SPX and RUT Update: Know Your Limitations

When you use a system like Elliott Wave (or anything else), it's important to know what it can do and what it can't do.  Range-bound markets, especially near potential turning points, are particularly brutal on most forms of technical analysis.  I'll try my best to present you with some helpful info anyway.

A range that appears in a young rally that's not yet overbought is one thing: it often means a consolidation before a new thrust higher.  A range that appears at the end of a (seemingly) tired rally can mean the same thing (new thrust higher coming) -- or it can simply mean that the rally has run out of buyers. 

If the market has run out of buyers, what will usually happens in a situation such as this is the market would test the higher prices with a breakout.  If there is still buying interest, the breakout will run.  But it's not unusual to see instances of a brief breakout that runs into a wall of sellers, leading prices to whipsaw.  One can see just such a pattern in eur/usd recently (see chart below).

This happened because the short term breakout was bought, and for a moment buyers outnumbered sellers so it jumped higher.  But it immediately ran into intermediate and long-term resistance, and a wall of standing sell orders that overwhelmed the short-term traders who bought the breakout.  Once that short-term buying money was spent, there were only sellers left. 

Moves like this reveal the pschology of traders.  Most are trying to squeeze every last cent out of a move, and greed can overtake reason.  So even with long-term resistance just overhead, many bought the short term breakout.  How do I know?  The strong sell-off that followed is proof positive.  Sell-offs like the one that followed can only occur if the majority were on the wrong side of the trade, and that adds fast fuel to a fire as the short term money suddenly starts bailing.

I saw the short-term breakout, but I was also well-aware of long-term resistance just overhead.  So how do you play it?  Well, my particular read was that euro still had a little bit of room that it could run before smacking into long-term resistance -- so, being unwilling to ride out a potentially high drawdown, I covered my shorts on the breakout.  However, I felt it was too risky to go long since the reward was marginal, so I sat and waited a bit.  Then I got short again on the whipsaw.  It cost me a few bucks of potential profit, but it was the less-risky play, in my opinion. 

Two lessons:

1)  Often we simply have to let the market declare its intentions.  No one can know for sure ahead of time if a breakout will run or whipsaw.  There are sometimes clues, but the market is always the final arbiter.

2)  It's important to be aware of what's going on across time-frames.  I feel the equities market may be facing a similar situation now, the difference being that equities could run a lot farther if they break out (the risk/reward is better, in other words).  There have been some short-term bullish signals, but there is also resistance just overhead.  Which will win?  We may find out soon.

This is one of those times that the systems simply can't predict with high confidence exactly what's going to happen -- at least, not until the market gives some more information.  My caution here would be to avoid getting too attached to any particular outcome at this juncture, and stay nimble.

The first option is the standard bullish impulse wave up.  This would have the market ultimately heading into the mid 1400's.  Probably the main argument in favor of this count would be the simple "trend is your friend" concept.  The count also matches well with a bigger picture buy trigger, noted a bit later.

There's a short-term bearish sell trigger noted on the chart, which will elect on a break of the fairly-obvious head and shoulders at the red trendline.  This would fit as wave c of (2) per the bullish count, with wave (3) up to follow.  There's no guarantee that the trigger will elect, so one should be cautious if considering front-running that trigger.

Trading ranges are difficult environments to read, because the market really isn't giving out much information.  Shown below is another way to look at things, using the RUT for illustration, though this could apply in SPX as well.  This count would fit the "fake-out breakout" potential in the market.

Looking at the bigger picture, and ignoring wave counts for a moment, there are a couple of intermediate trade triggers set up.  This chart also shows simple support/resistance lines, which can be quite helpful in a range-bound market.

As I said earlier, I would play this market cautiously.  What that means to me is I might use the breakout points shown above as pivots.  For example, I might be long above the breakout level, but flat (or short, depending on how things look) beneath it.  Then flat or long again back above it.

In conclusion, this market is a tough nut to crack right now.  Until it breaks one way or another, there's simply too little information available at the current levels -- however, there are a few triggers to watch and see how the market reacts to them.  I'm really looking forward to things resolving one way or another soon.  Trade safe.

