SPX, NYA Updates: Short-Term Potentials, and Key Levels to Watch

No change in the intermediate picture: new lows are still expected when this wave completes.  There's not a ton to add in that regard, but I'm going to put forth a few short-term options/ideas anyway, along with some near-term levels to watch. 

I still tend to favor the idea that there will be a new high made for this wave.  Yesterday was basically a choppy sideways day, which has something of a triangular appearance to it -- so it's entirely possible for a fourth wave triangle to be under formation here.  If so, it might head up and back down one more time before breaking out.  The chart below outlines that potential, and cites a bearish trade trigger.  I've also outlined some near-term support and resitance zones. 

Trade beneath 1346.45 rules out the triangle.

The next chart outlines a more straightforward bullish ST (short term) count, which has the same practical result as the triangle shown above.  Both the count above and the one below are invalidated with trade beneath the 1346.45 level.  Trade above 1363.46 would add confidence.  The bearish count, which allows the possibility that 1363 was the high for wave (ii), is shown as the alternate.

And finally, here's one for the ST bears who want their decline immediately with no more screwing around, using the NYA for form.  This interpretation requires a bit of outside the box thinking, but it's plausible.  That spike high on June 14 throws a bit of a curve into the ST wave structure; this count attempts to integrate it in a way that makes a bit of sense. 

On this chart, we can rule out the alternate wave (4) count if the "(D)/alt: (1)" price high is broken.  SPX also has similar options as the two shown below on NYA.  Trade above 7800.62 would tend to confirm the alternate count shown here. 

So, there's still a few potentials on the table, but the levels are straighforward.  Trade below 1346.45 would eliminate the first two counts shown, and basically leave the NYA chart as the last (high probability) option.  Trade above the recent high would tend to confirm the bull counts and should lead the SPX at least into the 1370's.  Trade safe.

SPX Update: Rally Now Solidly Overbought

Well, yesterday's preferred very short-term interpretation of an ending pattern was a miss, but I hope I at least conveyed my trepidation over that interpretation.  As I wrote yesterday:

There's no clear third wave in this mess (the third wave is almost always the longest and strongest wave) -- and that tells me it's either an ending pattern, or a wind-up to launch (meaning the strong third wave is yet to come). I realize one could look at the chart and say, "But you have red (iii) labeled, and it's the longest and strongest!" Yes, it is. But it's not a "proper" third wave -- there's too much price overlap. And it's bothering me.

It now appears that it was, in fact, the potential wind-up pattern I was worried about, and the 2nd tier targets (1365-1375) were very nearly reached.  The good news is that yesterday's action has finally eliminated some of the potentials, which makes things at least a bit easier -- for example, the possibility of a higher degree fourth wave is now firmly off the table.  We are therefore most likely dealing with a second wave rally.  I say "most likely" because we can never completely rule out anything in trading; we are always working solely with probabilities... so it's always possible this rally is the start of something bigger.  But these two options should be relatively easy to sort from each other going forward. 

To do so, we'll watch the key levels, and we'll watch out for an impulsive wave structure (a five wave form) in the upwards direction.  If we see an impulse wave develop here, we can then shift footing and assume we're dealing with a new uptrend -- and buy the next dip.  But if the rally maintains its present corrective structure (it's currently 3-waves), we can have high confidence that the trend remains down.  Based on the form of the decline and the key overlap at 1292, I continue to believe this is the case, unless and until the market proves otherwise.

Of course, if Ben "the Beard" Bernanke announces QE3, we can probably pretty much just assume the market is going to infinity (possibly higher).

So, let's look at some of the signals and some key price levels. 

The first signal of note is the McClellan Oscillator (NYMO), which is a breadth indicator, and one of my favorites.  Readers will recall I have cited this indicator's buy signals twice in recent months, and both came at bottoms which led to solid rallies (on May 18 and April 11).  NYMO has now reached overbought levels, which is a sell signal.  We can see on the chart that sell signals tend to lead tops, but all five prior instances have still been been profitable sells.

Moving on to the short-term SPX chart, it's not inconceivable that 1363 was the peak, but my best guess is that there's still new highs lurking out there for this wave.  This would tend to be supported by the past behavior of NYMO mentioned above.  Third tier targets (1400-1410) will open if the market can sustain trade over 1375.

 

No change yet to the intermediate picture: the strength of this rally is not unexpected from an intermediate perspective.  It's been a challenge figuring out some of the short-term structures (as it usually is), but so far the rally fits the intermediate expectations for wave (ii) perfectly. 

In conclusion, wave (ii) may be nearing completion -- but it wouldn't be out of the question for it to make a run at the higher targets.  As mentioned on several previous occasions, bulls continue to have the ball until the bears can break the lower boundary of the red trendchannel.  Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX Update: 1348 Target Hit, but Some New Signals Call for Caution

Yesterday's short-term outlook was anticipating a tag of 1348 and possible reversal; the high yesterday was 1348.22.  It appears reasonably likely that there is now a complete A-B-C correction in place, though the 1-minute charts allow the potential of a slightly higher high, along with some other potentials I'll discuss in a moment.

The market is a dynamic environment, and one won't last long as a trader if one is unwilling or unable to recognize and adjust to changing signals as frequently as the market dictates. 

