SPX and US Dollar Updates: Dollar Ready for Second Stage Lift-Off

Friday started off very promising for the bears, with a break below the significant support zone of 1285; however the bulls were able to get the market back above this zone before the close.  As I wrote on Friday, everything that happens between 1285 and 1300/1310 is just noise at this point -- so we're still in a bit of limbo regarding short-term direction. 

The market has been sitting in the target reversal zone for what seems like forever, and I'm starting to feel like a broken record everyday with "either the top is in, or there's one more thrust higher still to come."  Well, you'll be happy to hear that... nothing has changed yet.  If I didn't have to actually update the charts (and didn't feel obligated to provide my readers with new info), I could just do a form-letter for the updates until the market actually reverses.  That would save me a lot of time.  Trade safe!

Of course I'm only kidding.  Sort of.  Anyway, for today's new info, we're going to talk about the historical tendencies of this week.

The market started closing for Martin Luther King, Jr. Day in 1998.  Going back to 1998, this has historically been a pretty bad week for the markets, with the S&P 500 (SPX) ending the week negative 71% of the time for an average loss of 1.10%.  The worst loss was 2010, when the SPX shed nearly 4.5% for the week.  Couple that with the fact that January options expiration also tends to be negative -- the Dow Jones Industrials have suffered heavy losses on OpEx Friday in 10 of the prior 13 years -- and you have the makings of a week that favors the bears.

It is also likely that the bulls are running out of time on Minor Wave (2), if, of course, they haven't already.  Friday may have finally marked the turn, but there's still enough play in this ugly, ugly wave that there may be another thrust higher left in it yet.  It pays to remember that the absolute hardest thing to do when predicting the market is to call a turn before it happens, be that turn a bottom or a top.  When you predict a turn, you are betting against the trend.  And as they say, the trend is your friend... at least until the end, when it bends.

The first chart we're going to look at is the intermediate chart of the SPX, which shows the long-ago-reached Wave (2) target box, which the market seems intent on sitting in until the cows come home to roost (or whatever that saying is).  The expectation remains that once this wave reverses, the October lows will be broken. 

 
The next chart is the short-term SPX chart, with one possible count that suggests the market may have suffered a failed fifth wave on Thursday, in which case the top is in.  I'm favoring this count, but only by a slight margin.  Any significant downside follow-through on Tuesday would likely seal the deal; conversely, any upside beyond the recent swing highs would invalidate it.  If this count is invalidated, consult the second chart below.

We'll follow that chart immediately with my alternate count, which suggests wave 5 didn't fail, but actually started on Friday.  The short term wave structure of this rally is maybe the ugliest I've seen in about 6 months, and has really kept me guessing.  Remember the two week decline in December when every target zone I published was hit like clockwork?  That was an ugly waveform too, but nothing like this rally.  This current rally is the Ernest Borgnine of waveforms.

Also note how the market bounced right where a perfect new trendchannel could form (in red).  This is a very common occurrence, and it's one that veteran traders know to watch for.  I strongly suggest drawing channel lines whenever two swing highs or lows allow it during the day, to help anticipate potential reversal levels. 

The target for wave 5 would still be the 1300-1310 zone under this count, though that could change with new input from the market.  I still think it's unlikely the market will hold above that zone for more than a brief moment, if at all.

The last chart is the updated US dollar chart.  The correlation between the dollar and equities has uncoupled lately, but will almost certainly recouple at some point in the future.  In any case, the dollar is the one market that hasn't let my predictions down even slightly since my first published dollar update on September 3, when I predicted that a major bull market was starting in the dollar. 

I'm updating this chart because the dollar corrected right into target zone suggested on January 9 and reversed higher -- and the waveform out of the reversal zone looks impulsive, meaning it seems very likely that the nested third wave-up is about to break higher in an explosive way.  Since it seems to have completed five-waves up, a short-term correction is likely to occur first.  After that, it strikes me as probable that even though equities have been ignoring the dollar, a big move like this may get some attention -- from the algo-bots, if nothing else.  Note the blue melt-up channel.

In conclusion, I continue to believe that a top in equities is at hand; and that the dollar is going to continue markedly higher.  It's worth mentioning that I've had an excellent record at calling tops and bottoms, and hit both the October turns, and December turn, pretty darn well -- however, the market hasn't yet fulfilled my prediction that it will break the October lows.  So I haven't been too terribly early when calling tops (nailed the October bottom, but major bottoms are easier), but I have been too early in projecting where those prior tops would ultimately end up. 

Sometimes it's hard to see ten steps down the road, and traders may want to remember that although Elliott Wave allows us to make these predictions, often with a high degree of accuracy, there are always multiple paths the market can take to reach conclusion.  The lesson I hope to convey with this is that traders who protect their profits can do very well just hitting the turns, even if the market doesn't go down that road as far as one hopes it will every single time.  Trade safe. 

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX Update: 12-year Study of Investor Sentiment Points to a Top

The latest American Association of Individual Investors (AAII) sentiment survey numbers were released yesterday, and amazingly, were virtually unchanged from the week prior.  For the second week in a row, bearish investors remain at 17%, still near decade-long lows.  This struck me as a rare situation, so I decided to investigate further.

I set out to uncover how the market reacted when there were two or more consecutive weeks of bearish investor percentages this low, using bears below 19% as the control figure (thus allowing for roughly 12% standard deviation in the data figures). After combing through 562 weeks of AAII data by hand, I discovered that since the 2000 market peak, there have only been twelve other occurrences of this scenario.  Interestingly, the current back-to-back reading of less than 19% bearish is the first occurrence we've seen in almost six years.  So indeed, this is a rare set up.

After locking down the dates of prior occurrences, I went on to chart each example on the S&P 500 (SPX), in order to visually coordinate how the market responded to the excessively low bearish numbers.  What I found was that two or more consecutive weeks were always associated with some kind of peak in the market, even during bull markets.  In bull markets, the peak was sometimes minor, but it was still a peak.

