SPX Update: Intermediate Buy Signal Triggered

Yesterday's update expected further upside, which the market provided, though it spent most of the session moving sideways.  Of note, more of my intermediate indicators have shifted to buy signals.  The Dow Jones Industrials Bullish Percent Index (BPINDU) shown below has now given an intermediate buy signal, and we can see from the chart that these are generally pretty solid.

I have been marginally in favor of a bullish intermediate outcome for some time, and, given what's occurring in the indicators, I'm close to shifting to a more bullish footing -- but I'm going to give the market a couple more sessions to prove itself here.  A lot can happen in a day or two in this crazy central-bank-driven market, so I'd like to see these intermediate indicators firm-up just a bit before getting too far ahead of the price action.  With these types of buy signals, if they're going to fail, they generally fail almost immediately.

Both the bull and bear count remain pointed at higher prices before a meaningful top, though there are several paths the market may take to get there.  Below is an hourly chart of the S&P 500 (SPX).

I've shifted my preference on the short-term count back to my original read (my first read is right more often than not), which was that the 1377 swing low marked the bottom of wave (iv) of (1).  The market always reserves the right to force me to adjust it again, depending on how the next few sessions develop (some of this stuff is sooooo much easier in real-time, as the market can knock certain options off the table right at the open).  The next mid-term target of 1445-55 is unchanged, though the intermediate target has been adjusted higher. 

Note the potential of the black alternate expanded flat:  sustained trade below 1400 would suggest a target of 1379-85.

Finally, the bearish intermediate count is still viable.  There are several factors still keeping this count on the table for the time being.  The next upside target for this count is 1426, which is close-by -- so that would be an interesting target for bears to try and kill the fresh buy signal. (continued, next page)

SPX Update: Near-term Rally Likely to Continue

Last update expected the correction to continue over the near-term (though I published no official target for a bottom), and also noted that the rally to that point appeared impulsive, suggesting that the next-larger-degree trend was still up.  Yesterday, the S&P 500 (SPX) found a bottom at 1385 and put in a very impressive bullish reversal.

On one of yesterday's charts, I included a very specific annotation: "Trade below 1391 that holds above 1377 and subsequently breaks above 1409 is likely to lead to a relentless rally for several sessions."  This is exactly what happened yesterday -- so the up-trend is thus expected to continue over the near-term.  The market has now allowed me to calculate some new, additional upside target levels to (hopefully) tack on to the 30+ points we captured on Thanksgiving week.

From a longer-term perspective, I still believe the bulls have a slight edge, but there's yet no key markers to eliminate the bearish wave count, so we'll continue to track its progress and expectations for the time being.  Bears should take note of the strength and speed of this rally, which is eclipsing the last decline, and indicates that bulls may have more firepower in reserve than bears do.  What's really nice is that both the bull and bear long-term counts are again aligned over the near-term, which is always helpful for trades utilizing shorter time-frames.

First up is the daily chart of the SPX, which notes a few key trendlines, and shows that the long-term uptrend since 2009 still remains intact (indicated by the blue trendline, which goes back to the 2009 lows).  The lower red trendline is now a three-point validated trendline, and thus likely the key support for bears to break in order to take control of the long-term.

Next up is the bullish wave count, along with the next-tier targets for that count.  It appears the 1445-1455 target zone has become reasonably good probability. (continued, next page)

SPX and NDX: Intermediate Signals Remain Mixed

Monday's update noted that the charts indicated that at least a minor top was probable, and so far Friday's print high of 1409.15 has held for two sessions.  The questions still abound about the intermediate term, however.  In this article, I'm going to cover a few things to watch going forward.

The first chart I'd like to call attention to is the Dow Jones Industrials Bullish Percent Index (BPINDU), which has yet to relinquish its intermediate sell signal.

 
Next is an attempt to decipher the Nasdaq 100 (NDX) long-term chart.  Note that daily MACD has now crossed over onto a buy signal (this is true on several other indices as well, including SPX), and is rising from an oversold position.  Also of note, it is difficult to count the rally since 2009 as a complete wave structure, which suggests at least one more wave up is due before a long-term top.

The question this chart poses is whether the current decline is part of a complex fourth wave correction (black) or has now marked a complete intermediate low (gray).  It is, of course, possible that the 2012 print high marks the end of the line for the long-term, but that simply doesn't reconcile as well -- though the trend line breaks are of concern to the bull case.  Note the nice three-point validated green trend line that's formed, indicating that it's likely important for bulls going forward.

For the moment, I remain long-term neutral on equities, since (as the charts above hint at in a "tip-of-the-iceberg" sort of way -- there are a lot more charts I'm watching and not publishing), there are still too many mixed messages out there to gain a clear read.  Accordingly, I've decided to split the S&P 500 (SPX) charts into a bull chart and a bear chart (which makes my job a little more work, but should make the charts easier to follow for readers).  Each chart notes some key levels, signals to watch, and projected outcomes.

First up is the bull chart: (continued, next page)

SPX Update: Looking a Step beyond Global Uncertainty

Humans hate uncertainty.  We want guarantees, we want warranties, and we want insurance policies.  We want to know the future, and we want promises (preferably in writing) which assure us of that future.  And yet, what else is life but a constant, ever-shifting drama of uncertainty?  The irony behind our desire for certainty and security is that the very tension of uncertainty is the same psychological force that so often drives our greatest gains in personal, and societal, growth.