I want to be as brutally straightforward as possible in this update, because I have a number of unanswered questions about the overall outlook right now.  Be aware that some mid-term targets may need to be adjusted on the fly.  I've been trying to keep things simple for the sake of my readers, and mainly focus on direction and short-term targets (those which apply more universally), and that has worked out well so far, as the short-term targets have been reached.  But I want to convey a sense of caution in this update, because I'm seeing some new signals that are giving me pause.  I'll discuss these signals in a moment.

I wrestle daily with trying to convey the potentials in such a way as to not overwhelm folks, since I realize that for most people, Elliott Wave can quickly become confusing.  Even when I attempt to present things as simply as possible, I find some readers still become confused. Reading certain feedback lets me know I still have work to do when it comes to communication -- though some degree of deconstruction always comes into play when communicating, and I have no control over each individual's subjective interpretation of words.  I once had a reader take time out from his busy schedule of (I assume) burning ants with a magnifying glass to write an entire paragraph criticizing me for using the phrase "last gasp higher." (?)  It's a thankless job some days.

Anyway, to give you a glimpse into one of the issues I'm presently wrestling with: it is still possible that this rally is a higher degree fourth wave, and not the second wave as labeled.  It's somewhat irrelevant at this point, from an actionable perspective -- if we can hit the end of the rally, we'll be positioned properly for either of those outcomes, since both would expect new lows.  But here comes the caveat:

The above paragraph is, of course, assuming that there are new lows coming at all.  With the Fed meeting coming up, one always needs to remain cynically cautious.  Which brings up a recent development that's bothering me about the charts (though I'm not showing this in the charts I've drawn) -- and that's the potential of a much larger rally than I'm anticipating.  The structure that's developed since June 12 is either an ending pattern, or the wind-up to a big launch higher.  This is one reason why I've suggested that bears pay attention to the trendchannels.  As long as the market remains within the red trendchannel (2nd chart), the potential for the bulls to wreak havoc remains.

Let me see if I can help this make sense to a non-Elliottician, with the aid of the short-term chart below.  I have only labeled the bearish potential here, but it is still conceivable that some of the waves labeled as "a-b" are actually additional 1's and 2's.  There's no clear third wave in this mess (the third wave is almost always the longest and strongest wave) -- and that tells me it's either an ending pattern, or a wind-up to launch (meaning the strong third wave is yet to come).  I realize one could look at the chart and say, "But you have red (iii) labeled, and it's the longest and strongest!"  Yes, it is.  But it's not a "proper" third wave -- there's too much price overlap.  And it's bothering me.  

So please remain nimble and cautious if you are shorting this market.   The majority of my readers rode the big wave down from 1400ish to the high 1200's -- things were much clearer then, and they will become clear again.  If you established shorts yesterday when the 1348 target was hit: great, you're in the black already.  But please maintain stops and don't be afraid to exit those positions if the move goes against you.

If the market starts a solid decline in the next couple sessions, then my preferred interpretation (shown in the following charts) is probably correct, and my caution is unfounded.  But it would be remiss and irresponsible not to warn of other potentials which have developed recently.

The next chart gives perspective to the chart above, and shows how it fits into the larger view of an ABC correction.

And stepping out one more time-frame, on the chart below I've annotated another caution.  If this is a second wave and my short-term count is correct, then it's a bit too short, and sentiment probably hasn't turned bullish enough yet.  There is a pattern for such occasions, called a "double zigzag" (also referenced on the first chart) which is two a-b-c's connected together.  I've drawn in a rough sketch of this pattern in black.  Unfortunately, there's no way to predict that pattern in advance, it can only be addressed as it unfolds.  But again: I do want to at least warn traders of this possibility.

Finally, another indicator screaming for attention is the Volatility Index (VIX).  VIX generally moves opposite to the market (when VIX goes down, the market is usually rallying).  VIX is sitting right on a support zone, and additionally, it closed outside its lower Bollinger band on the daily chart (not shown).  Usually, one could expect a bounce from VIX in this situation (along with the corresponding decline in SPX) -- but again, the market is dynamic and we have to be aware that things don't always perform the way they do "most" of the time.  If for some reason VIX doesn't bounce here, it could be another warning sign to bears. 

The chart also notes the head and shoulders pattern on VIX (neckline shown in red).  I currently don't expect this pattern to reach its target of roughly 12, but that target is active as long as VIX is below the red neckline.

In conclusion, my 1348 target was hit, the market reversed, and things may well be right on track... but I don't want readers to become complacent here, because this market is not cut-and-dried at the moment -- so I've done my best to outline the alternate possibilities.  A fair number of these questions should be answered in the next couple sessions. 

It's always great to take low-risk trades (such as the shorts when a target is hit) -- but I would caution against getting married to positions right now.  Don't be afraid to exit to the sidelines if the market isn't performing as expected.   In other words: Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

To QE3 or Not to QE3? How to Predict Fed Response, and the IT Market Update

Let’s get one thing straight:  I can’t always predict the market with 100% accuracy.  I do a reasonably good job most of the time, but sometimes I miss by a little, and sometimes I miss by more.  I publish these updates pretty much daily, and it’s just not humanly possible to get every day right. 

