SPX Update: Short and Sweet

There's little changed, so no need for a circumloquacious update today.  Last update noted that "there's nothing definitively bearish about the charts yet," and that there were as yet no impulsive declines -- and Friday's session confirmed both points, late in the session, with new highs.

That remains the case, and the wave structure is such that any immediate decline would likely end up being a buy op.

In conclusion, beyond the things noted on the chart above, there's still not much to add.  The market is still facing resistance, which means that bears could always show up at the last minute and we do need to remain alert to that -- but as of right now, they have not shown up.  Trade safe.

SPX and INDU: Vive La Resistance!

Last update ended with:

In conclusion, the market has now rallied right up to resistance, so we could see some backing and filling to start the session today. Normally, given the momentum of yesterday's rally, we would expect to see higher prices once that completes.

And both of those things happened on Wednesday, as SPX meandered around before making a very slight new high.  Thursday saw an early sell-off to get bears excited, but SPX recovered before the close.  There's still nothing concrete in the charts that screams "short!" but we are still testing intermediate resistance, so anything can happen at a time like this.

SPX has created a bear option for itself -- but this is simply an option at this point.

In conclusion, bears would need to kick out yesterday's low (first potential support is near 2920 and rising) to start to open up more options.  Otherwise, the main thing they have going for them is the test of resistance, which can always lead to a rejection.  For that reason, bulls should be cautious here, but there's nothing definitively bearish about the charts yet.  Trade safe.

SPX and INDU Updates

Yesterday (and the entire last few months, really) illustrated the wisdom of why bears who are looking to buck the prevailing trend are wise to await an impulsive decline before doing so (for more on this, see:  Why Impulsive Turns Are Important).

Other than that, there's surprisingly little to add.  NDX made a new ATH yesterday, while INDU is somewhat compressed between near-term support and intermediate-term resistance:

SPX tagged an interesting confluence of resistance yesterday:

In conclusion, the market has now rallied right up to resistance, so we could see some backing and filling to start the session today.  Normally, given the momentum of yesterday's rally, we would expect to see higher prices once that completes.  Of course, in the event we see an impulsive decline in the interim, then that could always change.  Trade safe.

SPX and INDU: Next Upside Target Tagged...

So another exciting week in the market has come and gone.  Last week the market did what it does best lately:  Nothing.

INDU did advance enough to finally begin challenging the resistance zone I spoke about a couple weeks ago:

I'm not going to update the SPX chart, because every time I try to, StockCharts deletes ALL my annotations -- so I'll simply note that while SPX has reacted to the noted inflection zone, we don't know yet whether that will be short-lived.  Bears will need to sustain a breakdown at 2875ish to at least begin to open up possibilities on their end.

In conclusion, last week began and ended in roughly the same place, providing little in the way of new information.  As I suggested on April 12, this would take a little time to play out once we hit resistance, which we've now done.  As soon as new information becomes available from the market, we'll have more to talk about.  Trade safe.

SPX Update: Why Impulsive Turns are Important

Yesterday saw the 2915-23 target captured, which puts the market into a potential inflection zone.  We did see some reaction to that zone yesterday, in terms of a small sell-off -- but there's nothing conclusive yet that makes me want to start shorting with any conviction.  As I've preached for many years, one can't short blindly into a bull wave; it is always best to await an impulsive decline.

The reason we await clear impulsive declines before acting against trending rallies is that:

1.  Even if you correctly identify the location of the fifth wave, fifth waves can extend -- and when a fifth extends, it can run as far as -- or farther than(!) -- the entire rally leg has to that point.

2.  The old expression that "bears take the elevator, bulls take the stairs" is true, and as a result, rally waves tend to be less clear about making their exact structure known.  Sometimes what looks like a "fifth wave" is actually a new subdivision of, say, merely the third wave.  The stair-step structure of rallies can be very deceiving -- at least until you see your first decent impulsive turn, which allows you to begin triangulating the count with more accuracy.

