Near, Intermediate, and Long-Term Outlooks for SPX

Wednesday's update contained more caveats than a prescription drug commercial, but the wave counts suggested a final thrust lower in wave (5), followed by a snap-back rally.  The snap-back rally is underway now, and my current suspicion is that this rally will end rather abruptly and unexpectedly.  Before we discuss that in more detail, let's center ourselves with a look at the big picture S&P 500 (SPX) daily chart.

In the last update, I shared a chart which noted the fractal similarity of the current Dow Jones Industrials with the 1929 market; however, the odds presently still favor the idea that we're not quite to the end of the road for the entire bull market yet.  The alternate idea of a massive corrective rally which started in March 2009 and completed at 1850 still has to be considered an underdog to the idea of new highs after the current correction completes. 

At intermediate degree, presently this structure is suggestive of a two-legged decline.  This will ultimately form an ABC (wave C down is still to come) -- if it instead turns into an impulsive form (five waves instead of three), then we'll give more weight to the idea that 1850 was a long-term top.  That's the long-term outlook and alternate. 

At intermediate degree, there is an alternate count that wave (4) completed at 1737, but I'm viewing that as a heavy underdog, at 30% odds.  Nevertheless, on the hourly I'll detail the wave count which allows that option.

   
The hourly SPX chart outlines my preferred target, along with the first alternate option.  Again, the idea that the entire correction completed at 1737 is presently being viewed as a heavy underdog, but I'd be remiss not to mention the possibility.  Please note the majority of the text annotation is at the bottom of this chart, including the price targets.

Finally, an update to the SPY chart, which followed Wednesday's preferred path quite well:

In conclusion, I've discussed a lot of alternates in this update, so to avoid confusion, the preferred counts across all time frames is as follows:

1.  Near-term, higher prices appear probable.
2.  Intermediate-term, lows beneath 1737 are still likely.
3.  Long-term, it presently appears that the bull market has some life left in it.

While I project the market across several time frames in most updates, I have to admit I always feel a bit humbled trying to anticipate the market's every move on all scales from micro to macro -- so don't be shocked if some of these projections need real-time adjustments somewhere down the road.  

Enjoy the weekend -- and until then, trade safe.

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Current Equities Market Continues to Shadow 1929

The market has continued to punish those looking to buy the dip, which is market behavior most seasoned traders have been "waiting for" for a long time.  In a moment, we'll look at an interesting analog chart which overlays the current market with 1929 and shows a striking similarity -- but first, the current charts. 

On January 29, and in every update since, I've mentioned that the market was behaving like it's in a crash wave -- and so far, that continues to be the case.  I figured it needed no further discussion, but suppose I should add that, for less-experienced traders, "crash wave behavior" means that attempting to catch falling knives is ill-advised.

The SPY chart below shows a great example of where a seasoned vet might try to knife-catch this decline, on the idea that the most recent decline was/is a fifth wave.  The problem with crash waves is that they don't follow the "normal" guidelines of a wave structure -- which means that the bounces which would typically be expected to be tradeable often end up being nothing more than brief pauses in the decline.  When there's a crash-wave underway, most traders would do well to simply stick with the trend (as I discussed in a bit more detail on January 31).

Incidentally, January 31's near-term preferred count (the only count I published, actually -- no alternate was shown) proved to be correct, and wave (4) was indeed complete.  One could argue that we've reached, or are approaching, the end of this wave -- but again, given the crash wave behavior we've continued to witness, I would recommend approaching only with extreme caution.

In favor of the bulls, do note the positive RSI divergence at the recent low, and the fact that we hit black trend support and bounced.  If bulls can hold that line (or head-fake bears with a quick whipsaw) the market does have the ingredients present to put together a snap-back rally from here.

Next is the S&P 500 (SPX) 1-minute chart.  Near-term, this chart is an absolute mess.  I ended up cross-referencing five major markets against this chart, but none of those charts were much better.  The choppy, overlapping structure does suggest a market that's still struggling to advance against continued selling pressure, so we probably have to give odds to the idea that SPX is headed to new lows.

Examining the other side of the trade: the rally could conceivably be counted as an impulse wave.  In fact, that's what I've detailed on the chart (because that's how I do my chart work while trying to arrive at a conclusion).  I've outlined a few levels to watch.      
 

Next is the Dow Jones Industrial Average (INDU) -- a bit wider view than the two previous charts, which is always important for perspective:

Finally, there's an analog to today's market that you may or may not have seen previously.  It's certainly intriguing.  One of my regular readers has been tracking this for some time, and he was kind enough to send me his data in order to allow me to recreate his chart.  This chart compares the current Dow Jones Industrial Average to 1929's market.  We've been tracking this since before the market turned -- and now that we've seen something of a relentless decline, the comparison is starting to seem a bit uncanny.

In conclusion, SPX may be closing in on completing a fifth wave, which would finally lead to a larger bounce -- however, I would continue to recommend extreme caution.  Even if we bounce from here, all current indications still suggest that the trend has changed at intermediate degree and that bounces should be sold.  I will, of course, continue to watch for any signals which might suggest we reexamine that thesis.  Trade safe.

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Some of the Fundamental Issues Facing World Markets

It's time to address the elephant in the room.

I generally watch charts first and fundamentals second, for the simple reason that fundamentals give me a biased view of the charts.  That may sound a bit strange to some folks, so let me explain further by way of analogy:  I think of fundamentals as the foundation which underpins the collective "market."  Looking at the foundation of a house gives us a general idea of how many square feet it might be -- but the foundation won't tell us anything about whether the bathroom floor inside that house is made of linoleum or Travertine tile.  And it won't tell us how many people live in the house, or whether those people even like the house in which they live.