However, there is one arena in which I currently maintain a 100% perfect track record -- and that's in predicting whether more QE will be coming from a given Fed meeting (we have another one coming up this week).  In this arena, I have taken on pundits who have a myriad of more “official qualifications” than I do, and yet I’ve consistently out-predicted them.  These days, not surprisingly, hardly an hour goes by when I’m not hounded by various world-class economists begging me to reveal my secrets, frequently at gunpoint.  Frankly, the burden has become a bit tedious, so I’ve decided to finally capitulate and reveal my QE-Predicting Secrets to the world -- in a format so simple that even an economist can follow it.  I am referring, of course, to a flowchart (below):

As we can see from this incredibly-serious and perhaps overly-detailed flowchart, my theory (which has served me well thus far) is that this Fed is solely reactionary to what’s going on in the market – despite all the Fed jawboning about other factors and benefits of QE, such as the “benefit” of higher gas and food prices for all Americans.

However, there is an extenuating factor not outlined in this chart... and it’s one which I’ve not had to face before, so I’m not certain how it will impact things.  That factor is the upcoming Presidential election.  This is probably the last real chance Bernanke will have to launch QE3 prior to the upcoming election, because launching it later in the year would almost certainly draw fire for appearing too politically motivated.  So, while I’ve been quite confident in my prior “no QE3” predictions (going back to when QE2 ended), in this particular instance, I’m not 100% sure.  I have no “past performance” precedent to draw from that encompasses all the current factors.  I feel perhaps 65% certainty and tend to think they probably won’t launch QE3 now, because the market’s still levitating -- though it has taken a bit of damage in recent months.  I further postulate that if they don’t launch QE3 now, they probably won’t launch it for the remainder of the year. 

That said, if there is any significant central bank action, it should be viewed with great trepidation by bears.  While I suspect the intermediate trend has changed to down, I am also basing this on a “natural” market free of central bank intervention (I know: keep dreaming).  If the Fed or EU launches something in the near future, any developing down-trend will almost certainly get reversed by their liquidity -- and the central banks have recently publicly reaffirmed their blood-pact to support the markets at any and all costs, so it will be interesting to see how the market responds to this psychological booster shot.

Short-term Market Outlook

Prior to last week’s trading range, the market performed almost exactly as anticipated going back to early May when I warned that SPX was headed into the low-1300's to mid-1200’s.  More recently, on June 5, I warned that bears should be very cautious, that a strong snap-back rally was waiting in the wings, and that trade above 1298 would be bullish.  Then, in the next update, I published a target of 1336 +/-, which the market effectively hit and reversed from (at least temporarily) -- unfortunately, particularly during corrections, sometimes I can only see a short way down the road.  At these times, I simply have to watch how the market responds to key zones before I can get a feel for what may be next. 

Long-time readers (and traders) will recognize this pattern: the market gets hazy, then it gets clear… then it gets hazy again, then it gets clear again.  This is why two important keys to successful trading are patience and discipline.  Right now, we’re still in the “hazy” zone.  Accordingly, I have outlined some short-term signals to watch which will aid in bringing clarity to the picture.  At this stage, barring an immediate market reversal, it seems fairly reasonable to assume that last week's wave iv count is probably off the table.  We'll see what Monday brings. 

In any case, hopefully the numerous breakouts I warned to watch as bullish signals (dashed blue trendline and upper green channel line) allowed bears who were holding shorts taken near the 1336 target to escape at break-even, or with a small profit.

The chart annotations below discuss some clues to watch.  At this point, it's probably ill-advised to get overly bearish until:

1.  The lower blue trendline connecting the troughs at 1310 and 1320 is broken.

2.  The lower red trend channel connecting the troughs at 1266 and 1310 is broken.

The short-term trend is up until those trendlines are broken.  One can always take stabs when targets are hit, but one should remain nimble in a hazy market like this.

Intermediate Market Outlook

Presently, I remain in favor of the view that the trend has changed at intermediate degree, and that the market has begun a new long-term downtrend.  There are a couple things which could cause me to doubt that view:

1.  Sustained trade and closes north of 1370-1375 SPX.
2.  A new QE program.

The chart below outlines some of the immediate challenges faced by the S&P 500 (SPX).

Keep in mind that if this is wave (ii) (in other words, if the market doesn't reverse back down pretty much immediately), then its job is to turn the majority bullish again.  This means it could last as long as a couple more weeks, while it blows up bears repeatedly and convinces the masses that the prior decline was just a correction to an ongoing bull market.  This is what I was warning about on June 5, when I wrote:

I do believe bears need to remember that a strong snap-back rally is expected for wave (ii) after the current decline bottoms (assuming it hasn't already). This is worth remembering, because one does not want to short the entire way up during wave (ii) and potentially give back the lion's share of one's profits.

Hopefully, readers heeded that warning (along with the warning that trade over 1298 was bullish, in the same article) and closed shorts at 1298, and then waited until the 1336 target was hit before attempting new shorts.  Those shorts should, of course, have been closed when warning levels were violated, or at the very latest, when 1336 was broken to the upside.  If you're a bear whose heeded those signs, then you have certainly protected profits well during this rally.

The next chart I'd like to share is the Nasdaq Composite (COMPQ), mainly to simply show its present approach to one key overhead resistance level.  It will be interesting to see if the bulls can sustain trade above that key breakout zone.