The above two reasons (and all the other reasons previously discussed; see:  The Time and Place for Certain Analysis) are why I prefer to take a "ride the trend" approach during rally waves.  That approach prevents us from spending every waking minute obsessing over "top calling," and from giving up on longs too early/getting into shorts too soon.

So, until we see a clear impulsive decline (yesterday looked a bit like an impulse down in SPX, but as I warned on the forum, it was only an ABC in the e-mini S&P futures market), we have to presume bulls still have the ball.

We are in the ballpark of an inflection point, but it remains to be seen if that will turn into anything more substantive in terms of stalling the rally.

In conclusion, as I noted previously, the market is going to make its intermediate intentions known soon -- but as of yet, it hasn't given any new signals.  Trade safe.

SPX and INDU: No Material Change

Friday saw the market gap up, as is its wont of late, then grind around and go nowhere else for the day -- as is also its wont of late.

Accordingly, there's nothing at all to add to Friday's update.  If you'd like to reread it, it can be found here:  Friday's Update.

(Sorry, in this market, I couldn't help myself... Friday's actual update can be found here:  No, really, this is Friday's actual update, I swear.)

I've updated the last two charts anyway, and added a potential "if/then" on INDU's chart:

Literally nothing to add to SPX:

In conclusion, there's just nothing to add since Friday -- as I noted in that update, the larger inflection point will take a few sessions to play out.  Trade safe.

SPX and INDU Updates: 4th and Goal

Bears have continued struggling to accomplish anything on the downside, as bulls keep turning prior resistance into support, and making higher lows and higher highs.  Last update noted the market had reached an inflection zone and that bears might have a shot to get something going if they could hold bulls below 2896, but futures this morning indicate that SPX will gap up (yes, yet again).

Lately all the action has been in the overnight, with the day sessions being about as exciting as reading a washing machine instruction manual.

INDU shows that all the last decline did was test the black uptrend line and bounce -- and now it looks like it wants to test upside resistance.  Bears do need to be aware that INDU is in the early stages of coming out of a potentially dangerous pattern for bears.  One day at a time, of course, and this is ahead of the action, but if bulls can sustain a breakout over the all-time high, bears may need to bed down for a long winter's nap (again).

SPX stalled a bit, but bears never got any momentum going, as each decline found new buyers waiting:

In conclusion, the market is rapidly approaching the all-time high.  What happens next will probably take a few sessions to play out, in terms of the market tipping its hand -- but once it does play out, the market's tone will likely be set for the foreseeable future.  If bears don't show up near the ATH, then bulls will have a reasonable shot to run away with the game.  Trade safe.

Are You Trading or Gambling? And... Are You Sure?

(Note:  If you're looking for today's charts, they can be found: HERE.)

In this piece, we're going to talk a little bit about trading psychology, and one of the many ways in which we can derail ourselves as traders.

Recently I was asked by someone, "Isn't trading inherently just like gambling?" I began to respond with a well-rehearsed "No, of course it's not," along with my oft-given ready explanation of the difference between blind chance and trading -- but then I thought a little more deeply about it, and decided I may have some insight here that's worth sharing.

Trading is not inherently gambling, nor is it inherently NOT gambling — whether it is or isn’t "gambling" completely depends on how one approaches their trades. Let me explain:

One CAN approach trading as one would approach any game of chance — for example, one can enter a trade on “hope” or on a “hot tip” or on a “lucky feeling” or because Jim Cramer screamed to buy XYZ last night… and then pray their trade makes money. And for those types of trades, yes, trading is gambling. One-hundred percent.

Or you can approach trading not as blind chance, but as a calculated risk. This is the same way one approaches starting a business, buying a house, marrying a spouse, or crossing a busy street -- and while some would argue those things can fall under a loose definition of the term "gambling," most people instinctively understand the difference between pure gambling and calculated risks. Calculated risks are still a "gamble" in the loose definition of the term, but they are not at all "blind chance."

