Wednesday, July 27, 2016

SPX, OEX, BKX, and NYA: More Evidence the Rally is Overextended

The market has been in a holding pattern (also known as a chop zone) for the last couple weeks, illustrated well by BKX:

Some readers who are still learning Elliott Wave have asked about the qualifications for these waves, so the strict rules for a ZZZZZZZ wave are as follows:

1. The market MUST follow the most boring path imaginable.  Interesting moves invalidate the pattern.
2. Wave Z CANNOT be longer than Wave Z.   Although this seems self-evident, it is not.
3. Wave Z, on the other hand, can never be the shortest wave. Except during a full moon, and on weekdays whose names end in the letter Y.
4. The cheese stands alone.

On a more serious note, let's look at a few degrees of trend, starting with the near-term via NYA:

OEX may provide an additional clue, and suggests that there may still be more near-term downside coming:

SPX remains materially unchanged, but now there seem to be some near-term clues in other markets that indicate the path I suggested last week (toward at least the red "?") may come to fruition:

Bigger picture, BKX held the key level that I discussed at the end of June.  From an intermediate perspective, that's still the level bears need to get things going in a more significant manner:

In conclusion, last update talked about the message of VIX, and how it suggested the rally was overextended.  The current near-term pattern in OEX also seems to suggest that at least a near-term decline is pending.  Thus, barring a sustained breakout over the all-time highs in OEX, it appears that the next near-term move -- after this morning's opening pop completes -- is reasonably likely to be in the downward direction (although OEX is the canary, this directional move should apply to the broad market -- again, though, if OEX sustains trade over its all-time high, then we have to rethink that and simply accept the recent pattern as some lower-probability non-evident bull wave).

On a personal note, this may be my last update for about a week or so.  My family and I are in the middle of a move, and the next week to two weeks are going to be quite busy for us.  Time and internet connections allowing, I may try to sneak an update in here or there, but I can't be certain ahead of time if that will be possible.  At the absolute latest, things should return to normal near mid-August.  So, until the next update:  Trade safe.

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