Finally, long-time readers know I think it's important to track indices other than those tracked by the mainstream media.  One of my favorites is the NYSE Composite (NYA), which is a very broad representation of the total NYSE market.  The NYA is also approaching a confluence of overhead resistance, shown by the falling red trendline and falling blue channel. 

I have also noted the potential of a large head and shoulders top in formation.  It's important to realize that unless and until the neckline is broken, this is only a potential.  Patterns such as head and shoulders require confirmation by a decisive break of the neckline -- but it always pays to be aware of them early.

In conclusion, I remain skeptical of this rally from an intermediate-term perspective, but the current short-term uptrend should probably be given the benefit of the doubt until proven otherwise.  The potential does exist for an immediate reversal, but barring that, we should probably assume we are facing a higher degree wave (ii) rally -- the first target for which is 1348.  Over the intermediate term, there are some levels which could shift me to a more bullish stance, but it appears the bulls have their work cut out for them. Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX, INDU, COMPQ, RUT: Waiting for the Market to Decide

I've studied a lot of charts since Thursday's close -- everything from SPX to INDU to TRAN to NDX to AAPL to RUT and more.  The challenge is that for the past 7 trading days, the market has done nothing but run back and forth in a narrow range, which provides little information.  I may have uncovered some clues, but I was still unable to find a definitive answer to the question of short-term direction -- we're simply going to have to wait for the market to answer a few questions before getting too confident.

Yesterday, the SPX elected its bullish buy trigger, but I'm not yet completely sold on it reaching fruition, for a number of reasons, which I'll discuss shortly.  Nevertheless, this bullish potential cannot be ignored and a close above 1336 would add confidence to the idea that the bulls presently have some strength.

First let's look at the SPX chart, though my confidence in this count is marginal at this stage.  After that, we'll look at some additional evidence to see if we can get an idea of what the bulls may be facing as their next challenges if they can break to a new high here.

I still slightly favor the idea that this rally will die on the vine -- but I only favor that slightly, and I'm more than ready to shift my footing to something more short-term bullish if the market dictates.

Let's consider another potential for SPX over the short term -- one that allows for a new high, but doesn't see the market running up strongly thereafter.  The challenge here is that this developing pattern (below) could be an ending diagonal, which is bearish -- or it could be interpreted as potentially bullish, since there's no way to invalidate a nest of waves 1 and 2 getting ready to launch a third wave higher.  There's simply nothing in the SPX chart to clearly sort one possiblity from the other, though I'd have to give a slight edge to the diagonal. 

If this pattern is a bullish 1/2 nest, then it should launch rapidly and decisively higher if 1336 is broken, and cleanly break out above the upper blue trendline.  If it doesn't, then the diagonal becomes more likely.

Since SPX is ambiguous, I went to some other charts.  First let's look at the INDU daily chart, which shows several overhead resistance levels.  Traders sometimes get focused on the micro picture and ignore the larger view.  Many times, I've seen short-term bullish (or bearish) patterns break out and look like they're going to run, only to smack into a bigger support/resistance level soon after and get quashed.  Will that happen here?  I simply don't know -- but it pays to be aware of the challenges a move faces, and then watch to see how the market reacts to those challenges.

Let's also look at the Nasdaq Composite (COMP), which appears to need a new low to complete an impulse wave down (five waves).  The invalidation level is noted on the chart, and an invalidation here would actually slightly shake my faith in the intermediate bear case, because that would give the entire decline a three-wave appearance.  The blue channel also bears watching.

Further, let's look at the short-term chart of the Russell 2000 (RUT).  The best interpretation here seems to be that the rally since June 12 is corrective, meaning there "should" be further downside over the short-term.  Again, though, it's not a terribly clear-cut pattern.

Finally, a bit more on the big picture view, and another reason I believe that the market has changed trend at intermediate degree.  Below is a chart of the Dow Jones Industrial Bullish Percent Index (BPINDU), which is a breadth indicator that measures the percentage of stocks on point-and-figure buy signals.  We can see that there has been a strong move down since the high, and that after these types of strong moves the price lows are retested and broken more often than not (dashed lines, paired in the lower panel circles).

In conclusion, based on what I've seen, I remain marginally in favor of the idea that this rally is nearly over -- but there's enough ambiguity in the charts to give me pause, and I'm certainly not married to that view.  This is a great example of a time to let the market dictate what's next, and once we have a more clear answer, we'll be able to react appropriately.  As I've said many times before: cash is a position too.  The good news is that it appears the market is coiled and ready to spring out of this range in the very near future. Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX Update: All Roads Lead to New Lows

The short-term picture in the S&P 500 is less clear than I would like it to be.  On Monday, the market tagged my 1336 reversal target (okay, I was 48 cents off) as discussed on Friday, and reversed immediately; so far, that's been the high for the move.  One would think I would be supremely confident at this stage, but let me explain why there's still some lingering doubt over the market's short-term intentions.

Before I go further, the big picture outlook continues to believe that the trend has changed at intermediate degree, and that the trend will continue in the downward direction for some time to come.  Initially, I'm looking for a retest of the October 2011 lows, and ultimately much lower -- we'll examine that in more detail when it gets closer.