SPX and INDU Updates: Bulls Win Again

Recently it seems that virtually everytime there's a choice between a bearish count and a bullish count, the bullish count wins.  This was once again the case yesterday, as the bulls did what they needed to in order to knockout the bear count (in the Dow, at least). 

There now appears to be a complete five-wave form on multiple time frames, so it's likely that a correction is due at the minimum. 

The bears will hold out hope that the recent highs will mark ALL OF wave (v) up, but given the track record of bearish vs. bullish counts, I'm going with the more bullish count as the preferred view, which would see the recent highs as marking wave (1) of (v), with more upside to come.  We'll have to watch the decline carefully, and if it seems to be turning into an impulsive form and starts breaking some key trendlines, then we'll consider the more bearish option in greater detail.

The bullish Dow triangle count, shown on Sunday, appears to have played out to perfection.  Below is the original chart, followed by the updated chart.

Again, since the rally has now completed five smaller waves up, there is always the possibility of a larger top in this position.  Current expectation is that these five waves are only completing wave (1) up, but any trade beneath the E wave low would be a big red flag to bulls.  Barring that, we should probably continue to give the benefit of the doubt to higher prices.

Below is the short-term SPX chart.

And the bigger picture SPX chart, with an initial target possibility.  We'll narrow down targets after the assumed wave (2) bottoms.

On a bright note, yesterday's Euro/US dollar call was a big winner, as eur/usd dropped substantially.  This is the one thing which is causing me to give some serious consideration to the more bearish alternate count -- the dollar appears to have put in a base and could be due for a lengthy rally.  Now, dollar/equities correlations come and go -- however, a bullish dollar indicates that traders view QE3 as significantly lower probability.  And no QE3 hope is bearish for equities.

In conclusion, we'll have to watch this next decline carefully for signs of an impulsive move.  If that happens, the possibility of a fifth wave failure will loom large.  But if we get a garden-variety scary (to bulls) a-b-c down, which is currently the expectation of the preferred count, then it becomes quite likely that the SPX is on its way into the mid to high 1400's.  Trade safe.

SPX, COMPQ, Eur/USD Updates: Today Could be a Critical Day

Today could be a key day toward gaining more confidence in one of the two main counts, because -- as those of you who own digital watches already know -- today is the first of May.  The first of any month is frequently bullish, since there's often a big bag of fund money moving into the market. 

If the bulls are able to show some strength today, it's probably time to start betting on the alternate count.  Conversely, if the bears can keep control, then the preferred count will gain a bit of a confidence boost.  There are two main reasons I remain in favor of the more bearish count, and I'll outline my reasoning in a moment.

Yesterday's decline appeared impulsive, meaning it appeared to complete a five-wave move.  So there might be a small bounce, but if that was wave a or 1 down, it should be followed by more selling.  A material break of 1394 should get the ball rolling. 

Conversely, if bulls can take the market back above the recent 1406.64 print high, then the alternate count is probably unfolding.  I'm inclined to favor the alternate if new highs are made today, because that would then mean the market was up 6 out of the last 7 days, which is often (not always, of course) indicitive of a more meaningful bottom.  So if new highs occur, the favored odds shift to the bulls -- but currently the odds still remain with the bears.

As such, on the chart below, the blue count is still the preferred count, and suggests that the entirety of the recent rally is part of a corrective structure, which will be followed by new lows. 

The alternate count would view the recent lows as a base from which a larger five-wave rally will unfold.  As I said, I think tomorrow will go a long way toward adding confidence toward one view or the other.

One of the reasons I remain in favor of the rally being corrective is the Nasquack, which looks to have formed a clear five-wave decline.  That suggests that another five-wave decline will follow, though it does not preclude further sideways corrective action first.

The Nascrack also looks like a small impulse down, to be followed by new short-term lows after any bounce completes.

As a refresher, here's what the big picture looks like.  There are already targets for each count, but no confirmation.   As I've been stating, I continue to feel that the preferred count is slightly more probable.

Yesterday I mentioned that the Euro/US dollar currency pair is trading just beneath intermediate and long-term resistance levels.  If it does break out here, then equities bears are probably going to need to come to terms with the alternate count.  But again, odds here favor that it won't break out, since it's facing dual resistance -- and since it's formed a descending triangle, which leads to a bearish resolution 64% of the time. 