In other words:  The fundamentals set the backdrop for the market in broad strokes, but the charts contain the specifics.

Fundamentals drive social mood to a degree, and I've found that if I focus on them too much, I start to become subject to current mass sentiment -- and the problem is, the market is all about doing the opposite of what sentiment thinks it should do.  We can throw out adages in abundance to illustrate this point:  "Buy when there's blood in the streets";  "Sell on the sound of trumpets"; "Bull markets climb the wall of worry";  "Bear markets slide down the slope of hope"; etc.

So to some degree, I try to compartmentalize the "real" world (fundamentals), and keep it separate from the fantasy world of hopes, dreams, and fears that is the market.

And the fact is, what constitutes the "real world" as I see it is only my opinion anyway.  While there is most certainly an objective reality, none of us are truly capable of seeing it clearly -- we all see some vestige of ourselves when we look at the world, because we are forced to interpret the world through the lens of our own minds.  Our minds are, in essence, the brokers of reality, and due to a host of human traits which relate to our emotional needs and insecurities, our minds frequently avoid giving us a full disclosure of reality.  To some degree, we all cast our own shadows onto the world beyond.  (For more thoughts on this subject, please see:  Trader Psychology and Why the Stock Market is Always Right)

Anyway, to draw a totally arbitrary example, I might look at, say, a massive quantitative easing program and say to myself, "Self, something this huge is bound to have huge unintended consequences somewhere down the road.  Like ripples spreading across a pond, this is going to impact the global economy and cause issues we cannot control, or even foresee."  But the next guy, especially if he's a Primary Dealer for the Federal Reserve, might look at QE and say, "Hey cool, free money!"

His reality differs from mine -- but true, objective reality is likely to lie somewhere in-between.   

As a finite person in an infinite universe, I recognize my opinions of reality can never claim the corner on objective truth -- so I try to listen to the charts first, because charts are less subjective than my interpretations of reality.  As an example, back in late 2012, the news headlines still talked of fear and dark days ahead, while the charts told the story of a rally to new highs (and by the beginning of 2013, the charts told the story of a massive rally).  The same thing happened in reverse more recently: the charts told the story of pending trouble, while the media was still touting the message that stocks were headed to "infinity and beyond."

This has been my consistent experience of many years of charting: charts are forward-looking, while the media typically only reports that which has already happened.  Since the immediate past is what impacts current sentiment, giving the charts more weight is one way we can avoid becoming part of the herd.

So, with all that said, I feel it's time to talk about some of the fundamental issues which could become the catalyst for trouble -- especially since the charts continue to warn that trouble may be lurking.  The issue currently grabbing the headlines lately is "the emerging market crisis."  "Emerging" is a reference to the markets of less-developed countries; this is a term we use in the West to refer to countries who don't enjoy the sophisticated conveniences we do, such as:

1.  The Super Bowl, wherein we humbly crown a team from our country as "World Champion."
2.  A massive, ludicrously-powerful central bank.
3.  Ben Bernanke (currently available).

The "crisis" these unfortunate countries are experiencing comes about from, of all things, our very own ludicrously-powerful central bank (let's have a big Las Vegas welcome for: the Federal Reserve!).  In a nutshell, this is one of those unintended consequences people are always yammering about: When the Fed was pumping $85 billion a month into the primary dealer's pockets, that money found its way into anything and everything -- especially with Fed interest rates effectively at zero, investors looked for places they could put that money to work to earn a higher return. 

Enter the carry trade.  If you're not familiar with that term, quite simply, a carry trade is when investors borrow (or short) a currency which has a low interest rate, such as the Japanese yen or U.S. dollar, and then use that money to buy currency (or invest in assets) from a different country where they can get a higher rate of return.

Enter the aforementioned emerging markets.

So, for example, I might borrow money in yen at 0%, then invest that money in an emerging market where I can get 5%.  Seems like a no-brainer, right?  More free money!  Not necessarily.

Trouble starts when sentiment begins shifting.  As the threat of QE taper becomes reality, investors have been reassessing their risk exposure:  After all, if the good ol' U.S. of A. is going to raise interest rates, why stay invested in a higher-risk emerging market? 

Nobody wants to be the last one standing when the music stops, so in some emerging markets investors have been rushing the exits -- and this is causing currencies such as the South African rand, the Turkish lira, the Argentinian peso, and the Indian rupee to plummet.  This has a contagion effect, so the currencies of less-troubled nations, such as South Korea and Mexico, tend to suffer as well.


This is not the first emerging market crisis the world has ever seen, nor is it likely to be the last.  Historically-speaking, things have been relatively mild so far.  However, this is the worst "emerging market crisis" we've seen in the past five years -- and we must acknowledge that these things always have to start somewhere.  The financial crisis of 2008 didn't start off as the end of the world.  Don't get me wrong, I'm not trying to be alarmist here, I'm simply pointing out that problems generally start off small -- then from there, they either get better or they get worse.  How bad things will actually get, and to what degree this may or may not impact the U.S., is currently the subject of significant debate among people who know more about it than I do. 

So to bring everything full circle from the opening paragraph:  My personal suspicion (since the day QE was announced) is that as QE winds down, there will be plenty of other unintended consequences.  However, since I can't anticipate most of those -- and since I certainly can't time exactly when they'll occur -- I'll stick to the charts for the specifics.

