SPX Update: The Moment of Truth

I was recently reminded by a reader that sometimes people can have very short memories, as I was accused of the dreaded "top calling."  So, to clear the air, let's take a quick stroll down memory lane.  On April 16, I wrote:

As long-time readers know, I have been primarily bullish on equities since November 2012 -- but for the first time since then, I truly have no desire to "buy the dip" for anything longer than a short-term trade.  There are some disturbing early warning signs that the market may be undergoing a fundamental change of character.  I don't presently know how long this will last, but when I see signals like this from the market, I don't screw around and risk gambling away my financial future.

On the chart I published within that article, I projected a rally to the 1570 zone, followed by a decline toward 1540, followed by a rally to 1580 -- all of which have since happened.  If we ignore the (correct) projection for that roundtrip lower and only look at the "top call" of April 16, basis the 1570 projection of that same day, then the S&P 500 (SPX) is now up almost an additional 13 points. 

To go back even farther, I was exceedingly bullish from the very first trading day of the year (see: SPX and US Dollar: Rally Likely Only Halfway Through) and continued outlining the bull case for several weeks after.  I stayed unequivocally bullish until my adjusted target zone of 1520-1530 was reached, and since then, I've hit several of the turns with pretty darn good accuracy.  If some readers are expecting more outta me than this, then I'd like to state, quite matter-of-factly, that I simply can't do much better.  I'm quite sure somebody out there can, but this year overall has been about as good as it gets for me personally.

So I would like to take this opportunity to lovingly remind less-experienced traders that there simply is no such thing as an infallible crystal ball in market projection.  If one is expecting the impossible in terms of prediction, then one is certain to be disappointed.  Make sure your trading goals are realistic and achievable, or you are doomed to an ever-shrinking account caused by repeatedly pushing your luck to the breaking point (also known as "overtrading").  Todd Harrison has a philosophy called "hit it and quit it," and I think that sums it up just about as succinctly as possible. 

Since April 16, I have been systematically outlining the bearish signals which have popped up, including things like overly bullish sentiment, and the smack-down in IBM on their earnings miss.  These don't guarantee another leg down, but nothing guarantees anything in this business.  The only thing we're ever "guaranteed" is an interesting ride.  Well, that and a ludicrously Keynesian economic policy, of course.

The rally feels like it will never end, which, ironically, is exactly how it should feel if it's going to end.  Tops never look like tops until they're in the rearview mirror, otherwise nobody would have bought a single ounce of gold near $1900. 

Note the daily chart of SPX below, and think back to how many of those tops "felt" like tops at the time.  Incidentally, if you're an intermediate trader, there is almost never any need to front-run a top.  While I will frequently front-run tops (and bottoms) in my analysis and projections, my philosophy as a trader is generally (not always, but usually) to wait until the market retraces at least 61% of the assumed first-leg down before going short -- again, this applies, for me, when looking at things from an intermediate basis or longer (short-term is another matter entirely).  That approach not only seems to be in line with "the way tops work," but also helps minimize risk by providing a clear zone for stop-losses.  I'll never understand the subscription services who tell their subscribers to front-run by selling into the teeth of a high-momentum rally (seemingly) every other week.  I see no need to take on that level of unmitigated risk. 

As I mentioned last week, if the market breaks out convincingly over 1600, then we probably need to set our sights on the mid-to-high 1600's as the next target zone.

The rally has now exceeded my initial expectations, and the moment of truth has finally arrived.

The 10-minute chart notes one of those amazing "coincidences," when the market turned perfectly at the upper boundary of the blue trend channel I drew for Thursday's update.  Note the melt-up channel has finally broken.

SPX Update: Bears vs. The Fed

This market remains a question of historical indicators and the "real" economy vs. Fed liquidity injections.  QE-Infinity (incidentally, I do believe I was the first to actually coin this term) is still in full effect, and even as I write this column the Fed is feeding the market via its primary dealer accounts, to the tune of almost $36 billion over the short-term.  As expected, Bernanke's policy of "no banker left behind" has worked wonders for equities up to this point, though seems to be doing little to help the actual economy.

Now for a bit of market history which may fight the Fed -- I haven't mentioned this statistic in about half a year, but it's relevant to share it with readers again today.  Last week, IBM announced dismal first quarter earnings results; shares have taken a beating ever since, and dropped about 8%.  This bears attention because the S&P 500 (SPX) and IBM have a correlated history when IBM trades down on earnings:  70% of the time this has happened in the past, SPX then trades lower over the next five weeks.  It bears noting that the last time I mentioned this correlation was on October 22, 2012 -- and almost exactly five weeks later, the SPX reached the November bottom. 

That said, I'm reiterating this next point, because it's a discussion I seem to have awfully frequently with newer traders:  even 70% odds still mean that exactly 3 out of 10 times, the market will end up doing the exact opposite thing. Nevertheless, it makes no sense to me to take the 30% stance -- so unless the market breaks out over long-term resistance here, I'm continuing to favor the idea that there's at least one more leg down coming.

My outlook isn't coming from any sense of moral conviction about what the market is "supposed" to do next, it's purely based on the odds.  To go back to my poker analogies of the past:  when I'm dealt a pair of aces before the flop, I raise the bet not because I'm "predicting" the hand will win, or even because I think it "should" win -- I take action because the odds favor it will win, so raising is the correct play.  Yet, as anyone who's played serious poker will tell you, the odds never guarantee anything (except frustration when they go against you!).  Point being, when I see signals like I've seen in the current market, I'm inclined to sell the rallies for the same reason.  A minority of the time, though, I'll be dead wrong -- but I can't actually control that part of the equation.

This has sparked another thought that's probably worth sharing.  In order to be successful at trading, I think one has to learn to become comfortable with the idea of uncertainty.  Most of us have some difficulty with uncertainty, so we seek out ways to avoid or eliminate it, sometimes going to great lengths to do so, even if that requires we cling to a false sense of certainty.  I believe this is why some analytical services have decided to take the approach of: "Mortgage the house today, because our prediction is most definitely going to happen in the market tomorrow! No doubt about it!"

Personally, I view that approach as moderately irresponsible, but strangely, I believe it actually makes some people feel safer -- especially less experienced traders -- which means that approach probably brings in new subscribers for those services.  Ironically, to my way of thinking, less experienced traders are exactly the people who don't want to be feeling any level of over-elevated conviction.  Trading is hard enough already -- but it's ten times harder once a sense of conviction engages our emotions and our egos.  Anyway, that's just how I view it.

So let's talk about what is most definitely, without a doubt, for sure going to happen today!  Get set to mortgage the house, because I'm givin' ya gems here!  Ready?  What will most certainly happen today (and there is almost no doubt in my mind!) is:  the sun will rise.  You heard it here first!  As far as the market goes, though, we're still in the inflection zone -- so the bears will either get it done here, or they won't.

