SPX, INDU, and VIX Updates: Dow in a Turn Window; VIX Suggests Complacency

When I first glanced at Monday's charts, I thought I would have nothing to add to the prior update -- however, upon closer inspection, there are a number of interesting things to share.  I'm going to keep the commentary brief and focus on the charts today.

The first chart of interest is the VIX:VXV ratio, which I've mentioned on several occasions in the past.  This ratio measures the Volatility Index (VIX) compared to the 3-month Volatility Index (VXV).  In the past, this has worked well as an indicator that VIX is bottoming -- and usually when volatility finds a bottom, it means that equities are finding some type of top.

Note this ratio is currently showing its second lowest reading of all-time -- the lowest reading was in March of 2012, as noted.  This suggests that there's again a very high level of complacency among investors.

The next chart shows two time-cycles which the Dow Jones Industrial Average (INDU) has been responding to since the 2009 bottom; I stumbled upon these cycles quite by accident earlier this year.  Note the cycle shown in blue has reached its turn window; and most prior windows have marked decent turns -- including the 2011 top and October bottom.  The red cycle window last opened near the 2012 top, and won't reach another window until November. 

The next chart is a 3-minute chart of the S&P 500 (SPX) and shows that the sideways move of the past week-plus may have finally reached completion.  The move is still very messy, but the primary count suggests that the correction is complete and the market should move higher over the short-term.  Trade beneath 1395 would invalidate that short-term outlook.

The 30-minute chart still remains essentially unchanged since August 3, but adds perspective to the 3-minute chart above, and outlines some signals to watch.  I'd still like to see the market take a stab at higher prices here; though significant breakouts would negate the bear case for the moment.

Finally, a simple chart of the US Dollar.  On September 3, 2011, I turned long-term bullish on the dollar, but recently, on July 26, I switched from bullish to neutral.  I'm still neutral, and in watch-and-wait mode here -- so the chart outlines what I'm watching at the moment.  Interesting that the dollar may be completing a bullish falling wedge concurrent with SPX completing a bearish rising wedge.

The challenge remains that this pattern may not be a wedge, but a wind up to as stronger continuation move -- so it bears careful watching in both USD and SPX.

In conclusion, unless nothing bearish works here, there continues to be additional evidence that a top may be under construction.  Over the past week or so, I've outlined a number of signals which, on most past occasions, have been precursors to topping markets.  In addition to the signals mentioned today, two other recent signals include the ratio of Nasdaq total volume to NYSE total volume (now historically very high); and the concurrent new 50-day highs in TNX and SPX.

Of course, the last time the market generated this many top signals was late-January 2012, and it ended up marching right through them.  Nothing works with 100% accuracy, and these signals are based on the fact that they've performed well in the majority of past occasions; so it would be foolish to simply ignore them.  Of course, as I've said before: price is the final authority.  So while it appears higher prices are probable over the short-term, for the moment, I remain cautiously intermediate-term bearish.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media Inc.

The S&P 500 is Close to a Once-in-a-Lifetime Signal

In this article, I'm going to focus on the long-term.  I'll discuss the generational nature of a certain signal shortly.

First, let me make one thing clear:  I don't like this market one bit right now.  Usually I can look at the charts and get a good feel for the market on either an hourly or daily time frame -- but for this past week, I haven't felt like I have a definite grasp of anything other than the shortest time frames.  I've been limiting my personal trades to the one-minute and three-minute charts, and haven't held any trades longer than a few hours recently.

I view the current price territory as something of a no-man's-land: the market is currently beneath long-term resistance, but above short-term support.    At times like this, we have to look at other signals besides price; the challenge is that price is the ultimate authority, and other signals are always hit-or-miss... and even some of those indicators are giving mixed messages.  I can't tell exactly what the market's going to do next here; all I can do is assemble the evidence, look at what's happened in the past, and then try to draw a reasonable conclusion. 

The short-term trend is up, and the long-term trend is up. So why be anything other than bullish?  Well, there are numerous signals which, in the past, have been precursors to bearish markets.  Accordingly, I'm going to continue warning of the intermediate bear case unless those signals negate.

And there are no guarantees that these signals will work.  If you're the type of trader who marries their position, or has a hard time (emotionally) with missing a move that went in the direction of the previous established trend, then just follow the trends and don't try to anticipate turns -- anticipating turns is extremely difficult and higher-risk. 

Of course, trading only the trend has its disadvantages, too -- but whatever we didn't do always seems brilliant (in hindsight) any time the actions we took don't work out.

At times like this, it pays to remember that one doesn't need to always be either bullish or bearish.  It's a mistake to think those are the only two options in trading -- in fact, believing one should always be either bullish or bearish is a sure-fire way to lose money fast, because it leads to over-trading when the market is ambiguous.  Cash is a position, too, and successful trading is as much about patience as anything else.

Smart traders will sometimes lean bullish or bearish and take a stab because there's a clear bull/bear battle line, and the risk/reward is good -- but they're also quick to exercise discipline and close the trade if it isn't working.  If a trade doesn't work, never get mad about "missing a move" -- getting stopped out means you did something right, not something wrong -- and as long as you continue making disciplined and well-reasoned trading decisions, you are acting correctly.

Last week the market did basically nothing, and I've been excluding the short-term section of the updates of late, because I haven't felt there's a clear short-term direction... and I suppose, given the meandering nature of the past week, that my read has actually been correct.  The market may drift around a while longer -- it appears that numerous forces are working at cross-currents to each other right now.  As I said last week, this type of top is a process, not an event.  Of course, with that statement, I am presupposing that this is a top, and that the current signals won't negate.  A solid and significant breakout would suggest bulls are still in control.

