Wednesday, August 27, 2014

SPX, NYA: Correction Near?

Yesterday, SPX captured the 2004-2010 target zone.  Interestingly, the intraday high was 2005.04 -- and that makes this only the second time in history that the price of the S&P 500 has traded within 9 points of the year (in this case, 2014) that it's trading in.  The last time this happened was in the year 9 A.D., when SPX was trading at zero.

Rumor is that, even back then, certain permabear market services were sending out alerts to "go fully leveraged short" if the market "ever advances from zero and trades at any real number," with "stops at SPX 2000."  My understanding is that some of those subscribers' distant kin were finally stopped out this week, for a tragic loss of 1999.99 points.  It pays to consider both sides of the trade!

Anyway, we're finally into the zone where at least a minor correction would be reasonable -- though this type of thing is primarily for aggressive traders.  Even considering trying to catch a turn here is essentially front-running, since the up-sloping trend channel is still intact.

The question now is whether SPX has another fourth and fifth wave left to unwind, shown on the chart below as green 4 and 5.  I think it's reasonable to assume that it might, but I don't think it's a given.  In a moment, I'll share some more thoughts regarding both counts.

Let's skip over to the NYA, then come back to SPX.  NYA's chart is telling us one thing with high probability:  odds are good that the "final" all-time-high isn't in yet for SPX.  This is because NYA has a three-wave corrective decline, which means that correction should ultimately be retraced completely, to put NYA at new highs as well.  What NYA's chart is not telling us is how we get there -- we can make assumptions in this regard, but any assumptions are only that. 

The easy and obvious assumption would be that we have another fourth and fifth wave left to unwind, shown below in red.  Longer-term, that's probably what bears want to see happen, because it would mean this wave at least has a chance to complete relatively soon.  But there's still another possibility, and that's for the rally to have been part of an ongoing correction, such as a triangle (shown in black).

So, how do we sort one option from the other?  At this moment, we really can't.  Considering that there's still nothing in the way of a notable correction on the charts at present, there's very little info to parse in that regard.  Thus, we'll watch the shape of any pending correction:  If it appears to be an ABC into the red (4) zone, then we'll know to expect new highs to follow fairly directly; if it appears to be a five-wave impulsive decline, then we'll know to expect a deeper leg down.

If a deeper leg down were to unfold immediately, thus stopping NYA from reaching new highs, we would probably have to treat that as a significant buying opportunity, as that would suggest the rally in SPX was only wave 1 of a larger structure.  This is one reason why, earlier, I mentioned that bears probably want to see new highs more directly.

The main reason I'm considering the potential of a deeper correction is because SPX still has me considering the possibility that the rally from 1928 was all part of an extended fifth wave.  The blue path on the chart below would be the typical expected retrace if we're dealing with an extended fifth.  If SPX was not an extended fifth, then the first pending correction should be minor, and SPX has a shot at reaching Target 2 in the relatively near future.  Again, we'll simply have to watch the structure for signs of a three-wave or five-wave decline.

In conclusion:  near-term, the market has a decent chance of beginning at least a minor correction.  Intermediate-term, it's unlikely the final highs are in.  Longer-term, we may be close to wrapping up a large five-wave rally, in which case an appropriately large correction will ensue afterwards -- however, that still appears to be at least a few turns down the road, so probably not what we should be focused on just yet.  Trade safe.

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