The hourly chart remains materially unchanged, though I was able to correct the ChiOsc in the lower panel (yesterday, the Java program simply wouldn't let me draw the signal line where I wanted it.)

I've detailed two 10-minute charts of SPX.  The first one notes a confluence of resistance sitting just overhead, in the 1585-1590 zone I talked about yesterday:

The second 10-minute chart attempts to interpret the near-term wave structure.  This is actually a pretty funky wave form going back to the 1536 swing low, so if you're trading this, then please do so cautiously.

Yesterday's Flash Crash Fit the Wave Structure

Over the past week, I've outlined about half a dozen reasons why the odds favor the bears should get another leg down after this rally, and now the market has finally entered the critical "retest" zone for the 1597 high.  Elliott Wave is extremely particular about exact price points, whereas classic technical analysis allows a bit more leeway, and in classic TA, a "retest" is considered as something of a zone which extends somewhat below and above the prior swing high (or low).  I tend to focus more on Elliott Wave analysis within this column, but in practice I blend the two disciplines.  In either case, the market is now at an inflection point.

Yesterday made for an interesting session, as the market experienced a mini flash-crash after AP had their Twitter account briefly taken over by terrorists, who sent out some frightening false news items.  The market experienced several minutes of sheer panicked free-fall, when the terrorists falsely tweeted that Ben Bernanke had just been spotted reading a copy of The Road to Serfdom by Friedrich Hayek.  But it recovered almost immediately, as investors quickly realized this Tweet was so incredibly unbelievable, it had to be a hoax.  I think they also Tweeted something about explosions at the White House, but the market probably shrugged that off as irrelevant.

The hourly chart remains unchanged, and the "best guess" projection I detailed on April 16 has since tracked with far more accuracy than it had any right to.  Note the levels of the Chaikin oscillator in the bottom panel (also note that for some reason, Java refused to draw the red sell signal line in the correct place!  It should be drawn higher on that chart than it is, close to the indicator's current level.)

On the one-minute chart below, there's an amazing little tidbit for those of you who love math and the harmony of the markets -- and it's especially interesting given the events of yesterday's session.  On the chart below, the rally from blue B to blue wave (3) (from 1548.19 to 1560.18) is 11.99 points.  I am interpreting yesterday's rally as an extended fifth, and extended fifth waves often target the 1.618 extension of waves 1-3.  Waves (1) through (3) were 11.99 points.  If we multiply that by 1.618 (the expected extension), it calculates to be 19.40 points.

19.40 + 1560.18 (the peak of blue (3)) = 1579.58 -- which was the exact to-the-penny high of the wave before the flash crash. (Insert Twilight Zone music here...)   I find this all the more fascinating given the "unpredictable" event in the form of terrorist activity and the market's subsequent 16-point plunge.

While I remain in favor of the bear view, the 10-minute chart shows the near-term bull count in rough detail.

SPX Update: Clues from a Proprietary Sell Indicator

Yesterday's article was long on words, so today we're going to focus more on charts.  There's been no material change in the outlook, since so far the market hasn't done anything even vaguely unexpected, but I've refined a few charts and potential targets.

The first chart I'd like to share is one of my proprietary signal indicators.  While I'm not publishing all the constituents which actually make up this indicator, I have noted the prior few years of signals on the S&P 500 (SPX) chart below.  This is one of the signals which is presently keeping me in favor of the bears for another leg down.  Note the present similarities to the examples of 2011 where two sell signals fired off in close succession.

Today, we're going to start off with the one-minute chart and build from there.  One of the challenges in market prediction is the anticipation of how a corrective wave will unfold.  Corrective waves can be quite complex and thus extremely difficult to anticipate perfectly in advance.  Beyond that, the "easiest" market reads are almost always done in real-time, since the market gives off new information by the minute.  It's almost impossible to anticipate every potential turn which will come down the road in a given session (and even more impractical to try and outline them). 

But since a static published column obviously doesn't have the luxury of speaking in real-time, what I try to do is look several steps down the road to give readers some idea of what I'd watch during the session.  Assumptions have to be made in order to do this, and the first assumption I'm making is that this is indeed a corrective rally, as opposed to a new impulse wave which will head to new highs.  Accordingly, I've noted the two most likely possibilities for a corrective wave on the chart below.  If the market sustains trade above 1577, then we'll have to look more seriously at other angles.

 
In the event that my thesis of a corrective rally is wrong, on the 10-minute chart below, in black I have noted the rough turning points I'd watch for an impulsive rally.  Again, presently the only invalidation level for a corrective wave is the prior high -- so all we can do is watch key resistance at 1577 for our first clue that something more bullish may be afoot. 

Why Barron's Prediction of Dow 16,000 Favors the Bears

This weekend's Barron's Magazine cover features the exclamatory prediction of "Dow 16000!" and depicts a bull (replete with a huge Cheshire cat grin) on a pogo stick bouncing over a fat, slow, and apparently confused bear.  Clearly, the message this cover wishes to convey is:  "Have another margarita, bulls! There's nothing at all to worry about!" 

If I were still bullish, I'd worry about that.  (And it goes without saying that one should never drink more than two margaritas before hopping around on a pogo stick.)

This cover is the lead-in for Barron's latest Big Money Poll, and the following quote is found within:

“The stock market isn't the only thing that has set records this spring. Barron's semiannual Big Money poll of professional investors also is setting a record -- for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks -- an all-time high for Big Money, going back more than 20 years.”

Barron's has a bit of history with bullish magazine covers, and it isn't terribly encouraging.  There are some logical reasons that publications such as Barron's sometimes make great contrarian indicators, and I'll cover these in a moment. Unlike my column (and many other columns here on Minyanville), publications like Barron's are generally more focused on reporting the past than they are on predicting the future.  This is not to imply any kind of slight against them, or that there's anything wrong with news-based publications -- we have to get our news from somewhere.  To be honest, sometimes I'm envious: Writing about the past allows an infinitely higher degree of certainty -- and involves a lot less head-scratching, fewer sleepless nights, and virtually no potential for "getting one wrong" (or criticism about the same, for that matter).  As Yogi Berra once said, "It's tough to make predictions, especially about the future."

Interestingly, Barron's Big Money Poll in May of 2007 was also quite bullish in tone, and predicted Dow 14,000 -- and that prediction was featured on the cover in a similar way in 2007.  This level wasn't actually too far off, and was reached in October 2007 after a rally of about 6%.  We all know what happened after that.  The bullish cover of 2007 was a whole lot closer to the top than it was to the bottom.