I'm going to continue limiting focus on the short-term until it clarifies again.  Instead, let's look at some of the intermediate and long-term evidence and signals.

The SPX monthly chart shows a rare event that I've been keeping my eye on for a while:  the pending potential cross of the 50 month and 200 month moving averages.  It's fair to call this signal "once in a lifetime," since these two moving averages haven't crossed on SPX in over 66 years (they last crossed upwards, in April, 1946).  When they cross downwards, this is commonly called a "death cross" and considered a bearish signal -- but before bears get too excited, it calls for some discussion.

While this signal hasn't actually happened in SPX for 66 years, SPX did come very close in 1978.  This was at the tail end of the long secular bear market of 1966-1982.  I say "tail end," but this is of course relative, and it was still 4 more years until the bear market actually ended.  This monthly death cross happened a couple years later in the Dow Jones Industrial Average (INDU), in August of 1980.  The INDU then crossed back up (called a "golden cross") in April 1982.  However, in both those death cross instances, the bear market wasn't over -- and while we can look back and say it was near the "end" of a secular bear market, two to four years is still a pretty long time by the standards of most investors.

The Dow also experienced a monthly death cross during the Great Depression, in January of 1934; and the moving averages didn't cross back up until February 1946.  There's no argument that this was a useful long-term signal at that time.

And then there's Japan.  The Nikkei (NIKK) experienced a monthly death cross in early 1998, when the index was trading near 17,000.  This cross is still active -- and the Nikkei is currently trading almost 50% below the signal level.

So while this signal is so incredibly rare that we have limited historical evidence to draw from, the past history suggests that it's a bearish signal for the long term.  But, as the famous last words go, maybe "this time will be different."

The next chart I'm going to share discusses another recent signal that tends to be a top precursor. Last week, ten-year bond rates hit a 50-day high, as did the S&P 500 (SPX). The last time these two things happened together was March 13, 2012 -- and before that, October 27, 2011.

Note that this signal led the top in March by several weeks.  While not quite as long-term as a monthly death cross (what else is?), this is still an intermediate signal, so it doesn't mean the market's necessarily going to collapse tomorrow -- it just increases the odds that an intermediate top is under construction.

The next chart is the SPX daily, and discusses the next resistance levels, should the bulls break through 1407.

Next is the NYSE Composite (NYA), and I find the current fractal interesting for its similarity with 2010-2011.  The fractal here does suggest more upside is possible before a significant turn.

Trying to fit an Elliott wave count to the current charts is still an exercise in patience/frustration.  This chart shows one of the mixed-message signals -- as I mentioned on August 5, the breakout and backtest of the blue trendline can't be viewed as anything but bullish.



Finally, my best guess at the short-term.  This chart is materially unchanged since August 3rd, when I suggested an ending diagonal as a potential resolution to the present move.  I suspect the market might need to test higher prices eventually (not necessarily immediately) -- though as long as the bears hold 1407, there is always a chance that level ended the wave.

Of some note, with Friday's close, the SPX had 6 positive closes in a row.  When this happens, there is a 70% chance that the 7th close will be negative.

In conclusion, I'm effectively neutral on the short-term.  I remain cautiously bearish on the intermediate-term -- however, the market's behavior in late 2011 and early 2012 is still fresh in my mind.  During that time, the indicators repeatedly gave signals which were historically bearish, but the market ignored them and kept marching higher anyway.  As a result, I'm still hesitant to suggest anything but caution on either side of the trade.

On a lighter note:

In weekend Olympic news, the United States beat Spain on Sunday to win the gold medal in Men's Basketball.  At the press conference which followed, Fed Chairman Ben Bernanke stole the show when he revealed that the Fed "is standing by and has all the tools necessary to obtain gold medals for each and every U.S. Olympian" -- provided that nobody cares if all the gold content is replaced with paper. 

Later Sunday evening, Former MF Global CEO Jon Corzine announced that he had officially won the Fed's first "gold" medal -- in the challenging and aggressively-competitive category of Creative Accounting.

Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.

SPX Update: Little to Add...

Yesterday's flatline market added little in the way of clarity to the intermediate picture, and I debated not even publishing an update tonight.  There's been no material change from yesterday. 

I took a SWAG (Scientific Wild-@ss Guess) at the short-term structure; there's honestly no clear interpretation.  I'm slightly favoring the view that this structure leads to at least a short-term breakdown -- but it's simply going to take a directional break to clarify this move.

The wave from 1405 to 1398 appears impulsive.  The challenge is: this could fit a number of different corrective structures, including an expanded flat from 1404 (can be ruled out below 1398.8) -- or the a-wave down of an ongoing triangle (noted by the "or c" annotation on the chart -- can be ruled out beneath 1396). 

Unless this is a running triangle, 1396 is the line in the sand for the triangle count.  

So... after an ambiguous session that traded within a 7 point range in an ambiguous market, there's just not much to add here.  Trade safe.

SPX Update: Signs of a Top?

Yesterday I discussed some reasons that the market's current price zone would make a decent level for bears to launch a counter-attack.  I'm hesitant to scream that this is "the" top, because the short-term wave counts are very messy, and there really are no clear interpretations of the charts -- but there is some additional evidence today that may add some confidence to the bear view.

My best-guess interpretation is that there is either a top in place at 1407, or will be after a slightly higher high.  Let me explain the details and caveats:

The challenge with this type of pattern is two-fold:

1.  It's very difficult to anticipate the exact top with this type of pattern (called an "ending diagonal") -- they tend to run on just "one more high" than you think they will.  This type of top is a process, more than an event, so patience is usually in order.