Moving back to the short-term outlook:  The interpretation I'm using as my preferred count is a bit challenging, because I'm basing it primarily on the view that the decline from 1334 to 1266 was a three-wave move.  However, it's a bit unorthodox for the larger fractal of an a-b-c expanded flat (blue (a)(b)(c) in chart below), due to the length of the b-wave.  Generally, the b-wave of an expanded flat won't exceed 138.2% the length of wave-a, and this one does.  So, it's hard to be exceedingly confident in this view. 

Further complicating the matter is the fact that the rally from 1266 to 1335 is clearly impulsive (meaning it has unfolded as a five-wave move), which does fit as wave-c (my slightly preferred interpretation), but could also fit as wave-a of a new a-b-c fractal.

Accordingly, I've charted both potentials.  The first chart shows the a-b-c expanded flat (preferred count).

The second chart shows a close-up view of this same count, with some potential targets and trade triggers.

The third chart outlines the idea that this rally was the first leg of a new a-b-c for wave (ii).

Finally, a simple chart of support and resistance for the SPX.

In conclusion, both counts are looking for significant new lows over the intermediate term, and new lows for the week (perhaps after a small bounce) in the next couple sessions. The short-term should clarify a bit as it unfolds.

On a Lighter Note

And last but not least, a bit of exclusive breaking news.  The big news item of late is still the European Union agreeing to bailout Spanish banks (euphemistically referred to as “bank recapitalization”).

The mainstream news outlets have reported that Spain did not approach the International Monetary Fund to request the €100 billion loan -- however my sources have revealed otherwise.  As a matter of fact, I was able to obtain conclusive proof that Spain first asked the IMF for the 100 billion euros, and, fearing austerity measures, actually went to the EU as a last resort. 

Utilizing a source who wishes to remain anonymous, I obtained a copy of the actual letter sent to Spain from the IMF.  This exclusive evidence is reprinted below:

Dear Spain,

We have received your recent application for a       bank bailout       loan in the amount of    €100 billion  ($126 billion USD)    .  After reviewing your application for nearly 20 minutes (to be fair: 18 minutes of this were spent passing your paperwork around the office, pointing at various line items, and laughing hysterically), we regret to inform you that at this time we have denied your loan request for the following reason(s):

                                Delinquent Credit History
                                High Debt-to-Income Ratio
                                Insufficient Collateral
                                The Majority of Our Employees Cannot Roll Their “R’s”
                             
As a result of these issues, we are currently unable to approve you for the full loan amount; however, we would still like the opportunity to serve you.  In order to help you get back on your feet, we would like to offer you our new International Monetary Fund Airline Miles Credit Card with an initial credit limit of       $           250      at an Annual Percentage Rate of only   89.99   %, and with a low annual fee of only $    249.99   !  With the IMF Airline Miles Card, you’ll have the chance to properly manage and re-establish your credit while also accumulating valuable flight miles each and every time you use your card for common everyday expenses, such as groceries, dining, gas, and bank bailouts!  Your accumulated miles can then be redeemed for trips to exotic destinations like Greece, Italy, Portugal, or Ireland. 

Your card payment history will be reviewed each year, and as long as you continue paying your IMF bill on time each month, your account will receive annual credit limit increases equal to $       250      per year.  Assuming your account stays in good standing the entire time, your IMF Airline Miles Card will eventually provide you with all the credit you need ($      126 billion      ) in only 504,000,000 years!

Thank you for this opportunity to serve you.  We hope you’ll consider us again for your future bailout needs.

                                                                                                                      Sincerely,

                                                                                                                      Phil Rizzuto

                                                                                                                      Co-co-co-chairman
                                                                                                                      International Monetary Fund
                                                                                                                      “Why Not, It’s Only Money”

Reprinted by permission, Copyright 2012 Minyanville Media, Inc.

SPX Update: Overnight Futures Rally is No Surprise

On Friday, I suggested that the market looked like it needed to make a higher high over the short-term, and based on the futures action on Sunday evening, this appears likely to occur.  The futures market is very excited, because apparently Spain is going to ask the EU for a loan for its failing banks.  Yes, you read that correctly. 

In any case, further upside was expected -- the question I posed on Friday was of degree.

If the futures rally sticks, and there are no guarantees it will, then it appears that last week's slightly more bullish count of wave (ii)-up is in play.  Before we discuss that in more detail, let's consider the possibility that last week's wave (4) count is still viable.  The cash market is the final authority, so let's see how things go on Monday -- this count may be eliminated right at the open.

Below is the chart for the more bullish wave (ii) rally.  Please note that both of the count above and the count below are only short-term bullish, and intermediate-term bearish.  My preferred view remains that the market has changed trend at intermediate degree.

The first target for the count shown above is near 1345, the second target is near 1370. If the market materially exceeds the second target, we'll need to give additional thought to more bullish big picture potentials.  Accordingly, I have prepared an alternate big picture chart, though it primarily examines the structure of the decline.  Potential upside targets for the alternate count start in the 1480's.  So I would continue to caution long-term bears to pay attention to the 1365-1370 zone -- if the market reaches and breaches it.

This more bullish big picture count (below) remains the alternate for now, and may not even come into consideration, depending on how the next few sessions go.  However, I do want to publish it, since I've been kicking around the possibility for a while.

In conclusion, further upside was expected by Friday's outlook -- but as I warned, the extent of the upside was (and still is) unclear.  We'll simply have to see how it develops over the upcoming sessions to sort out the short-term potentials.  Trade safe.