Our extreme discomfort with uncertainty pushes us to invent, to learn, to grow, and to try and expand our understandings.  It pushes us to become better people; to become more than we are today.   

Global uncertainty can make the stock market seem like it should be an unpopular place -- and yet, always bumping against that global psychology and in opposition to it, there is personal uncertainty that makes the market appealing.  Why do people invest in stocks?  There simply is no other reason to invest, except the quest for financial security and expansion -- which is really just the quest to leave uncertainty behind.

Of course, we can no more eliminate uncertainty than we can become physically immortal; uncertainty is an intrinsic part of life (and of the universe itself, even down to the quantum level).  Despite the obviousness of that fact, the majority of us spend our lives fearing (and often running from) the uncertainty of the unknown, in a perpetual state of low-grade anxiety.  Thoreau described this perfectly when he said: "Most men lead lives of quiet desperation."

I believe understanding this psychology is a key to understanding the market.  So often, people look at the seemingly ever-deteriorating world and say, "How can anyone buy stocks right now, with so much global uncertainty?"  The problem is, this view only accounts for half the total psychology of uncertainty.

The traditional market wisdom says people buy and sell based on fear and greed.  That's true on a simplistic level -- but I believe that if one looks a bit deeper, one finds that both fear and greed (in this case) stem from the exact same psychological source: the quest to overcome uncertainty and gain more security (even for people who don't seem to "need" more security -- we're rarely satisfied at a plateau, and more security for some can equate to additional wealth/power).  So we're fearful when we're running from it, and we're greedy when we're chasing it -- but it all ultimately traces back to the same base desire.

This is why even when the world looks bleak and "everyone" is fearful, people are still buying stocks:  at that moment, their desire to gain personal certainty/security is greater than their fear of global uncertainty.

This is one reason I think it's a mistake to look myopically at global uncertainty when deciding whether to buy or sell for the long-term.  The fact is: there's always something going wrong with the world.  And if that's all there was to consider in the psychology, then we'd do nothing but sell stocks short.  Don't forget to consider the other side of that equation.

Speaking of uncertainty, the market is still in a position that leaves the intermediate-term unclear.  Last update expected higher prices, though the S&P 500 (SPX) exceeded the upper edge of my target zone by a few points.  Several of my intermediate indicators have now switched to buy signals, but others still remain on intermediate sells. 

There are some indications that at least a minor top is due, but this rally has shown a lot more legs than virtually anyone expected, and that always leads me to believe that front-running is a bad idea for inexperienced traders.  The approach I usually take at such times is to make a few quick stabs at low-risk entry zones, but with very tight stops.  If I get stopped out, I have limited my risk -- but once I catch the turn (assuming I protect profits properly afterwards), it almost always makes up for the small losses I've taken along the way.    

Disclaimer:  The above is not trading advice, and may or may not work for you.  Consult your broker, your accountant, your lawyer, and your know-it-all in-law (the one who was driving you nuts over Thanksgiving) before doing anything at all, ever.  Ask your doctor if you're healthy enough for trading.  Side effects include high blood pressure, blurred vision, nail-biting, intermittent feelings of hopelessness and inadequacy, and the nagging sensation that you left the stove on.

It's worth noting that the rally has recovered 50% of the two-month-long decline from 1474 in only five sessions, so I'm giving a slight edge to the bulls here for intermediate-term odds.  However, as mentioned, neither the bull nor bear intermediate case can be made with fervor yet -- so the chart below details both options, and notes the key invalidation levels.  Sustained trade beneath 1365 would favor a retest or besting of the 1343 swing low, and a break of that swing low would almost certainly be huge trouble for bulls. 

Below is a bit more detail on the bull case.  The decline counts very well as two three-wave corrections lower.

The Philadelphia Bank Index (BKX) has also overlapped it first important upside level, but not its key intermediate upside level yet.  Note that there is a lot of potential energy coiled in the present pattern. (continued, next page)

SPX Update and a Little Bull/Bear Thanksgiving Humor

No material change since yesterday's outlook, though I have outlined the two most likely short-term paths from here.  Odds are good that at least a minor top is nearby, but it appears reasonably likely we'll see slightly higher prices first.  The chart below shows that as long as bulls can hold above 1382, they have a good shot at moving the S&P 500 (SPX) into the mid-to-high 1390's. 

The SPX hourly chart notes that both bull and bear intermediate possibilities remain alive.  Worth noting: virtually none of my intermediate indicators have given buy signals yet and the intermediate trend is still technically "down."  The preferred count sees a correction beginning in the next few sessions, then (most likely) another leg up. (continued, next page)

Monday's Targets Reached; Will Bulls Hog the Whole Turkey?

I admit the article title is a weak attempt toward being cute by invoking the Thanksgiving holiday -- and I realize I'm mixing metaphors with "bulls" "hog" and "turkey."  This is making me hungry (though when I really want to eat bull, I just turn on the TV during a Bernanke speech).  Anyway, I'll try to do better on a Thanksgiving-related title tomorrow. 

Yesterday's update expected a rally, with a first target of 1378-1390 SPX.  The S&P 500 rallied with furor to 1386.87, and closed at the session highs.  The big question now is whether this is simply a bull trap, or a more meaningful turn.  Later in this update, I'll cover some of the key upside levels for bulls to reclaim.

Monday showed strong internals, and that suggests this rally will be more than a one-day wonder.  In fact, the strength seen yesterday is often associated with significant bottoms, as shown on the chart below:

 
My first upside targets were all reached, and the wave could count as complete, but it's entirely possible this leg has further to run.