When market publications which usually stick to reporting the past decide instead to predict the future, there is somewhat of an intrinsic "conflict of interest."  Barron's didn't become hugely popular by publishing stuff nobody wants to read -- so by the time they're willing to boldly predict something on the cover, it's at least partially because they feel that cover will make the majority of people want to buy their magazine.  Bears obviously don't want to read an article about "Dow 16,000!"  People who own equities do.  This tells us, in a roundabout way, that "bullish" has gone very mainstream -- and in this way, these types of magazine covers help indicate when sentiment levels are approaching extremes. 

The problem, and I've written about this many times, is that by the time everyone "knows" something about the market, it's usually dead wrong.  When we're talking about bullishness, there are only so many buyers out there -- and it obviously takes a constant influx of new buyers in order for any stock to continue heading higher.  Even if a stock were the Greatest Most Amazing Stock in the World (just as a "totally random example," let's say this amazing stock were, ahem, Apple (AAPL)), once everyone who wants to own Apple already owns it, then at that point, the share price has nowhere to go but down.  

Think of it like an auction where -- unbeknownst to the buyers ahead of time -- there will be 50 of the exact same item auctioned off sequentially, one at a time.  Further imagine that no one at this auction knows in advance that there are only a total of 49 buyers present for this particular item.  In this situation, the first few times the item comes up, the bidding will be hot and heavy since the majority of buyers are still competing with each other.  This drives the bid higher each time, and, more importantly, establishes a psychology of "fair market value" for the item in everyone's minds.  Since the price is continually being bid higher anyway, each subsequent auction then commences with a higher starting bid, and the buyers naturally take no issue with this. 

There will continue to be some degree of competitive bidding, and accordant price increases, right up until the second-last buyer (buyer number 48) secures his item.  Then, with no more buying competition, buyer number 49 will simply pay the high starting bid -- and for a brief moment, this last buyer will actually think he got a "really good deal" because no one bid the item any higher.  But trouble starts (seemingly out of nowhere) when the auctioneer tries to sell item number 50, because suddenly nobody wants it at the opening bid.  He lowers the asking price -- but still, no buyers.  What no one there realizes just yet is that all the potential buyers have already been converted into "owners," so there's simply no one left who's interested in the remaining inventory.  The auctioneer looks around in surprise, and drops the price again, but still no buyers step forward.  And now a new kind of trouble begins, because at that point, all the people who just bought this item feel like idiots.  They're not "happy owners" anymore -- in fact, now they're thinking they probably paid way too much! 

The feeling that we got "ripped off" -- or that we own something nobody else wants (especially an "investment" nobody wants!) -- brings up strong emotions.  These emotions can be exceptionally powerful when it comes to the markets, because emotions in that arena are tied to our sense of financial security, which in turn is tied to our deepest, most primal instincts for survival (none of us can survive for long without any financial resources!). As a result, when the above analogized situation occurs in the stock market, it can actually generate an outright selling panic.  The panic psychology is further compounded by the fact that equities have absolutely no practical use whatsoever in the physical world.  You're essentially buying a really fancy piece of paper, solely because you're hoping you can sell it to someone else for more than you paid for it.  This "greater fool" psychology makes the stock market much more emotion-driven and volatile than the markets for most physical items.  In any case, once a "no more buyers" situation is reached, the asking price will have to continue dropping until such a point as either new buyers find the lowered price attractive, or previous sellers find it attractive once again, at which point a new price floor can be established.      

Do note that I'm not predicting a selling panic tomorrow, I'm merely noting that the sentiment precursors are in place, and a 20-year high in bullishness shouldn't be ignored.  Since I always try to see both sides of the argument, though, I think it's also important to note that these types of sentiment indicators are purely relative, and that makes them difficult to time trades with.  For example, I remember some contrarian investors talking about what a great time it was to buy equities in 2008 when the polls came in showing bears numbered around 60%.  They said it again when bears numbered 65%, and again at 70%, and again at 75%... and so on.  The market didn't end up bottoming until bears numbered over 90% -- so the key takeaway is that numbers which look extreme this week can end up looking mild by comparison in a month or two. 

Moving on to the charts, I continue to feel it's more likely that this is a reaction rally and that bears will take the market back down again after it's over.  The 10 minute chart shown second has a bit more detail about upcoming resistance levels.

It's worth mentioning that last Tuesday's projection (reprinted in the red breakout box below) has played out exceptionally well since.  Hitting three turns in advance on a "best guess" isn't too bad -- especially considering SPX traversed more than 80 points during that time, and the market's now right back to almost exactly where it started (!). That projection correctly anticipated about 85% of the move in terms of points captured, as well as the correct turning points -- so if you traded that roadmap, then you probably did okay. Hope it helped anyway!

We'll see if the original roadmap continues to track or if Friday's slightly altered view comes to pass.  On Friday, while I (correctly) projected the rally into the blue target box, I also slightly favored the idea that would mark the end of the upwards correction.  I noted that I didn't feel I could see "two turns down the road" at the moment, and what would happen after that rally wasn't entirely clear to me.  After studying the charts over the weekend, it does appear there may be some additional upside momentum left, so I've noted the next resistance levels on the chart below.

More Warning Signs for Bulls

On Tuesday, I outlined some of the reasons why I felt the market was undergoing a fundamental change of character, and discussed why I believed the power had shifted to the bears.  Since then, even more warning signs have cropped up for bulls.

The most obvious is the fact that most indices have now broken their intermediate uptrends.  Additionally, the decline in the S&P 500 (SPX) appears to be a five wave impulsive move, which suggests that the trend has shifted, and the next highest degree trend is now pointed down.  Whenever we see a new five wave leg forming in the opposite direction of the prior move, we can generally anticipate this first leg will be followed by at least one more leg of similar length, or longer.  There are other warning signs as well.

The chart below shows the 5, 10, and 20 day exponential moving averages of SPX and the Dow Transportation Average (TRAN).  This is based on a trend-following system which was popularized by Gerald Appel, who rose to stardom by developing the now-ubiquitous MACD indicator.  Okay, maybe "stardom" isn't the right word, since us traders belong to a pretty specialized subculture -- it's probably unlikely that your barber or landscaper has posters of Gerald Appel hanging in the garage, and I doubt he's ever hounded by paparazzi.  

Anyway, the last signal from this indicator was a buy, back in November 2012.  As we can see on the chart, TRAN has already given bearish crosses, and SPX is now extremely close to joining in.  Of course, there are no "magic bullet" indicators, and this one can be prone to whipsaws around tops, which is another reason I use multiple indicators and charting systems.  Nevertheless, this is one more potential red flag in the making for intermediate traders of the bullish persuasion.
  

