SPX and INDU: Two Challenging Calls, but the Context Remains Bearish

I'm going to keep today's update as simple as I possibly can, given the complex options.

There are two questions begged of the charts, and both are quite challenging to answer right now.  Keep in mind that SPX is now on its ninth trip through the exact same price territory that it has been covering since November, and each trip through a zone weakens support and resistance inside that zone -- thus, making predictions while a market is still within a noise zone becomes increasingly difficult.

That said, let's tackle the challenge as best we can.

The near-term question is: is this leg of the decline complete?  I'm very slightly favoring the idea that it is not yet complete, meaning new lows are lurking on the near-term horizon -- at least for SPX, if not INDU.  Due to the fact that the decline may have included one or more extended fifth waves, this is a challenging call.

The bigger question:  Has wave (3) down begun, or is the recent decline from 2064 SPX still part of an ongoing correction?  I'm slightly favoring the idea that it is part of an ongoing corrective wave, and will launch back up to retest 2064 yet again.  I'm favoring that because the last rally to 2064 appeared to be three waves, and ended abruptly without a fifth wave.  That suggests it was wave (b) of a more complex expanded flat, as shown below:

 
Here's what I think I know:  this market remains intermediate bearish; the only question is how we get there.  This chart remains materially unchanged since November 17, and the market still seems to be following the projections that were outlined more than two months ago.

Let's look at the first two questions in more detail, via INDU.  Daily:

5-minute chart:

One-minute chart:

In conclusion, SPX would look slightly better with a new low beneath 1989, INDU is a near-term toss-up regarding a new low.  In the meantime, if either market can sustain trade north of its down-trending channel, we may have to consider the idea that the lows could be in.

At the next larger wave degree:  Due to the fact that the rally to 2064 in SPX appeared to be 3-waves, when it "should" have been five-waves, I'm inclined to slightly favor the idea that 2064 will be tested yet again -- but this is again a very difficult call.  Presently, I believe that any rally would present yet another excellent shorting opportunity, if it were to occur.

In all cases, the preferred intermediate count presently remains bearish, regardless of the exact path we take to get there.  Trade safe.

SPX Update: Detailing the Options on Fed Day

The current charts have left open multiple options in order to maximize frustration and confusion on a Fed day.

I can't tell exactly what the market's going to do next, but I have managed to put together some clear patterns to watch.

Let's start off with a couple key points:

INDU failed to reclaim 17923.  It "should" have reclaimed that level for the expanded flat, however it is possible that the pattern was a running flat, which is something I discussed on January 20:

It's worth noting that bears and bulls alike should stay alert to the possibility of a running flat, which would see wave (2)/B stall just short of the blue b-wave high.  The odds go to the expanded flat based on percentages, and because the market likes to fool the majority, but a running flat is always possible and simply cannot be predicted or ruled out.  Thus, as (and if) we approach 17,850+, stay very alert if there are any signs of an early turn. 

INDU dropped like a rock yesterday, which felt a little odd, given how well the supposedly high-beta indices like RUT held up (RUT closed just off its recent highs).  These are fractured markets, so we have to give real consideration to the possibility that INDU formed a running flat.  

This brings me to the second key point:  The rally into the recent highs in INDU and the 2064 high in SPX appears to be three waves.  Honestly, it's one of the ugliest waves I've seen in this market in a long time, so it's possible that it's a bizarre five wave rally, and that wave (3) down has begun.  But it does open up a couple possibilities, which we'll discuss momentarily.

Let's start off with the intermediate view, which remains unchanged since November.

The question now is whether the larger decline wave has already begun, but that's not entirely clear yet.  As noted, the recent rally in INDU/SPX appears to be three waves.  That leaves open the possibility that it was wave (i) of an ending diagonal, as discussed last update.  In fact, SPX dropped right into where I had drawn blue (ii):

Currently, we have a three-wave decline, which would still fit the bill for an ending diagonal, but that becomes a bit more iffy below 2019:

If 2019 fails, then we'll have an impulsive decline, and that would open up two options, as detailed on the chart below:

Next is a chart of INDU that I published in our forums after the close on Monday:

Finally, the ratio chart of HYG/TLT was one we began watching much more carefully back in March of 2014, when I called the top in that ratio.  This remains a foreboding chart for equities.