There is another very interesting finding in my study.  Without exception, when bearish investors disappeared during bear markets, it was due to a technical breakout on the indices.  In other words, the shift in sentiment was due to market technicals, and not due to an improvement in the fundamental backdrop.  Conversely, this was not the case in bull markets, where the sentiment shifts didn't seem to correlate to any particular technical levels.  This has important connotations regarding the market's position now.

It seems we may be facing a similar situation today, as the market staged a technical breakout in December, yet the fundamental backdrop seems to have improved very little.

As I present the charts, the question investors need to answer for themselves is whether they believe the current market is a bull market or a bear market, because the implications of this data are quite different for each type of market.  If one believes this is a bull market, then these numbers correspond to a coming correction, which may be minor.  If one believes this is a bear market, these numbers correspond to a major top. 

I personally believe this is the start of a major bear market, and that this sentiment data is part of the "calm before the storm."  I am, of course, always open to the market proving me wrong at some point -- there's no bull side or bear side, only the right side. But at the moment, I see far more evidence for a bear market top than for an ongoing bull market.

The first chart I'm presenting shows what happens when sentiment reaches these levels during a bear market (hint: not pretty), as last occurred five times during the 2000-2002 bear.

 
Note how in every single instance, the sentiment numbers shifted in response to a technical market breakout, just as they have today.  One thing bears may want to keep in mind is that during bear markets, these extreme sentiment readings sometimes went on for a third week -- which can only happen if the market isn't falling too much.  Historically, that would suggest the current consolidation/rally could continue for another week  My current expectation is that it will not, however that could always change with new price action and data from the market.

The next chart shows how this sentiment corresponds with bull market peaks from 2003-2005.  Again, two consecutive weeks of bears below 19% hasn't occurred since.  Worth noting is that the very first shift in sentiment for the last bull market did correspond to a technical breakout above resistance (as has occurred now) -- however, it also corresponded to the 50 day moving average crossing up through the 200 day (known as the "golden cross").  So there were actually two strong technical signals to shift sentiment in 2003.  This golden cross technical signal has not occurred in the SPX today, so current sentiment seems to be "jumping the gun" as it did in 2000-2002 with each upside trendline break.

The next chart is the daily chart of the SPX.  Under Elliott Wave Theory, this bear market should unfold in five waves.  It appears the market is in the process of completing the second wave up, which should be followed by a very strong move down in the third wave.  My expectation for the next wave is that it will first carry the SPX below the October lows, and then ultimately much lower.

We remain on the hunt for the top of Minor Wave (2), which has thus far been sitting in the target reversal zone for the entire month of January.  This is not unexpected, as tops generally take time.  Second waves are particularly difficult animals, since they are able to retrace 100% of the prior move without violating any rules.  This makes them difficult to invalidate, and therefore more difficult to predict.  My expectation remains that the 1300-1310 zone should put the brakes on this rally.  This is not to say that the market can't break above this zone briefly, however, I wouldn't expect it to stay above that zone for long.

The short term wave structure remains very messy, which is another factor that adds credence to the idea that the market isn't going to suddenly launch into a sharp rally and break overhead resistance.  Strong impulse waves have certain characteristics early on which usually gives away their intentions. This rally has, so far, not displayed those characteristics.  Instead, it seems to have struggled higher, and burned off much of its energy in the process.  It's a bit like a marathon runner who sprinted his way to exhaustion just as he's approaching the steepest hill in the race -- which, in this case, is the overhead resistance at 1300-1310.  It sure looks like the rally doesn't have the required energy and momentum to break through this zone right now.

My expectation in this regard has remained the same since a week ago on Wednesday.  Assuming that a major top is indeed under construction, the exact penny of the top will probably only be apparent in the rear-view mirror.  The market continues to keep its options open in this regard, and as I stated yesterday, my stance remains that the reversal could begin at any time, if it hasn't already. 

The next level the bears need to take, and hold, is 1285.  The critical levels for the bulls are 1300 and 1310.  At this point, everything that happens in between these two levels is just noise.

In conclusion, I believe the preponderance of evidence points to a major top in formation, or complete -- and we can now add strong historical sentiment data to that collection of evidence.  My expectation remains that after the market finally turns, the October lows will be broken in short order.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX Update: Gaps Usually Get Filled

Yesterday, the market spent the majority of the session in consolidation mode, and formed a wave structure which looks corrective -- indicating that it's reasonably likely there are at least slightly higher prices to come before this wave completes.  The structure is vague enough that higher prices aren't guaranteed, though, and the rally has already completed the requirements of the larger waveforms.  My stance is that the reversal could begin at any time. 

The S&P 500 has overhead resistance in the 1300-1310 zone, and the market is now approaching this zone in an overbought condition, which severly weakens its chances of breaking though.  I would be quite surprised if the SPX can break through this zone for more than a head-fake, if at all.

Something my readers and I have discussed at length is the current market sentiment, which is now well-above historic levels for bullishness, and well-below historic levels for bearishness.  While this indicates that many traders have already committed to positions (i.e.- there are more holding long positions than short postions and thus fewer buyers),  the question has come up as to what might shift sentiment to bearish and increase selling pressure?  One thought as to what might accomplish this is that the United States is once again bonking its head on the debt ceiling.  It remains to be seen how this will be handled politically during an election year, but if it turns into another drawn-out gunslinging contest, the market could react in a similar fashion as it did last August.  Not that anything like that could ever happen... I'm sure we can rely on our elected officials to handle this issue peacefully, and in good taste (excuse me for a moment while I fall out of my chair laughing).

In any case, the charts continue to suggest that the market is forming a top in this zone.  The first chart I'd like to share is the one-minute SPX chart.  I've simplified this chart because there are now a number of viable ways to count the current wave structure, but they all seem to end in roughly the same place: somewhere between here and 1310.

The next chart outlines some support and resistance zones which are below and above the current market.  The trendlines run back a long time in some cases, but in order to make it readable, I had to zoom in on the current price action -- so the beginning of some of the lines isn't shown.