Given the five-wave impulsive nature of the rally and the strength of market internals, the odds presently suggest that more upside will follow after the first correction.  As noted in yesterday's update, the market reached an inflection point on Friday -- though of course, nothing significant had developed as of the time of publication.  But now we can see that bulls have responded to that inflection point with fury, and this leaves open the possibility that an intermediate low has formed, though presently the intermediate trend should still be considered "down."  The chart below details the near-term path for the bull prospect, as well as the bearish prospect, and notes the key levels for bulls to reclaim.  Sustained trade below 1360 will favor the bears.  (continued, next page)

SPX, US Dollar, Gold: Charts Point to at Least a Near-Term Rally

Last update noted that the market was in a dangerous position and oversold, but that there were some indications that a fourth-wave relief rally was due.  Bulls managed to find support where they needed to, and the charts have now solidified the view that at least a near-term rally is likely to develop in equities.  Also of note, there are QE-Infinity liquidity injections coming on Monday and Tuesday which will total about $23 billion, and which should help put a bid under equities.

We should always assume the trend remains the same until proven otherwise -- and recently the intermediate trend, at least, has been down.  I continue to believe this is a dangerous market for bulls as long as it hangs around beneath the key price levels, but recognizing that danger is not the same as being completely sold on a long-term bearish outcome for equities -- and the fact is, I'm not yet sold on the long-term bear case.  That said, until some key levels are reclaimed, there's no real reason to be intermediate or long-term bullish either.  I've been driving myself to distraction trying to interpret this market's long-term intentions, and the bottom line is:  there simply isn't enough information yet to form a well-reasoned long-term stance.  So, for the moment, I've decided there's enough ambiguity in the charts that the only rational long-term stance is equities neutral.

Something purely anecdotal that bothers me on a contrarian level:  I swear I've seen at least 10 articles recently which are predicting an imminent market crash.  I know it's anecdotal, but that seems like too much rabid bearishness.  One of the basic rules of the market is that the majority are usually on the wrong side of the trade.

Anyway, let's discuss a couple things I'm watching to provide clues which should help tilt the playing field in one or the other direction.

One of the key markets that has yet to tip its hand is the US Dollar.  On July 19, I noted that caution was warranted for dollar longs, and even shifted my stance on the dollar from long-term dollar bullish to long-term neutral... and the dollar dropped like a rock immediately afterwards.  Then on September 20, I noted it could find a bottom in that zone and wrote that "I've finally started to take quick stabs at long dollar positions again."  It has been rallying ever since.

The dollar has finally reached another key inflection point, and I think risk is shifting again and is now increasing on dollar longs.  If the dollar can go on from here to form a five-wave rally (it needs a fourth wave down and fifth wave up), then that would be an all-clear for dollar bulls (and likely for equities bears).  But presently, the move up from the September bottom is still a three-wave rally, which is now facing resistance, and which may be just about complete.  I have to give a very slight intermediate and long-term edge to dollar bears here, because the larger rally from May 2011 counts better as a corrective wave than an impulse wave -- bulls need it to become impulsive to help confirm my original read that the dollar bottomed its Grand Supercycle wave at the 2008 print low.  In any case, I believe the dollar is a crucial market to watch going forward, since if the dollar heads lower, then equities will be "worth more" as measured in dollars (aka: inflation).

Another unclear market is gold, which has traded in a large range for more than a year.  I've outlined some buy/sell triggers for gold on the chart below, but I should note that the 200 point trigger is quite aggressive -- so I would suggest traders remain cautious of any whipsaws occurring around the trigger point (if and when we get there, of course).

Next is the S&P 500 (SPX) intermediate bearish wave count, with the bull count noted in green.  I'm presently projecting at least a short-term rally to the 1378-1390 zone, but sustained trade above 1403 would be the first warning to bears that the (assumed) rally could grow some legs. (continued, next page)

SPX and RUT: Still a Dangerous Market

Last update, I warned that the odds strongly favored lower prices, and the market has obliged.  Most markets are now below major support levels and the decline has given little sign of abating.  As I've warned for several updates, this is not the type of market to front-run bullishly: this market continues to meet the definition of trying to catch a falling knife.  At this point, I'm waiting for price to actually find some type of bottom before considering holding any intermediate long positions.

The chart below shows that most major markets have now broken their primary uptrends, as well as broken secondary support zones:

The Russell 2000 (RUT) chart emphasizes why the bullish wave counts have now become lower probability.  With the key level breaks that have occurred in RUT, it is all but impossible to count the summer rally as an impulse wave -- which suggests that rally will be fully retraced before the market finds a meaningful bottom.

Accordingly, for the S&P 500 (SPX), I'm going to focus on the bearish wave count until the market can find support and give some signs of a turn.  All indications are that the market is still within a nested third wave decline -- and third waves are not to be trifled with, except by the nimblest traders.  In third wave declines, indicators often reach oversold and stay there, with only minor bounces along the way. (continued, next page)

Treasury Throws a Wrench into QE-Infinity

Tuesday was an interesting day as the market gapped lower, reversed strongly higher, and then retraced most of the rally by the end of the day.  The market remains balanced at a key support zone, and the market is very oversold, so while those conditions could lead to a rally, oversold by itself doesn't mean anything.  As I've noted on several occasions, crashes generally begin when a market is oversold, not when it's overbought.  A lot hinges on what happens next.