A descending triangle indicates that sellers are coming back into -- and taking control of -- the market earlier and earlier, which is why the peaks become progressively lower.  So sellers are getting stronger, while buying interest remains flat.

The Euro/Dollar chart is another reason I remain in favor of the more bearish equities count. 

However, 64% odds are just that -- and there's no rule to guarantee that the 36% odds won't come to play on this particular occasion.  In either case, today's action could go a long way toward telling us if the higher odds will take the intermediate-term prize, or if Uncle Ben's loaded dice will once again guarantee that bears lose to the house.  Trade safe.

SPX, INDU, and Employment Updates: Looks Like the Shoe is on the Other Hand Now!

No one can deny that many indicators look bullish right now.  The bears are rapidly running out of real estate, and the Dow in particular is within a stone's throw of making new highs.

However, the burden of proof is now on the bulls.  Anybody can run the market back and forth in a trading range, but until it breaks out, it's just range racing.

It's worth remembering that things looked fairly bearish a week ago, but bears failed to get it done when they needed to, as discussed on April 22:

I think one of the key trendlines right now is visible on a longer-term chart, and it's not too far below the current market. If that red trendline breaks, the market could start the next big leg down. If it doesn't break, the market should continue to bounce higher.

Bears were unable to break the red trendline, as shown below, which did indeed lead the market to bounce higher. 

Now the market has reversed roles, and the onus is on the bulls. Things look fairly bullish (as they looked bearish recently), but the bulls now need to "prove it" by making new highs. Until they do, the danger of a bearish reversal can't be ignored.

The Dow chart illustrates the levels a little more clearly.

There are a few different ways to view the rally on this chart.  The bearish view basically needs a top immediately.  The bullish view suggests another new high, which would also invalidate the bear count.  It seems reasonable to assume that if the bulls get a new high, then that will probably mark wave (1) of the larger (v) and at least a couple weeks of new highs would be forthcoming.  It's also possible it would mark ALL of (v), but that seems less likely at the moment. 

The SPX looks like it either has formed, or is very close to forming, at least a short-term top.  It's completing either its C-wave or first wave up.

Zooming out a bit, the SPX counts look like this:

The advantage the bulls have, of course, is that they are continually backstopped by the Fed, whose goals of making the dollar worthless have, thus far, largely been successful.  A worthless dollar makes everything else worth "more" in dollars: from stocks to precious metals, to oil/gas and food.  So it seems like things are going up in value, when in actuality the dollar is simply going down in value.

In reality, it's a zero-sum game that only damages the American public with higher prices.  The upside is that we all "feel better" about things while they're doing it. 

However, I propose that the Fed should at least buy us all a nice dinner.  And I'm talking about a good restaurant, no greasy spoon joints.  I think this is only common courtesy, as the majority of us Americans appreciate being taken to a nice dinner before getting royally screwed.

Of note, the Fed recently announced a new motto, which I think is a sad, but excellent, example of Truth in Advertising:

The Federal Reserve:  Saving the World Daily by Destroying America

I'll stop ranting about the Fed now (until next time!), but it's hard not to get depressed about this stuff from time to time.

Segueing back to the market:  There is an interesting psychology that's developed among bulls and bears alike regarding the Fed.  The bulls have been backstopped for so long, that if/when that safety net ever goes away -- or fails to work -- I wonder: how far will the market fall before the masses realize it's not working anymore? 

And what will happen then, when they do realize it no longer works?  I doubt it will be pretty.  It will probably resemble a first grade fire drill, with everyone rushing about chaotically, failing to take their "place" in line, and most making a mad dash for the exits completely out of order. 

It's hard to say with any certainty how far away that day is... it might be next week, it might be next year.  But it does seem that, at some point, this fiat fiasco must end.

Along those lines, another interesting chart I want to call attention to the euro/dollar.  Euro/dollar has some pretty serious intermediate and long-term resistance not too far overhead.  Again, the onus here is on the bulls to break out.

I'd like to end this article with a couple charts and comments from my friend Lee Adler at the Wall Street Examiner.  Lee's comments in italics below:

Improvement in first time unemployment claims is slowing. Actual, not seasonally manipulated data, including an adjustment for the usual weekly upward revision, shows that the year to year rate of change is on the cusp of a possible upside breakout, which would be good news for stock market bears if it happens.