The last chart shows some of the unfilled gaps which are beneath the current market, which is a result of the fact that so much of the rally has occured in the overnight futures market.  The vast majority of the time (nearly 90%), gaps of this type are filled within 100 days of when they occur.  Obviously, there's never any guarantees, but this seems to be one more suggestion that the market will soon retrace this rally.

My expectation remains that the next move after the market finally turns will be a break of the October lows. For the longer-term charts, please see yesterday's article.  Beyond that, there simply isn't much more to add to the last few updates.  I'm starting to feel a lot like I did at the December top when I spent nearly a week suggesting that a turn was imminent, and I was even starting to repeat myself (repeat myself).  Unlike bottoms, tops take time.  To sum it up, here are some issues which support the bull and the bear cases:

In support of the bull case: 

1) The market is still in an uptrend
2) There were several resistance areas broken over the past couple weeks.

In support of the bear case:

1)  The market is overbought, and approaching resistance.
2)  The wave structure supports a top.
3)  Sentiment is exceptionally out-of-whack to the bullish side.
4)  The market has numerous unfilled gaps below.
5)  Several indicators which were triggered over the past few weeks suggest the market needs to return to lower levels.
6)  The put/call ratio is reaching extremes where tops normally form.  Conversely, the OEX put/call numbers suggest that smart money is placing bearish bets.  Unlike equity put traders, OEX put traders are right more often than they're wrong.

While my style is to try to anticipate the market by shorting near resistance and buying near support, I am also quick to exit if a trade goes against me.  My expectation is that a top is forming, but more conservative traders may want to wait for some type of actual confirmation of a trend change, such as a break of the lower short-term trendline, or a break of the trendline which connects the November lows and the December lows.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX and Nasdaq Updates: Long-term Charts Show Market Faces Key Resistance Levels

Yesterday, I spoke about the possibility that Minor Wave (2) up could complete its top within hours, and it's entirely conceivable that came to pass yesterday.  Once again, the market gapped up, and once again, the bulls took it nowhere after the futures gap. Back in December, I dubbed this the Buyerless Rally due to the fact that the majority of the rally has taken place in the overnight futures market, with very little movement coming in the cash market.  That continues to hold true, and I still believe this is a sign of distribution.

The Minor (2) top could have completed yesterday, however, the very short-term wave structure also allows for the possibility of one small thrust higher, so we'll see what happens in the next couple sessions.  1300-1310 remains as the next level for this market to beat.  Given the extreme bullish sentiment, and the fact that indicators such as RSI and MACD have been losing momentum and diverging bearishly for some time now, it's difficult to imagine the market will find the steam to push through right now. 

It bears repeating that Elliott Wave patterns are created by mass psychology.  When the majority are in one camp (i.e.- bulls), it's time to start betting the other way.  All the talk of a new bull market, and the recent laws passed in several states which now make it legal to hold public stonings of bearish investors, are both fully consistent with a major second wave top.

Several key long term resistance levels are now lurking just overhead.  The market has already broken out over a few important levels, but still has a lot of work to do before I consider turning long-term bullish.  The first chart is a daily look at the S&P 500 (SPX), and shows some significant overhead resistance in the 1300-1310 zone.  If the market can somehow break through that zone, it would open up the 1330-1350 area as a possible target.  My expectation, however, is that it will not break through this zone.

The next chart is the Nasdaq Composite (COMP), and shows it's in a similar position as the SPX, with key resistance just overhead.

The next chart is my preferred short term wave count, which shows the rally may have ended yesterday. The one-minute chart suggests the possibility that yesterday's spike high may have only been the internal third wave of wave c of v of C of (y) of Minor (2).  If that's the case, then there's one more ever-so-slightly higher high coming before it rolls over for real.  But it's not required, and the market could very well roll over immediately.

A break of 1283.05 would take that very short-term option off the table -- however it would not rule out the alternate count shown in the chart which follows this.  A break of the first wave a high at 1242.82 should serve as final confirmation that this wave up is complete. 

The next chart is the alternate interpretation of the wave structure (not the interpretation I'm favoring, in other words), and suggests that 1310 +/- might be the final target for the rally.

I want to follow that chart immediately with an interesting analog from 2001-2002.  What I find most interesting in the following chart is the fractal comparison between the first leg of its rally and the first leg of the current rally (from the October lows).  The structures look almost identical.  You can also see that in 2002, the market lolly-gagged around near that first high for several months (much like the current market) before finally rolling over and dropping 35%.

Another chart I wanted to share was the put/call ratio, which has reached extreme levels that are generally consistent with tops... however, Stockcharts has gremlins which randomly delete my charts (this is the third one that's gone missing without a trace; the Stockcharts server is apparently located in the Bermuda Triangle), and I simply don't have time to recreate it tonight. 

The last chart's the Dow, labeled with the preferred ending diagonal count.

In conclusion, I remain long-term bearish on this market, and unless the market can break overhead resistance, I am now short and medium term bearish as well.  Based on the wave structure, I believe something is "destined" to occur in the very near future to wake investors up from Bullish Happy Fun Land, and this wake-up call will rapidly turn sentiment from bullish to bearish.  When that happens, there will be a fast stampede for the exits.  Trade safe. 

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX and BKX Update: The Moment of Truth

In a perfect world, the completion to the Minor (2) rally would mark a new high which exceeds the October top.  My preferred count of an ending diagonal suggests that perhaps the session today or tomorrow will finally complete that top.

Since Wednesday, the market has kept us guessing about its short term intentions, while it's traced out a pretty ugly consolidation in the meantime.  As I write this, the futures market is trending higher, so hopefully today or tomorrow will finally provide an answer to the question of exactly where Minor (2) completes. 

Assuming the big picture count is correct, the suggestion is that a large and extended decline in equities is just around the corner.