In conclusion, the first step for bears appears to be sustained trade south of 2019, as that would create an impulsive decline.  That would largely (not entirely, but largely) eliminate the ending diagonal.  That would then leave the two options shown on the fourth chart:  either wave (3) down is already underway, or the expanded flat is becoming even more complex.  Due to the apparent three-wave rally into 2064, we would have to at least consider that second option.  Trade safe. 

SPX and INDU Updates

Thus far, there's been no material change from the past few updates, though it's interesting that my "best guess" near-term path for the Dow Jones Industrial Average (INDU) played out exactly as projected.  The song remains the same, though I'd like to see bullishness increase a bit over the coming sessions.  Ideally, we should peak shy of the all-time high at a point when most bulls are feeling invincible.

If we instead break the all-time high, then, of course, we'll need to consider more bullish options -- however, due to the pattern off the low, the first alternate count would remain intermediate bearish.  But we'll burn that bridge if we come to it.

Let's start off with the big-picture SPX chart, which has continued to follow the road map that was first outlined back in mid-November:

Next is a more basic classic TA chart of SPX:

INDU followed Friday's proposed path for a fourth wave correction almost perfectly.  Ideally, we'd still like to see INDU break the red (b) wave high, but there are some inflection points that INDU will need to clear first (see chart notes). 

The SPX 1-minute chart below.  Presently, this is still presumed to be a fourth wave, but note INDU's inflection zone above -- SPX may face a similar challenge at the 2060 +/- zone.

Finally, I gave some thought this weekend to what the market could do to cause the greatest level of confusion at this juncture, and in the event Friday's decline continues directly, then we should give some consideration to the possibility that wave C is unfolding as an ending diagonal.  The upper and lower trend lines are purely speculative at this point, and they could deviate substantially from the way they're currently drawn.  I think of the market as a chess opponent, so I try to think two steps ahead -- but right now, this is just something to keep in mind.

In conclusion, the intermediate outlook remains unchanged, and new lows are still expected.   In the meantime, we have clues and levels to watch for the near-term, which should help us nail down exactly how we get there.

Keep in mind that, as noted on Friday, SPX already completed the minimum expectations for the pattern, so new highs beyond 2064 are not required.  However, due to INDU, the option that ALL OF 2/B is complete has to continue to be viewed as at least a slight underdog, and the diagonal would be first alternate.  Ultimately, though, we are awaiting a third wave decline, so it reserves the right to begin unexpectedly.   Trade safe.

SPX and INDU: Upside Targets Reached; Is it Time to Short Yet?

Since January 14, I've been talking about a complex expanded flat, which was expected to produce a confusing "double-whipsaw" -- first, at the lows, then later, at the highs.  After developing a very unusual basing pattern, SPX finally launched into a stronger rally, and yesterday it reached its first upside target of 2064+. 

The pattern at the lows is very difficult to reconcile cleanly, which is going to make it a little challenging to predict the price point of the exact top.  And that's probably the way it needs to be, since expanded flats are not supposed to be so predictable that you're able to call them a week earlier, and two major turns in advance.

I do have a few inflection zones we can watch for reversals, and I'll get to those momentarily.  First, let's take a look at INDU's chart.  INDU has not yet broken its previous swing high, which it should normally do under the typical expectations of the current pattern.

Because of the odd nature of the beginning of this rally, the blue path is more of a guideline than a road map (unless I just happen to have counted that early mess flawlessly -- which is probably unlikely).

Let's also quickly revisit Tuesday's explanatory INDU chart.  I haven't updated any of the annotations since then -- this is more for the benefit of readers who missed it the first time around:

The fact that INDU hasn't yet made a new high leads me to suspect that SPX probably has further upside remaining.  Additionally, hourly RSI confirmed the 2064 high in SPX, and more often than not, that means we'll need at least one divergent high (price higher, RSI lower) before we see a more significant top.

Finally, the SPX 30-minute chart highlights the upside inflection zones.  These currently appear to be the most probable zones where the expected downside reversal could begin.  In a perfect world, we'll also see a downward impulse wave form as a confirmational clue.

