Friday, December 5, 2014

SPX and COMPQ: SPX Validates Preferred Count; Here Are the Next Key Levels

On Wednesday, SPX validated the preferred count and made a new all-time high, good for a quick 23 points of profit.  Bears are getting very restless with the seemingly-endless rally that's been underway since October.  There are real fundamental concerns underpinning this restlessness: Oil is down 38% since June, the yen has continued to collapse, the dollar has continued to rally, and the economy has continued to be sluggish.

The issue, of course, is that we can't time the market using fundamentals -- all we can really do with fundamentals is frustrate and head-trip ourselves.  Think about how well fundamentals have worked for timing since, say, 2009.  Or think about how well they've worked during this rally.  Are the fundamentals significantly different than they were a month ago?  Not really.

Meanwhile, as we've examined here since October, the charts have yet to signal a meaningful top.  The technical approach vs. fundamental approach is working just fine -- so, as always, everyone is advised to forget about whatever is making headlines in the current news cycle (barring a true black swan event, of course!).

I think it's important to ignore news, because news tends to bias our expectations.  We hear something bad and say, "Oh, man, no WAY the market can rally with that going on!"  And then when it rallies anyway, we start to feel like we're obviously smarter than the market, since (we think) we know why it "shouldn't" be rallying.

And at that point, things get dangerous for us as traders -- because we become emotionally attached to certain outcomes from the market.  We become emotionally invested in those outcomes, partially because the realization of our hypothesized outcome would (ultimately, eventually, one day!) prove that we were, indeed, smarter than the stupid market.  We were right all along!  Back pats all around, and another round of government cheese for everyone!  Because we're probably broke from being so darned smart that we fought the market tooth and nail the entire time it was going against us.

So forget about the news.  To some degree, forget about the fundamentals, too.  Let the charts tell you when the world is finally getting wise -- because they will tell you.  Or they'll at least tell you that the possibility is there, if X and Y qualifiers are met.  Maybe you won't hit the exact turn perfectly to the penny.  So what?  What's 20, 30, 40 points, relative to a major turn?

With that out of the way, let's look at the charts.  First up is the SPX 30-minute chart. The option of a complex fourth wave remains on the table, but will not be considered further unless/until the market sustains trade below 2066.  The alternate count shown here is for yesterday's high to have marked wave (v) of an ending diagonal (shown as black "alt: (5)), and this is another reason for longs to be cautious below 2066.

Next is the 5-minute SPX chart.  Bear options begin to open up below 2066:

Finally, there is a fly in the ointment right now, and that's COMPQ.  COMPQ's decline appears to be impulsive, and unlike SPX and INDU, it has not made a new high since then.  This is one of the main reasons I'm continuing to give consideration to the possibility of a complex fourth wave in SPX, and also cannot eliminate the SPX alternate count from consideration.

In conclusion, trade below SPX 2066 does not guarantee a bearish resolution, but there is enough doubt across markets that such an occurrence would probably at least call for some near-term caution from bulls.  Conversely, as long as 2066 holds, bulls are golden for the time being.  Trade safe.

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