Wednesday, January 28, 2015

SPX Update: Detailing the Options on Fed Day

The current charts have left open multiple options in order to maximize frustration and confusion on a Fed day.

I can't tell exactly what the market's going to do next, but I have managed to put together some clear patterns to watch.

Let's start off with a couple key points:

INDU failed to reclaim 17923.  It "should" have reclaimed that level for the expanded flat, however it is possible that the pattern was a running flat, which is something I discussed on January 20:

It's worth noting that bears and bulls alike should stay alert to the possibility of a running flat, which would see wave (2)/B stall just short of the blue b-wave high.  The odds go to the expanded flat based on percentages, and because the market likes to fool the majority, but a running flat is always possible and simply cannot be predicted or ruled out.  Thus, as (and if) we approach 17,850+, stay very alert if there are any signs of an early turn. 

INDU dropped like a rock yesterday, which felt a little odd, given how well the supposedly high-beta indices like RUT held up (RUT closed just off its recent highs).  These are fractured markets, so we have to give real consideration to the possibility that INDU formed a running flat.  

This brings me to the second key point:  The rally into the recent highs in INDU and the 2064 high in SPX appears to be three waves.  Honestly, it's one of the ugliest waves I've seen in this market in a long time, so it's possible that it's a bizarre five wave rally, and that wave (3) down has begun.  But it does open up a couple possibilities, which we'll discuss momentarily.

Let's start off with the intermediate view, which remains unchanged since November.

The question now is whether the larger decline wave has already begun, but that's not entirely clear yet.  As noted, the recent rally in INDU/SPX appears to be three waves.  That leaves open the possibility that it was wave (i) of an ending diagonal, as discussed last update.  In fact, SPX dropped right into where I had drawn blue (ii):

Currently, we have a three-wave decline, which would still fit the bill for an ending diagonal, but that becomes a bit more iffy below 2019:

If 2019 fails, then we'll have an impulsive decline, and that would open up two options, as detailed on the chart below:

Next is a chart of INDU that I published in our forums after the close on Monday:

Finally, the ratio chart of HYG/TLT was one we began watching much more carefully back in March of 2014, when I called the top in that ratio.  This remains a foreboding chart for equities.

In conclusion, the first step for bears appears to be sustained trade south of 2019, as that would create an impulsive decline.  That would largely (not entirely, but largely) eliminate the ending diagonal.  That would then leave the two options shown on the fourth chart:  either wave (3) down is already underway, or the expanded flat is becoming even more complex.  Due to the apparent three-wave rally into 2064, we would have to at least consider that second option.  Trade safe. 


  1. Hi Jason, can you approve me on the Deep Wave forum

  2. Hi Pretzel, just wanna say say how much I appreciate your analysis! As a newbie Ellotician it's a great learning experience to see how you keep several options open, instead of imposing just one preferred count. Definitely want to join your forum. Thanks and keep it up!