In conclusion, there's been no material change to the picture; in fact, everything that's happened so far was expected to happen.  Keep in mind that this is a c-wave rally, and the goal of c-wave rallies is to convince everyone that the trend has changed back to up.  This means it may grind higher for a few sessions in order to help flip the sentiment of the majority back to bullish.  It may also try to make us doubt that it's ever going to reverse -- so prepare to feel confused and paralyzed at the top.  

I do have to mention that, technically, 2064 is all that was required from this pattern, so there is at least a slight chance that the pattern is complete.  Due to issues mentioned, that appears to be an underdog, but if we begin to see downward impulse waves, then we'll look more closely at that option.

And, taking a look at the other side of the trade, since nothing's perfect: In the event that SPX makes new all-time highs, then we'll have to start considering more bullish options, though the first option in that event would still be bearish (a b-wave could make a new all-time high, but would still revisit the lows -- and that would be the first default count in the event 2094 is broken).  New all-time highs continue to appear less probable. 

Ultimately, this is still expected to be a sucker rally, and therefore an excellent short opportunity.  Trade safe.

This Counter-trend Rally Should Be Short-Lived; Here's Why

On January 14, I outlined why I thought the decline would continue a bit lower before finding a bottom and launching into a strong counter-trend rally.  I continue to believe this rally will present the best short opportunity this market has seen in a long time.  Let's discuss why.

First off, let's establish whether this Elliott Wave stuff has any validity.  As my veteran readers know, I was long-term bullish on equities on the very first trading day of 2013.  By February 8, 2013, I'd calculated (and published) two long-term targets for the S&P 500: my first target was 1750 +/-; my second target was  2170 +/- .  I mention this not to toot my own horn, but so that newer readers understand that I am not a perma-bear.

(If you're new to Elliott Wave, it may help to visit my primer on the subject:  Understanding Elliott Wave Theory)

I've been employing Elliott Wave since the 90's, and I learned a long time ago: It only works to the degree that you can take your ego out of the picture.  The second you lose your objectivity, you'll begin to warp the charts into whatever you personally want to see, and you'll stop seeing what's really there.  And once you stop seeing what's truly there, you're no longer analyzing the market, you're simply projecting your own hopes or fears onto a price chart. 

Time and again, I've watched analysts succumb to bias, to the detriment of not only themselves, but of their readers/subscribers.  Thus I do my best to analyze and trade what I see, as opposed to trying to get the market to follow along with my personal agenda.  To me, the challenge lies mainly in determining what the wave structures actually are; and the fact is, sometimes they're incredibly hard to interpret.  At those times, any of us can make mistakes, so my analysis is far from perfect.

But I do try to keep it unbiased as much as humanly possible.

Back to the point: I remained long-term bullish for the majority of the past couple years, but more recently, on November 17, 2014, I published the following preferred count for the S&P 500 (SPX):

  
As we can see, Elliott Wave has performed pretty well, considering that projection was published more than two months ago.  I refined those projections in real-time, and remained bullish until the end of December.  Let's take a look at the updated chart, which features additional trend channels, and a whole bunch of clutter in the form of historical annotations.

We'll come back to SPX in a minute.  I'd like to jump over to the Dow Jones Industrial Average Ordinary Mediocre (INDU) first, because this chart is the chart that clued us in to rally potential back on January 14.

The most noteworthy change to this chart is that Friday's failure at 17262 suggests that the remaining intermediate options are bearish or more bearish.  It's a challenge to find an intermediate bull count in this chart, and that's very unusual for me to say.  Literally the only bull count I can see would be if wave (3)/C truncated severely and completed at Friday's low -- but that's unusual, and would almost qualify as a "failed" c-wave.  In other words, that would be the exception, not the rule.

There's little to add since the update of January 15, but I have included a black alternate count, which would see a smaller expanded flat than previously anticipated.  Basically, if you're a bear, you might want to watch for the first five-wave impulsive declines as sign of a turn, because C-wave rallies (current rally) can be fast and unforgiving of counter-trend (meaning counter-trend to the C-wave) trade attempts.  Ultimately, this rally itself is expected to be counter-trend to the higher degree waves, of course.