  
The short-term wave structure in SPX is open to a few different interpretations, but I'm presently inclined to favor a path similar to the one shown below.  We'll have to see what today's session brings, but I suspect we'll see a green close today.

Tuesday's "best guess" projected path has since tracked nearly perfectly, but as mentioned above, I'm not certain if it will continue to do so.  I have left it unchanged on the chart below, but right at this exact moment I don't necessarily feel that I can see two turns down the road for the market.  I do somewhat prefer the path outlined above, which would see a rally for today, then a decline into Monday, then a bounce for Turnaround Tuesday.  Let's get through today's session first, then we'll take another look at the near-term path in Monday's update.

Do note that the red iii/C is not presently intended as a "final target," it's merely a general outline of expected direction at this stage.  Note that the trend line off the November lows has been broken for the first time since then.

SPX and Gold: Song Remains the Same

In the last update we looked at some of the reasons why lower lows are likely to follow Monday's low, while I noted that a snap-back rally could begin immediately.  The market spent yesterday's session in rally mode, and closed near the high of the day, which fit the pattern -- so as yet I have no reason to alter my thesis that lower lows await. 

It's currently unclear to me if yesterday's high will mark all of the (assumed) corrective rally, or if the rally will turn into a two-legged ABC -- in either case, I expect SPX to close in the red today.  There's no material change in the outlook for the S&P 500, so my best-guess projected path remains exactly the same as it was yesterday (though the price action did allow me to delete the rising blue line which was previously drawn in the place where Tuesday's rally has since occurred).

 
While I expect lower lows, we can't ignore the fact that SPX and the Dow Jones Industrials (INDU) both remain in technical uptrends.  A breakdown of the rising green trend line on the chart below is the next step for bears to gain confidence. 

Incidentally, for those who still doubt the value of technical analysis, I would like to note that I charted the blue channel (below) a pretty long time ago -- yet the rally was rejected immediately upon running into the upper boundary of that "imaginary" channel, and the same occurred in reverse when it fell back to the rising green trend line.  The next break of either will be telling.

Finally, given the recent volatility in gold, it's time to update the long-term chart.  Once again, simple trend lines worked their magic, as the recent decline found support at the rising blue trend line.  Given the wave structure, I would be surprised if gold does not ultimately break through that support level.  I've outlined next support and some potential targets -- trade above key resistance is required for me to re-examine that outlook.  Given the numerous failed retests of the all-time high and the subsequent breakdown of the topping pattern, it's hard to view the last couple years as anything other than a significant top.

The Market May Be Undergoing a Fundamental Bearish Shift

As long-time readers know, I have been primarily bullish on equities since November 2012 -- but for the first time since then, I truly have no desire to "buy the dip" for anything longer than a short-term trade.  There are some disturbing early warning signs that the market may be undergoing a fundamental change of character.  

I don't presently know how long this will last, but when I see signals like this from the market, I don't screw around and risk gambling away my financial future.  One of my trading mottos is "when in doubt, get out."  I have often likened trading to poker -- and one of the mathematical concepts required to become a winning poker player is an understanding of "pot odds," which is the ratio of the current pot to the cost of calling a bet.  Simply put: if the pot is $100, and calling costs $10, then the pot odds are 10:1.  Trading is all about odds as well.   

While I'm simplifying this analogy by overlooking concepts such as implied odds, etc., the next mathematical requirement in poker is to calculate the odds your hand has of actually winning the pot.  Then one compares those odds against the pot odds, and folds or calls (or raises) accordingly.  For example, if your hand will win 1 in 5 times, and the pot odds are 10:1, then calling a bet is a winning play over the long term.  But if your hand will only win 1 in 20 times while the pot odds are still 10:1, then the correct play is to fold if someone bets, and wait to try again next round.  (Incidentally, this is also why you want to bet aggressively and don't want to "check" a winning hand; if you don’t bet, you are giving your opponents infinite odds to draw to their long-shots for free against you.) 

In order to become a winning poker player over the long-term, one doesn't gamble, but plays each hand with discipline and according to the odds.  Oftentimes, inexperienced players will stay in the game despite the odds stacked against them -- usually this is because they either don't understand the math, or because they like "being in the action" and lack discipline.  Sometimes, in spite of their poor play, they'll win in the end -- odds are only odds after all, so even bad odds are mathematically required to win occasionally. 

Unfortunately, the thrill and reward of these occasional wins encourages bad players to continue playing incorrectly, and -- worse -- often leads them to conclude that their lack of discipline was actually pure, unadulterated brilliance.  The problem is, over the long haul players who have no discipline will, without exception, eventually end up 100% dead broke -- and that is a mathematical certainty.  I view trading in much the same light, and traders who lack discipline and overplay their weak hands will certainly end up broke as well.

All that to say, while the market always reserves the right to prove me wrong and go on to new highs immediately, I feel the odds are very good that there are ultimately lower lows still ahead.  Note that a near-term reaction rally could begin as early as today's session, but unless the market does something to shift the ball back to the bulls, given what I see today, I would expect the next rally will be sold.  Since the best we can do is attempt to play the odds correctly, here are a few statistics and observations to consider:

1.  The Volatility Index (VIX) rose more than 30% in the last two sessions.  Nearly 90% of the time this has happened previously in the past 20+ years, the market has subsequently gone on to make lower lows before making higher highs. Interestingly, the ferocity of the recent VIX rally also argues for a near-term snap back rally in equities, beginning as early as today's session.

2.  Precious metals have been absolutely slaughtered lately (I'll work up some PM charts over the next few updates), which means the market is at least considering the thought of a deflationary environment.  Further, the extreme volatility in PM's can often be a warning signal that things are about to become more volatile for equities as well.

3.  The momentum lows we saw yesterday are rarely reached in exact tandem with the actual price low, and generally we'd expect to see a bullish divergence before price finds a meaningful bottom.  Additionally, the up-volume to down volume ratio was high enough that we would expect to see further downside and new lows in the reasonably near future.

Let's start off with the S&P 500 (SPX) chart.  I've outlined my best-guess for a market path that presently appears reasonable to my eye, but do please note that predicting an exact path with the market in this position is exceedingly difficult, so don't be surprised if it deviates. 

As I mentioned yesterday, there is currently the potential of five complete waves up from the November lows, which usually means we can expect see a correction begin.

(If you're new to Elliott Wave Theory, I have written a primer article on the subject.)

I spent several hours working with the Philadelphia Bank Index (BKX) last night, since BKX has been a great leading indicator.  The chart below outlines one of the remaining bear options for the long-term: If BKX is forming a massive triangle, it will ultimately go on to new lows beneath the 2009 low -- though it would first grind around sideways/down (relative to the size of the pattern) over the intermediate term.  The chart below outlines the next important long-term levels.