I've poured over many charts this week, and I continue to feel this zone is critical for bulls to defend.  Below this level, and there's simply a lot of air.  I'm watching the charts for the market to declare its intentions, but there are two fundamental issues which could compound the technical situation and combine to create a "perfect storm" if support fails:

1.  We are again facing the "fiscal cliff" dilemma.  This was a precursor to the 2011 crash.

2.  Bulls have been banking on roughly $26 billion in QE-Infinity liquidity injections, due to start hitting the Primary Dealer accounts on November 14, to provide fuel for equities.  However, there has been a potential last-minute game-changer for this month.  The Treasury announced on November 13 that it will auction $25 billion in Cash Management bills on, you guessed it, November 14.  That auction will absorb much of the pending QE-Infinity liquidity.

A failure of support here thus has the potential to compound a selling-panic, because bulls may capitulate en masse if it's perceived that Fed cash isn't back-stopping equities as expected.

So this remains a dangerous position for the market, as I warned when SPX 1425 failed, and warned again when SPX 1403 failed.  Bulls who got out then can always get back in if and when the market starts giving more signs of a turn.  A wise old trading adage:  "Better to be out wishing you were in, than in wishing you were out."

A favorite chart of mine recently (below) shows that most markets are sitting right on support zones.  Bulls need to hold these zones, or the market could easily go into free-fall.  Be aware that markets often become very whippy around major support and resistance, as they try to shake traders out and/or get them positioned wrong.

The S&P 500 (SPX) daily chart is shown below, and little here has changed from last update. 

 
I also want to again note the Nasdaq Composite long-term chart.  Interesting to observe how the market was firmly rejected at the top of the base channel, which was the resistance level I discussed throughout August and September. 

Especially given recent word of today's Treasury auction, I can't overemphasize the need for caution here, and the chart below outlines the "conservative" bear case if support fails. (continued, next page)

How Will Equities React When QE-Infinity Liquidity Hits This Week?

Liquidity is the main driver of equities prices, since excess liquidity usually finds its way into assets, while a paucity of liquidity usually necessitates their sale.  The QE-Infinity liquidity will start hitting the market this week.  The first MBS purchases are scheduled to settle on November 14, so now we'll finally see how this will impact the market.  As noted on Friday, several markets are hovering near long-term support levels, but this zone is a key inflection point, and breakdowns of support here could lead the market into a rapid drop.

The chart below outlines several markets, and the bottom line is bulls need to make a "last stand" here or risk a panic sell-off.

The S&P 500 (SPX) chart below notes the potential air pocket beneath this price zone.  This results from the overlapping summer price range -- markets can race rapidly through such ranges, so a failure of support here could drop SPX quickly into the 1320's.

So... is there any reason for bulls to have any hope here?  This is a dangerous position for the market, so while I'm not encouraging front-running, there are a few signals that bulls could capitalize on, which I'll outline below.  It's a case of potential energy, but it's up to bulls to grab the ball and run with it.

In addition to this price support zone, there are a several reasons for bulls to feel all is not yet lost.  The first is the fact that, as noted, the QE-Infinity liquidity begins reaching the Primary Dealer accounts this week, and that usually translates into an inflationary reaction (equities up; dollar down).  Notably, the potential does exist for a complete (or nearly complete) corrective fractal from the 1474 print high (noted below as the double-zigzag).

Also interesting to note the US dollar seems to be forming a rising wedge, which is usually a bearish pattern: (continued, next page)

Bears Close-in on Claiming the Market for the Long-Term

Thursday's decline captured the target of 20 SPX points from the bearish sell trigger outlined on Wednesday (1403 to 1383).  In fact, all the bearish sell triggers I've outlined since the 1474 print high have now been captured.  The failure of support at 1403 caused significant technical damage to the market, but in this update we're going to examine both the remaining bullish potential and bearish potentials in detail.

The market has reached another inflection point, and further downside from here could spell long-term disaster for bulls.  The odds that the market has seen a major trend change at the 1474 high are increasing daily, and the chart below shows why this zone is important.

Most major markets have broken the long-term uptrends from the October 2011 lows, but are now reaching possible support levels concurrently. 

As promised yesterday, here is the intermediate bullish interpretation that remains standing, shown on the S&P 500 (SPX) chart below.  This would make for one heckuva surprise from bulls here.  While this count is still completely viable, I continue to have no intention of front-running this decline except at low-risk, tight stop entries, since the trend is clearly down at the moment (I trade primarily futures, so am rarely subject to huge gaps down as cash traders can be).  Front-running is only for the very nimble now, because of the danger of the bear count (shown later) which suggests a nested third wave decline -- which means it can go days without coming up for air.

If SPX can generate an impulsive (five wave) bounce, we can run with this count as a more significant and "safer" potential play.  Above 1434, and we can start favoring this count.

Honestly, the charts look horrible for bulls right now, and this count is becoming the underdog -- but there are three things which are causing me to continue considering the bullish wave count:

1.  The QE-Infinity liquidity injections, which start on November 14.
2.  The three-wave rally into the 2012 print high on the Dow Jones Industrials (shown later).
3.  Big money sentiment is quite bearish.  This is often bullish.

The bearish interpretation has been steadily gaining traction, and the rough expectations of the bearish count are charted in detail below.  This should probably be considered as the narrow odds-on favorite at this point in time.  There is a nice symmetry to this interpretation. (continued, next page)

Bears Caused Technical Damage on Wednesday

Wednesday's strong sell-off created some potential technical problems for the bulls, particularly in the Dow Jones Industrials (INDU), where the decline overlapped the wave (1)/A high.  I literally ran out of time while charting last night, and I'll simply have to publish what I have now and fill in the blanks in the next update.  It's not helping that I came down with the Martian Death Flu yesterday, and feel severely under the weather.