SPX Update: Is the Rally on Its Last Leg? Or Its First?

On Tuesday I warned that bears should be cautious, and that a large rally could unfold if the bulls were able to breach 1298.  That's indeed what happened.  Now the challenge is in trying to fit the puzzle pieces together to determine what's coming next over the short term.

The big picture still seems to indicate that the rally is corrective to the larger trend, which is now down.  I would give greater consideration to longer-term bullish potentials if the S&P 500 (SPX) can sustain trade and closes north of 1365.  Unless and until that occurs, I will maintain a bearish long-term stance.

The short term is (of course) open to interpretation, but perhaps moreso than usual.  The interpretation I'm leaning toward is that this rally is actually a continuation of the correction which began back on May 21.  This would indicate that the rally has nearly run its course already.  My best-guess would be another thrust up to a slighly higher high, and then a reversal downward.

But it's not a clear short-term picture.  The alternate potential is that the rally so far is only wave a-up of an a-b-c.  Wave b would follow soon, and be the correction lower in that case.  That downward correction would then be followed by wave c-up which would unfold in similar size to wave a.  I don't like that interpretation as much, because the structure of the decline from 1334 to 1266, and the character of the rally (which has behaved more like a c-wave), both lead me to believe this is a continuation of the earlier correction -- so I would give the a-b-c option roughly 40% odds against the first pattern I discussed. 

The chart below explores the intermediate picture for the SPX, and as mentioned, the preferred count believes the market either has completed, or is on the verge of completing, red wave iv.  The alternate count considers the option of a larger rally.

The second chart examines the short term, and notes the potential inverse head and shoulders bottom, which is a pattern that should give bears pause (paws?) if the market can sustain trade above the blue dashed neckline -- though the preferred count considers that it's entirely possible that the market will break this line, at least briefly.

In conclusion, my best guess over the very short term would be for another small thrust higher (though this isn't required), followed by a reversal toward the mid-1200's.  Over the intermediate term, I believe this rally is corrective regardless of which short-term interpretion is correct, and the market will go on to make lower lows either way.  Ultimately, the best interpretation of the wave structure suggests the October 2011 lows will, in time, be revisited.  Sustained trade and closes north of 1365 would cause me to reexamine this bearish outlook.  Trade safe.

Time for a Healthy Dose of Bear Caution

Most targets have been reached on the downside, with a bit more potential still lingering out there.  During the first part of May (and ever since), I made a projection for the decline to reach 1240-1260 on the S&P 500 (SPX).  So far the low is 1266, which is awfully close.  This is a time for bears to be cautious. 

Unless the SPX can get through 1298.98, there is still a chance for one more downdraft into the original target zone.  So far, the rally appears corrective -- so I'm still favoring that outcome of a lower-low by a slight margin, but the market is definitely getting into that "tough call" zone. 

The first chart I'll share is the intermediate picture SPX, because I do believe bears need to remember that a strong snap-back rally is expected for wave (ii) after the current decline bottoms (assuming it hasn't already).  This is worth remembering, because one does not want to short the entire way up during wave (ii) and potentially give back the lion's share of one's profits.

Next is the "scary bear chart" for the Russell 2000 (RUT), which I discussed over the weekend.  Since the first precursor I mentioned (a whipsaw below and back into the diagonal) has come to pass, this potential definitely bears watching here.

Finally, the short-term SPX chart, annotated with my best-guess of the current move.  As I said, this is a tough call right now, so stay on your toes. 

Converse to my bear warnings, here's a warning to the bulls: if the market breaks 1298.98 and then stalls for some reason near resistance at 1300, then things could actually get more bearish than discussed.  We'll have to watch the market carefully over the next few sessions.

In conclusion, the potential does exist for a lower low over the short term, but this is definitely not the time for bears to be complacent.  Assuming the market behaves "normally" here, a strong snap-back rally should be waiting in the wings.  Trade safe.

Temporary Publishing Schedule

As many of you are already aware, my father is quite ill and I have traveled cross-country to be with him during this difficult time.

(Since I live in Maui, everything is cross country -- it's as far from Maui to L.A. as it is from L.A. to New York.  Fun Fact:  Hawai'i is the most geographically-isolated population center on the entire planet.)

Thus, for family reasons, I will be sticking to a lighter schedule this week and next week.  My intention is to try to publish a mid-week update (Wednesday), a Friday update, and a weekend update geared toward next Monday's trading session.  The schedule will be the same the following week (6/10-6/17).  After that, barring some unforeseen event that lengthens my stay, I'll return to the usual daily updates.  And if I find myself with some free time in the evenings, I may even sneak in a few extra charts in-between.
     
Please keep in mind that this schedule represents "the best laid plans," and is subject to interruption by more pressing matters. 

For some reason, I actually feel guilty about this schedule!  I looked it up, more for my own curiousity than anything, and realized I haven't missed a single daily market update in approximately the last 220 trading sessions -- so I've decided to let myself slide this one time, given the gravity of the situation. 

The intra-day and after-hours market discussion forums will remain open for our lively and intelligent community members to continue posting their thoughts, projections, and observations.  If you haven't already done so, I encourage you to join us.  I'm certain I'll still be dropping in from time to time as well, even during this temporarily-adjusted schedule. 