So what turns a trade from a gamble into a calculated risk (or vice versa)?

The first step most traders take, prior to taking on risk, is to analyze the trade using whatever system(s) work(s) for them. Some people analyze stocks using fundamentals, such as the underlying strength of the company, the company’s potential future earnings, the overall economy, whether the company is expected to gain or lose market share, whether the company has a hot new product coming out, etc.

Others (myself included, obviously) use technical analysis, wherein you recognize that people behaving as a herd are somewhat predictable, and that the herd leaves repeating (and thus predictable) patterns on the price charts through their behavior.

It really doesn’t matter what system you use: What matters is that you’re familiar with it and you have a decent grasp of that system’s expected win:loss ratio. That matters because one of the most important equations that separates “gambling" from “calculated risk” is the risk:reward ratio (I’ll explain why in a second).  But the point is, you need to have a decent idea of your expected win:loss ratio in order to accurately assess whether your trade's risk:reward ratio is beneficial over the long haul.

For those who don’t already know, basically the risk:reward ratio is exactly what it sound like: It's how much potential risk your trade carries if it loses vs. how much potential reward you stand to gain if your trade succeeds.

To use a simple example, let’s say you buy a stock at $100/share expecting it will go to $200/share. Due to your analysis, you likewise know that if it drops below $80/share, then that’s a big red flag that would suggest you read the whole thing wrong and the stock is NOT going to $200/share. You might set your stop loss at $80/share in that case. So your risk is 20% (buy at $100; sell at $80 if wrong), while your potential reward is 100% (buy at $100; sell at $200 if right). That means you stand to make five times as much if you’re right as you stand to lose if you’re wrong.

Your risk:reward is thus 1:5, which is good.

And that example likewise begins to illustrate why the risk:reward (R/R) ratio is arguably the most important metric in trading, and one that’s too often overlooked. Think of it this way: Using our above example of a 1:5 R/R, even if you’re wrong a full 80% of the time, you will make money over the long haul (presuming you invest equal capital each time).

Using just one share of our $100 stock to illustrate (and ignoring commissions for purposes of illustration): If you’re wrong 80% of the time, then 8 times out of 10, you lose 20% (which would equal $160 total loss) — but two times out of 10, you make 100% ($200 total profit). Your profit on 10 trades is thus $40; so that strategy, while having high variance (meaning it has big ups and downs, and thus requires a large amount of capital in order to ride-out the losing streaks), is still a long-term winner.

You were able to create that long-term winning strategy by: 

1. Managing your risk, knowing where to exit and following through on that, so that you didn’t lose more than 20% each time you were wrong. 
2. Correctly assessing your potential reward, and staying in the trade long enough to realize that reward.

But do either of those things wrong, and you shift the balance away from “calculated risk” and closer to “gambling.” This shift can be minor or major -- let's look at how:

One of the reasons most people fail at trading is because it requires a BRUTAL level of self-honesty. To whatever degree you rationalize your trading decisions and avoid cold, hard rationality, you edge closer to being a gambler. Because in order to correctly assess your risk:reward odds, you must be both willing and able to ignore that which you “wish to be true” and focus 100% of your attention on that which is ACTUALLY true.

For example, if you're a bear in a bull market, you can't just run out shorting every rally because you "want" it to end soon, and you can't afford to engage in confirmation bias by only looking at the market's negatives.  Vice-versa if you're a bull in a bear market.

But the reason self-honesty is so important is that if you can’t (or won’t) see and accept what’s really going on in the market, then you will consistently underestimate your potential risk, while at the same time overestimating  your potential reward. 

Bears will think "the big decline" has better odds than it actually does.  Bulls will think "the big rally" has better odds than it actually does.  Both will see rallies and declines coming when the market plans to do the opposite.  The risk:reward assessments they create will consistently be WAY off, due to being based in bias and not in reality.

Ignoring reality in favor of bias is a sure-fire way to kill an account, and quickly.

