Is Cyprus the Bad News We Were Watching For?

In Friday's update, I noted the charts were suggesting a turn was approaching, and I speculated that there would be some type of "bad news" event hitting the press this week; I went a step further and speculated that the source of the news event might be the FOMC meeting on March 20.  Score one for my interpretation of the charts -- but score zero for my speculation as to the source of the pending bad news (though, to be fair, it remains to be seen how my speculation regarding the Fed will pan out – though, I suspect the events of this weekend may alter their game plan).

As it turns out, the source of bad news seems to have been a tiny country known as Cyprus, which is apparently part of the European Union, and in need of a bailout (act surprised!).  I'm not going to berate myself for failing to include "bad news from Cyprus" in my speculations -- prior to this weekend, if someone had asked me to relay the totality of my personal knowledge regarding Cyprus, I would have said it was "probably some kind of tree."  If pressed, I'd have added, "Or maybe a rap singer and/or the newest car from Hyundai."  

What's unique and frightening about the goings-on here is that the EU has asked Cyprus to levy a tax on the bank accounts of private citizens to help fund the bailout.  Todd Harrison has written an excellent piece discussing all this in more detail (See: Cyprus: Has the Next Phase of the Global Crisis Arrived?). 

There are legitimate concerns this will set off bank runs across the Eurozone.  One thought I would add to this discussion is that it's my belief that -- short of systemic failure, anyway -- European instability is actually bullish for U.S. markets.  This may be counter-intuitive, but if the EU experiences bank runs, it's not as if European investors are going to withdraw all that cash and simply bury it in their backyards.  The cash has to go somewhere.  Ask yourself:  If you were a European investor who felt your money was unsafe in Europe, where would you put it? 

Right or wrong, bubble or not, the U.S. treasury market and blue chip equities are still perceived as "safe havens," especially when seen in contrast with Europe.  So some portion of any massive capital flight out of Europe is almost guaranteed to find its way into U.S. markets.  That means even more liquidity flowing in, on top of the Fed's existing support.  More fuel for the fire would help drive down treasury yields and help drive up equities.  

It's all relative, after all -- and basically, we're still the prettiest ugly kid on the block. 

If you are truly aware of the challenges facing the world, it's logical to have a tendency to be bearish these days.  The danger for bears is it's tempting to view events like this as "confirmation" of a pre-existing bias, which can lead to over-trading one's convictions.  Believe me, my "inner bear" wants to pounce all over these types of events, too. 

Could this be the watershed event that leads to a prolonged bear market?  Sure, anything's possible -- but given how much liquidity is still flowing from the Fed, I think this event is probably simply yet another warning signal of an approaching storm.  I suspect the storm hasn't actually reached us yet... in fact, based on the most probable interpretation of the charts (in my opinion, anyway), it's still some ways away. 

If you're prone toward a bearish bias, just remember to consider both sides of the equation.  Bears tend to look at events like this and think: "Storm coming!  And nobody wants to be the last guy standing on the beach when that hurricane rolls ashore!"  But bulls think differently.  A bull would say, "Sure.  But then, nobody wants to cut short their vacation for a false alarm, either!" 

I covered my views on this psychology fairly well in an article in January -- one of my personal favorites of the articles I’ve written this year.  It's titled A Survival Guide for Bears in a Bull's World.  If you're aware of all the trouble in the world and are thus prone toward an intelligent fundamental bearish bias, I'd highly recommend giving it a quick read.

Let's move on to the charts.  The charts have been hinting that a correction was looming, which led to my speculation on Friday that bad news was forthcoming this week.  To be fair, I was expecting about 6 or 7 more points out of this rally, but it remains to be seen if the market will achieve that or not.  For a wave as large as this rally, a peak that falls 6-7 points shy of targets would be well within the margin of error.  So on the chart below, I have kept Friday's alternate count (of wave 5 complete at 1563.62) unchanged in the labeling, but the odds on that count must be considered at 50% after the overnight futures sell-off.

 

Since the two counts are being viewed as equals, the chart below shows how the wave could be viewed as entirely complete.  We'll simply have to see how the cash market responds today.  In any case, hopefully my warnings of the past several days have helped readers protect themselves and lock-in profits.

In conclusion, I wrote on Friday that I was on “high alert” for a turn, so the bad news out of Cyprus isn't entirely unexpected.  The news fits the charts, which continue to suggest bears may get a solid, scary correction here.  It's still too early to determine much in the way of probable targets, or even to sort out if this is the smaller degree fourth wave -- but if we've indeed seen the completion of the fifth wave in its entirely, then the high 1400's would be entirely reasonable.  Ultimately, however, I presently do not believe this will mark a long-term peak, though the market always reserves the right to change my mind.  In any case, after we see how the cash market responds, I may be able to generate some preliminary near-term targets for the next update.  Trade safe. 

Reprinted by permission, Copyright 2013, Minyanville Media Inc.

Will the Fed Kick-off an Equities Correction Next Week?

While it seems like this rally leg will never end, it is, of course, guaranteed that it will end at some point.  I have an interesting theory about where that point may be.

Something that's always fascinated me over the years is the way the price charts often lead the news.  I can't tell you how many times I've looked at a chart and projected a strong move would follow, only to have a news announcement hit later that day and seemingly "drive" price right to my targets.  So my theory starts with a question:  What could possibly slow this wave down? 

Well, the obvious event on the horizon is the FOMC announcement that hits on March 20.  When the most recent Fed minutes were released, there was a big show made of head-scratching about whether or not to continue QE-Infinity.  I opined at the time that I felt it was reasonably likely the Fed was simply trying to scare speculators:

The big question in my mind is whether this is "real" dissention, or simply the flip side of a coin we've seen from this Fed before.  For the past several years, when we've been in-between QE programs, the public-relations strategy was clearly to "keep hope alive" for new QE programs.  Of course we don't need to talk hope anymore, because now we have QE-Infinity.

As a result, the present problem faced by the Fed is no longer "how do we keep hope alive?"  Instead, the problem they face is how to gain control of the monster they've created, and how to put the brakes on rampant speculation.  We've travelled 180 degrees, from "Let's talk up QE and keep the market hopeful," to: "Let's talk down QE and keep the market grounded."   

I wonder if this isn't simply the Fed playing the game of "verbal monetary policy tightening" the way they used to play the same game in reverse, when Bernanke would run around making statements such as, "My finger is on the QE button!"