The first chart we'll look at is INDU, since this is where a potential key price overlap has occurred.  Note the decline has now overlapped the blue wave A high.  I suspect a snap-back rally is close at hand (toward black (2)) -- though this is purely anticipatory, based on the five-wave decline... the bulls need to break above the head and shoulders neckline and the red falling trendline first; until they do, the charts maintain a strong short-term bearish bias.

This chart has a lot of annotations on it, and only outlines the bear count -- I'll outline the remaining intermediate bull potentials for INDU in more detail tomorrow; for now, I've discussed them only on the final chart of the Nasdaq 100.

   
The next chart is the S&P 500 (SPX) bear count, which can't be locked-in yet, but which seems to be gaining traction.  SPX did not overlap its key wave (1)/(w) high yet, so it is still conceivable that this is a fourth wave correction.  Again, this chart only outlines the bear potentials.

The hourly SPX chart has a bit more detail, and notes my preferred short-term path.  This market meets the definition of "trying to catch a falling knife" and it should be strongly noted that trying to anticipate a bottom after a decline like yesterday's is quite difficult and often ill-advised.  Nevertheless, I wanted to share my thoughts and observations on what appears to me to be a reasonable short-term path.  Don't bank on this, though, as the decline could simply continue unabated.

Finally, the Nasdaq 100 (NDX) chart does have a bit more detail on the bullish intermediate potential still in this chart.  The rally from the June lows appears to be a five-wave impulsive form (meaning it is in the direction of the larger trend, though it could be the final wave of that trend).  So far, the decline is still a three-wave form.  This leaves open the option that this is a second wave decline (and INDU/SPX still share this option), which would be allowed to create the price overlap witnessed in INDU.

NDX could provide some key tells going forward if the decline turns into a five-wave structure (noted by the gray (4) and (5)) -- and if that happens, it will suggest the trend has indeed changed for the long-term.

In conclusion, the bears have done some important technical damage in INDU, and the potential we've been discussing over the past couple months for a more bearish outlook now has to be seriously considered.  The bulls could always pull out a last minute stick-save, especially with the QE-Infinity liquidity due to start hitting the market on November 14, but as long as the market hangs around these price levels, it's in a dangerous position for bulls.  Trade safe.

With the Election Over, Will the Market Break from this Pivot Zone?

The election's finally over, so it appears the country will have at least four more years under the reign of the Most Powerful Man in the World -- I refer, or course, to Fed Chairman Ben Bernanke.  I think there was also a Presidential election.

So what does this mean for the market?  Well, Obama staying in office suggests no radical changes in the guard, which means the market can likely count on QE-Infinity, and the generally inflationary policies of the past few years, to continue.  Barring a massive external deflationary event, this would seem to be bullish for equities over the longer-term.

The market, however, remains caught in a pivot zone and difficult to read.  As I noted last week, there is an excellent chance an intermediate low is forming here, but no key levels have yet been claimed to the upside to build confidence.  Across markets, there is still conflicting information in the charts.

On the S&P 500 (SPX), the decline from the 1474 has a great deal of price overlap, which so far leads me to believe it is corrective -- however, a material breakdown of the green support zone (noted on the daily chart below) could be quite damaging to the market's technical picture.  Unless that happens, though, the most probable view is that the decline is complete or nearly so, and that new swing highs will follow.

The short-term SPX chart is open to a lot of interpretation.  I've noted one potential wave count (which sees a complex 2nd wave correction unfolding) along with some buy and sell triggers.

I'm still watching the Philadelphia Bank Index (BKX) for clues.  So far, the bottom I noted last week as a complete fractal pattern has held, but I would become quite uncomfortable for the bull case if that bottom fails -- especially if the blue wave (1) high is broken. (continued, next page)

No Material Change... and Don't Forget to Vote (or not)!

No real change from yesterday's outlook, with the added info that bulls have thus far held the 1403 level and maintained the hope of a wave (4) bottom.

Accordingly, I'm only going to do a brief update.  The 15-minute SPX chart notes short-term support/resistance, and a bearish sell trigger.  Note the potential head and shoulders which everyone and their uncle's elder roommate is watching.  The fact that so many have noticed it leads me to think that means a lot of bearish front-running, which leads me to think the market heads UP near term.

And the SPX daily chart below, which hasn't really changed in the last couple months:

Trade safe, and don't forget to vote.  Unless you're one of those people that knows absolutely nothing about the real issues facing this country, or what this country stands for in the first place, in which case you should probably just stay home.

(Warning: Rant Alert!)  I think this idea that "everyone should vote" is incredibly stupid -- some people clearly should NOT vote.  My personal preference would be that a passing grade be earned on some basic test in order for an individual to be allowed to register to vote in the first place.  It would consist of simple questions about our government, and if you couldn't answer these questions, you'd have to go the hell home and learn something before being allowed to decide the fate of the free world (or if you're a Chicago voter, instead of going home, you would be sent back to the cemetery from which you were exhumed).

"Well, Pretzel," I can hear you muse, "What types of questions are you talking about?"  Funny you should ask, because I just happen to have a short list of examples floating around in my head.