If you have not yet registered on the boards, please read the New Member Requirements.  I'm very set on maintaining a pleasant and collegial atmosphere in the forums, and establishing some basic screening requirements appears to be the only way to accomplish that goal.

In any case, I will return with a new update for Wednesday's session.  In the meantime, as always (you already know what I'm going to say here):  Trade safe!   :)

Market Update: Reliable Long-Term Indicator Suggests the Bear Market is Back

Of note, we're finally starting to see a little bit of the panic that I've suggested needs to develop before the market can generate a tradable bounce.

I found the next point sad, but interesting (warning: rant alert!):  During the weekend, I couldn't help but notice a fair number of media bulls whining for the Fed to "step up" and intervene in the market -- so it would seem that, deep down, many bulls realize that their only hope for the market to continue higher is Fed intervention.  When a market is driven solely by Fed money supply (printing), and not by a fundamentally sound economic backdrop, that's a market bubble.  Why are people begging for the Fed to keep inflating a bubble?  Have we learned nothing from the housing bubble -- not to mention the last stock bubble?  These things never end well.

And what happened to the concept of free markets? Have we Americans strayed so far that we now actually beg the government to intervene and further curtail our freedoms? Try to think five steps down the road here, media-bull interventionists. This stuff is bigger and more important than your portfolio. If you’re that worried about it, you should quit begging Uncle Sam to bail you out and sell the thing.  Stocks carry risk -- it's not the government's job to backstop you… because, in reality, you are asking all Americans to backstop you, using the government as our proxy.

I personally have no interest in backstopping anyone's portfolio but my own, and I'm willing to bet that most readers feel the same way.

Let's have a show of hands: how many readers want to continue being taxed silently through inflation caused by QE programs -- and want to keep paying higher and higher prices to put gas in your cars and food on your tables -- so that you can back some media personality’s portfolio?  Yes, you sir, in the back... hey, aren’t you a mainstream analyst?

And in the meantime, the Fed is punishing savers by continuing to drive interest rates to zero.  To some degree, Americans are forced to carry high risk portfolios in a stock market bubble because the Fed has made safer investments worthless.  So, I suppose in that sense, I can understand the begging for continued intervention.  The logic goes something like this:  "Please Mr. Bernanke, you've forced me to carry this high-risk portfolio to try and earn some return on my savings... I know its value is inflated, but can you please keep it inflated?"

But we are creating our own demons here; one thing leads to the other.

Is there more to it than that?  Sure there is -- but I'm ranting about monetary policy at the moment, not trying to consider every side of the argument.  As I see it, it's a no-win scenario at this point, and it seems like a system-wide reset may be the only solution.  Left to its natural course, I think the free market would reset.

It seems we have two opposing forces at work in the market now: 

1.  The laws of nature, which seem to consistently demonstrate that bubbles return to their starting point; versus
2.  The specter of ongoing Fed (or other central bank) intervention.

Everything in the charts suggests that the laws of nature will win in the end.  The question is: have we reached the end (will the Fed let the free market be free again?) or will the Fed pull another rabbit out of Bernanke's beard?  (Trust me: there's rabbits in there, and who knows what else.)  And further, can another QE-type program even continue to keep the market elevated in the face of ongoing deflationary forces?

So, my official stance here, just so there's no equivocation:  barring further Fed (or other large central bank) intervention, this market will ultimately return to the 2009 lows.  I believe it will eventually do so no matter what -- the question is if they will (and are able to) continue kicking the can further down the road to delay the inevitable a while longer.  Is now the time?  I don't know; I can't see that far ahead -- but the potential is definitely there.

Alright, enough ranting. 

In Friday's update, I suggested two short-term targets for the S&P 500: 1284, and 1262 beneath that. The first target was reached and breached, and it does appear likely that the second target will be reached as well.
The first chart I'd like to share is the promised long-term indicator suggesting the bear market has returned.  This chart is the NYSE Composite (NYA), which is an index that doesn't get much media coverage. I like to track it because it represents thousands of stocks, and therefore is a much more broad and accurate representation of the total stock market than, say, the Dow Jones Industrials (INDU), which only consists of 30 stocks.

This is a monthly chart, and it shows that the MACD indicator has now formed a solid bearish cross.  We can see that there are only four prior occurences of this cross during the past decade, and each one led to a prolonged bull or bear run (depending on the direction of the cross).  The current pattern is similar to the double-cross formed near the 2000 top. 

Also of note: The triangle formed by the upper blue line and lower dashed black channel line projects potential disaster if realized.

The next chart shows the Volatility Index (VIX), also known as the "Fear Index," which usually moves in the opposite direction to the market.  We can see that VIX usually needs to trade into the 30's before there's enough panic to generate a meaningful bounce.  Sometimes it needs to trade much higher. 

New readers may ask:  why is panic necessary for a bounce?  Well, it goes back to the simple concept of supply and demand, which is what drives stock prices.  The basic idea here is that if there's no panic, then the majority of longs haven't sold yet.  And if the longs haven't sold yet, then there's a lot of sellers still waiting in the wings -- and those sellers represent supply.  That pending supply of stock needs to be worked through in order to clear the way for the equation to tilt the other way again (for demand to outstrip supply), and thus for prices to bounce higher.  So, some level of panic is usually needed to clear out the sellers who are still hanging on for dear life (those who don't read my column!), which drives prices lower and thus also makes equities more attractive to new buyers.