2.  There is a bullish pattern that mimics a bearish ending diagonal -- and it's extremely bullish.  So if the bearish interpretation is wrong, then it's really wrong, and the market launches strongly upwards instead of topping.

Reason #2 is the reason that I'm still a little hesitant here, and I want readers to be aware that this isn't the type of call to get married to.  As my tagline reads: trade safe -- and don't take unnecessary risk or allow your convictions to trump your trading discipline.  If this pattern breaks the other way, it's probably going to run toward 1475-1485.

In fact, almost every technician who's not a student of Elliott Wave Theory would probably interpret the current charts bullishly. Classical technical analysis looks at the current charts and sees a series of higher highs and higher lows, which is bullish.

Incidentally, back in April when the euro was trading near 1.32, I ran into a similar discussion with some other analysts (who were strict classical technicians). I made the argument that euro was putting in a meaningful top, and took some flak about it because euro had been making a series of higher highs and higher lows -- exactly as we see in the current S&P 500 (SPX) chart. Needless to say, the euro topped soon after, and is now trading near 1.23, so my interpretation turned out to be correct (and a pretty profitable call).

So, those are the caveats... and there are always caveats in analysis and trading.  Personally, I have an innate distrust of analysts who are too certain of their predictions -- I think it breeds complacency; and complacency in trading breeds disaster.

In any case, the chart below details the bearish ending diagonal interpretation.

The next chart considers both possibilities, with the bullish interpretation labeled in black.  Again, the bullish interpretation targets 1475-1485 -- but I'm not favoring that interpretation at the moment.

The next chart compares a ratio of the Nasdaq total volume to the NYSE total volume.  This indicator has been pretty reliable at locating tops -- the idea behind it is that when investors start pushing a lot more money into the high-beta Nasdaq, then sentiment is getting overly bullish.  And when investors get overly bullish, we're usually closer to a top than a bottom.  The indicator isn't flawless, and actually had two failures in a row earlier this year -- but over the prior 3 years, it's averaged a 79% win rate.

Finally, a 3-minute chart of SPX which outlines one short-term bullish and one short-term bearish trade trigger.

In conclusion, I continue to feel this price zone represents the bears' best hope for the foreseeable future.  The charts have aligned to give them a window into taking control; and while I can't promise they'll do so, the opportunity is there.  If the bearish interpretation is correct, it could still take several sessions to play out, so patience is in order.  Conversely, if the market pushes more than a little bit higher from here, then that will be a good indication that bulls are maintaining solid control, and we can probably forget about top-hunting for a while.   Trade safe.

SPX Update: Market Reaches Long-Term Resistance

I haven't tried to anticipate a top in this market in some time.  Top calling is a high-risk business, because you're trying to anticipate a reversal in trend before there's any indication that the trend has actually changed.  Inexperienced traders can lose gobs of money trying to pick tops (or bottoms), so I'm not necessarily suggesting anyone front-run the market -- but the market has finally reached the zone I've talked about since July 30.  As I've said since then:  If the bears still have any hopes, this is the zone where they'll need to reverse things. 

The charts are a real challenge to frame in Elliott Wave terms right now.  If the bearish wave count still holds water, it could allow one more small down/up series... but more than a little higher from here, and I'm going to throw out my top call and go back to playing "the trend is your friend."

The first chart I'd like to share is the S&P 500 (SPX) daily chart and takes a step back from the near-term and shows why this would be a good zone for bears to mount a counter-attack.  If bears can't get things done here, then there's room to run back to 1422, and then 1440.

Notice how, in 2011, the market retraced to the equivalent trend line, and then began its collapse from there.  What's nice about a top-call like this is that there's a pretty clear zone where you can see that it's either going to work, or it isn't.  I've said it before, but I believe that, whenever possible, one wants to establish positions at points where the market has pretty clear battle zones -- because if the market crosses those zones, then that conveys fairly clear information about whether to keep or exit your trade.

The next chart takes a look at the near term.  Notice the bearish rising wedge that's formed between the upper blue line and the lower black line.  Bears have a window right now -- but if the bulls keep pushing significantly from here, then they will defeat this pattern.

Next is the hourly SPX chart, which attempts to reconcile the wave counts, although the wave counts are spotty right now.  The terminal ending diagonal pattern I suggested on August 3 is still alive and well, and basically needs to either be complete at 1407, or run down a bit and then back up to a marginal new high for completion.  Again, if the market starts to break markedly higher from here, then fuggedaboutit, and it will be back to playing the trend.

A chart not shown is the Volatility Index (VIX).  Over the prior two sessions, VIX has moved higher in concert with SPX.  Based on past history, when this happens two sessions in a row, there's roughly a 75% chance that the next session will close lower -- so bears at least have pretty good odds for Wednesday. 

Finally, a chart of the Philadelphia Bank Index (BKX).  BKX has moved above key resistance and reversed to back-test it.  We'll soon find out if the bulls can hold the breakout, or if it's just a head-fake throw-over.

In conclusion, a number of short-term charts have seen minor break-outs, but at the end of a move, it's not unusual to see a breakout that whipsaws.  The long-term charts show that SPX is bumping its head on some decent overhead resistance.  And as I've shown on the SPX charts for a while, if the bears have any shot in the immediate future, then they need to hold this zone.  The window is there for bears to turn things; but if they can't, then the market is cleared for a run back to the previous cycle highs and beyond.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.