Example Questions in Order to Vote:

What is the Constitution?
a.  The supreme law of the United States of America.
b.  A "living document" subject to the current whims-du-jour of the very leaders from whom it is intended to protect us in the first place.
c.  A new car from Hyundai.
d.  A sandwich. 

Who said, "You can please some of the people all of the time, and all of the people some of the time, but you can't please all of the people all of the time."?
a.  Abraham Lincoln
b.  Abraham Lincoln, but he actually said "fool" instead of "please."
c.  What do you mean "you can't please all of the people all of the time"?  Why not?!?
d.  And who's Abraham Lincoln?

What form of government is outlined in the Constitution of the United States?
a.  A Republic.
b.  A Democracy.
c.  Wait, if I were smart, I'd realize that this actually helps me answer question #1...
d.  Can I go home now?

SPX, INDU, NDX, NYA: Charts Show Fractured Markets

Last week the market gave several buy signals, but Friday's action aborted some of those signals.  Hourly MACD on the S&P 500 (SPX) flipped to a sell signal, and several markets formed very bearish reversal candles.    

The good news is my short-term target from Wednesday (of 1430-1432) was reached before the market reversed, capturing 20 SPX points of profit.  The bad news is the intermediate-term outlook has been clouded by the strength of Friday's reversal, and bulls will need to reverse the market directly to maintain their hopes.  Trade below 1403 SPX would suspend the potential intermediate turn I talked about in Friday's article.

The chart below outlines the three viable wave potentials from here.  The reality is: at this point, if the market crosses back below 1403, that will tell us more about what this wave structure isn't than about what it is.  As noted, trade below 1403 would invalidate the wave (4) bottom and open up the possibility that this decline could have much further left to run -- though it's difficult at this point to say exactly how much farther.  The old expression "the trend is your friend" would be wise to keep in mind if this happens, as trade beneath 1403 would indicate the intermediate trend is still down.

The wave count discussed on Friday of a fourth wave bottom at 1403 is still the best fit to the entire structure, so if bulls can hold 1403, they give themselves a fighting chance at making new swing highs directly.  Trade above 1423.62 is the first short-term step for bulls to start feeling good again, and trade back above 1434 would be a confidence booster.

On the bearish side of the coin, the SPX trendline chart notes a potentially dangerous pattern for bulls if the market sustains trade beneath the 1395 zone.  Trade into that price zone would also break the long-term uptrend line of the past year.

The Nasdaq 100 (NDX) currently presents one of the more bearish-looking long-term charts out there (below), and muddies the overall outlook. (continued, next page)

SPX Update: Intermediate Low in Place?

In Wednesday's update, I noted that the market had likely put in a bottom at 1403 SPX, and I suggested a rally would begin to unfold.  I also published a short-term rally target of 1430-1432 for the S&P 500 (SPX), and on Thursday, the market came within 1.65 of my target. The bulls have taken the first steps toward validating an intermediate bottom, but there is still some work to do before we can declare the bears out-of-the-running.

My work suggests that an intermediate low is in place, and the market is now headed toward the (first) intermediate target of 1480-1490, but any trade beneath 1403 would invalidate that outlook.  The first step for bulls to gain confidence is to overlap the key 1430.64 price point.  Conversely, over the short-term, sustained trade beneath 1416 could suggest problems for the bull case.

The hourly chart notes the alternate potential of a 2nd wave rally, though I'm only giving that potential 30% odds at the moment.  I'll note the key downside levels going forward.

The 5-minute chart anticipated the rally perfectly, and Friday's market looks destined to hit the 1st-tier 1430-1432 target which was published on Wednesday -- when my blue target box looked a lot more lonely than it does now.  Considerably more upside is possible, and if the high-degree preferred wave count is correct, the market is on its way to 1480-1490 at the minimum. (continued, next page)

SPX Update: This is Still the Bulls' Battle to Lose

Before I get into the market update, my heart goes out to all those impacted by the super-storm on the East Coast.  Those affected are in my thoughts and prayers, and I wish you all the best in recovering.

Despite two days of storm-related market closures, there's been no material change in the outlook since Friday.  It is still anticipated that the market is likely to find a bottom in this zone and head toward 1480 -- though if for some reason it doesn't, then things could get very bearish.  

The S&P 500 (SPX) chart below outlines the preferred path, as well as the short-term (ST) alternate path (which allows the margin-of-error of a marginal new low), and the intermediate-term (IT) alternate path (which allows for a major trend change at 1474).  It's obviously too early to confirm a bottom here, especially since the short-term trend is still down -- so we'll watch how it unfolds going forward.  (continued, next page)

SPX, INDU: Bulls Need to Find Support Soon

I'm going to use an analogy I've used before, because I believe the current market fits:  The market is like a rubber band stretched to its breaking point -- either it will snap back and begin a strong rally over the next few sessions (quite possibly as soon as today's session) or it could break.

As we look at the options, it's important to remember that QE-Infinity hasn't actually started yet.  Some bears are calling QE-Infinity a "failure," and even the mainstream media (who should know better) has been guilty of this.  The effects of the QE MBS (Mortgage-Backed Securities) purchases won't be seen until the Fed cash actually makes its way into the Primary Dealer accounts -- there was no liquidity flood released when the media announcement happened.  And no liquidity added even once the first purchases were made, as MBS settlements are done on a forward basis.  The first MBS purchases aren't scheduled to settle until November 14, so that's roughly when we'll finally begin seeing the "real" effects of QE-Infinity, which is anticipated to be inflationary (i.e.- rising equities and commodities prices).  