Because in that case, you may "believe" you are taking trades with a 1:5 risk:reward ratio (or similar), when in reality you are taking trades with a far less profitable ratio -- perhaps even a 1:1 ratio. Or worse.

Couple that with the human tendency to hold losers too long and to let go of winners too soon (see: Prospect Theory), and you have a recipe for absolute disaster. Consider that if you’re already looking at your trades with rose-colored glasses (rationalizations and not reason) AND you’re not going to maximize each win -- but you WILL maximize each loss -- then you will actually overestimate your potential reward TWICE in the equation and underestimate your potential risk TWICE.

And you will do that on each and every trade!

It's not hard to see how this "perfect storm" of psychology gone wrong would inexorably lead to a rapidly-shrinking trading account.

So what's the solution?

The only solution I know to the first problem (of "seeing what we want to see" instead of seeing what's really there) is to assign truth the highest value in our internal hierarchy. We have to value truth over even our own feelings of self-worth (because that's what it all goes back to, really: It's a battle between what's actually true and the ego's need to be "right," which we sometimes can't help but tie to our feelings of self-worth, to a greater or lesser degree).

I don't know if it's possible to entirely eliminate the ego tie to being right or wrong -- because let's face it: It's hard to feel too good about ourselves if we're consistently wrong about things, but we do feel good when we're consistently right. The key is not to bullsh*t ourselves and try to convince ourselves we're right when we aren't, simply to avoid "feeling bad."

The beauty is, this isn't as much of a dichotomy as it may seem at first glance, because the more clearly we see reality as it truly is, the less often we will end up being wrong in the first place!

And if we are exceptionally good at managing our internal worlds, then while we may not be able to eliminate ALL the feelings that go along with being right or wrong, we can at least prioritize our willingness to see the truth and to course-correct when we are wrong above the "need to be right."

If we've organized that hierarchy correctly, then being wrong will cause us less internal pain than being obstinate in the face of countermanding evidence. And once that happens, we will begin to naturally prioritize seeking truth first and the need to "believe we're right" second.

(The above has broader life applications that extend far beyond trading, of course.)

As to the second problem (of holding losers too long and letting winners go too early)... well, the only solution I know of there is discipline. We have to recognize that our natural tendencies in that regard will lead us astray in trading, so we simply have no choice but to override them -- by brute emotional force if necessary. If we are entering trades where we know our potential target levels and our potential stop loss levels ahead of time, then it gives us clear "non-emotional" levels to use to override our natural urges.

So those are some of the ways we can determine whether we're trading or gambling. Many of us (wittingly or otherwise) perform a mixture of both.

But the key takeaway here is that the more we can correctly align with reality and ignore our own rationalizations, the more capable we are of making an accurate assessment of our risk -- which is exactly what's needed to make each trade a true calculated risk. The less we align with reality, the less accurately we can assess our risk, which weakens or removes the "calculated" portion of the equation.

And if we remove "calculated," then all we're left with is "risk."

And at that point, we are simply gambling.

Trade safe.

SPX and INDU Updates

Monday's update suggested "SPX would probably look a little better with at least one more wave up..." which we got late in Monday's session, as SPX made a new high for this move.

It then urged bull caution and warned that "we are at least getting into the zone where we could count five waves up."  Tuesday then saw SPX head lower for the first time in 8 sessions.

Is this the start of something more bearish?  Well, it very well may be, but bears do need to hold 2896  heading forward, so today will be the first test to see if they're serious.

INDU shows the "first step" for bears:

In conclusion, Tuesday's decline appears impulsive, which suggests another wave down of equal or longer length.  However, this is not the best setup because the top isn't clean -- thus I can't entirely rule out the possibility that the impulsive decline is wave C of a micro expanded flat, and it's important for bears to hold the recent high.  Trade safe.

