Friday, January 23, 2015
SPX and INDU: Upside Targets Reached; Is it Time to Short Yet?
Since January 14, I've been talking about a complex expanded flat, which was expected to produce a confusing "double-whipsaw" -- first, at the lows, then later, at the highs. After developing a very unusual basing pattern, SPX finally launched into a stronger rally, and yesterday it reached its first upside target of 2064+.
The pattern at the lows is very difficult to reconcile cleanly, which is going to make it a little challenging to predict the price point of the exact top. And that's probably the way it needs to be, since expanded flats are not supposed to be so predictable that you're able to call them a week earlier, and two major turns in advance.
I do have a few inflection zones we can watch for reversals, and I'll get to those momentarily. First, let's take a look at INDU's chart. INDU has not yet broken its previous swing high, which it should normally do under the typical expectations of the current pattern.
Because of the odd nature of the beginning of this rally, the blue path is more of a guideline than a road map (unless I just happen to have counted that early mess flawlessly -- which is probably unlikely).
Let's also quickly revisit Tuesday's explanatory INDU chart. I haven't updated any of the annotations since then -- this is more for the benefit of readers who missed it the first time around:
The fact that INDU hasn't yet made a new high leads me to suspect that SPX probably has further upside remaining. Additionally, hourly RSI confirmed the 2064 high in SPX, and more often than not, that means we'll need at least one divergent high (price higher, RSI lower) before we see a more significant top.
Finally, the SPX 30-minute chart highlights the upside inflection zones. These currently appear to be the most probable zones where the expected downside reversal could begin. In a perfect world, we'll also see a downward impulse wave form as a confirmational clue.
In conclusion, there's been no material change to the picture; in fact, everything that's happened so far was expected to happen. Keep in mind that this is a c-wave rally, and the goal of c-wave rallies is to convince everyone that the trend has changed back to up. This means it may grind higher for a few sessions in order to help flip the sentiment of the majority back to bullish. It may also try to make us doubt that it's ever going to reverse -- so prepare to feel confused and paralyzed at the top.
I do have to mention that, technically, 2064 is all that was required from this pattern, so there is at least a slight chance that the pattern is complete. Due to issues mentioned, that appears to be an underdog, but if we begin to see downward impulse waves, then we'll look more closely at that option.
And, taking a look at the other side of the trade, since nothing's perfect: In the event that SPX makes new all-time highs, then we'll have to start considering more bullish options, though the first option in that event would still be bearish (a b-wave could make a new all-time high, but would still revisit the lows -- and that would be the first default count in the event 2094 is broken). New all-time highs continue to appear less probable.
Ultimately, this is still expected to be a sucker rally, and therefore an excellent short opportunity. Trade safe.
Posted by PretzelLogic at 4:27 AM