The Fed knows they're playing a dangerous game by pumping this much liquidity into the market.  While they're getting the best of both worlds right now (a stock rally and some economic growth, without rampant speculation in commodities), it's a delicate equation, and they cannot afford for it to flip the other direction.  If speculators begin driving up commodity prices again, that will raise the costs of doing business and further harm consumers.  This would dampen (and possibly crush) the little bit of economic benefit we're currently getting from Bernanke's tireless printing press.

So I suspect that at the March 20 press conference, the Fed will put on their Frowny Faces and make another show of heartfelt-moral-conscience-brow-furrowing about QE3, as if they were lying awake at night wracked with guilt and tears.  In the end, though, they will "reluctantly" continue it... "for now."  But I think they're going to have to keep scaring us along the way, to keep commodity traders from getting too bold and killing their manufactured recovery.

Of course, I can't guarantee anything, as this is simply raw speculation -- but when we look at the hourly chart (below), we can see that the week of the FOMC meeting coincides nicely with the wave structure and the potential peak in blue wave 5.

For the past couple weeks, my expectation has been that we are now in the fifth (and final) wave of this particular wave sequence, and yesterday the market reached the first of my target zones for this wave (1558-1565).  When targets are reached, it's not necessary that the market reverse immediately (or even that it reverse at all), but it does become a zone of higher probability for a reversal.  With that, I must note that this first zone is not the "final" target for the entire wave, but only the target for red wave 3 of blue wave 5 -- the final target is 1570-1580.  The market is only a few points away from that zone now, and though it has shown no signs of reversal yet, I would keep a very close watch on this rally heading forward.  Note the black alternate count, because there are enough squiggles for wave 5 to be entirely complete.

(If you're new to Elliott Wave Theory and all those numbers on the chart make little sense, I have written a primer article on the subject which will aid in understanding what these types of charts actually mean.)

In conclusion, there's no sign of a turn yet, and the trend lines are all intact, which means the trend at every level is still pointed upwards.  Ideally, I would still like to see a bit more in the way of higher prices from blue wave 5.  Nevertheless, given that the wave structure seems nearly complete, and there is the possibility of more negative jawboning from the Fed next week, it's hard to recommend anything other than a high degree of caution here.  I think I'm probably a bit early with these warnings, but I remain on high alert for a pending turn.  I should add (for new readers) that at this point, I am not expecting this will be the final end of this central-bank manufactured bull market -- but I am on the lookout for a good scary correction starting in the near future.  Trade safe.

Reprinted by permission, Copyright 2013, Minyanville Media Inc.

Nine Straight Advances, Can Bulls Make It Ten?

"We cannot put off living until we are ready. The most salient characteristic of life is its coerciveness: it is always urgent, 'here and now,' without any possible postponement. Life is fired at us point-blank."  --  Jose Ortega y Gasset

Yesterday, the Dow beat the odds and posted its ninth straight advance, the first time this has happened in nearly 17 years.  Although that makes for a great headline, the raw statistic by itself is slightly misleading, because yesterday the Dow did not actually beat the intraday high of March 12 -- it simply closed higher than it opened.  In any case, November 1996 was the last occurrence of nine consecutive green closes (that particular streak then extended to ten advances).

Since 1973, the Dow has only put together nine or more straight advances on six prior occasions, so this is an extremely rare event. The record is thirteen straight advances, back in January, 1987 (an interesting year for equities!).

Before I begin presenting the charts: if you're new to technical analysis (and to Elliott Wave Theory in particular) and thus don't believe it could possibly have any relevance for projecting the market's future, then please take a moment to read this primer article wherein I briefly outline a few of the tangible ways it relates to the markets.  And while I'm discussing other articles worth reading: if you've not yet read Todd Harrison's 12 Cognitive Biases That Endanger Investors, I highly recommend it not only for trading, but for life in general.  It's one of the best trading articles I've read in years.

Let's move on to the charts, since, as they say, a picture is worth a thousand words (I've always wondered though: if you were to take a photograph of one word, is it still worth a thousand words?).  Below is the monthly chart of the Dow, which is loaded with annotations and notes, and discusses several relevant levels and patterns.

The main thing I wanted to again call attention to on this chart is the pattern which completed in 1995.  At the time, that pattern looked pretty convincing as a possible end to the bull market.  But as I've warned previously, these types of patterns can either be ending patterns, or compression patterns which lead to a sustained bull move.  My impression for the last several months has been that we're seeing the latter unfold. More and more, the current market is reinforcing that view, particularly on the Dow.
 

The 10-minute chart of the S&P 500 (SPX) contains some new details regarding the near-term.  I've studied the short-term structure on the one-minute charts, and frankly, the pattern is a complete mess and very hard to decipher.  While this is a market that has paid the trend-followers, it's also the type of market that can lull bulls into a deeply-complacent slumber.  My suggestion is to stay very alert at times like this, since the wave structure appears to be closing in on completion -- but at the same time, avoid the temptation to get too far ahead of the market.  In other words, respect the wave counts as potential warnings, but honor the basics like trend lines and support/resistance levels. 

Every system runs into limitations, so when the wave structure gets this fuzzy, it's important not to give back profits chasing low-probability plays.  Sometimes doing nothing is the most productive thing we can do.  If one feels they can get a good risk/reward proposition even when things are unclear, then one must limit their risk accordingly for the equation to work.  For example, sometimes when I'm trading euro/usd, I'll play a breakout to see if momentum will carry the market up and away from a very tight stop -- but I won't let that play turn into a long-term position.  If I get stopped for a small loss, then I accept that and wait for the next opportunity. 

If the market makes a new high directly, it's a bit more probable that we're still in red wave 3, but this is where I would tighten my stops on longs, since the potential exists that the market is moving to wrap up the larger blue wave 5.

Dow Reaches Eight Straight Up Days: Here's What History Suggests Will Follow

On Tuesday, the Dow Jones Industrial Average (INDU) managed its eighth consecutive advancing session (though just barely), which is a fairly rare event.  In fact, since 2000, there have only been eleven prior instances when the Dow advanced for at least seven consecutive days.  Of those, it made it to an eighth day on only five occasions.  If my historical data feed is correct, it has not managed nine consecutive advances even once since 2000.

There is another interesting fact that goes with this:  not one of these win streaks marked "the end," and a major top.  Some of them were followed by steep corrections, but in every single instance, the corrections were bought and ultimately resulted in a new high.  In a few instances, seven consecutive advances did occur in close price proximity to an intermediate top -- the most recent example being almost exactly a year ago.  The INDU rallied seven straight days into mid-March of 2012, then sold off briefly before finally reaching a new high a month and a half later.  From there, it embarked on a steep 10% correction. 