There really isn't much to add to the information presented in the articles over the past few days.  One chart worth updating is the Philadelphia Bank Index (BKX), which has so far performed in accordance with the projections posted in Friday's article -- which expected more upside and a new high for this move.  Both those things have happened, but further upside is still expected.  The question this chart poses is whether the BKX is forming an extended fifth wave, which is nearly complete (blue count); or if this current rally is only part of the third wave of wave c of (y) (black count).  The diverging RSI and MACD seem to argue that the extended fifth wave is unfolding.

The S&P 500's (SPX) preferred count of an ending diagonal would look perfect with one more lunge higher, ideally above 1292.  The implication of the very short-term wave count on the chart below is that the price should not exceed 1301.24.  Even in ending diagonals, the Elliott Wave Theory rule that the third wave cannot be the shortest wave still applies.

Below is an alternate interpretation of the short-term wave structure.  If the market exceeds 1301.24, then the count below (or some slight variation thereof) will move into the preferred role.

Beyond that, there simply isn't much to add to the technical picture from the last few days.  One of my favorite, and very reliable, indicators is approaching a major sell signal.  A decent rally on Tuesday is likely to trigger the indicator, and that sell signal would coincide nicely with the ending diagonal wave count which believes the top could be just hours away.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

US Dollar Update: Dollar Rally is Just Gettin' Warmed Up

[NOTE:  Intraday market discussion is being held in the comments of the SPX Update (next article below).  Please join us there.  :) ] 

The dollar continues to track my roadmap from September 3rd, when I first suggested a massive rally was on the horizon.  The most recent update from October 29 nailed the bottom perfectly -- and if the dollar continues to track, then the dollar rally is about to accelerate even faster. 

The dollar appears on the verge of entering a nested third wave advance, which should soon explode to the upside.  I have updated the daily dollar chart to show the targets for wave (iii) of iii of (3).

If the short-term count is correct, the dollar may do a little backing and filling first, before launching higher in wave 3 of (iii).  79.83 is the level that needs to hold for the short-term view that the dollar has entered wave (iii) to remain viable.  At the hourly level the dollar appears to have completed a small five wave advance, and may be due for a short-lived correction.  Correction target box in yellow on the chart.

It bears mentioning that this first wave is a very good-looking impulse wave -- about as clean as they get.  If this is indeed the beginning of a nested third wave advance, it's always possible that the correction won't even make it down to the 38% Fib zone.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX, NYA, Dow Updates: Top in Sight; No New Bull Market on the Horizon Yet

[Two important notes to readers:

1)  To bring up larger charts, right click the chart with your mouse and select "open in new" tab or window.  The NYA chart is big.

2)  This site now requires that you register a valid e-mail account though Disqus in order to post comments.  If your comments aren't showing, that's why -- so please register your account.  Sorry for any inconvenience, but I'm tired of dealing with the same BS over and over.  First offenders will be warned; 2nd offenders will earn themselves a one-week suspension.  Repeat offenders will be banned without further notice.

3)  How to Register:  Enter a comment, click "Post as" -- a box will come up asking you to enter your email and password.  If you don't already have a valid account, then select "Register a New Account" underneath the password box and follow the instructions.  TY]  :)


I've spent a lot of time this weekend examining charts, and rigorously challenging my assumptions regarding whether a new bull market could be starting or not.  After studying the charts from as many angles as I could, including upside-down (well, more correctly: inverted), I remain of the long-term bearish persuasion. 

I'm going to get right to the charts, because there's a lot of them.  Again, I believe the top is either in already, or will be after one more lunge higher. 

The first chart I'd like to share is a long-term chart of the NYSE Composite Index (NYA).  For new readers, I often like to examine the NYA because it represents a very broad look at the market, unlike the popular SPX and Dow, which have been culled of many of the weaker common stocks.

This NYA chart presents some interesting results.  I've drawn a Fibonacci fan from the 1994 low to the 2007 high.  I chose 1994's low because it was the last important low before 1995, and I believe 1995 was (arguably) the start of the stock market bubble.  Some may recall that 1995 was when Alan Greenspan gave his famous "irrational exuberance" speech.  (That's my recollection, anyway.  Maybe I should look it up.  Nah, I've done enough this weekend.)   ;)

Notice how those Fib fan lines have acted as support and resistance over time.  The 2008 crash started with a violation of one of these Fib lines.  In 2011, the market "returned to the scene of the crime" and backtested that same line from underneath.  The 2011 decline started there, and was then caught by the lower Fib line.

In red, one can also see a huge potential triangle which has formed since the 2007 top.  Volume has been falling steadily since 2007, which confirms the triangle pattern.  The triangle implies a move of 60% (6205 points on a measured basis) from the breakout/breakdown level, at either the upper or lower trendline.

There is a trendline of some importance which is called-out as well.  This trendline has acted as support and resistance for many years, and has been well-established with seven touches.  The market is still living beneath this resistance zone.

The massive multi-year potential head and shoulders pattern is also noted.

I did examine this chart in logarithmic scale as well, and both scales yielded many similar results.  I've selected the linear scale for presentation purposes.

Next is the long-term Dow chart, which shows some similarities between the current market and 2008.  It also shows how the Dow is still beneath some very important resistance levels, and notes the formation of a bearish rising wedge off the October 2011 lows.  The pattern is now complete, with the requisite four alternating touches of the upper and lower trendlines.

Rising wedges imply a rapid return to the start of the pattern once broken.

Next is the daily SPX chart, which shows the series of potential reversal candlesticks which formed last week -- right inside the target zone -- and notes some areas where similar candlesticks have occurred.  Not shown, the DIA and SPY weekly charts both show weekly topping/reversal candlesticks, and if the market gapped down on Monday, this would create a potential island reversal top.

Next is the chart of the hourly preferred count, which still believes that either the top is in place already, or it will be very soon.  The implication of this chart is that a massive top is, at most, only a few sessions away.

The next chart is an indicator chart I touched on the day after it triggered, but I want to take this opportunity to remind readers that this indicator is still "hanging" out there, unresolved.  This indicator suggests that the market still "owes" us a lower low beneath 1248, where the signal was triggered.

