Monday, November 3, 2014

SPX and INDU: Still a Spec Market

There's been no material change in the outlook, so today I'd like to discuss one of the shortcomings of Elliott Wave.  Yes, you heard that right.  I've said many times in the past that it's important to know the limitations of your trading system, so today we'll look at one of those limitations.

Everything in the physical world has limitations, and we can run into serious trouble if we ignore that.  Imagine, for example, that your car was a Ferrari -- and you loved your car for its quick acceleration, great handling, fast top speeds, etc.  But simply because your car does so many things so well does not make it limitless.  If you let your passion for your car override your common sense, you might start to think your Ferrari could do anything and everything you asked of it.  Thus you would be in for a rude awakening, and some very costly repairs, when you decided to drive your Ferrari in the local mud bog competition.

Trading systems are really no different, and every system has its own limitations.  And since we'd all like to avoid "costly repairs" as traders, we are always best off acknowledging those limitations -- and avoiding the mud bog competitions.

So, the first chart I'd like to share is a historical chart of the SPX from November 2011 through May of 2012.  The annotations explain why I'm sharing this particular chart:

(Please note the typo -- "fo" should be "for."  I have not started speaking slang.)

Please note I'm not saying this current rally will play out exactly like the chart above -- I'm simply pointing out that, in this particular instance and as of this exact moment, we simply don't know.  For that reason, I think everyone would be wise to keep that chart in mind heading forward.

Particularly keep it in mind as you look at the wave count below.  Could SPX be completing five waves up and soon due for a deeper correction?  Sure it could, that's absolutely a possibility.  But as I wrote last Wednesday:

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.   

Next is a simple trend line chart of SPX:

INDU's simple trend line chart:

And INDU's daily chart:

In conclusion, there's nothing to add down here that I haven't already said half a dozen times in as many ways over the past couple weeks.  Essentially:  This is still a speculative market -- treat it accordingly.  Trade safe.

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