Since we've been talking about the emerging market crisis and the carry trade, let's start off with the US dollar/Japanese yen chart.  This charts shows usd/jpy is sitting on a zone which appears to be key support, having formed an apparent head and shoulders topping pattern.  From an Elliott Wave perspective, the highest probability wave count appears to be a bearish nest of first and second waves -- but as of yet, there's been no serious technical damage to this chart and it could still be viewed as a simple back-test of support.  The noted support zone is critical, and if this market sustains trade beneath that neckline, classic technical analysis would target a trip to 97.800-98.100.   The first step for bulls to begin a recovery would be a sustained breakout over the upper boundary of the blue trend channel.

Next up are the financials, via the Philadelphia Bank Index (BKX).  My first inclination when I look at this chart is to think we rally over the near term -- but I've outlined a number of signals on the chart to allow for a "let the market dictate" approach.

Finally, the S&P 500 (SPX) chart.  This is another chart where I prefer to let the market dictate its next intention.  As I mentioned in a recent update, the market has been behaving like it's in a crash wave, so while I'd "like" to see a rally here, I also feel this is potentially a dangerous market right now.  I'm always in favor of trades where one can get a low-risk entry -- but I would highly recommend staying extremely nimble and honoring one's stops with the market in its current position.

In conclusion, so far all the market has done is briefly arrest its decline.  There's been nothing significant to indicate bulls have regained control.  Trade safe.

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Bears Wake Up from Hibernation in US Equities

Bears have made progress since last update, having forced the anticipated new low, which is beginning to give the wave structure an impulsive appearance.  This was the expectation, since we're following November's preferred count (for those just joining us, the preferred count anticipates that the market is now retracing an extended fifth wave rally), but it's important to have confirmation from the market anyway.  We've all seen what happens to traders who form a thesis and then ignore the market's signals (i.e.-- preferring to be "right" over being successful).

We'll start off with the S&P SPDR Trust (SPY), which is an effective proxy for the S&P 500 (SPX).  Since last update, SPY has reached the first downside target from January 10, but appears to need at least one more wave down to form a complete impulsive (five-wave) decline.  In a way, this is now the "hopeful bull" count... on the NYSE Composite (NYA) chart which follows, I outline a more bearish potential.  As I mentioned in the last update, this market has been behaving suspiciously like it's in a crash wave (or "waterfall" if we want to avoid the "c" word), so we need to stay open to that possibility.
 

The NYA chart notes the more bearish potential and some signals to watch.  Notice how NYA broke down from the lower black support line.  It's back-tested that line, and not only failed to rally above it, but has consolidated the breakdown by back-testing the trend line twice.  That suggests strong selling pressure in that price zone; price consolidation beneath support is generally a bearish signal.

For those following along at home, I've also labeled the subdivisions of the wave structure in more detail (on this chart), to help "show the math" behind the idea that the next wave down is wave (5).  I didn't show this level of detail on the SPY chart because when I tried, Stockcharts.com gave me the following message:  "You have too many annotations.  Try deleting some.  Seriously.  What is wrong with you?"

Finally, an updated look at the trusty SPX:AGG (essentially: stocks to bonds) ratio chart, whose signals have been dead-on for the past few months.

In conclusion, it appears quite likely that November's preferred count will continue to hold, and that bears are going to effectively confirm an intermediate trend change.  If you're a relatively new trader, remember the counter-trend trading is the most difficult type of trading there is.  When you trade with the trend, the market will always come back to you eventually, and will thus bail you out of even the worst entries.  When you trade against the trend, you have to stay extremely nimble -- your entries and exits must be close to perfect, or the market will leave you high and dry and not look back.

There are, of course, bullish options here; after all, we're always dealing in probabilities, never certainties -- but for the moment, there is nothing in the charts that suggests an intemediate bottom is at hand, though they do hint at the idea that we may be getting close to a short-term rally.  Trade safe.

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Bears Closing in on Intermediate Victory

There's been no material change in the outlook since last update, except to note that the first downside targets have nearly been captured for the S&P 500 Spyder Trust (SPY).  SPY so far has come within .12 of the target -- which isn't too shabby considering that thesis was originally put forth before the market had even reached the 184-186 upside target zone, much less reversed downwards.  Momentum has confirmed the low, so the charts appear to suggest at least one more wave down lurking in the future.  Another wave down would serve two functions:

1.  It would capture the first target zone.
2.  It would give the decline an impulsive appearance, which would suggest another leg down after the next bounce.

Stay alert to the fact that, at the moment, the market is behaving like it's in a crash wave, so I'd suggest staying very nimble on any long positions if 1772 fails.

Near-term, the S&P 500 (SPX) presents two options, as discussed on the chart below.  If we're forming a standard impulsive C-wave, then any opening declines should find support north of 1772 -- and the impulsive c-wave actually suggests a decline toward gray 2 (which would be bought immediately) to start the session.  Please read the annotations below for discussion of the potential of a "failed" c-wave, and the implications.

On the 30-minute SPX chart, it's interesting to note how the market was drawn to the confluence of support lines on Friday's chart.  It's also worth observing how the well-traded range of the noise zone provided virtually zero support, also as noted on Friday.

In conclusion, bears have done what they've needed to up to this point -- if they can force another new low, either directly or after an impulsive c-wave, then we'll have what appears to be a five-wave impulsive decline.  On the flip side: if bulls are going to stick-save this market and build an intermediate bottom, then now's the time.  Trade safe.