However, on the chart below we can also see that some of these win streaks were followed by shallow corrections which were extremely short-lived.

The bottom line is that a near-term correction would be quite reasonable, but odds are very good that correction will be bought.  On the S&P 500 (SPX) chart which follows, I'll outline some of the next key levels to watch.

For the near-term, I'm watching a couple favored possibilities.  My interpretation is that yesterday's decline was impulsive, which leads me to believe the market is now in a corrective wave.  Presently, I'm inclined to believe this won't be a huge correction, and that new highs will follow -- however, there are now enough waves visible that we have to at least consider the possibility that this structure is already a completed five-wave form (black alternate count below).  1525 is the first important bearish overlap level, so there's about 10 points of no-man's land, wherein the market's intentions would be vague.  That no-man's land lies south of 1535, which is the lower edge of the probable target zone, and reaches down to 1525, which is where we'll begin suspecting an even deeper correction is underway. 

Conversely, sustained trade above 1557 would suggest that red wave 3 is still unfolding. 

 



The hourly chart notes that  red 3 may have come up a little short of the target zone -- though if looked at from a bullish devil's advocate perspective, there is really nothing for bulls to get too concerned about until the red trend line breaks.  Please continue to keep the caveat of March 11 in mind, especially since there may be five waves completing at multiple wave degrees. 

Updates to the Long-term Market Outlook

(Sorry for the late update, had an important phone call as I was wrapping things up.  Incidentally, if you right-click on the charts and select "open in new window," you can bring them up at full-size.)

Well, it's that time of the month again, where I get really cranky and a bit bloated and... wait!  I'm thinking of something else.  Also, I'm a guy.  What I meant to say was it's been about a month since I updated the long-term charts, and there has been at least one significant development since then. Last time we looked at the long-term, there was still potential for two versions of the bearish count.  Since then, the alternate version of that count has been eliminated, so that allows me to narrow the long-term outlook down to two high probability potentials.

Let's look at the bear version first, since a lot of folks are wondering if the potential exists for a meaningful turn in the near future.  Indeed that potential does exist, as green wave iv would need to retrace back into the price territory of green wave i for this pattern to remain valid.  Ultimately this wave count would still see one more new high before a long-term turn.  Given the deteriorating situation in Europe, this count does not seem at all unreasonable from a fundamental perspective.

If the rally continues unabated, to the point where the two red trend lines which bound the diagonal no longer can be drawn as converging, we'll have our first real clue that the more bullish count (shown next) is gaining real favor.  At present, however, both counts remain viable -- so this bearish possibility does suggest that bulls should exercise real caution at current price levels.

 

 

 

Next is the long-term bullish interpretation of the wave structure.  Note that this count also suggests that price is nearing a peak, however this interpretation suggests a much smaller peak and turn in red wave 4.  If this is the market's intention, we normally would not expect to see red wave 4 break below the 1485 zone.  This count would suggest an ongoing bull leg, with only corrections along the way.

 

 

 

 

While both options presently remain viable, the next few weeks may allow us to eliminate one or the other.  Stay tuned...

 

Moving on to the more near-term, on Friday the S&P 500 (SPX) cleared the 1550 level, and has thus declared that it is more likely to be in the midst of forming a five-wave impulsive move to the upside.  As I noted on Thursday, there is no "true" invalidation level for the proposed expanded flat, so it remains an outside possibility -- but odds are against that pattern now, so it has lost the weight required to continue justifying its own separate chart, and is instead merely noted with the black "alt: (a)/(b)/(c)" labels on the chart below.  The market may be in the throes of a smaller degree fourth wave consolidation (not labeled), so may move sideways a bit before wrapping up red 3.  Do please note the caveat on the chart annotation.

 

Still Two Possible Paths to the Next Major Inflection Point

By now, everyone who has access to cable television, internet, or carrier pigeon knows that the Dow Jones Industrial Average (INDU) reached a new all-time-high earlier this week. 

I always enjoy anecdotal market sentiment indicators, so the following is presented as Case in Point #1:  yesterday, the mother of one of my daughter's school friends took time out from her busy schedule of watching her dog attack the postman (that's another story though) to send me a text message about the Dow reaching a new high.  Now, keep in mind this is not someone who would be lauded for her investment savvy -- in fact, the reason she texted me (I assume) was as follow-up to a conversation we'd had over the weekend, wherein she confided to me that she had sold all of her stock in 2009, almost-exactly at the bottom.  The gist of her message was:  She's thinking about getting back into the market now.

Uh oh...   

While INDU reached a new all-time high, and SPX has breached its February high, certain other indices are still flirting with their February highs.  The Russell 2000 (RUT) and NYSE Composite (NYA) come to mind. 

The NYA chart below is interesting to me, because classic technical analysis looks at this chart and sees the potential of a double-top.  I see that potential as well, but because I'm a practitioner of Elliott Wave Theory, I also look at some additional info here.  When I study the wave structure of the rally from 8700, it appears to me to be a three-wave form -- and that suggests to me that even if the double-top did play out, it is quite likely that the next decline will only be corrective, and ultimately be fully retraced to even higher highs.  Long-time readers will recall that a similar pattern in the INDU back in October 2012 largely kept me in expectation of new highs after the November lows.  The annotation on the chart explains the rest.

Building on that concept, I am still watching two near-term potentials in the S&P 500 (SPX).  While I've labeled them as "bull and bear" counts, they both project that the market will ultimately exceed current levels -- it's more a question of now or later.  In other words, in my current estimation, the next major inflection point appears to be lurking in the 1560-1580 zone and I expect that zone to be reached, but there are two likely paths the market may take to get there.

One possibility is the expanded flat referenced on the NYA chart above, and detailed in the SPX chart below.  One thing I like about that count, as it relates to the total market and some of the indices like NYA and RUT, is it allows for some singificant selling to come in as the other indices test their February highs.

However, something I do not like about this count is the momentum of the current move, which has been impressive, and may not turn on a dime.  I also have the impression that a lot of bears took their shot in the 1525 zone, and those shorts might not unwind as quickly as this count would require.  Fortunately, we should have our answer quite soon in terms of price -- the more immediately bullish count is shown on the second chart which follows, and the key upside level which divides the two wave counts is 1550.

In the event of a solid breach of 1550, the count shown below will become the favored outlook.  Note the potential of a larger corrective turn once the current rally wave is complete; we'll have to watch this structure closely as this leg unravels.