SPX and INDU: Yellow Lights for All Involved

Last update noted that "all roads still point higher -- for now," and SPX did indeed run higher during Friday's session.  We are now getting into more neutral territory, though, where there's presently nothing left in the charts that screams "higher!" -- at least, not at this moment (that can always change tomorrow, of course, since the market is a dynamic environment).

The market is now in a long and intermediate-term resistance zone.  I've illustrated this via INDU below:

SPX is getting into the zone where we can potentially count five complete waves up (I've had the "Bull: 5" label waiting on there at higher prices -- which we've now reached -- since last month).

In conclusion, we're getting into a "caution zone" for bulls.  This alone doesn't guarantee the market is nearing a reversal -- it can always plow right through these levels.  But it does mean bulls may want to walk and not run, and look both ways before they try to cross the street here... there could be an impulsive decline around the corner.  Once we see an impulsive decline, THEN it will be "as good as it gets" for bears.  But as of this moment, it's at least a yellow light for all involved.  Trade safe.

SPX Update: All Roads Still Point Higher -- for Now

Short and sweet today, as there's not much to add.  Last update noted that a complex correction was possible (meaning at best, bears could hope for a short break but all roads still pointed higher over the larger view), but that we'd watch for impulsive declines.  On Wednesday, we spotted an impulsive decline, but as I warned on the forum, it appeared that it could be wave C of an expanded flat (which is the one case where an impulsive decline is not the start of the correction, but the END of the correction).  Futures this morning are indicating that's exactly what it was.

Now, that pretty much ALWAYS leaves options for a more complex correction (shown on the chart below in black) -- but even if that materializes, all roads ultimately still appear pointed higher:

In conclusion, it appears now that we either head higher directly in a micro third wave off Wednesday's low, or we correct a little more first and THEN head higher.  In other words, not much for bears in the charts at the moment, though we MIGHT approach the end of Bull 5 in the next few sessions (still best to await impulsive declines).  Trade safe.

SPX Update: A Discussion of the "Time and Place" for Certain Analysis

Before we get into the charts, I'm going to reprint a response I posted on our forums last night, for the benefit of readers who may not have joined the forum:

First, let me preface this by saying that I, personally, do NOT like trying to slap "full" wave counts on waves like this one. Why? Because doing that causes me to start playing for a change in trend, and in this case, we don't need to anticipate a new trend! We KNOW what the trend is: It's up. And we've known that since early January.

Attempts to "anticipate a trend change" lead to only one thing: BUCKING the trend.

Can that be a good thing? At times, absolutely and of course, and some of my biggest winners have come from that very thing -- but there's a time and a place for it. During waves where we are (or should be, if we're humble) significantly uncertain of the wave's primary intentions, then attempts to "anticipate" frequently lead to quitting the trend too soon -- and/or flipping short and losing money.

That's the reason I haven't published full counts on the entire wave off the December lows. I learned a long time ago that's a losing strategy UNLESS you have a solid idea of what the wave wants to accomplish. And sometimes we do have that solid idea. But in this case, almost from the beginning, I made it clear that I didn't know what the wave wanted to accomplish, so I stopped publishing counts that could encourage poor trading.

Of course, I'm sure some places thought they knew exactly what this wave was from the beginning -- but how did that work out for them?

I know my approach frustrates some people and they just want "wave counts already!" -- but there's a time and a place for wave counts... and then there's a time to simply flow with the market like a raft on a river. "I've got it all figured out" wave counts have their place; but during waves that could be "any number of things" (especially waves that trend higher into new price territory, where you have no point of reference to work from) presuming one knows more than they actually do can lead to anticipation of an ending that never comes.

If you want a case study in how badly this can burn traders, just look at [certain well-known Elliott Wave subscription service]. I don't follow them at all, but occasionally people post their counts here, and the last big one I recall was years ago, around SPX 1500 or so -- and they told everyone to go "fully leveraged short" and HOLD, while I was telling people to ABANDON shorts just above their entry. I'm going off memory, but I seem to recall that they rode something like 200 or 300 points of drawdown before capitulating. (And for anyone "fully leveraged short," that's a "bankrupt!" sort of move.)