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How Deep Will the Correction Be in US Equities?

Friday saw the first 2% down day since Nixon resigned... or that's what it seems like anyway.  We've all become conditioned to the Invisible Hand supporting the market at all times recently, so the relentlessness of Friday's sell-off wasn't something any of us are "used to" anymore.  By the same token, as I've written about in almost every article this month, there have been repeated warning signals in the charts -- so while Friday's decline definitely exceeded near-term expectations, it certainly didn't come as a surprise.

So where are we now?  Bull markets, particularly near the tail end of third wave rallies, tend to breed an unusually high level of complacency (as I wrote about last week; See: Bulls Are Happy Now, But Charts Suggest Caution), so there are probably now a lot of trapped bulls north of SPX 1810.  That zone could represent solid resistance to any rallies.  

A near-term bounce isn't out of the question, since the market is oversold on a number of near-term metrics.  The key to remember with this, I think, is that to say this market is anywhere close to being oversold at an intermediate level is ridiculous.  Everyone and their mother's dog is still net long this market, so a continued shake up is entirely possible, and probably needed.

Let's lead off the charts with the S&P 500 Spyder ETF (SPY).  Back in November, I outlined my "out on a limb" extended fifth wave preferred count in this index, and suggested that an extended fifth would travel up to 184-186, then reverse back to 175-177.  We can see on the chart that the all-time-high was dead in the middle of the anticipated target/reversal zone -- and Friday's decline made good progress toward the first downside target.  Whatever happens from here, we're way ahead of the game already. 

I've outlined my "perfect world" path on the chart, assuming this count continues tracking.  An alternate count is noted, and the two charts which follow SPY give more detail on some of the signals to watch heading forward.

Next is the S&P 500 (SPX) long-term chart, which has tracked almost as well (SPX exceeded my target zone by about 10 points before turning).  The main notable feature of this chart is the breakdown of the bearish rising wedge (a pattern we've been watching for the past few months).  Rising wedges typically return to roughly where they began -- and they usually do so in 1/2 to 2/3 the amount of time they took to form.  This wedge pattern falls under "classic" technical analysis -- so it's interesting to note that its expectations also fit the "rapid retrace" expectations of Elliott Wave Theory for an extended fifth wave. 

Incidentally, to say Wednesday's bearish sell trigger (not shown on this chart) was a success is a bit of an understatement.  Also worthy of some mention: On Friday I noted that there was a remaining bull potential, in the form of an expanded flat, which targeted 1795 +/-.  The market exceeded that target slightly, but that option currently still remains viable, if lower probability.  The first step for bulls would be to form a small impulsive rally wave off the low -- so we'll cover that option in more detail if it becomes more relevant to do so.

For now, we're going to stick with November's preferred count of an extended fifth, with the expected retrace now underway.  Since the results have continued to match the expectations, the market has given us every reason to continue favoring that original thesis.

Finally, the recent top in SPX is a bit noisy on the chart -- so for the moment, I suggest we use another market as our "canary in the coalmine."  Below is the NYSE Composite (NYA), a much broader market than SPX.  This chart has the advantage of providing a clear pivot level on the upside.  I've saved some of the caveats for this chart, so please read the blue annotations for additional thoughts.

In conclusion, while the market has not yet formed a five wave impulsive decline, it has given us reason to continue favoring the preferred count of the past several months.  A fourth wave rally and fifth wave decline this week would create a larger five-wave (impulsive) decline, and go a long way toward adding confidence to that intermediate view.  Trade safe.

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Bears Make Some Noise

Bears made some noise yesterday, as the market opened with a big gap down.  Yes, you read that right (I'm picturing bulls pulling out their dictionaries and looking up the word "down"). 

Chart-wise, there are a few interesting tests underway.  First off, Wednesday's bearish sell trigger became active in the S&P 500 (SPX) when price crossed below 1832, and that trigger break targets 1817.  The alternate count is that 1820 marks the bottom of a corrective c-wave, but that appears lower probability.  Bears will want to be cautious if the market can convincingly reclaim the black (2)/(4) trend line on the chart below, and very cautious if 1839-40 is reclaimed.

In the bigger picture, price has reached an intermediate trend line, and I think the next few sessions will be extremely telling.  The fact is, while it's fun to play at getting far ahead of the market and making grand predictions about the upcoming months, it's simply too early to make much of the wave structure at intermediate degree yet -- so I'm going to take this one day at a time for the moment.  As the structure develops, we'll be able to draw more concrete conclusions about the market's intentions beyond the next session or two, and the chart which follows this will show why bears will want to stay nimble here.

The chart below shows that we may now be in the c-wave of an expanded flat correction.  This was an option I discussed last week, and it's completely viable as a nasty whipsaw move.  The expanded flat would break 1815, then find support shortly thereafter.  The textbook target for an expanded flat c-wave is 1795 +/-, so watch that zone if 1810-15 fails.  

In conclusion, SPX tested trend support yesterday, and while it held on the first test, the wave structure (and Wednesday's trade trigger) suggests it will break -- so near-term, I expect further downside to capture the target zone.  Beyond that, bears still have their work cut out for them at the next key noted levels, while to the upside, bulls want to try and reclaim 1828 and 1840.  We'll examine the intermediate picture in more detail in the upcoming updates.  Trade safe.