Just the RUT, Ma'am

Technically, tonight is supposed to be my night off, but I wanted to quickly share my interpretation of the RUT chart.

It's not a guarantee, but due to the depth of the recent retracement, and the structure of the prior rally leg, RUT looks like it will probably return to test the 765 area again.  Under this interpretation, the current rally is either complete/almost complete (blue "(c)?", red "2?"), or will head back to retest the 820 area first (black "B"). 

Trade above 808.53 rules out the very bearish blue and red count, but there is no hard stop for the black ABC count, though sustained trade above 825 would cast doubt on the black count.   

It's important to be aware that the bullish interpretation of this chart (not shown) is extremely bullish -- so if you decide to try and trade this on the short side going forward, stay very nimble.

My "not trading advice" would be: if you get a good low-risk entry (and decide to take it) -- if it doesn't perform from there, then don't push your position.

The Market Continues to Send Mixed Messages

For the last few weeks, the market has behaved like a hand grenade:  if you pulled the pin on a trade, you could make a profit if you let it go quickly -- but if you held on too long, it was liable to blow up in your face.  This type of market is loved and adored by short-term and day traders, but can really wear out the swing traders (and us chartists who are trying to find something useful for swing traders!).

Over the past five weeks or so, I've outlined both the bullish and bearish alternatives, but have largely warned that both sides should stay cautious as long as the market stayed range-bound and failed to reclaim any key levels.  Then, about a week ago, I suggested that the market might be getting ready to finally begin a sustained directional move.  With the benefit of the latest information revealed in the week since, I'm no longer sure this is the case.  I'll explain why:

Over the past week, I've largely suggested that the S&P 500 (SPX) "should" make a new high above 1391, which it's done.  But the breakout is suspect, because a number of indices are lagging badly, including the Nasdaq Composite (COMPQ), Russell 2000 (RUT), and Dow Jones Transportation Average (TRAN) (charts to follow).  These are not small or insignificant markets, and this suggests that even if a new bull leg is in the early stages, it still has some work to do first.  If the intermediate bear view still holds water, then these other markets are actually telling the "real" story, but it's a market of mixed messages right now... which means we might be in for continued chop for the time being. 

Of course, that could always change tomorrow -- but right at this moment, it looks like the bulls still aren't ready to commit; nor are the bears.   

On Friday, based on everything I could gather from the charts, I proposed an ending diagonal formation for SPX.  This still appears to be a reasonable theory, and Friday did "what it was supposed to" and followed my projected outlook.  Below is the updated chart, though since the diagonal is still largely hypothetical at this stage, I've outlined a few things to watch to see if it continues to hold water going forward. 

A diagonal does not need to follow my path perfectly to be viable, and honestly I'd be surprised if it did.
 

Next up is a chart of the RUT, which shows how much it's lagging SPX in performance.  This tells us that certain large-cap sectors are reasonably strong, but the "risk on" trade hasn't quite come into vogue just yet.

Next is the Nasdaq (COMPQ), which is also lagging, and which is another "risk on" index.  However, it's hard to view this chart as bearish.  I wouldn't exactly call it overly bullish yet either -- but the Nasdaq is maintaining a key long-term breakout level, and has just broken out from the recent downtrend.  More mixed messages, though on balance, this chart is slighly more bullish than bearish.

Below is an overview of six different markets, for side-by-side comparison.  Note how everything rallied in unison much more solidly back at the October 2011 lows... so the charts aren't screaming "bull" yet.  Again, though, it's hard to view most charts as terribly bearish, either, since everything except TRAN is maintaining short-term breakouts. 

But TRAN might be a problem for bulls.  TRAN is not considered to be a "risk on" index, but is much more basic to the economy and consists of companies like Fed Ex (FDX), Delta Airlines (DAL), and Union Pacific (UNP).  The fact that it's lagging here sends another mixed message.

Next is a chart which is designed to elicit angry responses from brokers (only from the lazy ones, though!).  It's really not terribly pertinent to the "mixed messages" discussion, except from a very long term perspective:  Keep this chart in mind if you're a swing trader who's felt frustrated during the past couple months.

Finally, a very simple chart that shows another mixed message which was sent with Friday's rally.  Despite the divergences discussed, it's hard to view this market as bearish after the successful back-test we just witnessed.

In conclusion, there have been bullish breakouts in some markets, but other markets are diverging badly.  The broad market is sending very mixed messages, and this suggests that investors are still somewhat undecided.  Barring a significant breakout/breakdown that sends the all-clear, it's probably best to continue to remain nimble.  Trade safe.    

SPX Update: Is This 2009 All Over Again?

The market hasn't had much good news lately, yet so far the sell-offs have been pretty mild.  It feels like neither bulls nor bears want to commit, and no key levels which give a significant edge to either side have yet been claimed.  Yesterday, the Russell 2000 (RUT) came within pennies, but still failed to break 765.

Before I get into the current charts in detail, I want to share an interesting analog I stumbled across while I was doing some historical chart studies on Thursday night (this is what I do while normal people are watching TV).  Below are two hourly charts of the S&P 500 (SPX):  2008-2009, followed by the current market.  At the moment, the patterns look remarkably similar. 

If readers recall the time just after the 2008 election, the news cycle was similar (in sentiment) to the current news cycle: rapidly alternating hope and fear.  My recollection is that the overall mood was darker then, but I'm not sure if that was actually the case, or if we've just gotten used to it.

Whether the analog will hold or not remains to be seen, of course.

This current pattern is every technician's worst nightmare, because the possibilities from here are extremely numerous.  The advantage in 2008 was that the larger pattern was much more defined and the correction (referenced above) was clearly counter-trend to the larger existing downtrend. 

