Monday, February 15, 2016

SPX, INDU, NYA: Smells Like a Sucker Rally

At any given moment, the market has nearly-infinite options as to how it will proceed, and if it was truly random, then it could bottom and reverse (or top and reverse) at just about any random price point.  Yet it usually gravitates towards certain specific price points before reversing, and these points can often be anticipated.  In this case, the inflection point appeared to be the zone around the low -- and it's worth a brief mention that SPX did end up capturing all three of my potential targets from February 8 (Target 3 was 1800-1812).

On February 8, I mentioned that the lower targets appeared very plausible, but also mentioned that if Target 3 was captured, it might hint more strongly that the decline was a third wave instead of a C-wave (which is a bit of a paradox because C-waves ARE third waves).  Nevertheless, the wave structure did not quite develop as one would have expected for a classic third wave, which now leaves two primary options open:

1.  The decline was part of a larger complex expanded flat, which is a corrective pattern at higher wave degree.
2.  The decline isn't complete at any degree, and the market hasn't even begun the third wave yet.

On Friday, I outlined those options on the SPX 30-minute chart, and noted the approximate dividing line with a red "?".  Today, I've added a bit more detail to that same chart, and thus replaced the question mark with a "2?" label:

Regarding the chart above, I'd like to note that this pattern allows for a lot of leeway at either inflection point: Blue 2 can't be fully eliminated until 1947 is claimed, and black C only needs to be higher than 1947, but could also run even higher than shown.  This is the type of pattern where we'll have to play it by ear in real time, and watch for a turn that's followed by an impulsive decline -- that would help with early confirmation that it's "the" turn.

Let's take a quick look at NYA, then we'll wrap things up with INDU, because the INDU chart suggests that bulls aren't out of the woods yet on an intermediate basis.

On NYA, I've shown that a higher degree C-wave could amount to nothing more than another test of the black resistance line and the dashed red horizontal resistance zone:

Finally, the wave structure in the Dow(n) Jones Industrial Average isn't particularly encouraging for bulls.  These are the little ways that the market sometimes tips its hand, and the pattern we have in INDU appears to be 3-waves up followed by 3-waves down.  This suggests that it's either a larger 3-3-5 corrective flat (the final wave would be an impulsive C-wave), or part of an incomplete bearish nest:

In conclusion, the market has a few different options for the near-term, which means front-running should be done only with extreme caution -- but the larger pattern still suggests lower prices, and even hints that there may be a significant decline pending after this rally completes.

Do note that in the event bulls can claim 1947, there are a few faint early hints in the wave structure that the market could form an even more complex correction and stretch sideways for several weeks before the next leg lower gets rolling.  This note only applies if 1947 is claimed, though, because until that happens, I can't be certain that what I'm seeing isn't simply part of an extremely bearish nest of first and second waves.  Trade safe.

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