Friday, May 1, 2015

SPX and INDU: Bull and Bear Cases Still Both Remain Valid

On April 24, I discussed that SPX had a decent shot at retracing to 2080-85 before it would have a chance to really get much going on the upside, and in yesterday's session, SPX reached a low of 2077 before beginning to bounce.  The question now is whether this is the start of the "real" bull leg, or whether this is simply part of an ongoing correction.

The answer isn't entirely clear, unfortunately.  We're several months into a trading range now, and as I've been warning for a while, it becomes increasingly challenging to read into the patterns.  Accordingly, I'm going to continue publishing both the bull and bear perspectives for the time being.

On the SPX chart, we'll begin with one of the bear perspectives.  SPX does now have a break at the lower blue trend line, which is something of a change of character from the last four weeks or so.  Does it mean it's the end of the world for bulls?  Not necessarily -- the key understanding with trend lines is somewhat self-explanatory, in that they represent (of all things) trends.  We are not currently in a trending market, so trend line breaks carry less weight than they would in an established trend.  Nevertheless, it's worth watching how the market reacts to the breaks of the blue and black trend lines on the chart below, particularly how it responds on any back-tests of said lines.

Moving over to the bull view, and we can see that SPX finally tested the zone I was anticipating it would test on the 24th -- and this test does not negate the bull counts.  The first informational level on the downside is 2072, and I've outlined the next bull option if that level breaks.

INDU still hasn't done a thing to provide any additional information, and this "informational blackout" has been ongoing for months now:

In conclusion, I hesitate to get too married to any particular outcome at this inflection point.  If the decline was wave 2 of a bull wave, then it will be straight on to new highs from here.  The issue for bulls is that, on a near-term basis, it appears unlikely the decline is entirely complete.  Due to the nature of trading ranges, it would be somewhat foolhardy to make a "strong" call, but I would not be terribly surprised to see the next bounce sold to new lows -- however, I would caution bears against front-running in a market like this, and if bears wish to play at all, personally, I'd await only clear, low-risk entries (not trading advice!).  Frankly, the best times to sell have been into resistance once "everyone" thinks a rally will never end -- in the most recent past, anyway, once a decent decline takes hold, it has often been too late to participate.

So, for bears, watch for rally structures that appear to be complete ABC's, followed by the first small impulsive decline.  For bulls, watch for a rally that develops via five wave upwards structures as one signal that the upside will continue.  Trade safe.


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