The final chart is a look at some alternate short-term potentials for the market to resolve the Minor (2) top.
The chart below is not my preferred count, but is instead provided to help readers recognize some of the additional possibilities still remaining.

The chart is an attempt to "think outside the box" and suggests a few final waves to confuse technicians and throw them off the trail a bit.  Some Elliotticians are suggesting that the move from 1284 to 1265 is a leading diagonal first wave.  This is plausible, however the first wave of an impulse move generally should take out the next key low, which that move did not.  This chart suggests that said move may have been a leading diagonal a-wave, as part of wave iv of the larger expanding ending diagonal (see black count). 

The blue count suggests the same alternate discussed on Friday, of a more conventional five-wave move to complete wave c of (y) of Minor (2).  The chart notes some invalidation levels (knockout levels) for each count.

In conclusion, I believe the evidence continues to point to lower prices over the long term. My short term opinion hasn't changed since Wednesday: either the top is in, or it's very close.  The US Dollar seems to be confirming this view (See US Dollar Update). 

I remain of the belief that the October lows will not hold, and that the market is within days of beginning the next leg down, which should move rapidly lower once it begins.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX and BKX Update: The "Wear-Ya-Out" Market

The last time I felt the charts were this challenging was on September 29, 2011.  That was the market getting geared up to reverse and turn into the October rally.  I ended up nailing the turn to the day, but a few days before it happened, the charts got really messy.  The market often gets most confusing near major turns as it tries to grind everyone up, and right now it feels like the market just doesn't want anyone to know exactly what's coming next.  Many of the other technical analysts I periodically check in on seem to be expressing similar angst -- at least the ones who don't just shoot for the easy answers.

Yesterday was another one of those "do nothing" days that doesn't aid much in analysis.  The possibilities put forth on Wednesday and reiterated yesterday still stand.  The top may be in, or another lunge higher may be in the cards.  Let's start with the preferred count, and then I'd like to share a couple alternates.  The first chart is the preferred ending diagonal count, and suggests that one more lunge higher may be needed to complete the rally -- though it's not required.

Now let's discuss some alternate possibilities.  I uncovered a potential in the Philadelphia Bank Index (BKX) which will probably not thrill bears -- there is still the potential of a bit more melt-up from these levels.  Here's the BKX chart, so you can see what I'm referring to; I'll discuss this further beneath the chart. The blue count agrees with the ending diagonal preferred count; the black count does not.

The chart annotations explain some of the positives each count has going for it, however there is one additional mention that the black count has in its favor: the target of roughly 45 equates to both the Fibonnacci 1.618 extension of wave a, and the target given by the equation where wave 5 becomes equal in length to wave 1.  When two forms of targeting both agree on the same number, it calls for caution. 

That said, the issue I have with the black count is discussed on the chart: momentum should have increased during the third wave, not decreased.  So I am somewhat torn, and unable to give an edge to one count or the other at this moment.  Hopefully Friday and/or Monday's action will help.

The next chart shows how the S&P 500 (SPX) could track the BKX if the "more melt-up" scenario unfolds.  The other thought regarding this scenario is that a move like this could break the last of the bears into capitulating.  Surprisingly, despite the AAII sentiment numbers of 17% bears, there are still a reasonable number of us who haven't yet been shot or had to gnaw off our paws to escape traps.  A final push that sustains trade over 1300 for a few days would probably get most of the remaining bears to cover their shorts. I like to say those are the levels where the big players sell their shorts -- which are then bought by all the retail bears who are covering theirs.

Anyway, this SPX chart shows how to count this potential in line with the information revealed on the BKX chart.  The blue 5th wave would target the 1310-1330 zone under this count.  Again, hopefully the next couple sessions will reveal if these alternate counts have any legs.

The ongoing observation I have is that the SPX has not performed at all in line with expectations for a "normal" c-wave rally.  The third wave in particular was weak thus far, and had a very deep fourth wave retracement.  This suggests several possibilities, such as those discussed, but we're still left with unanswered questions. 

There are now many divergences beginning to crop up on the indices and on individual stocks, and this too suggests that the rally is not much longer for this world.  The patterns being formed are suggestive of a distribution top.  I remain of the belief that this is the last rally before an extended decline -- but the market isn't making it easy on technical analysts to pinpoint the top.  I'm sticking to my call for a reversal in the 1269-1310 zone.  In a perfect world, today's market would run higher to complete the ending diagonal in the 1292-1310 zone, then reverse and call it a day.  Keep in mind that non-farm payroll days often line up with major reversals.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX Update: Bears Have Left the Building -- Look Out Below

I think being long this market right now is exceptionally risky.

Yesterday, I suggested that the sentiment survey due out today from the American Association of Individual Investors would indicate that sentiment levels were reaching bullish extremes.  The survey actually exceeded my expectations: not from the bulls so much, but from the lack of bears.  The percentage of bearish investors is approaching the lowest levels of the past decade, and this type of sentiment is generally bad for bulls. If most of the buyers have already bought, and most of the short-sellers have already covered, the market is going to have a hard time putting together a meaningful rally.

This is when it's most challenging to be a bear -- when virtually no one else is (the same applies to being bullish, like I was at the beginning of October)... but this is also when it's most profitable. 

Sentiment data is not to be construed as a guarantee of an immediate top (or bottom) -- in fact, the last time the bearish percentage was this low was December 2010, and the SPX went on to rally another 100 points before putting in the 2011 top and crashing over the summer.  Prior to that, one has to go all the way back to July of 2005 to find bearish investors this non-existent (the market fell through the rest of July); one can also find readings this low near the 2002 top (in February/March of '02 -- market lost over 30% afterwards), and near some of the major tops of the 2001 bear market.  But one can't trade on sentiment alone, because extreme readings can last a long time; however, this is a strong confirming indicator to the wave structure of the Minor (2) top.