BKX is one of the markets I've been keeping a very close eye on for several months.  A few weeks ago, I made reference to the possibility that a number of markets may be completing extended fifth wave rallies, and BKX was one of the markets I had in mind during that discussion.  I have never been satisfied with the summer-2012 rally as a complete five-wave structure, and the decline into November also did not overlap the potential red wave (i) peak, which keeps the extended fifth wave viable.  Though it's too early to say with certainty, the chart below does outline some signals and price levels.

SPX Finally Connects 2000, 2007, and 2013

A lot can happen in a week.  As some of you know, I have been dealing with a family crisis recently, so I'd like to thank those of you who continue to offer your kind words and support. 

A lot has happened in the market as well -- the S&P 500 (SPX) fell one point shy of my first downside target zone, then reversed strongly and went on to reach a new all-time high.  Interestingly, on Thursday, SPX pinged the trend line which connects the 2000 and 2007 highs, then reversed (as seen, zoomed in, on the chart below).  This is basically the last remaining horizontal resistance level, but it is a "doozy" as they say. 

The market has done its best to make us forget the potential of a long-term triple-top by ramming into it at high speed and looking invincible -- ironically, sometimes this means we should be on higher alert for a reversal.  I genuinely don't have a strong opinion as to what will happen next right here, since the market is basically at resistance but still above support -- but I feel neither side can afford complacency at current price levels.

There are a couple of signals in the chart below which bears may find encouraging:  Note the Bollinger band indicator in the lower panel.  These types of extreme readings are often found in the vicinity of tops.  Daily RSI (top panel) is also continuing to throw off bearish divergences.

   
The 10-minute chart notes some updated trend lines and support/resistance levels. 

In conclusion, the market has finally reached the very long-term trend line which finds its beginning in the same year the country was trying to figure out what the heck a "dimpled chad" was.  I'm not going to make any grand sweeping predictions about this being the end of the line for the rally, because I simply don't know -- but this is a long-term resistance zone, and the potential is there for a complete five-wave rally.  There are also a couple of indicator signals (shown in the first chart) which are often bearish.  This is one of those markets where bears have everything going for them but the actual price action, which has continued to run higher.  Some people refer to that as a bull market. 

Presently, there are no new targets, and this is more of a watch and wait position at the moment -- over the next few updates, the market will likely allow me to calculate some new targets. Additionally, we'll take a closer look at some of the long-term potentials and the signals to watch along the way.  In the meantime, trade safe.

Reprinted by permission, Copyright 2013 Minyanville Media Inc.

Publication Note

Unfortunately, I am dealing with a major family emergency right now, which has temporarily impacted the publication schedule.  I'm hoping this crisis will be resolved by Wednesday, but I'm uncertain if that will actually be the case.

Thanks for your understanding... and thanks again to those of you who show your support openly and generously -- I can't tell you how much that means to me at times like this.  You are surely the best group readers on the planet!  <3 

Good luck out there, and trade safe. 

Why Do Some in the TV Media Still Insist "You Can't Time the Market"?

The ending diagonal we started tracking in late March completed at 1573.66, about one-third of a point shy of the target zone.  On April 3, I wrote:

It is worth noting that yesterday's action did fulfill the minimum expectations for this pattern, complete with an overthrow of the upper trend line -- so while one more new high would look better, it is not required.

I was leaning toward the idea that there could still be one final thrust up still in the cards, but it never came.  It's rare that the market follows a projection that tightly, which is why most traders scale in and out of positions, as opposed to trying to time every move to the exact penny.  Considering that many of the TV talking heads will tell you that "you can't time the market" at all, I think hitting a turn within a third of a point on a 7-point target zone probably argues otherwise -- especially considering that we hit the two prior turns leading into that within a couple of points as well.

Before we get overly excited about the bearish prospects, we do have to recognize the reality that, presently anyway, only the short-term trend is pointed downward.  The intermediate and long-term trends are still pointed upwards -- for the moment.

In the last update, I outlined my expectations for the intermediate-term, so I won't repeat that here.  For the moment, we'll focus on the more near-term and see how things develop.  The first chart is the S&P 500 (SPX) 2-minute chart, and details my preferred interpretation of the wave structure, along with my first two targets.  Keep in mind that if my wave count is correct, we're now entering the small third wave within a larger third wave -- which often means a relentless down-trend for the near-term.  1549 will become key short-term resistance if this plays out. (Incidentally, I ran out of space on this chart...)

The hourly chart notes an intermediate bullish alternate count, which still expects lower prices for the short-term.  It also highlights the first target zone, and notes the second target zone in passing.  If it becomes appropriate, we'll discuss those options in more detail sometime over the next few updates, after the market reveals a bit more of the near-term wave structure.

The Pattern Nears Resolution as SPX Flirts with Its All-Time High

The preferred wave count continues to track extremely well and, as they say, "worked like a charm" again yesterday.  In this update I'll discuss the levels I'm watching for the short-term, and I'll also provide a bit more detail on my preferred intermediate outlook.

I remain bullish on the long-term, not because I feel the fundamentals support it, but because the central banks are still flooding the world with liquidity.  And as long as that continues, it will drive up asset prices.  The Fed seems to be trying with all its might to blow the biggest bubble it possibly can.  Somewhere down the road, I suspect this will all end badly (just as the last two bubbles have) and Bernanke will end up with a huge, unruly wad of US Mint-flavored bubble gum tangled up in his beard.  Then it will be time to break out the scissors.  In the meantime, though, the bubble is what it is -- and there seems to be no reason to try and fight it at the moment.

Let's start with the short-term charts and build from there.  The pattern I've been anticipating and tracking is called an ending diagonal, and so far it's done the "diagonal" part of the pattern perfectly.  Whether it will do the "ending" portion equally as well is likely to be revealed in the next session or two.

It is worth noting that yesterday's action did fulfill the minimum expectations for this pattern, complete with an overthrow of the upper trend line -- so while one more new high would look better, it is not required.  The key upside level to call this pattern into question remains 1582.82.  I have mentioned this next caveat in the past, but not recently:  when patterns such as this appear, if they turn out not to be ending patterns, then they are usually compression patterns which launch the market higher.  It's rare that they're anything in-between, so we should keep that in mind if the market sustains trade above 1583.  That's the caveat out of the way -- but because of the position of this wave within the larger structure, it is more likely that this is indeed an ending pattern.

To the downside, trade below 1558 would suggest wave v of 5 is complete -- or that the pattern was morphing into something entirely unexpected.

