Friday, October 3, 2014

SPX, INDU, COMPQ: Market Reaches Inflection Point

I've been pretty openly bearish on the market since September 24 (See: "As Good as It Gets" for Bears), and SPX has since performed in line with expectations, and captured (and slightly exceeded) my downside targets.  But we have to recognize the market has now reached an inflection point.

This is where it's always tempting to overstep our bounds as traders and analysts.  There are certain patterns the market forms which are predictive -- for example, predictive patterns are what caused me to think a top might occur near SPX 2018-28, and caused me to think we'd decline to at least 1935-42.  But now the predictions have come to pass, and we've moved from a predictive market to an inflection point.  The reality is, with the market is its current position, no one on the planet can say with certainty what form will develop in the intermediate wave structure from here.  Not just yet, anyway.

Let's start with INDU for illustration.  I've put (4) and (5) in gray because they are unknown variables in the equation at the moment.  If INDU wants to form an impulsive decline, then it needs a fourth and fifth wave.  But we simply don't know if it wants to form an impulsive decline.  If it wanted to simply form an ABC, then it counts as potentially complete.

The rally off yesterday's low was clearly impulsive, and I mentioned this to everyone in the forums before the close yesterday.  Outside of expanded flats, impulse waves do not occur in isolation -- so while this chart doesn't give us conclusive intermediate answers right now, it does suggest further upside in store over at least the near-term.

SPX has so far found support near the long-term uptrend line:

Let's take a look at NYA, which also suggests a near-term rally.

The one-minute chart for NYA shows a pretty clear extended fifth wave, and that suggests the market may form a complex double-retrace correction.  Though I did not detail that on the chart, keep that potential in mind for now:

COMPQ also highlights the importance of the current inflection point.

In conclusion, the market has progressed from intermediate predictable into "intermediate guesswork" territory.  Near-term, a rally is expected, due to the impulse wave off the low.  If that rally forms an ABC, then we'll know with higher probability whether to expect new lows.  If it becomes impulsive, we'll know to expect the rally to continue higher for at least one more leg.  Trade safe.

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