Here's why it's mind blowing. I've plotted it below on an inverse scale with the S&P 500 overlaid.

That speaks for itself. As the improvement in claims has slowed, so have the gains in stock prices.

I found this data quite interesting, since it fits with both counts quite well.  Sometimes we get so focussed on the short-term that it's easy to lose the big picture; the counts are really just nit-picking in the grand scheme of things.  Assuming the SPX drops back below 1000 at some point in the future, what's the practical difference if the top was at 1422 or 1452?  Trade safe.

SPX Update: Bears Need to Get 'er Done, or Go Home

Yesterday's count expected further upside, which is what the market provided.  At this stage, there's just not much to add.  This remains one of the more challenging structures I've had to decipher in some time, but if the expanded flat interpretation is correct, the market should find a top in the near future.  If the alternate bullish count is correct, then the SPX is probably on its way to 1460-1470.  There's been little to add confidence to either direction. 

Viewed with a more traditional technical analysis eye, the market appears to be breaking out from a trading range/base, which would be considered bullish.  Of course, if the market does whipsaw back into that range, then it would not be a surprise to see it drop rapidly, as oft-traded ranges offer little in the way of support or resistance, except at the edges of the range.

The very short-term structure is extremely difficult to decipher, and the rally may be complete or nearly so, or may have another down/up left in it.  Watch for a bounce off the top of the old trading range.

One of the reasons I remain in favor of the more bearish count is the COMPQ, which appears to have formed a clear 5-wave decline.

It's worth keeping in mind that if this is indeed a larger second wave retracement rally, then bullish sentiment is to be expected. Second waves "want" to be bull markets.

In conclusion, there are no magic bullets that I can find at the moment.  At this point, it's up to Old Man Market to either prove or disprove the bear case.  If the preferred count is correct, then there should be a reversal brewing soon.  Trade safe.

SPX Update: Revenge of the Beard

This market remains a mess, though perhaps some semblance of order is beginning to emerge from the chaos.  Way back on Friday the 13th, I suggested that the market would form some type of "double retracement" due to the extended fifth wave.  What threw me off heading into yesterday was that it looked like we'd already had that double retracement.  Turns out the market felt we needed another retracement just for good measure. 

The market seemingly felt obligated to cheer on good old Uncle Ben yesterday and, no doubt, cries of "Win one for the Beard!" could be heard echoing throughout the halls of Primary Dealers everywhere.

It's vitually impossible to predict this type of market in advance.  To a degree, it can be predicted in real-time... but looking at charts from one day to the next, it's quite difficult to anticipate a correction of this complexity.

The mess at the beginning of the wave makes predicting its resolution somewhat challenging as well.  I'm inclined to believe this is a 3-3-5 expanded flat, as I mentioned yesterday morning.  In that case, it's nearly complete.  It may have a bit more down/up first -- my "perfect world" target would be 1397-1399 for completion -- but it's also possible that it completed yesterday.

There are two counts shown.  The count not shown is represented by the red box -- another repeat of the fractal within the box, to stretch the correction out even farther, is possible.

In the bigger picture, I still favor continued downside after this correction is complete (assuming that ever happens).  The alternate count remains as a possible bottom at 1357.  I view that as unlikely.

Yesterday pre-open, I mentioned that I believed the Euro/USD currency pair was forming an ending diagonal.  I wasn't sure if it was complete, or had one more wave up left in it.  Today, we got that wave up, and the pair has now formed what appears to be a complete textbook ending diagonal.  There should be strong selling in store for Euro over the near term.

This is a particularly good diagonal because that last wave up ran a ton of stops -- I watched it unfold, and actually played it on the long side.  Caught a few quick bucks as a momentum play, then I sold my longs to all the shorts who were covering.  But I imagine a lot of shorts will have to chase now, which should give it some fuel down.

Diagonals can be misleading, and it's still possible that the wave labeled v is actually iii, but in this case, that seems much less likely.

In conclusion, I continue to favor an ultimate downside resolution to this mess.  In a perfect world, this correction may or may not have a tad more upside left, but should be over fairly soon.  Trade safe.

