Tuesday, January 16, 2018

SPX and INDU: Time to Break Out Some 38-Year Charts...

A couple weeks ago, I noted that if SPX was able to sustain a breakout over the red trend line on the chart below, then it was likely to get "nutty parabolic, as the market imagines itself temporarily free from all restraints."  I think we can all agree that's not a bad description of the rally we've seen since then. 

This "I'm free, I'm free!" behavior continued until yesterday's session, when the market finally encountered resistance just north of 2800 SPX.

The structure of the rally means that sorting the second and fourth waves, as well as sorting the third and fifth waves, is like (as my good friend used to say) "trying to sort fly dung from pepper."  (Although, he never used the word "dung" -- he used the more colorful word with the same number of letters.)

If this market has told us nothing else, it has clearly told us that it wants to be an outlier that flies in the face of all conventional systems and methods.  Thus I think we have to continue to be very careful about how much we think we know, and I'm likewise going to continue deemphasizing wave counts for the time being (since that's what the market environment has called for recently) -- but I will offer some if/then potentials in the "in conclusion" section at the end.

When markets get into this kind of nosebleed rally territory, it's a good idea to break out the very long term charts, so below is a chart of SPX going back to 1980:

INDU's very long-term chart is similar, but with some observable differences:

In conclusion, as I've been saying for several months in many different ways:  This rally has clearly told us that it is an outlier.  And that means it has no intention of behaving in accordance with past markets, or in accordance with "the usual" systems.  This is why anyone who's been treating this market as "the same old same old" has been repeatedly steamrolled, while we haven't.

That said, here's what we've got regarding the near-term:  Yesterday's drop can be counted as a complete 3-wave decline -- so far.  That means that 2768 could mark the bottom of a fourth wave, but it could also simply be an incomplete wave.  If SPX breaks below 2768 before it rallies above 2794, then the decline is probably impulsive, which would signal a larger two-legged correction underway.  Bears also have options for a complex 3-3-5 correction, where SPX could rally up to retest/break the ATH, then drop back down in a larger 5-wave C-wave.  We'll simply have to spot that in real-time if it unfolds, and I'll update with additional inflection points (besides the ATH) as and if they occur.  Trade safe.

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