On the INDU chart below, I've added significant detail to outline my thinking.  The pattern currently underway is expected to be an expanded flat.  In a bearish expanded flat, the (b)-wave low exceeds the start of the (a) wave; and the (c) wave high then breaks the high of the (a)-wave before reversing again to head back below the (b) wave low.  It's the ultimate double-whipsaw, slaughtering traders who use prior highs and lows for their stops or entries.  What's interesting about the current wave is that there appears to be an expanded flat within the expanded flat (the middle blue a-b-c that makes up the (b) wave).  This is one of my favorite patterns to trade, because it's fairly high probability.

It's worth noting that bears and bulls alike should stay alert to the possibility of a running flat, which would see wave (2)/B stall just short of the blue b-wave high.  The odds go to the expanded flat based on percentages, and because the market likes to fool the majority, but a running flat is always possible and simply cannot be predicted or ruled out.  Thus, as (and if) we approach 17,850+, stay very alert if there are any signs of an early turn.

Finally, let's examine the 1-minute SPX chart.  It's worth mentioning that SPX has a slightly different wave structure than INDU, in that it did not make a new high when INDU did -- so it's possible that SPX is in a slightly different wave count.  As noted on the first INDU chart as "alt. 2," there is another possibility here, and that's the more bearish option that the prior decline is a first wave.

For the moment, anyway, we have to give significant respect to that possibility.  Note the classic TA target for the prior basing pattern also lines up with the second Bear: 2 target zone. 

In conclusion, there's limited clarity in the near-term wave structure from which to draw a high-confidence reversal target, though the pattern does at least suggest further upside for the moment.  Hopefully the near-term charts will clarify further in the next session or two.  In the meantime, we do have some pending near-term inflection points, where we should at least stay alert to developing turns.  If the rally can make it through those, then, at best, I think bulls are done when the expanded flat noted on INDU is complete.

And regardless of which near-term path we take, the intermediate picture still appears decidedly bearish for the moment.  Trade safe.

SPX and INDU Updates

Ran a little short on time today, so I'm going to let the charts do all the talking.  I actually outlined the options in detail, along with some signals, on the 5-minute SPX chart.

Let's start with the INDU chart, since it's less cluttered.  Blue expanded flat count is still on the table:

The SPX 1-minute chart from yesterday, with the addition of a subdividing black 1 and black 2.  That count looks like a reasonably viable option at present.

And the SPX 5-minute chart, which covers the options/signals/targets in detail.  The preferred count (expanded flat, shown on INDU) isn't discussed on this chart, as that count is covered on the other charts -- and do note that none of the bear options become an issue as long as 1988 holds. 

I covered the bear options here for the sake of being thorough.

In conclusion, there are a lot of options for the near-term, but the intermediate term still remains decidedly bearish.  I'd still love to see the previously-discussed expanded flat play out (see yesterday's update if you missed it).  Trade safe!

Quick Update: High Probabily Short Op

ES (E-mini S&P) revealed last night that the market remains extremely volatile at the moment... 

So far, INDU and SPX have found some support where they needed to -- but in the event this is not an expanded flat and the third wave lower has already begun, then support will continue failing spectacularly.  Although SPX and INDU could both support one more modest low and still preserve the flat potentials, things start to get iffy if that happens, so, ideally, near-term bulls want to see yesterday's lows hold.

Basically, don't get too attached to the flat if (and only if) the market can't find support here, because third wave declines can become relentless and nobody wants to miss that.

From an intermediate standpoint, due to the three-wave move into new lows in SPX, any bounce to 2065ish should be viewed as an incredible selling opportunity (not trading advice!).

INDU found support just north of 17262, thus technically the potential of a third wave RALLY stays on the table, however, that seems rather unlikely given the failure of the red 1/A low in SPX, and I'm not even showing it on the chart anymore.

In conclusion, in a perfect world, bears would like to see a rally toward 2064+, because that would be a high-probability short op.  Meanwhile, the intermediate outlook remains decidedly bearish no matter which path we take.  Beyond that, there's not much to add down here.  Trade safe.