The hourly chart discusses the targets if 1582.82 is claimed.  Ironically, the only thing bothering me about the pattern is that it's tracked so incredibly well.  Whenever the market tracks this perfectly, I start suspecting that it's getting ready for a fake-out -- nevertheless, this pattern provides a clear trade setup that's hard to ignore. 

From an intermediate standpoint, the risk/reward is solid.  If the pattern completes cleanly, there's potential for a fair amount of downside.  Don't forget to keep the more bullish alternate count in mind when looking at the chart below, as I have not detailed it here.

Make-or-Break Day for the Near-Term Projections

Yesterday was a make-or-break session for the preferred S&P 500 (SPX) wave count of an ending diagonal, and today offers similar potential.  Heading into Monday's session, wave iii had a short-term invalidation level of 1572.56.  The market not only reversed about two points shy of the stop, but then moved down to perfectly break the trend line which "needed to be broken."  Thus this wave count gains a bit of confidence and continues forward.  The 10-minute chart below is almost unchanged since 3/28, as the market has tracked the projection exceptionally well since.  For short-term trades, this has provided a few excellent low-risk entries, with clear stop levels along the way.

It can be very tempting to get cocky after the market follows a projected path this well -- but these are exactly the times to be cautious as a trader.  I can't tell you how many nights I've scalped a string of eight or more consecutive wins, only to grow too big for my britches and give back half my night's profit on one bad trade.

Just as life does, the market has a way of quickly humbling the proud; so moderation and discipline become the keys to lasting success.  So often, after we achieve success, we become proud and careless -- but in so doing, we forsake the very qualities which brought us success in the first place.  Failure is bound to be the result.  At times we seem unable to recognize that we are rising and falling on our own endlessly repeating inner cycles:  We fail, so we decide to buckle down and work harder; then we work harder, which allows us to achieve success; then, after we achieve success, we become proud and careless again -- so we lose our hard-earned success only to find ourselves right back where we started.  Rinse and repeat.  I've known a lot of traders (and beyond), myself included, who have fallen into this trap at times.   

I believe one key to trading is to learn to act in accordance with the times, and to recognize that sometimes doing nothing is actually the most productive thing we can do.  Trying to plant crops in frozen ground only wastes precious resources -- so avoid the trap of needing to "constantly be part of the action."  We can gain a great deal of understanding by learning to recognize not only the cycles of the market, but also the cycles of our own tendencies.  And many days, the opponent we're trying to overcome isn't outside of us at all.  I've said it before: I believe our biggest opponent in trading, and the hardest one to beat, is ourselves. 

We currently have a pattern that appears reasonably clear -- and we also have some key levels to watch which will tell us where things become less clear.

It's now anticipated that SPX will form another thrust up, to a new high.  Ideally, I would like to see this rally break the upper red channel boundary (but this is not required), then reverse back into it and rapidly retrace toward 1540.  We are again presented with a very clear stop level for near-term trades, since the diagonal as labeled is invalidated above 1582.82.

The hourly chart notes the targets of the more bullish alternate count if 1582.82 is broken.  This level is key because wave v in a contracting diagonal cannot exceed the length of wave iii.  Every now and then, diagonals are transposed slightly from the most obvious count -- in other words, the wave which currently appears to be wave iii could conceivably be an extension of wave i (a diagonal is "allowed" to have a wave which is a double zigzag; a double zigzag is two connected ABC's).  That presently appears markedly less likely, but it is not entirely outside the realm of possibilities.

In conclusion, the ending diagonal pattern has tracked quite well so far, now it remains to be seen if it will conclude with equal ease, or morph into something more bullish.  Trade safe.

Reprinted by permission, Copyright 2013, Minyanville Media, Inc.

Intermediate Indicator on the Cusp of a Sell Signal

In my opinion, for the last couple weeks, this market has been less about clinging doggedly to set-in-stone predictions, and more about figuring out the correct "if/then" equations and then trading accordingly.  I believe it remains that way heading into this week. 

Early in Thursday's session, the S&P 500 (SPX) edged up over the prior high, which invalidated the most immediately bearish short-term wave count (the "if" part of the equation), and moved into the next target zone of 1568-1571 (the "then" portion).  This places the next if/then equation on the table, which I'll discuss momentarily.  The near-term ending diagonal wave count has gained favor, while the intermediate wave count remains unchanged.

The intermediate wave count continues to believe the market is finally approaching a more meaningful correction, though I presently believe this correction will be a buy opportunity, and I remain bullish on the longer time frames.  I still find this market environment unusual, however, so while I think it's important to remain cognizant of the long-term potentials, I don't necessarily think it's wise to get too far ahead of the market -- so we're just going to focus on the near-term and intermediate term right now. 

Before examining the wave counts, I'd first like to offer the chart below as additional supporting evidence for the intermediate wave count, and my corresponding thesis that a larger correction is drawing near.  This indicator has not yet given a complete sell signal -- however, we can see the full sell signals usually come after a correction has begun, so it's worth paying attention when the indicator is close to triggering, as it is now.

Looking at the intermediate-term, the preferred outlook is still that the rally is completing the fifth and final wave for this leg, and that a larger correction will follow.  If you're new to Elliott Wave Theory, the underlying concept is that the market is fractal in nature, and when a five wave structure has completed, a correction is then due.  (I've written a more detailed primer article on the subject, which can be found here.) 

Something I like about the current charts is that the market has declared some key levels for us to watch, and those levels are providing our if/then equations.  When I interpret the market using Elliott Wave, I take a detailed look at the current pattern and try to anticipate the fractal that's forming.  If I can correctly anticipate the fractal, then I can correctly anticipate the market's next move.  It's never cut-and-dried, though, because some fractals look identical in the early stages, which is one reason I often bring other forms of analysis to bear.  However, the advantage I feel Elliott Wave provides during such times is that there are clear rules which allow us to invalidate certain fractals.  While this doesn't always tell us exactly what the fractal is, it still gives us probabilities to work with -- and an invalidation level can most certainly tell us what the fractal is not, which can be very valuable information.

Based on the price action of the last few weeks, I'm inclined to believe the fractal forming in the chart below is a pattern called an "ending diagonal."  In an ending diagonal, the market forms five waves (labeled i-ii-iii-iv-v below) -- and each of those five waves breaks down into three wave structures.  There are two rules for contracting ending diagonals which would allow us to invalidate this pattern and favor the alternate count.  In a contracting diagonal, wave iii must be shorter than wave i, but must be longer than wave v.  This is why 1572.56 can invalidate this pattern -- crossing that price point immediately would make wave iii longer than i.

Ending diagonals make great topping patterns, because they are brutally choppy and keep breaking out just a little bit, only to reverse lower each time, and then reverse again to head back up.  Short-term traders become conditioned to believing the market will come back up each time -- and then, finally, it doesn't come back.