The old adage of "don't fight the Fed" sticks in my mind going forward.

Yesterday's preferred short-term count played perfectly, as the market rallied up to my wave 4 label and reversed immediately to a new low.  So, the short-term count was correct -- but what about the intermediate-term counts? 


The predictive power behind Elliott Wave analysis is underpinned by two key strategies:

1.  Using the available price action to attempt to anticipate the pattern that will unfold going forward.
2.  Understanding the key levels where that anticipated pattern becomes invalidated and mutates into something else.

This is why I usually give both a preferred and alternate count.  The preferred count is "here's what looks most likely, given the price pattern that's currently visible"; the alternate count is the "okay, that fell apart, so this might be unfolding instead."

This task can be quite difficult in certain markets, because some patterns start off looking like a specific high-probability pattern, but then turn into something else entirely.  This happened near the recent peak.  The Dow Industrials (INDU) in particular looked like a nice clean pattern called an "expanded flat," but then went on to mutate into something much more extended.  The upshot of Elliott Wave, even during such predictive failures, is that it does provide clear levels where we can recognize that the first predicted pattern was wrong -- and sometimes the short-term work can still get you a winning trade even when the larger pattern fails.

To stick with the example of INDU, on October 19, I suggested it was due a correction to roughly the 13400 zone -- and also noted that "sustained trade beneath 13398 would open up more bearish intermediate prospects."  Even though the larger pattern failed, Elliott Wave allowed the patient trader to locate a low-risk entry-point, and further allowed the patient and nimble trader to bailout with minimum damage when the trade didn't work (as we know, patience isn't the only skill required of successful traders).  A really nimble trader could even have played the decline on the short-side and made a profit along the way. As an aside, this drives home a big part of what trading is all about: managing risk.

So, here we are in today's market -- trying to put the puzzles pieces together into a "most likely scenario," while at the same time looking for key levels that will suggest the preferred scenario is failing and "something else is going on."  I realize things can get a bit confusing to readers at times, because I'm working on several different time frames, and sometimes the five-minute (or one-minute) chart looks crystal-clear, while the daily or hourly is more of a toss-up, or vice-versa.  As best I can, I try to fit them together into something readers can understand.

And sometimes, it seems like detailing the alternate prospects is a ridiculously-complicated task which will only confuse everyone -- and to some degree this market fits that bill.  During these times, I try to note a few key levels where it's time to capitulate or reverse position.

There's been zero change in the INDU preferred count -- in fact, this count performed perfectly yesterday, accurately predicting the pop and drop reversal to within a few points.  The $64,000 question is whether we should anticipate the blue "4?" rally and reversal.  Hopefully, we'll be able to determine whether that's probable as the action unfolds.

The alternate intermediate count that isn't shown is morbidly bearish -- so if the market markedly fails target support, then bulls who didn't heed my Monday warning might want to consider that failure as a second chance at taking a vacation.

For SPX wave counts, I'm only going to focus on the daily chart today, since the questions and potential outcomes are essentially the same as for INDU. (continued, next page)

SPX, NDX, INDU, VIX: Signals Suggest a Bounce is Due

There's not much to add to yesterday's update, so I'll simply let the charts do most of the talking.  The first chart worth noting is the Volatility Index (VIX), also known as the "Fear Index" since it substitutes as a good indicator for investor sentiment (high VIX means investors are fearful; low VIX means complacency).  VIX has closed outside its upper Bollinger band the last two days in a row .  This is often the precursor to at least a short-term rally in equities.

Next is the S&P 500 (SPX) daily chart.  As yet, still no material change here. 

The SPX hourly chart is showing some early bullish signals in RSI and MACD.

The Dow Jones Industrials (INDU) probably still needs at least one more fourth wave rally and fifth wave decline -- though yesterday's little rally and decline could theoretically qualify, which would mean the decline is complete.  The strength of any forthcoming rally should narrow the options. (continued, next page)

SPX, INDU, NYA, RUT: Market Wants a Debate

In keeping with the spirit of election season, the bears have decided it's time to open a debate.

On Tuesday, bears broke the market down through some key trendlines in several markets.  The analytical challenge I'm running into remains the same as mentioned last update: there are a lot of mixed messages being conveyed by different markets, and it's difficult to find a pattern that holds across all of them.

The one market that has largely convinced me that higher prices are still ultimately coming is the Dow Jones Industrial Average (INDU).  I can't get past the three-wave rally into the new high, which suggests the final high isn't in yet -- and this is a pattern I've learned to never ignore.  It doesn't work 100% of the time -- nothing does -- but it does work the vast majority of the time.  The main question has become how deep the correction will run, and as I suggested on Monday, wise bulls probably wanted to get out of the way once that lower red trendline broke.

I can now count five clean waves down into the recent low.  Where I'm most unsure is whether those five waves form wave 3 of c, or ALL OF wave c.  On the chart below, I've drawn-in the potential for wave 3 of c, with a fourth and fifth wave still to come -- but there really isn't a clear answer. 

An interesting fractal study I want to share is General Electric's (GE) pattern of March-June 2012 in comparison to the current S&P 500 (SPX).

SPX below.  The beginning of the structure looks remarkably similar to GE, but they diverged recently, as SPX has materially exceeded the lower support line -- and has done so on a confirming MACD reading.  This is the signature of a third wave decline (c-waves are third waves), the question for SPX is the same as INDU -- whether this is ALL OF (c) or whether there is a correction to come, followed by new lows.