It also suggests an ongoing state of suspended disbelief in the fundamental problems facing the world governments and economies.  Just as a few examples of the differences between now and the last time we saw readings this extreme:  back in December 2010, the TED spread was less than half its current level of 0.57, Italy's bonds were yielding around 4.5%, and QE2 was alive and well and feeding the stock market with liquidity. 

The market action yesterday finally took some of the short-term options off the table, and the call I made yesterday now appears to be the correct read:  either the top is in already, or there's one last spike high coming (ideally, just above the October highs, but not required).  

The Minor (3) decline should be just around the corner.  To reiterate a bit, I expect the first leg of Minor (3) to take out the October low of 1074.  My ideal target for the S&P 500 (SPX) is 1000-1050, however, wave extensions are always possible, and the 800's would not be out of the question.  It's been a frustrating market for swing-trader bears since the October top, with the bullish alternate counts seeming to win at every turn (although, a lot of points should have been picked up by the more nimble traders who took profits in the target zones).  The days of bear frustration should finally be drawing to a close.

Below is the intermediate term chart, which is unchanged of late:

The second chart I'd like to share is a very short-term chart, and presents a slightly altered take on yesterday's ending diagonal.  I'm genuinely not sure yet which diagonal could prove correct (assuming the top isn't in already), but the overall feel of an ending diagonal is certainly present, and the three-wave rallies seem to confirm that.  For those not well-versed in Elliott Wave, an ending diagonal consists of five 3-wave moves, and generally indicates buying exhaustion, as a balance is being reached between buyers and sellers.

My solid expectation now is that the top is either in, or will be after one more spike high.  I would take a very cautious stance with long positions at these levels (i.e.- I wouldn't hold longs here, personally, at least not for more than a short trade).  The temptation is always to go long after the meat of the rally is over, and your linear-projecting brain thinks it's "safe."  That's essentially what fifth waves are: the stragglers who missed the turn trying to jump on a bandwagon they already missed.  Another term for these traders would be "the bag holders" because they're the ones buying at the top (or selling at the bottom).  Successful trading often involves doing the exact opposite of what your emotions want you to do.

The last chart is the ending diagonal speculative count shown yesterday.  As I said, I'm genuinely not sure exactly how the end will shake out here -- the chart above and the one below are both completely viable, as is the view that the top is in.  We're really picking nits when we're talking about a couple percentage points of upside verses 20% or more downside.  The larger point I'm trying to drive home is that I don't believe this is a zone where swing-traders want to establish long positions -- exactly the opposite; I think swing traders should continue establishing shorts.  Nimble day traders are another matter, of course. 

What I like about the chart below is the "shake-out" factor it presents, both to weak longs (who dump when this heads lower) and to weak shorts (who dump when it heads higher).  It would simply be the path of greatest confusion.  An interesting factor to keep in mind is that Friday is a non-farm payroll day.  I've mentioned this before, but it bears repeating: on non-farm payroll days, the market often reverses from the direction of the open.  So if the open is down, it often reverses up and vice-versa.  Again, like everything else, this is just another odds-on favored historical fact; it doesn't guarantee a reversal.

On the other side of the coin, what I like about the count which suggests that the top is in already is that I don't think anyone's expecting that at all.  Major tops and bottoms should always leave the majority expecting the trend to continue, even if it's "just a little farther."

In conclusion (if you haven't already figured this out from the body of the article), my expectation is unchanged from yesterday: either the top is in already, or it will be after one more lunge higher.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX and RUT Update: Market Has Reached the Topping Target Zone

I was watching CNBC last night, and it seemed like every other guest was predicting Dow 36,000 for 2012.  Correct me if I'm wrong here, but don't bull markets start when everyone is bearish?  In March of '09, AAII sentiment was over 70% bears.  The new AAII numbers come out tomorrow, and I'm reasonably certain the bullish percentage is going to be well above the historic average; the numbers were slightly above average last week, and the rally since is sure to get more on board the bull bus. 

Anyway, I changed channels a couple times to see if I could find any bears out there, and finally I did.  I came to a channel where a fellow was talking about how he expected the Dow to hit 10,000 soon.  He was even wearing a Dow 10,000 hat; and I thought, "Now here's a guy who might have a clue!"  Then I realized the show was a re-run from March of '99. 

Part of the job of the second wave retrace during the early legs of a bear market is to fool the majority into thinking that the first wave down was just a correction in an ongoing bull.  Bear markets need buyers early on -- that way there's somebody selling later to keep prices heading lower.  That current sentiment fits that pattern.

The other factor which fits the pattern is the extreme difficulty in nailing the exact top.  This top needs to leave confusion in its wake, and that can only happen when the majority are still looking for higher prices.  There should be buyers all the way down for the first half of wave Minor (3); so those buyers can turn into sellers all the way down for the second half of Minor (3). 

Now, all that said, if prices break above the 2011 highs at any point, it's back to the drawing board on the whole kit and kaboodle.  I'm not a perma-bear with some type of agenda -- so if the market proves me wrong, then so be it.  However, my expectation that the market is in the process of forming a significant top has thus far been unchanged by the price action -- and this top seems to be confirmed by sentiment.

The market action yesterday was in line with larger expectations.  I'm going to present the long-term chart first.  It shows some resistance lines from the old head and shoulders pattern of 2011; yesterday the market broke above, but closed beneath, that resistance area.  The blue target zone has now been solidly reached, but still remains active for the moment. 

  

The next chart is the Russell 2000 (RUT), and I'm sharing this one because it shows an ugly, but clear, 5-wave structure off the December lows.  The count shown on this chart would seem to indicate that time's about up for the rally -- but prices are still living within the nicely-defined red trendchannel, and until that breaks, there's no solid signal of a trendchange.

The last chart I want to share is a speculative possible ending for this move.  I've been kicking this around for awhile, and the market has performed close enough to my expectations under this potential that I feel it's worth sharing.  This count would create even greater confusion over the short-term, and I think that's what I find most appealing about the possibility.