Let's start with the more detailed 10-minute chart, and then examine the hourly for context.

On the hourly chart, we can see the rally appears close to completing the fifth wave of the fractal.  Once this fractal completes, the minimum expectation for a correction would be a trip back into the 1485-1525 zone.  That's a very broad target range, but we'll be able to narrow it considerably if and when the correction actually begins.

SPX Update: Near-Term Starting to Clarify Again

The market has continued to grind within the noise zone -- but there is now the potential of a near-term problem developing for bears.  There have been several attempts at the 1561-1564 zone, and the more times support or resistance is tested, the weaker it becomes.  In the case of resistance, eventually the overhead supply of sell orders is exhausted -- and once the balance shifts to where there are more buyers than sellers, the law of supply and demand leaves the market no choice but to head higher... at least until it runs into a new layer of supply.

This is the reason there are no officially-recognized "quadruple" top or bottom patterns in classic technical analysis (to my knowledge, this pattern is only recognized in P&F charting). Shorting the first retest can work, shorting the second retest can work -- but shorting the third retest is usually a losing play for more than a quick trade, because odds are good that the market has already chewed through most of the sellers at that price level.

In other words, bears are basically facing their "final stand" at these levels.  Another thrust back up here, and the sellers will likely become overwhelmed, at least for the near-term.

In regards to the intermediate-term, there has been no change in my outlook and, unless there is a material change in the market's behavior going forward, I continue to feel this is the final leg of the rally before a larger correction.  The challenge of the past few sessions has been in trying to determine how we'd get there, and the market really hadn't been giving me too much to work with in terms of clarity.

Things are finally starting to clarify, though, and for this update I have a number of potential targets, as well as some key levels which would suggest progressively higher price targets if crossed. 

There's now one obvious pattern in the near-term charts, and this is the pattern many technicians seem to be watching; it's called an "ascending triangle."  In classic technical analysis, this is a continuation pattern, and suggests a target of 1588-1590 if the market breaks out above the upper boundary.

While I can't be certain, I suspect that pattern may not play out as most are expecting.  I'll explain the pattern first, then I'll explain what to watch for to determine if it's "working" or not.  Of course, the first thing that needs to happen for this pattern to have any validity at all is the market needs to break 1565 -- if that fails to happen, then it's a moot point.
 

While the triangle is more obvious, I'm still inclined to favor the idea that a top is closer than this pattern suggests.  There are two near-term options for bears here: the first is that the prior high holds and the market continues lower immediately.  The second is a pattern I mentioned a few days ago, called an ending diagonal.  If 1565 is broken, the diagonal will become my odds-on favorite, with the next target (for wave iii) being 1568-1571.  If the market then goes on to break 1573 during wave iii (on the chart below), I will then be sold on the ascending triangle pattern discussed above and be inclined to favor a trip to 1580-1600.  Unless that happens, though, I think the diagonal shown below (or the more immediately bearish count) is more probable.

SPX Update: The Market Just Raised Its Noise Level

Two words keep coming to mind as I study the charts right now: "inconclusive noise."  I think it's vitally important as a trader (and probably as a person, too) to "know when you don't know."  The near-term possibilities having suddenly spiraled into infinity, so it's going to be difficult to project the market's next move until it gives us a bit more info.  If you're a new trader (or a new reader), please don't be discouraged by this; the market alternates between moments of clarity and moments of ambiguity, and it will clarify again soon enough.

I studied a number of markets yesterday, and while I'm not going to publish charts on every one of them, there are lots of conflicting signals out there.  Some updates leave me feeling that I put in a whole lot of work for a very limited reward (for readers), and this is one of those.  I'm inclined to give the bears a near-term edge, but my confidence is low at the moment.

I'm going to start off with the Dow Jones Industrials (INDU), since the rectangle pattern here has some fairly clear implications using classic technical analysis. 

     

On the SPX 10-minute chart, I've outlined the two near-term bull and bear potentials which presently appear most reasonable, but I have not shown the most bullish of the near-term potentials.  I'll outline that potential briefly here in the body of the article (and on the Russell 2000 chart in a moment):  It is possible that the rally from 1538 to 1561 is wave i of 5, and the entire move since is a corrective second wave.  That count suggests a target in the 1580-1600 zone and becomes an option above 1565, while it would be invalidated below 1538.  The annotations explain the details of the other two counts.

 

 

 

On the hourly chart, I've moved a couple labels, but the conundrum remains the same as it's been.  I continue to believe that wave 5 has either completed or will complete with one final leg, at which point we should see a larger turn. 

SPX Update: Insert Witty Title Here

The market has remained within the trading range since last Thursday's update.  There was one new development since then, and that's the fact that on Friday, the decline overlapped itself in a fashion which indicates that it may have been a corrective ABC decline.  This puts the odds slightly back into the bulls' favor over the near-term, although things can get fuzzy around these types of inflection points -- technically, bulls still need to reclaim 1563.62 to put a stake in the very short-term bear count.

If the S&P 500 (SPX) does clear 1563.62, then it is presently still assumed that this is wave 5 of 5, the final wave before a more prolonged correction.  Note the now-striking similarity between the current market and the fractal I called attention to on March 13.  I have also added a much more bullish alternate count, but this is just a foreshadowing, and I'm not paying much attention to it just yet.

The rally has now gone on so long that I had to increase the time frame on the hourly chart to accommodate the entire channel.  This is characteristic of a third wave rally, and this type of strongly-trending wave is rarely seen immediately before a long-term top, which is one reason I remain bullish on the longer time frames.  Usually there are several deceleration waves before a long-term top is reached (this is what I am anticipating will occur soon). 

It will be interesting to see if the cash market can clear the prior high and then push into the final target zone.  Note that, up to this point, three of the four target zones have generated reversals.  This next target zone is expected to precede a decent-sized correction, if the alternate count is invalidated.  Of course, now that I've mentioned this, I have all but guaranteed that the market will either fall short of that final target zone, or will slice right through it like a hot helicopter blade through a credit crisis. 

The daily chart shows the market continuing to flirt with long-term resistance levels.  There are some divergences beginning to show up in RSI and MACD, which is typical of fifth waves.

There is only one "small" detail that's bothering me about the anticipation of a correction starting soon.  If the rally from 1266 to 1474 was indeed a first wave, then a typical target for the third wave would be a 1.618 extension of that wave -- which would put the target for this wave all the way up around 1680.  Thus my caveat here is if one is inclined to take stabs at short positions along the way, I would suggest staying nimble and not getting too married to those positions.  It's always entirely possible that my preferred interpretation of a pending intermediate correction is premature.