1540 Target Reached, Can Bulls Keep Pushing?

In Monday's update, both the preferred outlook and the first alternate count projected that the S&P 500 (SPX) would rally to 1540 +/-, which happened with blinding speed on Tuesday.  The main bull and bear outlooks from Monday remain materially unchanged, though of course with the added information provided by the price movement since then, I have been able to refine some of the key levels.

Before we get into the near-term outlook, let's center ourselves with the long-term.  As I've mentioned several times before (and as most every other technician on the planet has no doubt noticed), the market is in a very long-term resistance zone. 

Of note, the Dow Jones Industrial Average (INDU, not shown), did make a new all-time high yesterday (and in the process finally reached my 14,200+ target zone from January 24).

I always find it interesting when wave counts target potentially important confluence zones (almost as if the market knew exactly where it was headed from the beginning of the move), and in this case, the more bullish interpretation of the wave structure (below) seems to be pointing right at the blue confluence highlighted on the monthly chart above.

The wave count below suggests a fifth wave rally is now pushing into this long-term resistance zone, to be followed by a sizeable correction (typically about 50% of the preceding rally).

On Monday, the preferred and first alternate count were both in agreement on higher prices to the 1540 zone, but now we reach an inflection point where they begin to diverge.  The expanded flat, shown below, is hard to invalidate, but we should probably scrap that count above 1550 and favor the more bullish option at that point.

In the previous update, I was quite tempted to favor the more immediately bullish interpretation shown above, and I'm now even more tempted to do so -- but we'll wait and see how this plays out with the 1550 zone.  If nothing else, we should have an answer fairly soon.  Do note that this count is only bearish for a short time, but ultimately suggestive of higher prices to follow.

I'm still watching the Philadelphia Bank Index (BKX) for clues, as noted on the chart:

No Material Change

I combed the charts for a while tonight, and there's effectively no change at all to yesterday's update.  Bull/bear counts are both still in agreement until the 1540 +/- zone, so I'm still looking for higher prices over the near-term.  Good luck out there!  And of course:  Trade safe (NYSE symbol: OMGWTFSTOPLOSS).

And totally off the subject of the market, since there's really nothing to add to yesterday -- I shared this next quote with the good folks in the forums last night, and feel it's worth reposting here (I'm simply cutting and pasting my forum post):

Okay, this has absolutely nothing to do with anything on this thread, but I stumbled across a quote tonight which I found it so deeply profound that I just had to share it. This is from Rainer Maria Rilke's Letters to a Young Poet, and it's about "loving the questions" (about ourselves or the world) which we have yet to answer:

Have patience with everything that remains unsolved in your heart. Try to love the questions themselves, like locked rooms and like books written in a foreign language. Do not now look for the answers. They cannot now be given to you because you could not live them. It is a question of experiencing everything. At present you need to live the question. Perhaps you will gradually, without even noticing it, find yourself experiencing the answer, some distant day.

Bulls and Bears Locked in an All-Out War

Bulls and bears have been locked in an impressive battle for the past several weeks, as we can see on the weekly chart below:

Four straight weeks of indecision from the market makes it unwise to become overconfident about what's coming next here (since we are not, after all, smarter than the market).  So for this update, I've prepared both bull and bear charts, along with some guide levels to help determine which side is claiming victory going forward. 

I'm also going to go out on a technical limb with my preferred projections, which I'll cover in a moment.  As always, I could very well be wrong -- so I want to note that the blue trend line on the chart above is clearly important to the market, and sustained trade above that trend line would favor the more immediately bullish options.

With that warning out of the way, let's cover the options and the levels which will help sort one from the next.  The main chart which is influencing my preferred outlook is the Philadelphia Bank Index (BKX).  I'm convinced that the recent decline in BKX was a five-wave impulse, and that means it was either the first wave of corrective move, or the last wave of one.  I realize that sounds confusing, but that info will actually help us sort things out going forward.  There are two counts shown here, and there's been no change since 2/28 -- in fact, while red wave a exceeded my expectations minimally, wave b found support exactly where projected on the chart in last Thursday's update.

I'm never certain if the preferred counts are correct; this is always a game of probabilities -- but we have to start somewhere and build a thesis from there, so I'm presently sticking with the idea that the BKX preferred count is correct.  That leads me to look at the S&P 500 (SPX) in a way that allows the two markets to reconcile.  The preferred SPX count, shown in blue below, projects an expanded flat.  The expanded flat does require another leg up, and the preliminary target is the 1540 zone.  Sustained trade above 1541 would suggest the more bullish count (shown later). 

There's an interesting struggle pending if bulls reclaim 1525:  the struggle between the short-term pattern and the intermediate-term resistance trend line (refer back to the first chart, upper blue line). The preferred count shown below gives the intermediate resistance level the benefit of the doubt, and suggests the market needs a bit more coiling and confusion before it can build up the potential energy to clear these levels. 

There is also a more immediately bearish alternate count shown in green; unless/until the bulls push through here, the three-time rejection in the 1525-1530 zone can't be ignored.

SPX, INDU, BKX: Can We Draw a Conclusion from Three Fractured Markets?

Long-time readers will recall that I've written about fourth waves as my arch-nemesis, and the current market hasn't disappointed me in that sense.  The market has been whipsaw city for the past few sessions, and this is typical behavior for a fourth wave -- which is one of the reasons I despise them, and generally simply avoid trading them except for very low-risk entries that I'm often quick to exit. 

While it's tempting to look at yesterday's rally as the "all clear" for the bulls to proceed into a fifth wave rally, I would simply caution that price is still within the fourth wave trading range, and fourth waves are almost never as straightforward as they appear at first (or second... or third...) glance.  Further, we are presently seeing some fracturing across markets. 

Yesterday, I called attention to the Philadelphia Bank Index (BKX), which appears to have formed an impulsive five-wave decline.  This is a tricky one, though, because the preceding move was a mess, and so the impulsive decline could conceivably be the c-wave of an expanded flat correction ("alt: (4)" label).  However, I presently do not believe that's the case; I'm more inclined to view that decline as a first wave down ("(1)/A" label), and am not yet convinced the correction there is over. 

That leads me to a more complex count in the S&P 500 (SPX), which I'll share momentarily.  Further, note how much BKX is lagging SPX in price, and that's often not a good sign for SPX.  As long as this fracture between markets continues, it's more likely that BKX will ultimately win that battle and drag SPX lower, as opposed to vice-versa.

The bottom line here is that I'm inclined to believe that BKX will see lower prices before it sees new highs, and that suggests SPX will be struggling uphill for the time being.  We'll watch this carefully going forward for signals which either validate the rally in BKX as corrective, or which suggest that rally is becoming impulsive in nature.