This labeling takes a little creative license with the waves, but I don't feel it's forcing the count excessively.  Keep in mind that the lower red line is just for illustration, as opposed to being an actual support zone.  Also keep in mind that this is pure speculation; there's nothing yet to indicate this will unfold.

The short-term waves yesterday left me with the expectation that prices during Wednesday's session will reach beneath Tuesday's low, but whether that was "the" top remains to be seen.  This is going to be a hard top to nail to the penny, so the larger waves in the first chart will have to be our guide.  The target zone's been hit, so my stance now is that the rally could end at any time.

Worth mentioning, the Euro is sporting a complete wave structure which allows for the possibility that it may have already completed all of its 4th wave rally, as anticipated and mentioned yesterday.  The rally fell slightly short of the target zone, so if that was the whole of wave 4, it indicates extreme weakness in that currency.  This would bode ill for equities as well. Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

Some Thoughts on Trading Strategy; and How to Paper Trade for "Real"

Over the past few weeks, we've had a number of discussions on trading strategy.  In this article, I'd like to reiterate, and add, some key points:

1)  Know your exit before you enter a trade. 

Once you're in the trade, your emotions take over and you will tend to compound mistakes.  Awhile ago I wrote an article which discussed Prospect Theory.  For those who missed it, Prospect Theory found that people become risk-averse when it comes to gains, and risk-seeking when it comes to losses.  In other words, the natural instinct of people is the exact opposite of what it takes to be successful:  most close their winners too early, and hang onto their losers way too long.  For the record, it should be:  Cut your losses, and let your winners run.  To a point, anyway.  That brings us to:

2)  Don't be a pig. 

Everyone's heard the expression, "Bulls make money, bears make money; pigs get slaughtered."  This refers to the greed factor.  Have you ever watched a winning trade turn into a loser?  If you haven't, you've never traded.  This happens because, the majority of the time, the market covers the same price territory repeatedly.  If you get too greedy (piggy!), you'll watch many of your winners die, along with your account.  That brings us to:

3)  Develop a system to protect profits. 

Once your trade is in profit, how are you protecting that?  Do you move your stop-losses?  At what point do you close your trades and take profits?  Are you being a piggy! and just hoping for more and more?  You should design a system that allows you to take at least partial profits at certain times.  As an example, years ago when I traded options frequently (which I don't anymore), I used to close half my position whenever the value doubled no matter what.  That allowed me to guarantee I got all of my capital back (50% of 200% = 100% of the original investment).  After that, I was in the remainder of the position for "free," which allowed me to manage it much less emotionally.  To use casino terms, I was playing with the house's money.  I'm not suggesting this works for everyone, but it worked well for me.  The larger point is you need some type of strategy that you can stick to with discipline.  That brings us to:

4)  Protect your capital.

As a trader, your capital is your life's blood.  It's everything.  If you have no capital, you have no income.  There is no worse feeling than blowing up your trading account, and I speak from first-hand experience.  Back in 2001, when I was less experienced at trading bear markets, I over-leveraged myself into short-dated puts at exactly the wrong time, and blew up my account to the tune of six figures.  I had decided to try and "knock one out of the park" -- and I did it at just the wrong time.  As a result of this experience, I am now much more careful trading leveraged instruments, especially options.  If you're taking excessive risks with your capital, you might consider that living to fight another day is irreplaceable for a trader.  That brings us to:

5)  Discipline must trump conviction. 

Another tendency we all have is to "marry" our beliefs in life.  This can be death for a trader.  Maybe we believe the market is due to fall because jobless claims came in showing that unemployment just hit 50%, and the ECB just announced that they're going to start holding public executions of Prime Ministers, and Ben Bernanke just gave CNBC the finger.  The market doesn't care what you think should happen, even when what you think makes complete sense.  The market is often completely irrational, because there are factors at play that have absolutely nothing to do with fundamentals.  So one has to respect the price signals, and one has to be willing to exit a trade with discipline, even when one's conviction says otherwise.  That brings us to:

6) It's rarely smart to "bet the farm" on one play.

Unless you're the World's Greatest Market Timer (hint: you're not), it's usually a good idea to also scale your way into trades. If you bet it all on one entry, you leave yourself no room to be wrong and average down. You are also putting a ton of psychological pressure on yourself if your position doesn't perform immediately.  And as I've said many times: your first opponent as a trader, and the hardest opponent to beat, is yourself.  That brings us to:

7)  There's no such thing as "missing" a move. 

How often have you missed a limit entry by some miniscule amount, and then kicked yourself as you watched the trade you're not in move in the direction you thought it would?  Or missed an exit by a small amount, and then watched your profits start to vanish?  It happens to all of us.  Both of these situations have the potential to turbo-charge your emotions, which makes you prone to mistakes. 

It's human nature to hate feeling "left out" and like we missed an opportunity.  I believe this somewhat immature emotion is a vestige of childhood.  One of my first experiences of the fallacy of "missed opportunity" came when I was eleven-years-old: my friend was going to Disney World, and I was invited to go with him... but my parents refused to pony up the cash.  I remember getting quite upset about it and telling my father that I had missed a "once in a lifetime opportunity to go to Disney World."  That's actually how I felt, at eleven.  My father, to his credit, burst out laughing.  Needless to say, a few years later I went to Disney World -- a second chance at that "once in a lifetime" opportunity.  I've been to Disney World three times since.  As an adult, I realize that considering Disney World to be a "once in a lifetime" opportunity is completely silly.  The same goes for that trade you just missed.

Obviously, the market will still be there tomorrow.  So why all the frustration over "missed opportunity"?  I believe the majority of it boils down to the desire for instant gratification.  We start kicking ourselves over the money we "could've" had right now if we'd made the trade.  A trader can't afford to give any quarter to this type of thinking.  Trading is like everything else in life that's worth doing:  it's not a sprint; it's a marathon.  Patience is key.  The very human desire for instant gratification must be controlled with discipline; and the self-indulgent poor-me emotion of "missing out" must also be controlled with discipline.  If you can't control the emotions, walk away from your computer and come back when you can, because otherwise you're going to make bad decisions for your next trade. 