SPX, COMPQ, and INDU Updates: Possible Reconciliation of Counts Across Markets

I've been trying to reconcile the counts across market, and may have found a solution tonight.  Each market gives a bit different appearance, and readers know I've referred back to RUT several times, which argues that the next low (assuming the market makes a new low) will most likely be a fifth wave and lead to a larger rally.  COMPQ seems to suggest the same thing.

A quick look at COMPQ first -- if the wave labeled as blue 4 exceeds the invalidation level, I'll consider switching it to the more bearish count of black 1 and 2.

Next, the INDU, which is much stronger in appearance than most other markets, and is giving the impression of a large triangle.

RUT isn't shown, as I didn't have time to update the chart, but readers can refer back a post or two for why I believe RUT's correction was a fourth wave.

So how to reconcile all these markets with SPX? 

Well, how about an expanding ending diagonal fifth wave?  This seems to fit not only the pattern, but the current patterns and expectations of other markets as well.  As such, this is my preferred count for SPX, shown in blue below.

The more bearish count, currently labeled as the alternate, would view the present decline as a nest of 1's and 2's.  We'll have to see if other markets invalidate their counts -- for example, if INDU invalidates the triangle, then we can seriously consider the mega-bearish 1-2 count.

For contrast, here's how the more bearish possibility would look.  Currently, this doesn't reconcile as well with other markets, but we'll keep watching to see how things unfold.  The appearances could all change tomorrow.  The alternate (iv) count still can't be ruled out, and might end up marking the next low (I view it as quite unlikely that the market's bottomed already -- too much overlap in the wave).

In conclusion, the market still has a few questions to answer to bring more clarity to the structure, but I'm still favoring the idea that new lows will be seen, likely this week.  Further, given what's in the charts at the moment, the ending diagonal currently reconciles all the markets fairly well.  Trade safe.

Morning open update -- not sure how I missed this earlier, but an expanded flat looks quite possible now:



SPX, RUT, COMPQ Updates: Bulls Running Out of Options

As I'm certain some of you read in the comments section, there was a death in my family yesterday, so I'm going to need to keep a bit lighter schedule through the remainder of the week.  My thanks to those of you who have expressed your condolences and kind thoughts.

Despite the challenges of my personal life, it's hard for me to simpy abandon "you guys" (my readers, male and female, of course) during what may well prove to be a key turning point in market history, so I have prepared a few charts and a brief update.  Two of the charts were completed before I got the bad news yesterday, but I also added an SPX chart because I know readers expect/rely on it more than the other indices.

Keeping things fairly brief, it does appear that the preferred count of the prior week is playing out.  There is still the option of another leg up to new highs, but given the strength of yesterday's sell-off, that now appears much less likely. 

The more relevant question appears to be in trying to determine the trend degree of this decline.  Both RUT and COMPQ seem to suggest that the recent rally was, in fact, a fourth wave at lesser degree as opposed to a larger second wave.  The meandering nature of the recent rally is also suggestive of a fourth wave. 

This would suggest that the current decline is the fifth wave of the larger first wave, which should be followed by a decent retracement rally (in wave (ii)), which will probably show more "purpose" than the most recent back and forth retracement rally.  Second waves are generally sharper and faster than fourth waves.

To illustrate why I currently view the recent rally as a fourth wave correction, and this as a fifth wave decline, here's the RUT chart, followed by the Nasdaq Composite.

COMPQ also currently counts best as a fourth wave correction.

For the sake of showing the difference, I've labeled the SPX chart with the rally as wave (ii).  Based on the evidence, I'm far more inclined to view the recent rally as wave 4 and suspect a larger retracement after this wave down is completed.  That is, of course, subject to change as the pattern unfolds more fully.

It's also possible that the current decline is simply wave (1) of 5 and will hit the target zone, bounce and then collapse again.  We'll have to reasesses this as it unfolds.

 

 

In conclusion, the more bullish alternate counts are beginning to appear less and less likely, though a blistering rally tomorrow could always force a re-examination of that view.  However, given what there is to work with in the charts today, new lows seem very likely to show up later in the week.  And, once new lows confirm, the broader message from the market will be that the larger trend appears to have turned -- not that this would be unexpected news to any of us, since we've been largely expecting that result for a while anyway.  Trade safe.

