Monday, February 1, 2016

SPX and INDU: Bulls Keep Hope Alive -- Will It Stick?

Last update concluded that: may be a do-or-die session for bulls' near-term hopes.  The market is trying to build a base here, but still needs a sustained breakout for the base building attempt to end up successful.

Apparently, bulls realized that Friday was their last chance, and they showed up in droves on the heels of the Bank of Japan's announcement of negative interest rates.  The central banks are continuing to take the approach of "no program is too radical, and there's no such thing as unethical."  I remain in the "old school" camp that believes "there ain't no such thing as a free lunch" (RIP Robert Heinlein) -- i.e.: you can't get something for nothing.

Or, as Fred Brooks so succinctly put it:  "You can only get something for nothing if you have previously gotten nothing for something."  Thus, I continue to believe that this Grand Economic Experiment, which the world's central banks are inflicting upon all of us and our children, will eventually end very badly.  But in the meantime... well, in the immortal words of The Artist Formerly Known as "The Artist Formerly Known as Prince" but Now Known as Prince Again:  "Tonight we're gonna party like it's 1929."

As far as the charts go, there are a lot of unanswered questions at the current juncture.  On Friday, bulls essentially rallied the minimum they needed to in order to keep hope alive for a half-decent bottom.  Early this week, the market should show us if there's any reality to that, so we'll be watching support zones and wave structures very carefully.  Bears do need to remain aware that if support holds, there are options for a solid rally from this position; while bulls need to remain aware that if support fails, it just might end up qualifying as a whipsaw (depending on how it shakes out) of their inverse head and shoulders pattern:

I've tried to simplify the bigger-picture INDU chart as much as possible, at the risk of the market taking a significant deviation from the paths shown.  I can see half a dozen clean and fully viable potential wave patterns on this chart, so I'll have to update those as and if it becomes appropriate to do so.  SPX has similar options, so there's really no need to chart them twice, with the market as ambiguous as it is currently:

In conclusion, if you're a bear, you could, of course sell the resistance inflection points; if you're a bull, you could, of course, buy the support inflection points... or, if you're a more cautious trader, there's always the option to await a bit more clarity.  Traders who took profits when the downside target zones were captured (See:  SPX and RUT Capture Downside Targets) -- and thus avoided the recent 100 points of drawdown for shorts -- are probably glad they did.  As written January 21:

Yesterday saw the capture of the preferred count target zones in both RUT and in SPX.  Folks always wants to know "what's next?" -- but this is a good moment to relax and enjoy the completion of some very successful trades.  As I wrote last night in our forum:

Random Trading Psychology Thought: Sometimes it's a good idea to take a moment to allow a big victory to settle in before rushing off to fight the next battle. Daily study is a discipline, but never-ending daily account expansion is impossible, and trying to achieve it only leads to ruin.  In other words, after a big win, taking a victory lap with the attitude that "I won that round, so I don't NEED to know what happens next" is often beneficial to one's account. In my humble opinion, of course.

Accordingly, we're currently in "victory lap" territory:  The decline might be complete, or it might not.  As I've said for years:  We don't need to know what the market will do every minute of every day, we only need to have a good enough idea often enough to make money.  And, of course, the discipline to both manage our risk, and to know when to take action and when not to.  

Trade safe.

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