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Trader Psychology: The Importance of Knowing When to Trade, and When to Stand Aside

Traders usually have expansive dispositions; they tend to be ambitious people who are seeking more from themselves and from life.  Generally speaking, I think that's a good trait: after all, one doesn't get very far in life with little or no ambition.  However, like most personality traits, there's a positive and negative side to ambition (incidentally, have you ever noticed that your spouse is exceptionally aware of the negative side of every single one of your good traits?  For example, your friends say you're "tenacious," but your spouse says you're "stubborn.").  Anyway, one of the dangers of having an expansive disposition is that not every problem in life can be solved by an aggressive push forward.  Some problems require us to wait patiently, while others actually require us to retreat temporarily.

Markets must be approached with those options in mind.  Sometimes the best trades are the ones you don't make -- and (as I've been known to remark on occasion) cash is a position, too.  Sitting idly by can be an incredible challenge for those of us who are used to accomplishing our goals by pushing ahead through sheer willpower.  Yet no matter how great our willpower or personal fortitude, we cannot force our accounts to increase every moment of every day without pause.

Like most things in life, there is a time and a season.  We wouldn't plant crops in the winter and still expect them to grow (well, okay, out here in Maui we do -- but you know what I mean).  In trading, there is a right time to expand capital and a time to preserve capital.  A big part of successful trading is learning how to tell the difference between the "seasons" -- and then an even bigger part is having the discipline to take action or stand aside in accordance with the time.

We can draw analogy from the physical world:  Think of your account like a solar panel which, instead of sunlight, collects money.  When the market is illuminated and direction is clear, then that energy can be harnessed to grow your account.  Capital can and should be expanded in those situations.  But when the market is dark and hazy, there is simply no energy coming in and nothing can be done.  Capital cannot be expanded during the dark times -- at best, it can be preserved for the next moment of clarity.  Getting frustrated and climbing up on the roof to smash the solar panel with a hammer because "it's not working anyway" in the middle of the night isn't a solution that understands reality.  The panel still works just fine -- once the sun rises again. 

If we fail to acknowledge the reality that there's a time for action and a time for stillness, then our accounts will be a huge roller-coaster of inconsistent ups and downs.  Our trades will be winners during the bright times... but then we'll give most (or all) of that profit back by trying to expand when we should be conserving during the dark times.  Over-trading is as futile as trying to force the solar panel to work at night.

Conversely, if we sit still when we should be taking action, then we also fail to align with reality.  If we don't capitalize on the moment to enter a good trade, we must often wait through an entire cycle before another opportunity arises.  In my opinion, the times just after a missed opportunity are some of the worst moments for traders psychologically.  There's a pressure that comes with the feeling of "missing out," which is why we sometimes find ourselves forcing trades when we should be sitting quietly:  We're hoping to catch up with an opportunity we missed, so as to relieve that pressure.  Yet opportunity in the market comes at its own pace, not at ours.  We cannot "rewind the market" to the position it was in last month for that low-risk trade we should have taken.  And we cannot force opportunities to appear simply by randomly entering trades.  What's done is done, as they say -- we cannot call the exchange and have them "un-ring" the opening bell.   

These are some of the reasons that discipline is so incredibly important for traders.  The market will pull our emotions in every direction imaginable, so if we allow our emotions to dictate our trades, then we'll pretty much take the exact wrong trade day after day until we're flat broke. 

Entire books have been written about trading discipline, so that's beyond the scope of this article.  My main point today was this:  Before you enter that next trade, ask yourself, "Is this the right moment to be trying to expand my capital, or should I be in conservation mode?"  By the same token, when you find yourself acting like a deer in the headlights and watching that next low-risk trade entry pass by, ask yourself the same question.

Moving on to the charts, this remains, in my opinion, an ambiguous market in its current position -- however, I feel we finally have some high-probability near-term levels to watch.  Before we get into that, though -- I've had a number of readers over the years ask what I mean when I say "sustained trade," so I thought I'd take a moment and address that.

Sustained trade has less to do with time and more to do with how price reacts to a given level.  It's fairly easy to learn to recognize what it looks like, and even easier to learn what it does not look like.  The chart below contains several recent examples, and learning to recognize these moves in real-time and adjust accordingly can save one considerable cash over time.

Yesterday the S&P 500 (SPX) head-faked below 1835 and reversed.  It has expanded its boundaries a bit, but near-term, I feel these boundaries now mark reasonably high-probability trade trigger levels.

In the big picture, we still have indicators flashing warning signals for bulls, one of which is noted on the Dow Jones Industrial Average (INDU) chart below.  That said, there's nothing actually bearish about the price action in this chart yet -- it's a chart with bearish potential energy.

In conclusion, I feel SPX has set up some reasonably good near-term trade triggers, and sustained trade beyond those triggers should have above-average odds of reaching the noted targets.  Bigger picture, we still have warning signals in a number of indicators, but (as I've noted previously), this bull market has defied all top calling for a long-time now, so take that under advisement.  I'll continue to watch the price action and patterns for stronger indications of the next move.  In the meantime, trade safe.

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"Someday This War's Gonna End"

"Someday this war's gonna end."  

-- Lt. Colonel Kilgore, Apocalypse Now

Ralph Nelson Elliott, the man whose wave theory is so often discussed in this column, called third waves "a wonder to behold."  In the very first article of I penned for 2013 (January 2, 2013), I wrote:

In conclusion, this is not a rally I would look to short any time 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.

Bulls have been experiencing a third wave rally for over a year now and, looking back at the market's behavior, I think we can all agree that Elliott had it right in his description.  But despite the wondrous power behind third waves, there is a dark side to them as well.

