Monday, October 6, 2014

SPX, INDU, NYA: Bullish, Bearish, or Neutral?

Last update, I warned that the market had reached an inflection point, and that it was likely to rally over the near-term, but that the intermediate picture was a bit hazy.  Has the intermediate picture clarified since then?  Let's find out.

People hate uncertainty.  Some traders feel uncomfortable with the concept of neutrality, and would rather just "pick a side, any side!"  Some folks would even rather be wrong in the end, just as long as they can feel like they're being decisive in the moment.  And I think that's a fine approach for things such as choosing what you want when you're in line ahead of me at Starbucks (seriously, hurry up already!  Yes, Venti is the large size, for crying out loud; I thought everyone figured this out years ago.).

But, personally, when it comes to money, I would rather be right than be arbitrarily decisive.  And as I've said many times before:  Cash is a position, too.

I'm going to refer back to something I wrote on Friday:

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.

So surely we're there now after one whole session, right?  Well... hmm... Let's take a look at the evidence.

We'll start with a simple weekly chart of SPX:

So, as seen above, large-caps have a potentially bullish candle on the weekly chart.  But when we look at the broad market, via the NYSE Composite Index (NYA), the picture isn't quite as inspiring.  Note NYA took out its last swing low, as opposed to making a (thus far) higher-low like SPX.

Thus we have a bit of a disconnect between various markets at the moment.  Let's look at the near-term charts, and see if that will help clarify things.

The chart below is a great example of what I call a "Rorschach chart" -- bulls will see bull patterns, bears will see bear patterns, Cookie Monster will see patterns that look like cookies, etc.

Some of that goes back to my discussion on people wanting to feel like they're being decisive.  The reality is, this pattern just isn't clear-cut -- but it would certainly feel more comfortable to pretend it was.  If I had to "pick a side, any side," I would probably lean ever-so-slightly toward the extended fifth impulsive decline, but that's just because I'm a rebel.  Well, that -- plus that's what the pattern looks like to me.  And I think that pattern would burn a lot of people.

Just for grins, if this were an extended fifth, it would mean a corrective rally underway now -- one that could stretch out for a spell, with a possible "double-retrace" in store at some point.  That would see the market continue to rally for the near-term, then decline toward the recent low, but that test of the low would hold and we'd then rally back up to break that first high.  A prolonged corrective rally with a higher low/higher high should also be sufficient to burn off some of the excess bearish sentiment.

But, again, I'm not entirely sold on that outcome.  I can see the bull case quite clearly for an ABC decline -- and we've been in a bull market for the past few years, so until that changes, the simple reality is that bears have to consider themselves the underdog in any market battle.

In COMPQ, we find a similar pattern.  COMPQ has nearly reached Friday's upside target.  Once that target is captured (assuming it is), then I will have no further strong opinion at this exact moment.  That may change by Wednesday's update, as the market will reveal more information in the continuing wave structure.

In conclusion, I think the near-term edge probably has to go to the bulls for now.

Intermediate term, I think the picture remains a bit fuzzy.  And I'm content with that.  We were on the right side of the decline from the beginning -- and this move captured its downside target, plus a few points for good measure.  Thursday's impulsive rally then warned that profits should be protected on any remaining shorts, and got us looking up instead of down.  It's okay not to know what the market will do every second of every day -- we just need to have a good idea often enough to make money; and then be able to adjust to changing conditions as necessary.  Trade safe.


  1. Over the weekend I was considering the weekly candles too - Great minds think alike :))
    My indicators still point to a double top at least and most probably new all time highs !
    I think we are about 4% away and will make a rapid ascent very soon - SPX 2,040-2,063 has been my target for several months now !!

  2. I gotta question - IF this is the beginning of some big wave 4 down like it seems most are trying to hang their hats, wouldn't this first decline be a bit more 'impulsive'? I know nearly 100 points down from 2019 to 1926 in a month or so is big, but the market just doesn't seem like it wants to go down. Stock buybacks filling the void? Who knows. But I just can't seem to feel the bear side gaining any momo. The NYA just seems like it's on another planet inviting the RUT to tag along. SPX says it doesn't want to go.