The impulsive decline in BKX leads me to believe that one of two outcomes awaits SPX.  The first option is that the current correction will become more complex in nature (blue 4 below).  The second option is that SPX will make a new high for wave 5, but that it won't be significant (red "alt: 5").  I would like to caveat that I'm front-running the market with this conjecture, and the intermediate trend is still clearly up -- so play along at your own risk. 

Another market which has now gone its own way is the Dow Jones Industrial Average (INDU).  INDU made a new high yesterday, and SPX often follows suit.  So we have BKX, SPX, and INDU each doing their own thing.  SPX presently seems to fall right in the middle of the two, so hence my conjecture that a retest or marginal new high followed by a decent reversal is in the cards.  This proposal actually matches the INDU count quite well, as the present rally leg does appear to be the final fifth wave in INDU's series.

INDU's rally is presently corrective (an ABC), and has not yet formed five waves at micro degree. 

SPX Update: Will the Market Break this Pattern?

Some nights I study so many charts that I have no idea how I get the update finished -- and this is one of those nights (I know for most people, the sun is up already -- but for me, since I live in Hawai'i, the market opens at 4:30 a.m.).  I've been studying chart after chart, because there's something bothering me about this market, but I can't quite put my finger on it.  Sometimes when I look at enough charts, I can figure out what my gut is trying to tell me -- and sometimes it's nothing.  Maybe my feeling of nagging discomfort is just normal bull market "wall of worry" stuff.  I ran out of time tonight, and couldn't quite pin it down, but may have come close with a ratio I watch.

Since this is a currency-driven rally in the form of the QE printing press, I often try to view things through a dollar-lens, so to speak.  The chart below is a ratio of the S&P 500 (SPX) to US Dollar.  This is a bit inconclusive at present, but the chart explains the reason for caution:  what's bothering me right now is that every rally prior to this (in the QE era, anyway) has begun a deep correction right where we'd normally expect a fourth wave decline and a fifth wave rally.  Maybe this rally will break that pattern -- but given the precedent, it seems unwise to simply assume it will.

The Philadelphia Bank Index (BKX) is also warning that a larger turn may be in the works.

The NYSE Composite (NYA) shows that bulls probably need to hold the black dashed trend line, or risk bigger problems:

The preferred count for the SPX still has the active downside target of 1470-1473.  I went over the one-minute SPX chart in detail tonight, and it is possible that the market has completed an ABC fourth wave correction in its entirety (hence the alt: 4), but I presently view that as the underdog.  And, as I just noted, I'm having trouble simply assuming we'll even have a fifth wave up.  The annotation from yesterday still sums up my approach right now.

Finally, a short-term chart of the Dow Jones Industrial Average (INDU) which staged a pretty solid snap-back yesterday.  The chart is simply for aid in identifying potential support and resistance areas throughout today's trading session.

In conclusion, if it weren't for the market's behavior over the past few years, I would normally be reasonably confident in the idea of a fourth wave decline now underway, and a fifth wave rally still to come.  But given the three-wave nature of most rallies since 2009, I am continuing in my cautious stance until I see more signs of an "all clear" from the market.  Trade safe.

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

SPX and INDU: Ambiguity Remains the Order of the Day

In yesterday's outlook, I outlined the fact that I felt the S&P 500 (SPX) was quite ambiguous, and as a result, choose to focus on the Dow Jones Industrials (INDU) as a waypoint -- hopefully one which would help in unlocking the wave count in SPX.  I expected INDU needed to make a new high, which it did -- however, SPX did not follow suit and stalled right at the key 1525 resistance level.

We are now within potentially dangerous territory for traders.  I can tell you from experience that this is where many traders do great damage to their accounts, as they attempt to anticipate the market's next move based solely on prior expectations.  My advice in this market would be to "live in the moment," as the saying goes, and trade only what you see.  We booked a nice profit for January/February, and it's now critically important not to give that profit back trying to call the next turn.  Please avoid the temptation to think that any system is so flawless that it can see several months and "three turns" down the road.  As I wrote about at length yesterday, the climate has shifted, and this is now a market that we need to take one day at a time. 

The bearish engulfing bar yesterday has to be respected over the near-term.

INDU fell short of the upside target, but did fulfil the minimum expectation of a new high and reversal.  This topping pattern should be respected unless INDU can whipsaw solidly back into the trading range.

SPX also presents a topping pattern.  Both indices haven't yet moved far enough below the pattern to preclude bullish whipsaws, but "what we see" here presently appears bearish. (continued, next page)

Market Wants to Take Things "One Day at a Time"

It goes without saying that nobody wants to get caught looking up when it's time to look down, and vice-versa.  This is especially challenging in a market such as this one, where the long-term picture is, quite frankly, ambiguous at best.  While the market's bullish intentions seemed fairly clear to me over the past couple months, the market has now reached a zone where (for the moment, anyway) we have to unravel the outlook on a day-by-day basis. 

I analyze charts first and fundamentals second -- but usually we have some type of fundamental backdrop from which to draw, which creates a reasonble overarching framework for the technical analysis.  Either things are getting worse or they're getting better; either the economy is growing or it's dying (as any good entrepreneur will tell you, these are the only two real options in business: there is no status quo), and we can use that information as a waypoint for what then seems reasonable and likely within the charts. 

However, this is an unusually challenging market environment because equity rallies have been driven, in large part, by the world's central banks.  On a fundamental level, the long-term outlook for this market seems to hinge almost solely on the outcome of inflation vs. deflation.  If the central banks can maintain an inflationary environment, then equities will continue to rise; if they can't, or they choose not to, then equities will fall. 

And now we must add a technical ambiguity to the fundamental ambiguity, created by the very-long-term resistance zones which are being reached in most major indices, including the S&P 500 (SPX) and the Dow Jones Industrial Average (INDU).  The mid-to-high 1500's have held SPX in check for more than a decade, and have rejected two prior rallies -- and both rejections then led to protracted bear markets.  Accordingly, we have to view this area as strong resistance, and realize that any long-term decline which begins in this zone will, in retrospect, appear to have been blatantly obvious. 

I don't think we're quite "there" yet, and my preferred outlook does still expect higher prices.  From a long-term perspective, I'm still slightly favoring the bulls as long as the Fed keeps the printing presses running at full throttle -- nevertheless, my confidence in the long-term is marginal at best, for the reasons outlined above, and I remain on alert for the bears to show up in force at any time.