One of the "jobs" of a third wave is to shift sentiment from bearish to bullish and vice-versa.  Folks who've traded for the past decade have now been fortunate enough to live through massive third waves in both directions, in order to experience this firsthand.  In 2008, a third wave decline unfolded into October and did its job of shifting sentiment from bullish to bearish -- so much so that by the time the fifth wave rolled around and bottomed in March, lots of folks had decided stocks were headed to zero (or lower).  Bears were fat and happy... and complacent.  Some were so complacent that they shorted their accounts to oblivion during the subsequent (current) bull market.

Now sentiment has firmly shifted the other direction.  Bulls are fat and happy, and bearish talk is quickly laughed away as "impossible," "stupid," or "stupidly impossible, stupid."  Investment clubs have even begun to spring up again -- remember those from the 90's?  These are groups of folks whose knowledge of equities is generally limited to something they've seen on TV, and whose raison d'etre (French, literally: "raisins exist") is to buy equities because "stocks always go up in the long run!"


To add to the point, I'd like to again borrow quotes from the archives, this time from February 11, 2013 ("Is Bullish the New Bearish?"):

...for the first time in a while, I decided to check out a few random articles across the web to get a brief pulse on sentiment.  Maybe I just read the wrong articles, but it seemed like just about everything I read was bearish and looking for a top.  As I skimmed through, I got to wondering: when did it become so popular to be bearish in the midst of a powerful rally?  Is it contrarian to be bullish now? 

I think it's wise to consider that this is pretty much how sentiment behaves in bull markets: they call it "climbing the wall of worry."  There are always a million reasons not to buy and there are a million reasons why the market will finally top tomorrow... but it just keeps going up anyway.  Bear markets work in reverse -- once everyone is convinced that every single decline should be bought with both fists, then we'll keep dropping.  Maybe we'll get there when the bearish voices are the lone nuts in the wilderness again, like they were in 2000 and 2006-2007. 

So -- are we there yet?


Personally, what's surprised me most about this rally is the fact that we've yet to see even a good fourth wave correction.  Even third waves don't go straight up (or down) forever.  Somewhere along the line they lead to fourth wave corrections.  However, there is yet no concrete evidence that said correction has begun.


I still feel the charts suggest caution for bulls, since there have been warning signs that a larger top may be close -- but the market is ambiguous at current levels, and that calls for a different trading approach than when the market is clear.  The key to remember is that there will be time to get on board once a real correction starts.  Just as we had advanced warning a year ago that a big rally was coming, we should have advanced warning when a real decline begins.

For some perspective, let's look at a long-term chart.  Below is the Nasdaq Composite (COMPQ), which has now slightly exceeded July 2012's dual-Fib target zone.  The current wave can also be counted as nearly complete, but as noted, is still open to interpretation.

The S&P 500 (SPX) notes two potential counts.  I'm inclined to give a very marginal near-term edge to the bulls for a trip to 1860-65.  However, if SPX sustains trade below 1835, I'd be inclined to think we're headed at least 20 points further south.

In conclusion, the only easy answer here is that the trend is still up, since there have been no key level breaks yet.  That said, I'm not entirely comfortable with the easy answer at the moment, since the indicators have flashed warnings that we may be in the neighborhood of a top.  Thus I'm left with the conclusion that it's "too close to call" at this exact moment and we'll have to await a bit more in the way of signals before assigning higher probability to a direction.  Trade safe.

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Bears Fumble, Bulls Recover -- But the Game is Still Deadlocked

(NOTE:  There was something weird going on with Blogger that it wouldn't let me publish this... I've been trying to publish for at least 40 minutes now...)

Every now and then, the market catches me completely off-guard; frankly, the strength of yesterday's rally surprised me.  While I noted in passing that the potential existed for a fairly direct bottom, I actually expected the market would rally only briefly, then decline to new lows, even if only marginally lower.  The silver lining is that yesterday's action probably couldn't have done a better job driving home the point I was trying to make about trades vs. projections when I wrote:

The point is, on several occasions last week I mentioned that selling retests of the S&P 500 (SPX) 1849 high appeared to be a solid trade to me -- but now that we've seen a decline and selling actually looks like a "good" trade to our linear-thinking minds, it's much more dangerous.  Don't get me wrong, I think the odds are good for at least some continuation to the downside -- but every projection doesn't make for a good trade, because entries, risk/reward, stops, etc. must all be considered.     

So if you're bearish but missed the boat last week, be very careful about where you try to hop on going forward.  The reality is, the market hasn't yet done anything but form a three-wave corrective decline.  No key intermediate levels have been broken, and the pattern has not yet formed an impulsive five-wave decline to suggest a larger trend change.  While there have been intermediate warning signals, price and pattern trump everything -- and practically speaking, the pattern at intermediate degree has not yet ruled out the potential for another wave up.  Speculate accordingly.


The interesting thing about all this is that bears who missed the boat are now being presented another opportunity to take a crack at a retest of the all-time high.  That trade looked a bit better to me last week, but as we'll cover in a moment, I can't say it doesn't still appeal to me for technical reasons (these days I'm not really a bull or a bear; I have no bias beyond whatever the charts give me each day, and simply try to project and trade what I see.).


Let's jump right to the chart which suggests bears aren't completely out of the running just yet.

