Friday, July 18, 2014

SPX and NYA: New Lows Likely

Last update revealed that I'm something of a cynic when it comes to the Fed -- and I seem to recall I also covered some charts.  The market's been a bit of a roller-coaster in the two sessions since, so today's update will be lighter on cynicism and heavier on charts (sorry!).

The first noteworthy observation is that the S&P 500 (SPX) failed to cross the technical invalidation level for the preferred count (though it certainly made a good show of pretending it would), then collapsed in a fashion consummate with the projected c-wave.  Before getting to the SPX chart, though, I'd like to discuss the NYSE Composite (NYA).

NYA presents a very interesting chart.  It made a new low in yesterday's session -- and that provides some important information.  This chart also reveals a glimpse at an alternate count that, if realized, would almost certainly be an excellent shorting opportunity.

The NYA chart tells us that lower prices for SPX are good odds, because NYA's fractal is such that it's unlikely to be entirely complete.  The way market fractals function in this regard is probably best described by analogy:  Imagine looking at a side view of a car where the back half is covered by a black curtain.  While you can't be 100% certain of what the back half of the car looks like, you can make some pretty high-probability extrapolations based on what you've seen so far.  For example, you can extrapolate that there probably is, in fact, a back half to the car (as opposed to just air behind the black curtain).  In a similar sense, the fractal in NYA strongly suggests that lower prices are ultimately in store for the broader market, because it's an incomplete fractal.

Therefore, SPX presents essentially the same preferred and alternate options as NYA.  The nod goes to the red/blue count as preferred based on RSI, and based on seniority (it's been the preferred count all week and I don't want to hurt its feelings) -- but just as a side-note, I'd love to see the alternate count come to fruition, simply because it would present a very high probability short opportunity.

In the last update, I mentioned that the Dow Jones Industrial Average (INDU) and Dow Jones Transportation Average would both "look better with a couple more thrusts to new highs," and each index reached a new high on July 16, and again on July 17.  Those two new highs appear to have completed five waves up in both of those indices, and also formed pretty ugly bars on the daily charts.  As a result, bulls must at least remain cognizant of the potential that this correction could mark the start of something larger than the aforementioned "traditional" c-wave.
I had already anticipated that possibility prior to Wednesday's session, and had been showing it on the 2-hour SPX chart as black "alt: 5/alt: C" with little in the way of explanation.  An explanation will have to continue to wait, because I'm not going into much more detail on that unless it becomes appropriate to do so in a coming update.  For now, it's at least something to keep in mind, especially in a market that has so often rewarded complacency.

Not shown today is the Russell 2000 (RUT), which failed to generate any type of significant bounce on Wednesday.  As discussed previously, my belief is that RUT has entered an intermediate down trend; the recent surprise to the downside would seem to validate that thesis.

In conclusion, it's unlikely that the final low occurred in Wednesday's session.  Bulls will need to defend support in the 1940's to ward off the potential of a larger correction.  In the event of a breakdown at support, bears start to open up the game; and if that happens, then we'll discuss those options in more detail in a coming update.  In the meantime, trade safe.

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