Wednesday, October 8, 2014

SPX Update: Short and Simple

I apologize, but I ran short on time today, and, accordingly, have to do a relatively short update.

The simplest thing to do is reprint my "best guess" call from Monday:

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.

Hopefully the above at least kept readers from getting too bullish near the highs, as it seems many other traders did.

Step 1 and 2 of the suggested pattern have played out, and the market is now into the zone that qualifies as a retest of the low.  Basically, bulls need to hold it in the general vicinity of the 1926 low to have a near-term shot at another leg up.  They do not need to hold the exact low, because a brief break of the low would not rule out a b-wave (shown in red below).  But any break of the low would imply a third wave decline is in the cards, either immediately upon the break, or after a more prolonged rally to complete the "double retrace" (ideally toward the red 2 on the chart below).

The challenge on the chart below is that both the rally off the low, and the decline from the recent high, appear to be impulsive.  This makes it almost an impossible call as to whether we'll see another leg up or not.

In conclusion, my inclination remains that the decline from the all-time-high to 1926 SPX was impulsive (first waves are often sloppy and difficult to count, and that wave fits the bill), which means the rally is a correction to the decline.

It's worth noting that bears have pushed a few indices, such as RUT, to new lows -- and (although, obviously, one can never be 100% certain of the market's future) this was one of the points I tried to call attention to on Monday when I discussed the disconnect between large-caps and the broader market, which seemed to be showing more weakness than SPX and INDU.

The market is now roughly where I suspected it would be when I penned Monday's update, so at this point it's a simple matter of watching to see whether this test of the lows is successful or not.  Trade safe.

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