In any case, coming back to the present: quite frankly, at this exact moment, all I can do is speculate about the short-term.  Of course, speculation is all trading ever truly is, but usually the charts are a bit cleaner than they are right now. 

I'm trying to factor in everything currently in the charts (short and intermediate term) in order to draw a coherent overarching picture:

1.  Short-term, the decline from 1391 still looks corrective.
2.  New swing highs above 1391 have continued to appear slightly more likely.
3.  On an intermediate level, since 1266, the pattern seems to have too much price overlap to be viewed bullishly.

While studying the charts and trying to reconcile all these factors, I realized that an ending diagonal fits all existing criteria, and the wave forms, quite well. 

So, while the pattern shown below does break the interesting analog from the first two charts, it also fits all currently available price info, which means it's worth sharing.  This pattern would also allow additional bullish sentiment to develop, since it would mean there are one or two more sideways/up waves still to come.

The big picture SPX chart is little changed and the wave peak could be in place at 1391.  If that's the peak of the wave, it represents a very bearish short-term pattern, but at some point, the market needs to actually sell off to validate that potential pattern -- and so far it just hasn't wanted to.

Friday is a non-farm payroll day, and that lends to volatility, so I suppose the opportunity might be there for either Friday or Monday -- but bears are running out of time over the short-term.

Regardless of what the market's short-term plan may be, my intermediate outlook currently remains leaning bearish.

In conclusion: the short term picture remains hazy, and has continued to reward nimble traders and punish the over-confident.  The short-term is still up for grabs at this moment, though the ending diagonal shown earlier would make a fitting end to this pattern.  Trade safe.

Reprinted by permission, Copyright 2012 Minyanville Media, Inc.

SPX and RUT Update: Bulls Losing Key Ground

The short-term pattern on the S&P 500 (SPX) remains a mess, but the intermediate picture appears close to clarifying more definitively.  The Russell 2000 (RUT) lost some potentially key short-term price territory yesterday.  A trip beneath RUT 765 is now required to "seal the deal" for the bears. 

If RUT moves below 765, it will be extremely difficult to match the current move to any type of intermediate bullish pattern, and instead will suggest that RUT has been warming up for a more serious decline.  The chart below shows that RUT has also formed a potential head and shoulders pattern, which seems to confirm the Elliott Wave fractal. 

Again, 765 is the key intermediate-term level here, so I don't want to convey that bears are completely in the clear yet; because they aren't.  However, Wednesday's deep retrace overlapped some key short-term price territory (774), which was the apparent peak of wave a or (1).  Elliott Wave rules do not allow waves 1 and 4 to cross paths, so this overlap suggests that the recent rally in RUT was an ABC corrective rally, which means the intermediate trend is down.

One of the key tenets of Elliott Wave Theory is that price travels in a series of five waves when it's heading in the direction of the larger trend, and it travels in three waves (or some variety thereof) when it's moving against the larger trend.

In other words, the overlap at 774 suggests that 765 will eventually be tested and likely broken.  The market could head lower fairly directly, but, as always, reserves the right to first stretch out the pattern sideways if it so desires (and by "sideways," I'm referring to the range that's formed between 765 to 808). 

Looking at this chart, we can see that the decline from 820 is still three waves, and thus could still be viewed bullishly.  A new low beneath 765 would break that three-wave appearance.

The hourly RUT chart shows the updated pending bullish and bearish trade triggers.

The short-term SPX chart remains messy, and is of little use.  I am completely uncertain if 1391 will mark a meaningful turn, or if the bulls have some more firepower.  The pattern currently still looks like a bull flag, which could suggest higher prices over the short-term -- however the setup is very similar to the last time the market broke out and then came to rest on the black trendline (on July 20).  The market gapped down the following day. 

Given the information in the charts at this moment, an eventual bearish resolution to new lows beneath 1266 still appears probable over the intermediate term.

The NYSE Composite Index (NYA) also suggests the rally may be over, or nearly so.

In conclusion, new swing highs over the short-term would actually look better for the pattern but are not required.  A bit more upside would still leave the larger fractal looking bearish from an intermediate perspective -- it would, in fact, take a meaningful breakout from the bulls to invalidate the current bearish appearance of the intermediate charts.  This would probably require a bullish announcement of new liquidity from Europe's central bank.  Trade safe.

Reprinted by permission, copyright 2012 Minyanville Media, Inc.

SPX and RUT Updates: Happy FOMC Day!

Before I get into today's discussion, I wanted to clarify my last update regarding monetary policy.  Many readers (understandably) took my discussion of additional printing to be a reference to QE3.  Let me clarify that I would be shocked if the Fed announces QE3 this week.  The market's very close to the highs of the year, and the Fed just extended Operation Twist; so I can't see them announcing QE3 anytime soon.  When I was speculating about the potentials of a new central bank liquidity program coming in the relatively near future, I was referring primarily to Europe.

Tomorrow is FOMC (Federal Open Market Committee) Announcement Day, which of course means we all have to wear something green and hand out little cards shaped like clovers to our friends and family.  Cries of "Happy FOMC Day!" will echo through the halls of our nation's grade schools, as starry-eyed children dream of finding the mythical pot of gold that's rumored to lie at the end of the printing press (don't spoil it for them: childhood is a magical time).  In the evening, the bars will fill with adults who've been lured in to drink the green beer... which, in honor of the ongoing devaluation of our nation's currency, will be sold at the discounted price of only $899 per pitcher.

Or maybe I'm thinking of St. Patrick's Day.  FOMC Announcement Day usually means a whipsaw market.