The simple SPX chart below still outlines the key intermediate pivots (continued, next page).

SPX, BKX, RUT, VIX, TRAN, NYA, IBM: Market Refuses to Leave the Intermediate Chop Zone

Last update expected that the market was due to turn lower for at least a minor top, and turn lower it did -- however it moved a bit lower than expected, and this has now thrown the intermediate outlook back into the ambiguous zone.  This weekend, I've charted more markets than I can count, and wrestled with what to present to readers to try and keep the whole thing reasonably understandable.  I finally decided to boil it all down to a simple chart of the S&P 500 (SPX) to avoid confusion.  Don't worry, there are plenty more charts coming in this update, but I think it's easiest for readers to focus on the simple message in this chart:

The bottom line is: this is still the intermediate "chop zone" and until the market break down or breaks out, there are multiple options still open -- and the problem I've been running into this weekend is there are simply a lot of mixed messages being thrown off by different markets.  I'm going to present a few charts that convey the case for each side -- and maybe the best assumption from this data is that the market may just continue chopping around for a bit longer.

If it does cleanly break through this zone, the losing side might just want to get out of the way until things clarify again.

One of the more bullish charts I studied is the Philadelphia Bank Index (BKX), which, at the moment, sure looks like a fourth wave triangle -- and it's right where you'd expect to find one.  Sustained trade beneath the (C) wave low would open up more bearish prospects.

Also still looking bullish is the NYSE Composite (NYA) (continued, next page)

SPX and INDU: Key Levels and Next Targets

The intermediate outlook is materially unchanged and continues its bullish bias.  The short-term outlook has become slightly ambiguous, but suggests a minor top may be near.  It is currently expected that this will only be a short-term top, and that new swing highs will follow.

I've loaded up the hourly chart of the S&P 500 (SPX -- shown below) with virtually all the relevant info, so I won't retype every data point here.  The bottom line is that a correction lower could be due as soon as today's session, though a bit more upside would be within the margin of error (the second chart may help with this).  In either case, if the next decline is indeed the expected small second wave lower (blue (ii)), then ideally it would be a bit scary and cause a fair number of traders to turn bearish.  Conversely, if it does not correct as deeply as shown, that would actually stretch the wave (iii) targets even higher.

I'm viewing 1438-1439 as the key bearish pivot, and sustained trade beneath that level would dictate that more bearish intermediate outlooks be considered.  Ideally, if this is to remain a correction to an uptrend, this wave should not break the lower black trend line that connects blue (2) and blue (4) -- so that occurrence would act as a second subsequent warning if 1438-1439 were to be broken.  Beyond that, trade beneath 1425 would put the bears in control.  The chart annotations pretty well detail everything I'm watching, and my expectations, at the moment.

The 5-minute SPX chart looks at the short-term trend-channel, which is still intact.  The short-term trend remains up as long as it holds, but a breakdown here would be the first warning that a correction was unfolding.  The chart also notes the potential of a small head and shoulders top, along with the classic measured target if prices were to break down through the dashed red neckline.

The Dow Jones Industrials (INDU) is in essentially the same position as SPX, and it's also unclear here if there's a bit more upside due before the correction.  Note that both hourly RSI (SPX chart above) and 30-minute RSI (INDU below) are showing bearish divergences.  (continued, next page...)

SPX, INDU, NYA, NDX: Bears on the Run

For several weeks, I have projected that after this correction completed, the market would make new swing highs for the intermediate term.  In the most recent update, I discussed two short-term possibilities: a short-term turn near 1444-48 SPX, or a run directly to new swing highs.  I listed 1453 as the key level to differentiate one outcome from the other, and the market both sailed through that level and also closed above it, which now causes me to favor the view that the bottom is in at 1425.  It's simply going to take a break of that level for bears to get anything going at this point. 

It's too early to say for sure and declare bulls the long-term winners, but there are some signs that this rally has the potential to pull the indices at least another 10% higher.  The first case in point is the NYSE Composite Index (NYA), which, as I've been warning since September, still looks quite bullish.  Bulls have now held the breakout level on two back-tests, and the last test resulted in a very strong bounce -- so unless that level fails, it's simply wishful thinking to view this chart as bearish in any way.

The next case in point is the Nasdaq 100 (NDX).  On September 20, I warned that NDX appeared to have formed a complete five-wave rally, which meant it was likely to correct lower.  The problem now for bears is that if the blue (2)/b high is broken, that will strongly suggest that the recent decline was a second wave lower.  This would mean that the current rally is going to be a Minor Third Wave up -- which is every bulls' dream.  Third waves are usually the longest and strongest wave, since they represent a "point of recognition" for the masses.

Again, it's too early to be certain here, but a third wave up would largely be confirmed by a break of the (2)/b high at 2846, and could put the bears on ice for months. 

On the S&P 500 (SPX), while my short-term outlook stayed bearish until 1425, my preferred intermediate outlook has remained bullish for some time.  The question that now needs to be asked is whether it was "bullish enough" -- the next swing high may mark ALL OF wave (5), or only wave (i) of (5), with (ii)-down, (iii)-up, (iv)-down, and (v)-up still to come. 

Of course, I'm getting way ahead of the game here, and the first step, of course, is for those new swing highs to occur... but it looks increasingly probable that the projected turn at 1425 was a meaningful one.  Obviously, closes back beneath that level would create problems for the bull case (continued, next page...)