Nevertheless, I currently remain in favor of the interpretation that the fifth wave is nearing completion.  The last two waves fit the characteristics of fourth waves quite well, and that lends credence to the preferred wave count.

In conclusion, the near-term bear count remains alive until 1563.62 is reclaimed, so it's up to the market to declare its next intentions.  At the intermediate level, I still believe we are approaching a turn.  Trade safe.

Reprinted by permission, Copyright 2013, Minyanville Media Inc.

Sentiment Reaches Extreme Levels as the Charts Reach an Inflection Point

Well, the FOMC meeting yesterday turned out to be a complete dud.  In keeping with the spirit of the recent St. Patrick's Day holiday, Bernanke simply reaffirmed that the green wine of liquidity would continue to flow unimpeded by the possible cork of inflation, and apparently gave no thought to the severe hangover which will be experienced when the country wakes up in a strange place, with a "QE" tattoo, and buried under mountains of debt.  The message of the press conference seemed to be that the Fed will keep printing gobs of money until either the unemployment rate reaches 6.5%, or until the earth crashes into the sun, whichever comes first (I'm taking bets!).

Before I move on to the charts, it goes without saying that I'm generally discussing several time frames at once in the updates.  At times this can get confusing, so here's a quick review of where I stand on the different time frames: 

Long-term, I remain bullish for the time being.
Intermediate-term, I believe we have reached (or have nearly reached) a turning point.
Short-term, I am slightly favoring a bearish resolution to the current wave.

I should note that the trend itself, at all degrees, is presently pointed upwards.  One law of physics that the market usually seems to obey fairly well is the law of inertia -- so, all things being equal, the odds are always slightly against us when we're betting against the prevailing trend.

We'll cover the short-term first, and then move on to the intermediate term.  The S&P 500 (SPX) performed largely as anticipated yesterday, and has continued to leave all near-term options on the table.  It did exceed the 1559 level I expected, while at the same time it failed to reclaim the prior 1563 swing high, which leaves the more bearish near-term count wholly viable.  While I can't say exactly what the market will do next in this position, I have listed a few signals to watch, and what their likely resolutions would be, on the chart below.

Near-term, I remain slightly in favor of the bear count shown above, partially because of the pattern in the E-mini S&P futures, shown below.  This pattern looks like an impulsive decline off the 3/15 high, followed by an ABC rally.  If this pattern is not an ABC, then it is a very bullish nest of first and second waves, which projects significantly higher.  I have trouble seeing the market sustain a rally that strong from this position -- and though stranger things have happened, I believe this lends credence to the near-term bear thesis on the chart above.

On the 10-minute chart below, I have simply extended the existing trend lines and added a few new ones.

An Alternate Bearish Potential for the Intermediate Term

Today, we’re going to start off with a long-term chart, because I finally feel the time is right to call attention to this particular potential.  I often begin tracking potential patterns many months in advance, but don’t mention them in the articles, because I feel it would only confuse people if I discussed these patterns too early.  The chart below is one that's been on my watch list for a long time, but the pattern has only now reached a position where I feel I can talk about it without confusing readers. 

As we all know, bullish sentiment has been extreme, and many major indices have broken, or are probing, their all-time highs.  More often than not, this is where the general public finally decides it's time to "put some of our savings into stocks."  Usually not long after that happens, the Big Boyz figure out a way to fleece retail investors of most of that money so they can go buy themselves a new Congressperson or two.

Accordingly, the chart below notes that the wave since June 2012 reconciles quite well as a fifth wave extension (shown in blue), which would actually lead to a significant retracement.  Of course, this is way ahead of the game here and should presently be considered as an alternate count -- but I do want readers to be aware that there are indeed more bearish potentials than the ones I've been focusing on recently (shown in black).  So as always, it's important to avoid getting too complacent if you are bullishly inclined.

 

The hourly chart below shows the more bearish count as the alternate, but I am still giving it equal odds at the moment.

There are literally infinite possibilities at any given moment, particularly in a structure like this.  Nevertheless, I've narrowed the chart below to the two I feel are most probable.  When I look at this chart, I am actually somewhat inclined to favor the bears. 

There's a 7-point window where the bear count and bull count split -- in fact, if my interpretation is correct, then the SPX should actually get back above 1559, which makes it a 4-point window.  Even though the bull and bear counts are roughly equal in odds, as a trader, I almost have no choice but to position short if that window is reached, because the risk/reward is exceptional.  Some trades are almost automatic for me -- and I'll take most any trade if I can get an entry that offers high potential profit with only a few points risk.  (This is, of course, not trading advice and you should consult your broker, your banker, and your priest before doing anything, etc.)

Bears Want to Know: Are We There Yet?

Yesterday saw a solid gap down after the weekend Cyprus news, but buyers appeared immediately, and the market rallied strongly into the afternoon, before running into some selling again into the close.  The question everyone wants answered now is whether this is merely a low-degree fourth wave correction (a deceleration of the uptrend) or the beginning of a larger shift in trend.  Let's discuss a few factors relating to both.

The first salient point is the fact that the ensuing rally was able to overlap 1555.74, which is the potential bottom of a first wave down.  In the Elliott Wave model, this is significant because it eliminates certain possibilities -- specifically, it eliminates the possibility that the ensuing rally was a fourth wave correction to the decline.  That gives the decline the appearance of being three waves (an ABC decline), which is typically the sign of a correction to an ongoing trend.  It's not entirely clear-cut in this case, though, because a series of first and second waves could overlap the 1555 price territory without violating the rules.

Yesterday I suggested we give equal weight to both counts, and I still think it's too close to call.  However, given the overlap at 1555, the position of the decline within the larger waveform, and the fact that the trend should generally be given the benefit of the doubt, one might consider giving very slight odds to the black count shown on the chart below.  Trade below 1545 would start to open things up for the bears, while trade above 1563.62 would confirm the black count.

I've also added a series of if/then target equations to the annotation box, along with my interpretation of the relative probabilities for each target.  Those probabilities are read given what's in the charts right at this exact moment, and thus could increase or decrease as more information becomes available from the market.
 

The hourly chart is unchanged from yesterday, and the alternate count still remains a very real potential.  In the event of the alternate count, minimum preliminary targets with the market in its current position range from 1485-1525, but could extend lower and would have to be adjusted in real time.

The long-term chart of the S&P 500 (SPY) shows that the market continues to push against the prior long-term peaks.  While I haven't annotated the chart with a wave count, I have noted on the chart that there are two pivotal price points to the downside.  As we just discussed, the peaks and troughs of potential first waves are important in Elliott Wave -- so I've noted the last two prior assumed first wave peaks.