The market continues to send mixed signals.  Over the weekend, I talked about the up volume to down volume ratio, and how its reading on Friday suggested a higher high still to come.  The market made a new intraday high on Monday, but has traded sideways-down since, and closed in the red on Monday and Tuesday.  This actually damages the bullishness of the prior signal, at least over the short-term.  This is similar to the signals being sent by this indicator before the actual bottom was reached in October of 2011, and thus now suggests that the odds favor a new low coming, beneath the last swing low of 1329.

This recent trading range has reminded me of September 2011 in a number of ways already; so we'll add the above signal to the list of similarities.

The one-minute chart is a complete mess and is also sending mixed signals, and I simply can't interpret it with any value at the moment.  I can see it as a possible ending diagonal c-wave (complete at Tuesday's low and suggestive of an immediate continuation of the rally), or a bearish (short-term, at least) nest of 1's and 2's, but I can't find anything that clearly sorts one possibility from the other.  I'm inclined to favor the ending diagonal, but only slightly.

Whether there are lower prices coming over the very short-term or not, the 15-minute chart says there are still pretty good odds of a trip toward 1400-1410 (or higher).  I would be cautious about front-running any hypothetical turns.

The hourly chart shows that bears have so far at least caused the bulls to pause at the current overhead resistance levels, and there is some additional layered resistance up through 1407.  So far, the correction of Monday and Tuesday looks like a bull flag, which is also suggestive of higher prices.

At least one reader asked why the invalidation level is 1422 instead of 1415, and this is an intelligent question.  The reason I'm using 1422 is to allow a margin of error since I'm considering 1415 as the top of a failed fifth wave, and it's not entirely clear if that's indeed the case.

Readers will note that I've added the text "mega-bear" to the invalidation annotation, and the /a and /b labels behind the (i) and (ii).  This is because some indicators are now beginning to suggest that the current ugly rally may be wave b of a larger flat correction (this would mean a rally back toward, or even a bit above, 1422, and then a reversal back down beneath 1266 before ultimately heading to new highs).  We'll see how it plays out from here; but if the market dictates, then I'll need to illuminate and expand on that potential in a future update.

I've also updated the short-term Russell 2000 (RUT) chart, and added a bit more detail with horizontal support and resistance levels. 

In conclusion, there are reasonably good odds of higher prices still to come over the short term.  Trade safe.

No Material Change

There's been no material change in the outlook from yesterday, and as such, I'm taking the night off!  I have decided to do 4 updates a week for the time being, as there's usually (at least) one day each week when nothing really changes, and the current hours are killing me.

I did want to clarify that in yesterday's update, when I talked about potential monetary stimulus, I was referring to Europe.  I have little hope for a QE3 program from Uncle Ben at this time.  Trade safe.  :)

SPX and RUT Updates: Has the Market Finally Reached a Tipping Point?

A few readers have asked why I haven't published much in the way of longer-term projections recently (outside of a few hypothetical if/then type charts, which were contingent on key level breaks that never came), and the simple answer is: there haven't been any longer-term projections I've had much confidence in lately. 

About a month ago, once the market rallied back above the 1363 swing high, everything got a bit hazy for the longer-term outlook.  And while July was a good month for the short-term portion of this update, I haven't done much focus on the bigger picture because I felt there were no clear targets to focus on.  In retrospect, this was the correct approach. 

This has been a challenging market across the board, and the market has repeatedly punished traders who've held positions longer than a few days.  And while I've been preaching for several weeks that traders should remain cautious and nimble, and that no result could be counted on as long as the market stayed range-bound, I now believe the market has finally reached a decision point.

I suspect that what happens over the next week or so will telegraph the intermediate-term direction fairly clearly.

I'm not a big fan of following news and believe that news is generally noise -- in other words: the charts tend to lead the news.  However, I have always stated that genuine central bank policy actions (not rumors, but actions) do not qualify as news noise, because central banks represent liquidity... and liquidity drives the market.


As I've been discussing for several weeks, the charts haven't been crystal clear for the longer-term, but did appear to be coiling for a big move.  It would now appear that the market has been waiting on the central banks.  This coming week, leaders will be meeting to discuss monetary stimulus -- and the charts suggest that the market has finally reached a tipping point, coincident with these meetings.  Interestingly, the charts could support either outcome:  A disappointment for the bulls (i.e.- no printing) should lead to a sustainable decline; but an announcement of more printing should lead to a sustainable rally.

So the two main potentials visible in the charts seem to match the reality of the central bank fundamentals quite well.   The nice thing about following the charts is that no matter which announcement comes and which way the market breaks, the charts will then provide us with longer-term targets.  I'm pretty sure that the news won't provide that much detail.

Friday's bullish trade trigger I published for the Russell 2000 (RUT) was activated early in the session, and then easily reached and exceeded its target (as I stated Friday, the target was conservative).  I now want to update the bigger picture RUT chart, previously published on July 15, because the targets for the pending trade triggers ("pending" meaning they never triggered and became active) have changed.  Since the pattern has changed since they were originally published, I want to update them now before price crosses any trigger points -- additionally, there are two new short-term trade triggers which I've added.

On July 15, when I published this chart, I wrote:

This market may actually become more challenging going forward, because it is still trading in a large range, and strange things can and do happen in trading ranges...  I think traders should remain very nimble until the market breaks out of this range.  

These types of ranges can be very challenging to trade profitably, and if one doesn't take profits quickly, the ongoing price overlaps can nickel and dime one's account to death. A range like this suggests the market is coiling and building up potential energy for a large and sustained directional move, to be launched at some point in the future.