Long-time readers will recall that in late April and early May, I noted that VIX had formed a base and should be headed into the high 20's to low 30's at the minimum.  It's getting into that projected price zone now -- but do keep in mind that my projection was the minimum expectation. 

Here's the long-term VIX chart, which shows that we still haven't reached any of the zones commonly associated with a more significant bounce.  And yes, I do think that there's probably a "Zone 2" for Global Financial Crisis levels... and I'm not looking forward to the day the market reaches that level of panic.  2008 was terrifying for everyone who was paying attention -- even for those of us who were bearish at the time. 

Just because I'm bearish doesn't mean I have to like the situation we're in -- I'm merely acknowledging and recognizing it.  Unfortunately, I do believe it probably needs to happen to purge all the fiscal and monetary mistakes we've made -- in much the way a surgeon needs to remove a cancer to keep it from spreading.  It's unpleasant and painful, but ultimately necessary for healing to occur.

Moving on to the intermediate targets, the next chart of the SPX has so far performed admirably since I first published it in early May.  The expectation for further downwards price movement remains.  I have noted a couple more bearish potentials, and we'll simply need to see how the market responds to some key levels going forward.

Next, the short-term SPX chart, which continues to reach each downward target and has now captured well over 100 SPX points of profit.  The preferred short-term target of 1260-1265 remains unchanged from last week.

Finally, I do want to publish one bullish alternate count, which I feel is lower probability, but worth mentioning at this juncture.  The Russell 2000 (RUT) currently has the appearance of a bullish falling wedge. In Elliott Wave terms, a pattern like this is termed as a "diagonal."  This pattern is one of two things -- one very bearish, and one bullish.  At this point, it's not possible to sort them out conclusively -- the best I can do is try to assimilate everything else I'm seeing and therefore conclude that the bullish outcome is the lower probability. 

In any case, I'm going to publish the chart, in order to give readers some idea of things to watch for -- so they can figure out in real-time if the lower-probability bullish outcome is occuring.  The chart notes some clues to watch, and is only annotated with the bullish potential -- I feel we've covered the bearish preferred count in depth elsewhere.  Again, I would stress:  this is an alternate count, and only provided for reader education and warning.

In conclusion: in early May I went out on a limb and suggested that an intermediate trend change was in the early stages.  The evidence continues to pile up for that case, and it now appears that nothing short of central bank intervention will prevent this decline from turning into a protracted bear market.  I think the bulls are running on fumes here, and if they can't turn this market up very soon, the technical damage will probably be too great to overcome.  Trade safe.

SPX and Chevron: Low-to-Mid 1200's Likely Just Around the Corner

As I warned yesterday, it appears likely that the next wave down has indeed kicked off.  There are still other potentials (always are), but I'm going to stick to talking about what's most probable right now.  There are invalidation levels to watch, and if the market approaches those levels or throws a major curveball here, then we'll examine the alternate probabilities more closely.

(If you're new to Elliott Wave Theory, it might be helpful to cover the basics, as discussed in this article.)

The current expectation is that the S&P 500 is headed to the mid-1200's at the minimum, and ultimately much lower.  It will be interesting to see if the central banks mount another attack soon, or if they're going to drop the "equities must stay inflated at all costs!" approach, seeing as it's basically done virtually nothing to improve the real economy.  Unless you count making the prices of gas, food, and everything else higher for Americans as an "improvement."

The first chart we'll examine is the intermediate expectation.  This chart makes some assumptions, and is skewed to the side of being "bullishly" conservative.  The alternates to this count are much more bearish.  In any case, these projections will almost certainly need to be revisited at the next swing low.

The second chart examines the short term outlook.  There's a new bearish trade trigger that will elect beneath 1298.90.  (Please note that triggers are active when beneath the pivot and suspended when above it.)  This trigger targets 1262, and that number lines up perfectly with the expectations of blue wave (3).  When two different methods of calculation yield the same target, it often means that target has an above-average probability of being reached.

The third chart is the one-minute SPX, and is provided largely for educational purposes, to help those who are playing along at home and attempting to learn Elliott Wave Theory.  Note the (b)-wave triangle, and how wave (c) of red 2 is an almost perfect .618 ratio of wave (a) (there's that golden ratio again!).

And finally, Chevron (CVX), which has been a cash-cow for everyone who's followed along since I called the top near 112.  Yesterday, Chevron made me beam like a proud father, and did the "how close can I come to hitting projections to the penny?" dance (check yesterday's chart for comparison).  Hopefully it will keep playing along.

I've drawn-in some targets for blue wave 3 and red iii.  This count is invalidated with trade above 100.86.

 

In conclusion, the projections from early May (mid 1200's) still look solid and everything still appears to be on track.  Honestly, the main thing making me a bit nervous is the fact that everything's played out so well to this point.  Sometimes the market will decide to smack me around a bit after I've been on a win streak for a while, so, you know... fair warning.  The levels are pretty clear here, so barring an invalidation level being crossed, it should be smooth sailing for bears to new lows.  Trade safe.

Reprinted by permission.  Copyright 2012 Minyanville Media, Inc.