SPX, INDU, NDX Updates: Trying to Make Sense of the Mess

The charts are an absolute disaster right now.  I've looked at roughly 20 million charts this weekend, but there are so many possibilities, it simply becomes confusing to try and cover them all.  This update was a whole lotta work for very little tangible reward.  I looked at everything from NDX and COMPQ to SPX, INDU, BKX, and TRAN -- but there's nothing that jumps out as "this is the one!"

The market keeps us guessing at times, and this is one of those times.  At times like this, it's sometimes better to zero in on other indicators, such as trendlines and so forth.

I think one of the key trendlines right now is visible on a longer-term chart, and it's not too far below the current market.  If that red trendline breaks, the market could start the next big leg down.  If it doesn't break, the market should continue to bounce higher.

As I mentioned, there are literally too many options to list -- so I'm going to present my "best guess" short-term outlook and if it works, it works; if not, so be it.

First off, it does appear that the SPX formed an impulse down on Friday, so I would expect a bounce (which may have ended already, into Friday's close), followed by another impulse down.

Backing out a few degrees, here's what the best-guess counts looks like.  Again, if the market materially breaks the trendline mentioned in the first chart, then all bets are off for the more bullish count.  The bearish option is a very wild flat for wave (2).

The market has never allowed us to rule out the alternate wave (iv) count (meaning the last decline could have marked the bottom of wave (iv)).  The INDU has shown more strength than the other indices of late, and the potential exists that it's forming an ending expanding diagonal fifth (and final) wave.  This option is shown below, and would jive reasonably well with the SPX triple-zigzag bullish count shown above.

The other option, of course is that wave (ii) completed at the recent high.

Interestingly, the NDX looks like the weaker sister, no doubt due to Apple's recent fall from grace.  Unfortunately, this chart presents much the same mess as everything else, though possibly more so.  However, the alternate count in NDX calls for a rally almost immediately there, so what happens Monday should be telling.

It's always possible for NDX to decline while INDU/SPX rally, especially if funds decide to rotate out of tech and into blue chips.

A factor that's always worthy of attention is the upcoming Ben Bernanke Beard Expose, which occurs on Wednesday, though tickets went on sale last week.  Thanks to my new beard, I'm able to get in free as an exhibitor! 

Anyway, at 12:30 on Wednesday, the FOMC announcement takes place, during which Ben will tell us about all the "tools" the Fed has at its disposal -- including hammers, screwdrivers, and their latest addition: a belt sander.  He'll also probably tell us "no QE3 today!"  So maybe that's what the market's waiting on before it starts the next serious leg down.  The more bullish "best guess" count would fit a potential rally into Tuesday/Wednesday, so we shall see.

In conclusion, there's too much clutter in the charts to make a strong call right now.  I've done my best to present what appear to be the "most probable" short-term options, but still could very well be completely off, since I can literally count at least 7 other potentials without really trying.  We're simply going to have to see what happens over the next couple sessions to allow the short-term options to be narrowed down a bit, unless one of the two presented works out. 

In either case, it still appears quite likely that the whole rally is corrective, and should ultimately resolve with lower prices. Trade safe.

SPX Update: Shortest Update Ever

Today's update is going to be very short and sweet, due to time constraints I ran into with some family issues.

There are two reasonable ways to view the most recent action, as shown on the chart below.  The good news for bears is that the rally is almost certainly corrective, and should ultimately resolve with lower prices.

The question is more whether it will do so more directly, or if there's another run-up still left.

Here are the two most fitting ways to count the rally so far:

1.  It is a complete w-x-y double zigzag, and the next wave down has begun.
2.  It is an incomplete double zigzag, and yesterday's action completed the b-wave of said zigzag.

I've marked a few levels to watch on the chart. 

(Editor's note:  There's a typo on this chart -- red "3/c" should read "i/c.")

In any case, it is thus far extremely challenging to count the rally as an impulsive form.  If it's a motive wave, it would have to be counted as either a leading or ending diagonal.  It's very challenging to see it as anything overly constructive to the bull case.