I continue to believe that this trading range has been part of the energy-building process -- but there are now, finally, some indications that market is ready to make a decisive move soon.

Below is the updated chart:

A close up version of the RUT chart with some additional support/resistance lines and info is shown below.  Note the 781 level applies over the short-term only.

It's interesting how much RUT has lagged the S&P 500 (SPX) during this recent rally.  SPX has made clean new swing highs, but RUT hasn't even broken through its lower-high July peak yet.

The SPX chart below shows that there is a confluence of trendline resistance in the zone just overhead.  Bulls need to break through this zone to gain clearance for a larger rally, so if bears want to maintain intermediate hopes, then this is where they need to launch a counter-attack. 

The pattern of the last two months is finally reaching another point where it could close the fractal.  If bears can close the fractal in this general area (the current blue C-wave would equal A near 1395) and then retake 1329, they will almost certainly gain control of this market for the next several months.  If they can't close the fractal here, then bulls have a good shot at launching a strong and sustained rally from this pattern. 

Again, what happens over the next few sessions is highly likely to reveal which side will control longer-term direction, and I've listed a couple preliminary targets, dependent on some price trigger points. 

I had drawn up a longer-term chart, but I want to hold off on publishing it until the market has clarified a bit more and is out of the noise zone.  Instead, I've outlined the key levels to watch on this chart.

A chart that might be serving as a warning to bears is the up volume to down volume ratio, which measures accumulation.  Friday was a very strong accumulation day: in fact, it was the strongest accumulation yet seen in 2012.  This suggests that while there may or may not be some consolidation or retrace here, eventual higher prices are pretty good odds over the near term (if not longer).

My first reaction when I looked at this chart was, "Somebody knows that there's monetary stimulus coming, and they're front-running it."  We should know soon enough.

In conclusion, the market is again flirting with the upper edge of the noise zone, and thus there's still not much to talk about for the intermediate term, at least not with any conviction.  However, this now appears to be a major decision point:  if bears can close the fractal soon, they can still take control of the longer term.  If they can't, then it's probably time to start wearing some bull horns. Trade safe.

SPX and INDU Updates: Are You a Bull or a Bear?

"Are you a bull or a bear?"  In today's modern world of lightning finance, where stocks are more widely-owned than at any prior time in history, a person's answer to that question is probably even more fundamentally revealing than his or her political affiliation.

But it's a loaded question.  When it comes to investing, trading, charting, and analysis, there are at least two psychological factors which all humans share, but which both need to be controlled and minimized as much as possible in the bull/bear equation:

1.  We all tend to see what we want to see.  In charts (and in life, for that matter), we often find whatever it is we're expecting to find.  This tendency is linked to:

2.  Our desire to be right.  The more consistently we're right about things, the more we feel smart, successful, and valuable.  This is such a deep-seated need that we actually go around the block at times to blind ourselves to anything which could prove us wrong.  Anyone who's married knows that their spouse has weaknesses that he or she refuses to see as true; and so do you and I.

We all have some degree of bias, that's unavoidable.  But as a result of the factors above, we tend to give additional weight and credence to data which supports our underlying bias, because that data actually rewards us emotionally (it appears to prove us "right").  For the same reason, we sometimes discount data or evidence that runs contrary to our bias (it would, heaven forbid, make us "wrong"!).  Most do this without conscious awareness; it actually requires conscious effort to do the opposite -- to suspend bias and "turn the charts upside down," so to speak.

The further emotional challenge is that questioning our bias creates uncertainty.  And as humans, we strongly dislike uncertainty -- we crave a sense of consistency, stability, finality, and resolution.  We want security; we want guarantees and insurance policies; we want our answers simple, straightforward, and easy to comprehend.  Then we want to stop thinking about it.

A quote I've always liked comes from F. Scott Fitzgerald:  "The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

There's a simple reason that a fair number of analysts seem to be either perma-bears or perma-bulls, and I can tell you, from my own experience, exactly what I think that reason is: it's simply because it's a heckuva lot easier to operate that way.  Pick a side and stick to it forever, and you save yourself an unimaginable amount of work and stress.  Plus you attract a core group of die-hards who are also "perma" somethings, and everyone is happy, even if they miss a decade of profits because the market went the other way.  Don't get me wrong: this group isn't happy from a financial standpoint (obviously) -- but they are happy on a far more important emotional and psychological level.  The perma-analyst is feeding their basic human need for acceptance, and makes them feel reassured that they are "right."

I bring this up because when I look at the present pattern in, say, the S&P 500 (SPX) chart, I think of a Rorschach ink blot.  I can imagine a psychiatrist asking, "Tell me what you see in this chart," and then passing it around a room full of traders:
 
"I see a bull!"
"I see a bear!"
"I see my father yelling at me for getting an F in math!"

What do you see?  (Also, to that last trader: it's time to let it go about your father. You're an adult now; take responsibility for your own life!)

I'm sticking with the bearish intermediate outlook (aka: the preferred count) for the time being, because the risk/reward is good, and the count has played out amazingly well, going all the way back to April (it hasn't performed flawlessly, of course, there have been a few minor miscues, but that goes with the territory).  For July, it has performed exceptionally well, and here's a quick review of the preferred count's July performance: 

-- Hit the 1325 bottom within 8 points
-- Hit the 1380 top within 11 points
-- Hit the recent 1329 bottom within 6 points
-- Captured yesterday's rally to 1362

The resounding message of this market has been "don't get greedy on either side of the trade."  Has that changed yet?  I'm not sure.