Last update's preferred count expected the market was closing in on completing a fourth wave correction, and after the SPX broke below 1510, it found support directly in the middle of the highlighted support zone on my 10-minute chart (1492-1503).

Let's take a look at INDU first, because I feel the near-term pattern is a bit less ambiguous than SPX.  INDU appears to have completed a complex fourth wave flat correction, and if this is correct, it should be ready to move higher and into the next target zone of 14,200 +/- (not coincidentally, this lines up well with the all time historic high).  Unless the bears used up all their firepower on the recent drop, it's quite possible there will be a fair number of sell orders awaiting in this zone, and the wave counts are suggesting INDU is moving into a fifth wave rally (the final wave before a larger correction), so there's every reason for caution heading forward.

We'll start with the long-term chart.  Note the target zone from January lines up with the all-time high, which lines up well with the upper boundary of the red channel -- and thus bulls should be quite cautious as this zone is approached (assuming we get there, of course).  It goes without saying that any sustained breakout through this zone would be bullish and suggest that my wave counts are too conservative, but normally I would expect to see a correction begin after this next thrust higher.

On the shorter time-frames, both my preferred count and first alternate are viewing the recent low at 13,834 as the bottom of a fourth wave, though there is some question in my mind as to which degree that fourth wave is.  Thus, both the preferred and alternate counts are near-term bullish, but suggest a correction is looming after the next thrust up.  This remains a market where we have to unravel the intermediate term from the short-term, and the long-term still remains veiled -- but it pays to be aware that my bearish long-term count presently suggests the very real possibility that the market is approaching a long-term top.  I would currently give that count better than 35% odds.

The red trend line should provide early warning that something more immediately bearish may be afoot, while trade beneath the 13,834 low (prior to a new high) would invalidate both fourth wave counts.  I'm going a little bit out on a limb here and not labeling an alternate count that shows the high as being in, but that is, of course, always a possibility.

I started this article with INDU charts because I'm building the SPX count from the INDU pattern.  SPX is much more ambiguous and difficult to interpret, and reminds me of the scene in the movie Airplane when Lloyd Bridges hands a radar printout to his partner and asks: 

"Johnny, what can you make out of this?"
And Johnny replies: "This?  Well, I can make a hat, or a broach, or a pterodactyl..."

Assuming my interpretation of INDU has any merit, then SPX has also likely completed its fourth wave correction and should be headed higher.  The same warnings and caveats apply, and it is expected that the market is entering a fifth wave rally, which will then be followed by a more significant correction, or worse.  Assuming 1530 is reclaimed (invalidating the alternate count), then the preliminary target for wave 5 is 1548-1565 -- I'll attempt to narrow this down further as the wave develops.  I would currently place the odds that wave 5 is underway at roughly 60%. (continued, next page)

Is the Fed Serious, or Are They Simply Trying to Scare Speculators?

Yesterday saw the release of the latest Fed minutes, and they revealed considerable dissention among committee members as to how long QE should continue, and whether or not it should be scaled back.  There was even a proposal about whether to vary the pace of asset purchases on a meeting-by-meeting basis (talk about volatility!).  The minutes seem to show a divided Fed who suddenly appears to be questioning its own policies, and the committee is presently less unified than we've seen over the prior few years.  A review of the current program has been set for March -- so let's all Simonize our watches and mark our calendars for March 20, at which time Ben Bernanke will hold a press conference in the aftermath of the Fed's two-day meeting. 

The big question in my mind is whether this is "real" dissention, or simply the flip side of a coin we've seen from this Fed before.  For the past several years, when we've been in-between QE programs, the public-relations strategy was clearly to "keep hope alive" for new QE programs.  Of course we don't need to talk hope anymore, because now we have QE-Infinity, which (in its current form, anyway) is effectively a huge green light for bulls, screaming that the market is endlessly back-stopped.  The message has been: "Buy risk assets at any price, and we'll make sure there's always liquidity flowing in to cover them."

As a result, the present problem faced by the Fed is no longer "how do we keep hope alive?"  Instead, the problem they face is how to gain control of the monster they've created, and how to put the brakes on rampant speculation.  We've travelled 180 degrees, from "Let's talk up QE and keep the market hopeful," to: "Let's talk down QE and keep the market grounded."     

Which brings me back to my original question:  Is this simply part of their PR strategy?  Or is the Fed genuinely having second thoughts?  Obviously, I have no way of knowing, but I think it's a valid consideration.  If they are having second thoughts, then that's a critical piece of information, and the market realizes that: hence the sell-off yesterday.  If this is simply a PR strategy, then this is a temporary scare. 

This has largely been a Fed-driven rally since 2009.  Without the Fed's "greater fool" purchasing power, it's unlikely risk assets would continue on their present upward course.  This conclusion requires little in the way of speculation:  every time a QE program has ended, the market has sold off (plus an angel gets its wings).  Of course, we do need to remember that QE hasn't actually ended yet, and may not end anytime soon.  All we have right now is the "threat" of QE maybe possibly sort of ending -- and again, I wonder if this isn't simply the Fed playing the game of "verbal monetary policy tightening" the way they used to play the same game in reverse, when Bernanke would run around making statements such as, "My finger is on the QE button!" 

Nevertheless, perception is often reality for the market, and with the release of yesterday's minutes, we do have a watershed event that clearly shifted at least the near-term sentiment.  In fact, yesterday evening, a headline on Market Watch read:  Dow Suffers Second Biggest Drop of 2013.  To quote one of my favorite lines from the old TV series M.A.S.H.:  "That's roughly comparable to being the finest ballerina in all of Galveston."

While I make light of the temptation to jump all over yesterday's dip as the Eighth Sign of the Apocalypse, there are actually a couple issues we'll cover from a technical perspective which tell us bulls do need to stay on high alert here.   

The first revolves around that fact that the most recent breakout failed to reach the short-term upside targets (SPX fell about 4 points short).  The near-term pattern whipsawed, which indicates that sellers came in earlier than they would normally be expected to -- and this is sometimes the type of behavior we see near larger turning points.  The chart below shows the whipsaw of the green triangle pattern, and the failure of multiple up-sloping trend lines, along with the penetration into the support shelf in the 1514 zone.  If support fails at 1509-1510 the odds are good we're headed to retest the area highlighted by the blue box. 

The odds presently favor a bounce in the next session or two (which could be viewed as a selling opportunity by the nimble), followed by new lows. 



I've largely ignored the bear counts since 2013 began, because up until now, I saw no reason to be bearish at all.  It's rare that I have enough confidence in my preferred read of the market to essentially publish only one count, but it makes it much easier for people to follow along with the outlook when I'm saying "the two main options I see here are higher or higher." 