In conclusion, the next wave down may be underway, and that's the interpretation I'm leaning toward -- although just barely.  Part of the reason I'm leaning that way is because the Euro has been rallying all night, and just tagged 1.32075... and I think it's now on the verge of a steep decline.  So I'm factoring that in as the final straw.  It's possible my Euro analysis is wrong, since I lack the market confirmation I need regarding a decline in Euro (no key overlaps yet), and so I may be factoring in something that isn't going to happen!  The equities decline could have been a b-wave, with c-up to come.  The key level for that argument would be 1390.46.  Trade safe.


ADDENDUM:

At the request of a reader, here's a quick breakdown of the correction that came on April 18 and 19.  This is why it can sometimes be challenging to figure out exactly what the market's planning -- it's virtually impossible to predict a wave like this in advance.

SPX, RUT, and CVX Updates: Additional Telling Signs in RUT?

Well, I've got good news and bad news.  The bad news is that the short term structure is an absolute mess.  The good news is: I think I've found the key to figuring it all out over the next few days.

"How?" I can hear you ask incredulously, as you scratch your head in wonder, possibly hard enough that your fingernails remove several layers of your scalp. 

Well, once again, RUT seems to be throwing off some key signals.  Yesterday, RUT overlapped the assumed wave (1), which means that the current wave up in RUT already topped.  Plus RUT is now sporting a pattern that, if it generates another wave up, would look an awful lot like a leading diagonal.  I think the chart below may be our Holy Grail for the next few sessions. 

As goes RUT, so goes the world?

The next chart is the 5-minute SPX chart, which would still look a little better with a new high.  It's also possible wave c of (y) topped.  It's nearly impossible to say, given the short term charts, which look like a child's drawing of a bamboo forest on a really windy day.

It's also time to update CVX.  The original battery of CVX charts can be found in this article from March 18 (Why I Haven't Yet Joined the Long-Term Bull Camp).  CVX also would look better with another wave up, since the decline yesterday appears corrective.  The only thing that bothers me a bit about CVX's chart is the current expected shallowness of the retrace rally.  It would not surprise me to see CVX do something unexpected to deepen the retrace a bit.

Next is the 60-minute CVX chart.  I've noted the possible target a bit differently on this chart.  We'll just need to see what happens over the next session or two.  For now, based on the smallest waves, 104.50 +/- seems like a pretty good target area.

And finally, since there isn't a ton to add to the short-term SPX outlook, here's a big picture count that I've been playing with and tweaking for a while now.  I wanted to share this because I've never seen a count exactly like this floated in public, and I find the possibilities intriguing.

The alternate count for this chart would also move the wave iv bottom to the recent lows.  This would still maintain the ending diagonal form.

In conclusion, there appears to be a little more upside due for SPX -- but that's just a best-guess.  Of note, if RUT makes a new high, I will probably shift everything onto a more bullish intermediate footing (though not necessarily a short-term bullish footing) -- but I will of course need to see how it looks across markets before doing so. 

The upside for traders is that if RUT invalidates the preferred count, and is forming a leading diagonal, there's usually a deep retrace in the first big correction to allow bears to exit and bulls to buy the dip.  However, unless and until that new high happens, the more bearish intermediate count remains preferred.  If the more bearish count is correct, a big decline should unfold soon.  Trade safe.

SPX, RUT, and INDU Update: Trying to Reconcile the Contradictions...

Yesterday's alternate count came to pass, and hopefully readers heeded my warning regarding the red trendline and protected profits.  There are certain things I take for granted as "common knowledge" and I sometimes fail to expand upon certain statements for that reason.  It was brought to my attention that the following annotated chart might be helpful to some readers.

When I make statements like one made yesterday: "watch the red trendline for clues" -- this is the type of watching I'm talking about.

The chart also contains the updated count, though I'm now on the fence as to whether it's wave 4-up or wave (ii)-up (see Dow chart) -- but it's largely irrelevant at this stage.  More relevant is the fact that it's possible that ALL OF wave (y) completed yesterday, due to certain things I'm seeing in other indices (such as the Dow Industrials).  Yesterday's target was 1393 -- it's possible that 1392.76 was close enough.

There is a bit of confict among indices.  I've previously mentioned the RUT and how it doesn't count well as a complete five-wave move down.  Here's that chart again, along with the updated count. 

So the RUT appears to be in a fourth wave correction (or starting a new leg of the rally). 