Sometimes the market gives us straightforward patterns to work with, and sometimes it gives us patterns which would force Stephen Hawking to break out a calculator and start cussing.  Right now, we're in the latter type of pattern.  People who've followed my work for a while know I analyze portions of the wave structure which are often "skipped-over" in popular Elliott Wave analysis.  Some of my best calls historically have come from the results of this micro-work, but...

The obvious count here is a simple ABC decline in SPX, shown in black below.  The thing is, when I look at this chart with zero bias and no opinion of what the market "should" do next, I come up with the count shown in blue below.  The challenge with the blue count is that the inherent complexity of the structure creates a higher probability for error -- just like most things in life: the more moving parts, the more opportunities for something to break or go off-track.  So I can't say that count is high probability, because that's simply the nature of the beast.  The end result is this "here's what I see" micro count is keeping me from jumping on the bull bandwagon just yet.   

As I've noted previously, no key levels have been broken yet in either direction.  Traders sometimes let their imaginations run wild during these types of noise-filled ranges, but it's often better to sit back as patiently as possible and wait for the market declare its intentions.

The Dow Jones Industrial Average (INDU) has not yet invalidated the possibility of a fourth wave.  While SPX has simply expanded its trading range (and is running within that range), INDU is still trading below its most recent consolidation -- a potential resistance zone.

 

 



 
In conclusion, bears put in a good showing on Monday and bulls put in a good showing on Tuesday, but neither side has actually accomplished anything of intermediate significance yet.  As I mentioned yesterday, the action over upcoming sessions will have implications for the bigger picture -- but we're not "there" just yet.  Trade safe.

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Upcoming Week Has Intermediate Implications for US Equities

For the past couple updates, I've been warning that I felt the market was in a potential topping zone, but was uncertain if the S&P 500 (SPX) had another small wave up still left.  As the pattern developed across markets, in Friday's update I noted that the Dow Jones Industrial Average (INDU) looked destined for new lows.  With this mention, I published an if/then target: if 16,378 failed, then it suggested a strong decline to 16,200-16,240.  On Monday, INDU broke the key level, then dropped rapidly to 16,240.60 before staging a small recovery.

For at least a year, this has been a very hard market in which to project downside moves against the (obviously) prevailing bullish trend -- and the market's current position is often where things get even trickier for bears.  No matter how hard we try, as humans we can't help but want to envision a market that moves in a linear fashion.  We have to fight the urge to project the market's future by using the same equations that work in the macro world, such as: "If a train leaves New York and travels at 100 miles an hour, how long until it reaches Cleveland, 400 miles away?"  We figure: 4 hours, right?

The problem is, when it comes to the market, that train may decide to travel to Cleveland by way of Miami.  Or, despite the fact that it's headed that direction, it may decide not to go to Cleveland at all -- just like the rest of us. (Sorry Clevelanders!)

The point is, on several occasions last week I mentioned that selling retests of the SPX 1849 high appeared to be a solid trade to me -- but now that we've seen a decline and selling actually looks like a "good" trade to our linear-thinking minds, it's much more dangerous.  Don't get me wrong, I think the odds are good for at least some continuation to the downside -- but every projection doesn't make for a good trade, because entries, risk/reward, stops, etc. must all be considered.

So if you're bearish but missed the boat last week, be very careful about where you try to hop on going forward.  The reality is, the market hasn't yet done anything but form a three-wave corrective decline.  No key intermediate levels have been broken, and the pattern has not yet formed an impulsive five-wave decline to suggest a larger trend change.  While there have been intermediate warning signals, price and pattern trump everything -- and practically speaking, the pattern at intermediate degree has not yet ruled out the potential for another wave up.  Speculate accordingly.

Let's start off with INDU, since the pattern here still appears a bit cleaner to me than SPX.  I've noted some key upside levels on the chart.

SPX doesn't have the clear nested first and second waves that INDU has, but bears would like to see 1823-27 act as resistance to any rallies.  Bulls would like to see 1810 +/- act as support.  The action over the next few sessions will have intermediate implications, though it must be noted that a failure at 1810 simply rules out a micro fourth wave and limits bull options.  In itself, it is not the "end-all" to the bull case -- more on that in the next few updates.

One chart (not shown) which was quite bearish yesterday is the Dow Jones Transportation Average (TRAN).  TRAN lunged to new highs at the open, then closed below Friday's low, thereby forming a bearish engulfing candle.  

I'd also like to show the SPY chart again, to emphasize the intermediate importance of the current inflection zone.  Bulls can still stick save the market in the near future and keep the uptrend alive -- but if they don't, we're likely in for a solid correction, in the neighborhood of 8-10% or more.

In conclusion, the ingredients are in place for an intermediate decline, but we don't yet have confirmation from either the price or the patterns.  This has all the makings of an important week for the markets.  Trade safe.

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Two Intermediate Charts with Warnings for Equities Bulls

There's been no material change in the near-term outlook from the past few updates, but I've discovered an interesting near-term pattern in the Dow Jones Industrial Average (INDU) which may be helpful, and which I'll discuss in a moment.

The near-term question remains the same for the S&P 500 (SPX):  will there be one more wave up to new highs, or are five waves complete at 1849?  I continue to feel the pattern in SPX is too ambiguous to call at micro degree, but feel that the pattern at higher degree suggests a larger correction is pending.  I've assembled a couple more indicator charts which seem to back up this thesis.

First up is a ratio chart of SPX:AGG (equities to bonds), which, in November, pointed to higher equities prices -- but has now reached its price target and is quite overbought on the weekly time frame.

