Wednesday, April 9, 2014

SPX, Nasdaq, NYA: Bull Case, Bear Case, and Determining Who Has the Ball

The easy money's over for now.

Trying to anticipate what the market will do next involves vast amounts of forensic detective work.  Today, we'll try to determine whether bulls or bears have more evidence on their side.  Sometimes, the evidence is reasonably clear, which means future outcomes can be anticipated with reasonable probability.  Other times, the evidence for the bull and bear cases reaches a seeming equilibrium, which makes it difficult or impossible to come up with high-probability projections.

Last week, I felt the market would break higher from the March trading range, rally briefly, and then whipsaw, catching both bulls and bears by surprise.  Those things came to pass.  Then on Monday, I discussed what I felt were the first high-probability targets for the S&P 500 (SPX), at 1834-42, and Nasdaq Composite (COMPQ), at 4030-60.  Both of those targets have now been captured.

All that was the "easy" part.  As I noted on Monday, the target zones I published also represent inflection points, which means those are price zones where reversals become possible.  Today, we'll look at the evidence for bulls and bears and try to determine who has more weight in the market right now.

First off, let's talk about the bull evidence:

1.  SPX has reached the 50 day moving average, and, as is typical, there has been some buying around that level.  The 50 dma is a lagging indicator, but I pay attention to it because other traders pay attention to it, which means the price action often becomes heated near that zone.  So far, we can view the bounce at the 50-dma, at least in SPX (Nasdaq is another matter), as mildly bullish.  Considering that the 50-dma crosses a major price support zone, though, it's hard to read too much into the bounce yet.

2.  The Volatility Index (VIX) formed a bearish engulfing candle on Tuesday.  VIX down usually means equities up, so we can put that in the plus column for bulls as well, at least over the near-term.

3.  There's an Elliott Wave pattern called an expanded flat, which has now reached the minimum downside expectations in SPX.  Every large impulsive (five wave) decline since 2012 has been wave-c of an expanded flat, so we have to stay alert to that potential here as well.  This isn't really "bullish," exactly, any more than a potential head and shoulders that hasn't actually broken down yet is "bearish" -- it just exists as a possibility that has to be respected.  Let's look at that in more detail.

In an expanded flat in an uptrend, the market rallies to new highs in an irregular b-wave, then declines to break the a-wave low in wave-c.  SPX has completed the minimum requirements for such a pattern.  However, the NYSE Composite (NYA) has not yet broken its (potential) a-wave low, but has broken its uptrend line -- so we have to put this index as a plus-mark in the bear column for the time being, and it suggests new lows still on the horizon for the broader market.

Let's back away from the near-term view for a moment and take a look at the weekly chart of SPX.  Even though bulls have the uptrend still in their favor, there were two fairly strong trend reversal signals which came at long-term resistance.  Signals can go unrealized, of course, but until SPX breaks 1897, this chart probably argues in favor of the bears.

The Nasdaq Composite captured its target, then reversed.  This behavior does keep bull options alive, though the overall structure presently hints at new lows -- so this has to be placed in the "neutral" column.  Near-term, a bounce would be reasonable, so we'll have to rely on real-time feedback heading forward.

Finally, the hourly SPX chart does suggest at least a near-term rally.  The bounce out of the captured target zone appears impulsive, suggesting at least one more leg up over the near term.  I've outlined targets on the chart:

In conclusion, it's difficult to get too far ahead of a market like this one.  Near-term, the weight of evidence tilts toward the bulls and suggests a bounce is due.  Intermediate-term, the evidence slightly tilts in the bears' favor -- but since the bulls have the long-term trend in their favor, it's a close call.  For the time being, I probably have to give a slight intermediate edge to the bears, but I'm not stubbornly set on that by any means.  As I noted, the easy money is over for the moment -- so we'll be wise to observe how the market reacts to this first bounce opportunity, then we'll examine the new evidence in the next update.  Trade safe.

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