Now, however, responsibility and prudence dictate that it's time to give the bears a bit more airtime.  As of yesterday, we cannot ignore the fact that we do have the potential of a completed ABC rally off the November lows.  While I still prefer the more bullish outlook, which suggests a fourth wave correction and fifth wave rally still to come, there is another fact I can't ignore:  every rally leg since October 2011 counts better as a corrective rally.  And that means if this current rally follows that same pattern, it could be entirely complete.

So: here we are with the market having now completed three clear advancing waves (shown below as the black ABC).  That means we have to at least consider, and remain aware of, the possiblity that this is all she wrote for the intermediate term, and the market could embark on a much deeper correction than I'm currently anticipating. The daily chart (not shown) shows a bearish reversal bar, and down volume vs. up volume was strong yesterday -- and those warnings must be respected, since both typically argue for lower prices.

Let's also take a look at the Philadelphia Bank Index (BKX), which I've been using as a leading indicator for a long time now.  BKX actually warned of this turn in advance, when it made a new low last Friday.  I noted the warning (before it happened) in Friday's update, but was uncertain how to interpret it immediately. 

The BKX chart also presents another potential issue for bulls: this leg can now be counted as a complete five wave rally, which would suggest a deep correction is forthcoming.  Quite frankly, that last bit of wave structure is an absolute mess and nearly impossible to interpret cleanly, which leaves enough wiggle room for the black alternate count.  Nevertheless, this may be an early warning sign and needs to be watched carefully going forward. (continued, next page)

Understanding Technical Analysis Using the Current Market

In the pre-market update of February 14, I anticipated that 1514 would become an important short-term support level, and so far the market's bounced twice from that level.  I'm going to use this opportunity to unveil a bit of the "magic" behind technical analysis, and discuss some of the logic behind it, and a few of the reasons why anticipating future price action based on technical analysis works more often than it doesn't. 

The 10-minute SPX chart now sports a pretty decent triangle consolidation, which has been formed with two rejections at the 1524 level, and two bounces off the 1514 level (see chart below).  1514 has been tested several times now, and support becomes more important each time it's tested.  In a moment I'll discuss why.  I'll also discuss why we can further anticipate that this is now quite likely to have turned into a market where additional buyers will show up at higher prices, while additional sellers will arrive at lower prices.

Everybody knows the rule that support tends to become resistance and vice-versa, but I don't know if everyone has thought through why this happens.  Investors who think that technical analysis is some kind of "voodoo" clearly haven't thought much about it, but it's all very interesting to me from a psychological standpoint. 

Let's say the market is moving down to test support.  As it hits support, bulls are buying, which usually causes the market to bounce, especially on the first test of support, and sometimes on the second test or beyond.  But, obviously, it doesn't bounce every time (if it did, of course, then trading would be ridiculously easy).  On the times that support fails, we end up with many of the bulls who bought the level earlier now trapped at a loss -- particularly the ones who bought on that last leg down, just before support broke.  When support fails, the breaks are usually fast, and trap more than a few people, since most traders won't put their stops that close (unless they're scalping; nobody wants to get whipsawed out by a few points).

Shortly after the break, the majority of the time the market rallies back up to the zone that broke -- so if you bought it earlier, you have a decision to make: do you take the chance to exit very close to break-even, or do you stay long and strong with your original stop?  If enough of the trapped bulls do decide to take that exit, then that prior support zone becomes resistance, as the market gets hit with a wall of sell orders on the rally.  If the bulls are of high conviction and don't sell, or if the market has simply exhausted its sellers (sometimes "too many" stops are run when the break happens, and you end up with traders chasing back into their original positions), then you get a whipsaw.

Let's study a real-life example, using the 10-minute S&P 500 (SPX) chart.  When we study this chart a little more closely, we can see that sellers came in at 1514 in a pretty big way on two occasions during the first week of February (on the way up).  Unfortunately for some sellers, due to the gap up on February 8, it's a fair bet that any sellers who came late to the party got trapped short.  We can then see the back-test of 1514 on February 11, and further reason that some of those trapped sellers surely elected to cover their positions -- but it's unlikely that all of them did.  SPX has only moved up about 10 points since then, so it's also a reasonable bet that a fair number of swing-trader bears are still holding onto their shorts.

Looking to the upside, 1525 has rejected the advance twice, and thus now becomes an obvious stop-loss level for shorts.  Typically, most traders will leave a bit of cushion beyond the obvious level, so we should assume 1525 plus a few points.  The chart also shows us that ever since February 8, the market has been in a battle between buyers and sellers -- the pinball back and forth action tells us that bulls and bears are pretty equally balanced in this zone.  And that then tells us another piece of information about 1525: if the market does more than take a quick peek above that level, additional buyers should show up in the form of short covering (and possibly also in the form of bulls who are hoping to buy in lower, but will feel the urge to chase a break higher).  The reverse is true of 1514 on the downside: 1514 (minus a few points) has become an obvious stop-loss level, so we can make a reasonable assumption that additional sellers will show up below that level.  This is why the triangle breakout or breakdown can be projected to run at least 10 points. 

So, sustained trade beneath 1514 is very likely to lead to a test of the next support shelf, in the 1495-1500 zone, where buyers are likely to show up again.  Sustained trade above 1525 is likely to lead to 1535 (+/-), where many short-term traders will take profits.   

Technical analysis really isn't a bunch of voodoo, it's simply based on trader psychology.

We've discussed and charted the triangle above.  In classic technical analysis, triangles typically show up as continuation patterns to the prior trend, which in this case was up; more rarely, triangles are reversal patterns.  In Elliott Wave analysis, triangles always show up as continuation patterns, but typically show up as the penultimate (second to last) wave in a waveform.  There are two challenges here for Elliott Wave: the first challenge is determing whether or not this is a true Elliott triangle, and thus "destined" to resolve higher.  The second challenge is which wave it would actually complete if it is a triangle.  Neither question has a clear-cut answer right now, so this becomes a bit of a "confirmation" market.  Trade below 1514 would rule out an Elliott Wave triangle, while trade above 1525 would largely confirm it. (continued, next page)

SPX Update: An Interesting Fractal Comparison with 2012

Last update noted the market may be in position for a correction, and expected some downside follow-through beneath Wednesday's low.  We did see a little downside follow-through, but as I highlighted yesterday, 1514 was the key level to watch as the break-point catalyst for any larger correction.  The market bounced at 1514.02, and has thus left its options open.

