the market reached an inflection point, which proceeded to generate a reversal and decline.  By virtue of the wave structure, it has now reached the next inflection zone -- and what happens next, especially in usd/jpy, should have big-picture implications for both bulls and bears.  Trade safe.

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  1. Pardon my ignorance, but for the S&P, how can what you have labelled as (2) possibly be of the same degree as what you have labelled as (4)? Thank you. Bryan

  2. Where would you suggest for (2)? Given the micro structure and the way it unfolded in real time, there really is no better place for (2) that I can see. Fourths tend to stretch out and complicate, especially when second waves are straightforward. If you're taking issue with the way I have (4) labeled, then all I can tell ya is it's not an exact science and counts can always be debated. Feel free to post a chart of your count.