Contradicting the fourth wave interpretation is the Dow, which does count best as a complete five-wave move down.  If the current rally remains as a corrective 3-wave move, then that makes the rally a larger second wave up.  Which means, if that interpretation is correct, then a big sell-off should follow in the third wave down.

Basically, the big challenge now isn't about whether the rally is a fourth wave or a second wave -- because both of those lead to lower prices.  The big challenge is whether it's a corrective wave (of some variety) or the start of wave (v) up.  The knockout level for the corrective rally (which ultimately leads to new lows) is the previous yearly high. 

It's not really possible to definitively sort one count from the other at this stage, because the rally has formed only 3-waves up so far.  So it could be a-b-c (or w-x-y), or these could be the first 3-waves of a new impulse up.

I'm continuing to favor the more bearish count by a slim margin for the time being, largely because the first portion of the rally in SPX counts much better as a 3-wave rally, which suggests that the entire rally is corrective.

But here's one thing that can't help but bother me:  the conundrum between the RUT and Dow can be resolved -- if one counts the RUT as a 4th wave (an a-b-c) down.  So the counts all work together just fine and dandy if we count the decline as a fourth wave with wave five up still to come. 

Now, this isn't to say that they don't work when counting them more bearishly -- if they didn't, I would throw the bearish count out.  But it's a little cleaner factoring everything together if we count the decline as a correction. 

So maybe that's the answer -- but I'm not ready to see it?  Maybe you are -- I'll leave it to the reader to decide.

The market rarely makes this easy.

I've marked a number of levels to watch on the various indices which should give us some clues.  Basically, if this is a corrective rally, it needs to remain as a 3-wave form.  Overlap at certain levels would help to guarantee that.

In conclusion, there's nothing in the charts right now to rule out either count, and both remain quite viable.  Based on the current overall appearance of the structure, it looks pretty good and counts very well as a corrective rally with new lows to follow.  I remain in favor of this interpretation for that reason. 

If that's correct, and this is a 2nd wave rally, then the market should be on the verge of a strong sell-off.

Conversely, and running in complete opposition, the more bullish count would have the market on the verge of a strong rally (since it would view the rally as a nest of 1's and 2's).  Preliminary targets for the rally interpretation would be in the SPX 1450-1470 range. 

The one thing that seems fairly certain is there's a strong move coming soon enough, one way or another.  We should be able to sort those two options out over the next few sessions, by keeping an eye on the key levels. Trade safe.

SPX Update: A Dangerous Position for Both Sides of the Trade

Yesterday's action removed some short term options from the table, but has still left the pattern open to interpretation.  It appears that I had Friday's decline labeled properly as an impulse wave, but that doesn't tell us with certainty whether that impulse was wave 1 or wave a. 

As I've been warning for a few days, I believe bears need to remain very cautious right now.  I'm still quite leary of the (x) wave count. 

Below is the 1-minute chart, which shows the difficulty in nailing down a count with any certainty.

Next is the 5-minute chart.  I'm almost equally split on the odds between wave 5-down having started, and the (x) wave count.  The chart shows the expected outcomes of whichever count is correct. 

If the wave 4 label is correct, then the market should not sustain trade above the red trendline.  If it does so, then suspect that the (x) wave count is playing out.

And finally, the big picture alternate.  It still remains possible that wave (iv) bottomed, though this seems decidedly less likely now that the 1367 price point has been overlapped and locked-in the view the the move from 1357-1388 appears to be a 3-wave form.  I'm more worried about the (x) wave count -- especially since the extended fifth wave practically begs for that count to play out.

In conclusion, I feel the market is in a somewhat dangerous position for traders who end up on the wrong side right now.  There's some room to run in either direction, and there's little help from the market in sorting the impulse count from the (x) wave count.  It's a tough enough call that I'm basically equally divided between the two counts.  I've labeled the (x) wave as an alternate simply to sort each count out.

Beyond that -- from my point of view, since I continue to believe this is the fifth and final subwave of wave (i) down, there should be a big bounce lurking in the shadows soon.  The question is whether the market makes the wave (i) bottom directly, or runs up quite a bit higher first.  If the (x) wave plays out, I doubt bears want to hang on for dear life waiting for it to end.  Trade safe.