Wednesday, January 7, 2015

SPX and BKX: Downside Targets Captured; Bulls and Bears Now in Balance

Monday's update expected the decline would continue, and the S&P 500 (SPX) has since captured both of my downside target zones (2015-20 and 1984-94).  With both downside targets captured, a rally/reversal becomes possible.  This appears to be an absolutely critical intermediate inflection point for both bulls and bears.  Let's discuss why.

The basic premise of Elliott Wave Theory is that the market advances in five-wave moves, which occur in the direction of the next larger degree of trend.  Therefore, one five-wave rally or decline typically begets another of similar or larger size.  From there, the market builds fractals -- in other words, once we see five larger waves (each wave composed of five smaller waves), then we know to again expect another five-wave move in the same direction, and so on.  Each completed five wave move is typically interspersed by a three-wave corrective move in the opposite direction.

Elliott Wave has kept us on the right side of this market for most of its major moves of the past few years, and it has kept us on the right side of this decline since December 31 -- in other words, it's kept us looking for lower prices throughout roughly 90 points of decline; certainly not a bad week of trading.

By Friday, SPX had completed its first larger impulse wave (shown as blue 1 on the chart below).  That allowed me to generate the two downside targets discussed earlier, both of which have since been captured. 

Well, here's where things get interesting again.  The two-minute SPX chart below shows that we have reached the most key intermediate inflection point of 2015 (so far, anyway -- sorry, couldn't help myself).  Based on the long-term market charts, I'm inclined to favor the idea that we've begun an intermediate decline.  However, I make it a rule to consider both sides of the trade, because there is always room for error when attempting to interpret the market's patterns and wave structures.  In this case, considering the other side of the trade means that I must objectively acknowledge that it's entirely possible that these two five-wave declines represent a simple ABC correction (shown as the black bull count below). 

In other words, until blue 4 and 5 have been realized (thereby completing an even larger five-wave decline and thus suggesting a trend change at an even higher degree of trend), bears should be cautious at current levels.  If SPX is going to bottom on an intermediate basis, it's likely that this is the price zone from which that would occur.  So, put another way: If you're a die-hard bull, then this is finally where you place your bets.

The Philadelphia Bank Index (BKX) has already captured my first intermediate target, and again, that suggests this probably isn't the best time for bears to get greedy.  As the old saying goes, "Bulls make money, bears make money, pigs get slaughtered."

One of the more bearish points is the strength and speed of this decline in BKX -- unlike anything we've seen from this market in a long time, and hinting that maybe we're seeing a change of character in the market:


In conclusion, bears have had a great week, so there should be no rush to give that profit back at a point where the market is objectively in balance, and could thus return to the bulls' control.  I'm inclined to favor the bears for the intermediate term, but I'm not entirely closed to the bull case yet, because the charts are not entirely closed to the bull case yet.  In very short order, we should have a clear and definitive answer as to who controls the intermediate picture.  Trade safe.

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