And the bottom line message I'm trying to convey is: I'm not married to my prior analysis.  Everything is based on the best information available at the time, but the market is a dynamic mechanism and reserves the right to alter its appearance -- so if the picture seems to be changing into something more bullish for the intermediate term, then I'm going to do my best to change footing accordingly.

The short-term picture is muddy as of Thursday's close, and I think new swing highs (above 1380) aren't completely out of the question here; in fact, I'm now roughly neutral on the odds.

Let's take a look at the Rorschach charts and see what we can come up with...

The first chart's focus isn't price; it's a chart I've already shared twice this month.  Now, for the third time in July, the market experienced a huge up-day with somewhat weak internals.  The chart below shows the ratio of advancing volume to declining volume.  Since it's a ratio, it's always relative to the total volume of the day, so it's not seasonally impacted by high or low volume days.  And yet again, Thursday's ratio shows that the accumulation levels were minimal. 

Bulls haven't really committed to these rallies; the rallies appear to be mostly short-covering.  Despite this, on the prior two occurrences this month, bulls have still managed to squeak in some new swing highs, so this indicator doesn't preclude short-term rallies.  It doesn't even preclude intermediate rallies -- it's just one more statistic that gives the bears better odds.

The next chart is the big picture SPX, and discusses the most likely short-term options -- again, it is unclear if the rally has peaked or will continue, but the 62% retrace level we've reached is a higher-than-average spot for a turn to occur, if it's going to. 

The very bullish big picture alternate count is still lurking out there as a potential, and I'm watching for signs that might suggest its appearance, in which case I'll shift intermediate footing.  Based on all the current evidence, that count still appears to be the underdog.

The short-term SPX chart is below, and discusses some key levels that will swing the short-term odds in favor of bulls or bears.  Note that micro wave 4 (small blue label "or 4?) could become more complex and simply chop sideways for a session or three.

Next is the Dow Jones Industrial Average (INDU), which has already exceeded its 62% retrace.  I have labeled this chart with the short-term bullish (still intermediate bearish) potential, which sees a new swing high coming in the area of the "C/(y)" label.  There are more bullish potentials in the present pattern, but they are not currently shown on the chart.

Finally, a short-term Russell 2000 (RUT) chart that suggests a pending bullish buy trigger.  The target, should the trigger become active, is conservative.  There is an aspect of this chart that disturbs me for the bear case, but it's only a potential at present, so I'll discuss it next week if it becomes appropriate to do so.

In conclusion, as I've said for some time, as long as the market stays range-bound, there's not much information being conveyed, and neither the bulls nor bears have crossed any of the key intermediate levels to confirm a more solid outlook.  A few days ago, bears were quite excited -- but at the time, I warned that the bears would accomplish nothing if they couldn't reclaim 1306 (which they didn't do).  So it still appears to be an undecided market. 

The intermediate odds still seem to favor the bears, but to date, there's been nothing in the price action to confirm the indicators -- and price is always the final arbiter.  One more new swing high (marginally higher than 1380) would remain within the tolerance of the intermediate bear outlook.    

Neither side has been able to get anything done in two months, and in the meantime, the pattern has built up a lot of potential energy -- so when it eventually starts breaking more decisively, it should have fuel to run for a while.  Until then, all we can do is take it day by day (which has worked pretty darn well all month) -- and try to shift intermediate footing if and when appropriate.  Trade safe.

SPX and US Dollar: Charts Lead the News Again

There's been no material change in the counts from yesterday, so I'm going to keep the update short and sweet.  Yesterday's update anticipated that the market was likely beginning a relief rally to the 50 or 62% retracement level.  This count remains valid, although sustained trade above the 62% retrace will call it into question and suggest that something more bullish may be afoot.

No change from yesterday:

Last night, while ES was still deeply in the red, I posted my interpretation of the short-term counts over in the forums (charts reprinted below).  Based on the futures action this morning, the counts I posted last night appear to have been the correct interpretation, and yesterday's rally was wave 1 of C (or possibly the start of something more bullish):

Here's the down-to-the-minute breakdown, for those of you following along at home:

The SPX daily chart below discusses two key zones for bulls and bears on an intermediate time frame.

A chart which I'd like to call attention to is the US Dollar, which recently hit its first target (which I published in mid-April).  The chart explains why I'm calling attention to it: There are two counts shown on the chart, and the less-bullish of the two could be finishing up right now.  Therefore, caution is warranted for those considering dollar longs, at least until the market declares that it's intending to follow the more bullish count. 

A funny thing happened after I finished this chart, too:  Europe announced it was going to save itself (I know: again!), and the Euro launched a huge rally against the dollar.  However, I think we need to be very careful about discounting that notion, because I had this chart done well before that announcement was made...

The more bullish count sees a correction, followed by more upside, but the implications for the less-bullish count are that the dollar rally is over on an intermediate basis.  We'll have to see how it develops from here, but the first target has been captured, concurrent with the potential conclusion of the wave structure.  I have been bullish on the dollar non-stop since September 2011 -- but I would now consider my stance as neutral on the dollar as of this moment. 

In conclusion, the bearish intermediate count remains preferred, but as discussed all month, unless and until the bears can reclaim some key levels, I remain fully cautious and on alert to the possibility of bulls pulling out a last-minute upset.  The bullish alternate count I published recently has not been invalidated -- and this "Save Europe" news announcement, coming right where it has relative to the charts (which are at a potential pivot point), is hard to ignore.  The charts are still at a point where things could go either way, and as long as the market stays range bound, there are simply no clear answers.  Trade safe.