So for folks who want the market to follow their "ideas" of what it "should do," instead of flowing with the market and aligning with what IT wants to do, there's [those guys].

I will never be like that.

Using the current rally wave as an example, here's the thing: If this wave is going to make new all-time-highs (and, of course, it may or may not) then there's no TECHNICAL RULE that says it can't run another few hundred points unabated. There's only SPECULATION that it will or won't. It might even be well-reasoned speculation. But speculation isn't technical analysis; whereas wave counts should at least attempt to be.

In my view, this is where most similar services fail time and again: They mistake their speculation for some sort of technical read. As I said, there's a time and a place for that, and Elliott Wave Theory absolutely can and WILL give you DETAILED technical reads unlike anything else (IMO) -- but it will only do so when the market has created a fractal structure that allows rules to impact that structure, which can then "lock" the market into certain predictable behaviors.

But in a case like the current rally (as I said), there are no predictive "rules" that HAVE to be honored if it runs to new highs. Once it hits a new high, there are only guidelines, inflection points, and wave counts that may or may not consider things like extended fifths that could materialize -- but there's no "rule" that says it HAS to stop at X price point.

Thus, unless the move is spelled out in the charts relatively clearly (like it was with the recent expanded flat), I'm content to simply ride the trend during vague waves like this, at least until I see an impulsive decline come along. This was the same approach I took for the entire latter portion of 2017, during that huge extended fifth rally. Meanwhile, everyone else was trying to "anticipate" based on where THEIR count said the wave "should" end, and those people were calling tops left and right while the market barreled over them.

But worse, as a consequence, they ignored what the MARKET was saying, in favor of what their own little numbers and letters on a chart said. And they missed hundreds of points of profit.

The map is not the territory.

Almost every day for months, from September 2017 until the first portion of January 2018, my updates amounted to "still looks pointed higher," and some people got frustrated with that. Yet when that wave actually DID end, we were on top of it immediately.

So, like my madness or not, there is a method to it. 

Anyway, that's my philosophy during waves like this. Let the market tell us when it's REALLY done. And it will; usually loud and clear. 

All that to say: THAT'S why I haven't been showing counts trying to break down the whole thing since the December low.  

Moving on to the current charts, the most recent wave count I published was, of course, only a partial count of the most current fractal -- for all the reasons just discussed above.  On March 22, I showed the following prediction based on that partial wave count:

Both of the turns shown on that chart ended up playing out very well (though SPX bottomed just a little lower than shown).  Presently, we're still in a market that will require us to stay nimble, due to the potential for a more complex flat structure:

In conclusion, my expectation of a minor, but scary, decline followed by a reversal back above 2860 proved to be correct.  We're now into territory for another inflection point, so if we begin to see impulsive declines, we'll stay alert to a more complex flat.  Trade safe.

SPX Update: No Material Change

Last update concluded:

In conclusion, the market has done what it needed for a complete correction, but always reserves the right to form a more complex correction if it feels the need (it does complex corrections to draw out time and price, and to confuse participants).  Both options are pointed higher for the near-term, but we should approach the upside inflection point in the next session or three.  If we see an impulsive turn from that inflection zone, then we're prepared and already alert to the potential of a complex correction. 

And that conclusion is unchanged, though it's become obvious with the futures rally this morning that it was at least correct (that the fractals indicated the market would head higher over the near-term no matter what).  Accordingly, there's not much to add for today's update:

SPX's more detailed chart is below:

In conclusion, there's no material change from last update, and the prediction that the market would head higher over the near-term will prove out with today's open.  The complex correction does still remain on the table -- and keep in mind that the expanded flat pattern I've been arguing in favor of for the past couple weeks is NOT necessarily "long term bullish" -- even for the "bull count," SPX could break 2860, rally a little farther, and reverse strongly if it wants.  We'll burn that bridge when we come to it.  Trade safe.