I believe it's very important to assimilate new information as quickly as possible as a trader.  The fact that the market bounced at the key 1514 level is new information I didn't have yesterday, and the market's reaction must be respected.  Today we'll find out how the market reacts to the prior high, which is now the key upside level. 

I do want to emphasize here that I continue to believe the intermediate trend is up, so top-hunting is a dangerous game right now.  I spent a lot of time on charts tonight, trying to unlock exactly where we are in the micro and macro pictures, and the conclusion I've come to is that if the market sustains trade above 1525, it's probably time for me to put my quick foray into top-hunting on the back burner again until the next clear signal.  Could there be one more little wave up to 1534?  Sure there could, but there could just as easily be "one more little wave up" to 1600.  As I've mentioned like a broken record almost every day since 2013 began: this is a third wave rally at several degrees, and that means this is as strong a trend as one is likely to ever see. 

So... let's not get too hung up playing the top-hunting game.  It's fine to take quick stabs at inflection points (like now), but I would strongly suggest not getting married to any bearish positions just yet.  Since we can't take both sides of the trade, one could just as easily end up chasing back into longs and regretting ever having sold in the first place.  Third waves can be extremely unkind to counter-trend trading.

One of the charts I spent a lot of time with was the five-minute S&P 500 (SPX), which I then broke down again on the one-minute chart (not shown).  I'm content that my intial hourly chart read was correct, and that either wave (5) of blue 3 has completed/nearly completed, or we are only seeing wave i of black (5) of blue 3.  That means if the market doesn't put in a good reversal here in blue 4, we could have a lot farther to run before the next inflection point.

Let's look at the hourly chart first to get our bearings.  Note the red alternate count: a new developing five-wave structure could still see some short-term downside action, but would be devastating to bears over the intermediate term. 

Now let's zoom in on the five minute chart.  I am still inclined to believe that further downside follow-though awaits over the near-term, but via the alternate count, we can see there is immediate potential danger for bears here, particularly if 1524.69 is knocked out.  Given the present position of the market, targets are ambiguous at best -- however, this chart outlines a number of levels to watch which should help roadmap the next few sessions.

Next is the ten-minute chart.  I've deleted the wave annotations from this chart, because I feel they are better conveyed on the two charts above -- however, this chart is useful for monitoring trend lines, support zones, etc..  Let's pay close attention to behavior around the lower trend channel boundaries, assuming the market gets there. (continued, next page)

SPX Update: Time to Stay Alert for a Correction

Yesterday's update noted that the S&P 500 (SPX) was in a somewhat ambiguous position, and that remains the case today.  The waveform has gotten a bit sloppy over the past few sessions -- nevertheless, an added degree of caution is called for, since the wave reached perfectly January's target zone, and the waveform can be counted as complete at blue degree.  If my preferred wave count is correct, the current rally should be nearing a correction -- but it must be noted that there is as yet still no solid indication of a turn.  I've annotated a 10 minute chart of the SPX which should help provide clues. 

The first important zone is now 1514 +/-, and sustained trade beneath that support zone may provide the catalyst for a deeper correction.  Yesterday's decline appeared impulsive (to me, anyway), but left just enough doubt to keep more bullish near-term options on the table (black count).  If my preferred interpretation of the decline as an impulse is correct, there should be some downside follow-through over the next few sessions.

The hourly chart is materially unchanged over the past several weeks, and if the preferred count is correct, then the blue wave 4 corretion is underway (or will be after one more small wave up).  While I'm inclined to view yesterday's decline as an impulse wave, which suggests downside follow-through, there are presently no solid targets with the market in this position.

In conclusion, the wave has now reached dead-center into the target zone, and has registered momentum divergences while doing so.  When targets are reached, it's always time for added caution, and indeed blue wave 3 can be counted as complete (or nearly so).  It's time to start watching for further signs of a correction.  Trade safe.  

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

January's Target Zone Has Been Captured; What Next?

I'm not able to present as many charts today as I would like to, because I primarily create my charts using Stockcharts.com, and their site crashed while I was working.  It has remained non-functional for several hours.  Fortunately, prior to the site crash, I had already finished the SPX hourly chart.  I'd also partially completed a chart of the Philadelphia Bank Index (BKX), with at least has enough detail to allow me to fill in the blanks in the body of the article.

On Tuesday, the S&P 500 (SPX) finally captured my 1520-1530 target zone from January 10.  The bottom line now is that we'll simply have to see how the market responds before generating new targets.  There are no clear signs of a turn yet, and in fact, there are some indications that this wave may still have farther to run (as shown on the BKX chart to follow).  In Elliott Wave Theory, the third wave of a move usually represents the longest and strongest leg.  As I wrote in the very first article of the year, on January 2 (SPX and US Dollar: Rally Likely Only Halfway Through):

In conclusion, this is not a rally I would look to short anytime soon. There is massive pent-up energy in the charts, and nested third waves are not to be trifled with. Third waves are the "point of recognition" for the masses, and tend to be strong trending waves that rarely let up for very long. Third waves tend to peg indicators at extreme readings and stay there for much longer than seems reasonable.

Since a picture is worth at least 74 words, if you've ever wondered what a third wave rally looks like up close, we need look no further than the hourly chart below.  Do note the more bullish alternate count, which would postpone the blue wave 4 correction.  As I've mentioned several times over the past six weeks, I do not advocate front-running against third waves.  Once we see our first five-wave impulsive move to the downside, we can feel a little more confident that a correction has begun.

I didn't quite finish the BKX chart I was working on when Stockcharts crashed, but I completed enough to convey the general idea.  On 2/8, I noted two possibilities, and BKX appears to have chosen Door Number 2, behind which was a nest of first and second waves, and a Brunswick pool table (not shown).  I've noted the first key bearish overlap on the chart, and unless price is sustained beneath that pivot in the near future, BKX is free to continue trending unabated.

One of the charts I was not able to finish prior to the gremlin attack at Stockcharts was the long-term BKX chart, which shows BXK is now within pennies of a key overlap, at 55.88.  If crossed, this would add confidence to the long-term bullish outlook, and leave bears hoping for a triangle consolidation, with two large waves still left to go (we would be in wave c-up now, with d-down and e-up still to come).  The triangle would get knocked out at 58.83.

In conclusion, the target zone has been captured, but there are no signs of a turn yet, and BKX suggests there may be a bit more room to run.  SPX is a bit ambiguous for my liking, so I will publish new targets as they become higher probability.  If you've remained long since the beginning of the year, you may be content to simply raise stops until there are more concrete signs of a turn.  Trade safe. 

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.