Monday, March 19, 2018

SPX and INDU Updates: No Surprises Yet, as Bears Won the Near-Term Battle

Here in Hawaii, we don't do daylight savings time.  I grew up on the East Coast and always hated daylight savings time when I lived on the mainland... but I think now that I live here, I hate it even more.  It's been kicking my already-exhausted butt lately, because it causes the cash market to open at 3:30 a.m. local time (instead of 4:30 a.m.). 

As a result, I am going to switch from the long-standing Monday/Wednesday/Friday schedule of updates to a schedule of Tuesday/Thursday updates, at least until further notice. 

Fortunately, there have been no real changes to the last few updates anyway.  Last Thursday's update noted the level bears needed to claim, but likewise noted that the Dow Jones Industrial Average (INDU) made lower prices appear likely for both INDU and SPX.  As I wrote in that update:

On the INDU chart above, I won't say I've never seen a pattern such as this one that ends up resolving bullishly -- but it's far more frequent to see such a pattern resolve bearishly over the near term.

INDU's updated chart is below:

The biggest challenge faced by all market participants right now is that we are clearly dealing with a series of complex corrective waves, and -- unlike impulsive waves -- corrective waves have virtually infinite options.  They do not need to adhere to the same rules as impulse waves, so (at times) they have the freedom to do almost anything.  The challenge this creates becomes especially pronounced within the context of the massive decline we saw from the January highs to the February lows -- because that leaves an awful lot of price leeway for them to work with here.   

We hit the bottom in February rather well, and knew to expect a sizeable rally from there -- but what we didn't know was the exact form that (presumably corrective) rally would take.  I kept hypothesizing complex moves, based on my prior experiences with such waves, and we're finally seeing just such a move.  But that doesn't make this any more predictable.  So please keep that in mind when you look at the charts I present.  Given what's in the charts at the moment, I'm projecting the path that seems most likely -- but the market can take other, more complex, paths if it so chooses.

This is one of the facts that some traders fail to understand about Elliott Wave Theory (or any market projection tool, for that matter):  Impulse waves must adhere to certain rules, which makes them predictable.  Corrective waves do not need to adhere to those same rules (except within the context of the next larger wave degree), which can make them somewhat unpredictable.

Your money is made during the impulsive moves; but failing to adjust your strategy during corrections will often cost you money.  One cannot treat corrective waves like impulse waves. 

Along those lines, I'd like to mention that it is technically possible that the big Red C decline has already begun, but again, I view that as less likely.  I view it as less likely because it's difficult to reconcile the correction since the February lows as a complete wave structure -- so I would expect that when the current decline completes, bulls will get another rally toward the all-time-highs to complete the structure.  I am mentioning it, though, because "less likely" and "impossible" are not the same thing.

On SPX's chart, I have outlined one additional complex corrective pattern (black alt. count) that is (again) possible, if seemingly-less-likely:

I'd actually like to see a rally up to back-test the red trend line, and possibly even a test of the blue horizontal support/resistance zone (on SPX's chart), but neither of those options are required.

In conclusion, bears have whipsawed the prior breakout, which we anticipated was likely.  Ideally, they'll keep pushing and break below the March lows, but because this is a complex correction, we cannot guarantee that this wave won't morph into something even more complex.  Trade safe. 

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