Wednesday, October 29, 2014


Last update noted that SPX had likely completed an ending diagonal, thus hinting that a correction to 1946 would unfold.  But this rally again threw a bit of a curveball, and the expected ABC decline instead developed into a shallow sideways triangle, thus giving bears very little relief (we'll look at this on the chart in a moment).

This has been an unusual rally, with virtually nothing in the way of pull-backs.  This is the type of move that simply feeds on itself:  Those who stayed strongly bearish near the 1820 low are eventually forced to cover into strength, which gives more fuel to the rally, which then causes more shorts to cover into strength, which gives more fuel to the rally, etc.  There's probably even a handful of people who are buying the market.

I've heard a few bears talking about thin volume in this rally, but generally speaking, volume is a red herring for bullish moves.  Bull markets don't need volume -- and I've watched many a bear burned with volume analysis during bull moves.  Bull markets only need more buyers than sellers; they don't need massive volume "confirming" the rallies.  Volume is always interesting to observe, but, in my experience, it's pretty useless as a predictive tool during these types of moves, and paying too much attention to it can actually do damage to a trader.

Let's take a look at the charts, starting with SPX 5-minute.  On the chart below, we can see how the last correction was a bear-burner, especially to any bears who were late to the party.

I should add that the chart notes 1995-2000 as a potential completion point for the current wave -- do note that this would not necessarily for the entire rally if gray iv and v are in play.

NYMO is getting into overbought territory, which usually means a rally wave is nearing completion.  This jives with the SPX count discussed on the 5-minute chart above.  Do note that "overbought" can always become "more overbought," so this indicator doesn't necessarily promise an immediate reversal, but it does help confirm my suspicion that the rally is now wrapping up its 4th and 5th waves.

COMPQ's chart clearly shows that this rally has been the most vicious rally in the entire 4 year history of this chart.

I still have nothing new to add since 10/22, when I noted that the anticipated ABC decline had effectively been confirmed as an ABC (ABC's are corrective waves, and corrective waves are always fully retraced to their point of origin).  Beyond that, I still have no new high-probability intermediate targets.

INDU also shows the viciousness of this rally, via the monthly candle -- which also shows just how rare these types of rallies are over decades of market history.

Today is, of course, the second day of a two-day FOMC meeting.  The Fed is expected to waffle-on about all the usual stuff that the Fed waffles on about, and the market is expected to react in its usual wild and whippy fashion.  My conclusion is that this market stinks for both bulls and bears.  If you're a bear, you've been beaten repeatedly by this rally.  If you're a bull, you were beaten repeatedly by the decline.

Personally, while I somewhat regret missing most of the rally, I'm thankful that I shifted into an essentially neutral stance immediately after SPX 1820, and warned readers that the decline could be complete and to stay nimble -- because that beats the heck out of the alternative of being stubbornly bearish the whole way up.

My conclusion, trade-wise at this moment, is that with a typical rally, I might think it was nearing completion -- but this rally has already clearly shown it's not a "typical" rally; therefore, we would be foolish to ignore that and attempt to treat it as we would a typical wave.  We've only had one clear impulsive decline in this whole rally (last Thursday), and that did indeed point the way to an ABC decline on Friday, though it fell short of its targets.  The next impulsive decline will thus be the first confirmative signal that helps point the way toward an end to the rally; until then, this rally has already shown us that most anything's possible.  Trade safe.

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