In the long run, if you lack discipline, you may make some winning trades and win the battle of market direction at times, but you will ultimately lose the war.  That brings us to:

8)  Trading is war. 

Make no mistake: trading is a fight to the death -- not only against your own emotions, but against the other market players. The Japanese have a saying, "business is war" -- I believe this absolutely applies to trading as well.  You are the general, and your positions are your troops.  Are you deploying your troops at random, in a haphazard fashion?  Are you "hoping" they can win, when they are outnumbered by superior, better-equipped forces?  Your enemy has done extensive recconaissance, developed a solid strategy, and deployed his troops accordingly.  What's your strategy to beat him?  What's your plan for retreat if the battle is being lost?  If you don't take it that seriously, how can you hope to win against those who do?  That brings us to:

9)  Refine your strategies by paper trading.  Save your money until after you have a plan.

Don't send your troops off to get slaughtered while you try to figure out what you're doing.  Paper trading is a great way to help develop and test trading strategies without it costing an arm and a leg to do so -- and without needing to sit by your computer armed with several bottles of Mylanta.  In the past, a number of readers have expressed an interest in paper trading.  The problem for most people is that writing everything down can be somewhat tedious and lacking in the "fun factor."  Well, I may have found a solution for that. 

Zecco Forex offers a free 30-day practice account that comes loaded with $50,000 in fun money.  After download, you gain full access to all the real-time charts, quotes, and tools you'd have, just as if you had a real account -- and it tracks all your paper trades like they were real.

If you instead sign up for a real account (not a practice account) through the links on this page, then you're also helping to support the blog, since I receive compensation for the advertising.  If you wish to do that, then use the link below and select "Open a Forex Account" when their link page comes up.  I went and opened one myself (took me about 3 minutes), because I'm curious to test their platform, and their commissions are extremely low.

If you want to sign up for a real account, please use the link below (it's not required that you fund the account when you open it -- when you get to the funding page, you can select "add funds later" at the bottom right):

SpeedTrader is another new sponsor who offers free practice accounts -- this one comes with $100,000 in fun money.  Same rules apply: if you sign up for a real account then your're helping support the blog, since I then receive compensation for the advertising.  No compensation for the free practice accounts, though.  :)

Of course, there's always more that could be said about trading strategy -- but I was attempting to write an article, as opposed to a book.  ;)  As always, trade safe!


Disclaimer:  The information and opinions in this review are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency and/or opening of an account with Zecco Forex or SpeedTrader.

SPX and Euro Updates: Still No Change Since Thursday

There's been no material change in the counts from as far back as last year (always wanted to say that).  The market remains balanced at a short term pivot point, and there's literally been no change at all since the updates which were published for Thursday and Friday.  As of this writing, US futures markets are closed; however, the rest of the world's markets seem to be very excited about 2012.  The German DAX closed up 3% on Monday, and Asian markets have been generally positive as well. 

Although the SPX reached its target zone (1269-1310), this zone remains an active target.  On Thursday, I felt prices needed to head lower on Friday, which they did -- however, I was looking for more of a move.  I'll admit that the world market party has left me feeling in doubt about the potential of lower prices over the very short term.  It bears repeating that a break above the recent 1269 highs could lead the SPX above 1300 -- however a top could form anywhere in this zone and until the short-term picture makes more sense, it's very difficult to nail down an exact price.  Since the short term questions from Thursday and Friday haven't changed in the slightest, I'm going to focus on the larger picture tonight. 

The first chart I'd like to share is of the NYSE Composite (NYA).  This index remains a favorite of mine, due to the fact that it's a much broader index than the indices generally reported by the mainstream media.  The NYA shows the same basic Elliott pattern as the Dow, however the NYA remains well-shy of its October highs, while the Dow has bested its October highs.  This suggests that there's been something of a "flight to safety" into larger companies and dividend-yielding stock, as opposed to a broad-based recovery rally.

The chart above highlights some interesting volume trends.  Going back to the March '09 bottom, one can see that the volume was quite strong off the lows, and then surged again in July '09 as the market rebounded higher off its first correction.  Moving into the 2010 correction, one can again see that volume was trending upward as prices rose off the base.  Contrast both of these with what has happened since summer of 2011, where volume has been steadily decreasing across the board.  Some have suggested that a new bull market is forming, but in my view, the decreasing volume doesn't give much support to that thesis. 

The next chart is the SPX.  Back on November 20, this chart was the bullish alternate count, but it has since shifted into the preferred role.  I wanted to share this chart because it provides a nice view of the October top, which was erratic and something of a blow-off top.  That type of top leaves a lot of confusion in its wake, as it tends to get market participants looking "up," blows up a lot of short positions, and then reverses somewhat dramatically.  It will be interesting to see if the market does something similar this time around.   

Also note on this chart how the market behaved at the last two target zones (blue boxes) in early and mid-December -- it tagged the target zones, reversed, and then surged back into them.  We may see a similar occurence this time around.

On December 4, I published a target for the Euro, which was hit.  On December 26, I discussed how the Euro looked like it needed to make another new low, and that has also happened.  It's worth noting that the Euro has now completed the minimum expectations for lower prices in this wave, and as such, could be forming a short-term bottom.  This would imply that if the Euro corrects higher into the wave (4) target zone, then equities will probably head higher right along with it.

As I shared on Friday, the sentiment among retail stock investors is very bullish, and this suggests that the market is in the process of forming a top.  Sentiment is never a call for immediate reversal, however.  The market can always continue moving in the same direction as the extreme sentiment levels for a time -- but high bullish sentiment does tend to argue against a large and sustainable move higher.

The first couple days of January are often bullish, as money from various fund sources flows into the market.  The short-term charts remain inconclusive -- but the expectation that the Minor (2) top is forming hasn't changed yet.  Hopefully, this week will finally answer some of the questions of the short term.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com