 
Next is another ratio I track, of VIX:TNX -- which recently triggered a warning signal.  This one doesn't always work (does anything?) and doesn't give signals very often; the advantage is that, historically, it tends to catch larger corrections.

Since I'm limited in the number of charts I can publish, I'm going to use SPY as the proxy for SPX today, since this chart details the extended fifth wave count I published in November (and notes that said target was recently captured) -- but also more clearly outlines the expectations of a retrace/correction from an extended fifth.  Note the target correlates to the low 1700's, with potential for the mid-1600's, on SPX.

Finally, a look at the near-term via INDU.  This pattern suggests two near-term bear wave counts, and one near-term bull count.  Though I'm unable to rule out the bull potential, the pattern in INDU gives the odds to the bears for a new low, either directly or indirectly.  A direct new low would suggest a bearish 1-2 nest, first target as noted.

In conclusion, I'm still inclined to believe the market is close to a larger top, and feel INDU now suggests that bears already have the ball.  That said, we still have no confirmation from the wave pattern in SPX, and projecting turns against the prevailing trend is always a tough proposition; this has been especially true against this particular bull market -- so stay nimble, and trade safe.

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Wave Counts for US Equities Beginning to Diverge Markedly

Some markets make you want to give up trading and take up something that requires less focus and concentration, like working in the "customer service" department at Kmart, or being President of the United States.  The market has continued to form an ambiguous pattern, which leaves a lot to interpretation.

Sometimes Elliott Wave provides (what I feel) is an unbeatable edge, such as when the two highest-probability counts agree on intermediate direction -- for example, as they did in the Transportation Average back in early/mid November, when both the bull and "bear" count pointed to higher prices.  When that happens, I'm a little more lenient on my entries and play wider on my stops.

Other times, we end up with two seemingly-equal probability counts which are diametrically opposed:  In those cases, we have to refer to key price levels and allow the market to dictate in real-time.  And at such times, I'll generally enter trades only when provided a low-risk entry, and usually keep tighter stops.  This is where we are at the moment, at least for the very near-term.  At the next higher time frame, though, both the bull and bear counts suggest a top is nearby.  Then the counts diverge again, so the long-term significance of said top will need to be determined in real-time.

For a closer look at the intermediate view, let's start off with the Dow Transportation Average (TRAN), which reached the lowest target zone I published on November 14 (7400-7500).  Back then, the bull and bear counts both agreed that prices were headed higher into year end; however, those two paths are beginning to diverge, with the potential for this to be a marked divergence.  And, just like famous poet and investment advisor Robert Frost, we'll probably want to take the "Trade Less Traveled," since crowded trades usually stink.

On the chart below, I would refer to gray wave iv as an "intermediate" trade (for lack of a better term), and from that perspective we should be close to a peak for both the bull and bear counts, so they both agree on that.  From a near-term perspective, the structure allows for another smallish wave up without any issue.  But from a long-term perspective, the bull and bear counts are significantly different, as gray wave iv (bull count) would mark only a mild correction, whereas the bear count would lead to a protracted decline.  A sustained breakout with multiple closes above the red channel would force a reexamination of the bear thesis.

Moving on to the S&P 500 (SPX), we have two near-term potentials in the making, and for the near-term I'm about 50/50 split on the odds.  This is the type of position where bears might consider a crack at shorts if price moves a bit higher, since that would provide an entry with clear, nearby stops.  That is, of course, certainly not trading advice, and you should consult your broker, your spouse, and a Tarot spread before making any investment decisions.

Based on the length of the existing waves, I'm making an assumption on this chart that if 1823 fails, then the blue wave 1 peak will be broken.  The blue 1 peak is relevant because fourth waves are not allowed into the price territory of first waves (except during patterns known as "diagonals"), so a break there would leave the bulls with fewer options.

In conclusion, from an intermediate perspective, the bull and bear counts both seem to agree that a top is close (as noted, a sustained breakout would call that into question, of course).  From a near-term perspective, the structure does allow for another small wave up -- and it's worth mentioning that if SPX makes a new high and thus validates the fourth wave triangle count, then we have good odds for a decline to follow directly, since triangles virtually always appear as the penultimate wave in a structure.  The market should be close to clearing its way out of the sideways chop of the past few sessions, so I'm hoping for better near-term clarity by next update.  Trade safe.

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Quick Informal Update

Sheer exhaustion has necessitated a short update today.  I'm not certain how much help it will be, since I didn't have time/energy to do my usual cross-market comparisons, but I'll publish a couple quick charts anyway.  My intention is to publish more complete updates Thursday/Friday.

The challenge I'm seeing at the moment is the lack of a clear structure from the 1849 high.  Coupled with the lack of clear structure INTO that high, it's difficult to say whether we've seen any kind of meaningful trend shift.  I'm marginally inclined to think we have:  The only clue I can find on the SPX charts is the apparent triangle noted in the last update, which leans me toward an impulsive decline.  The chart annotations describe my thoughts:

On the 30-minute chart, I'm again left making assumptions.  IF 1823 fails, then the present wave lengths suggest a decline that will break the blue wave 1 peak -- therefore, I can make the assumption that 1823 is probably the game changer.  Note these types of assumptions don't always work, and 1823 could break, but the market could then surprise from there.

In conclusion, sometimes I feel repetitive ending every update with "in conclusion."  (Since this is an "informal" update, I feel okay with publishing that.)  Frankly there's not much to add down here beyond my usual sign-off: trade safe.

Bulls Dominated the Equities Market in 2013 -- Will 2014 Be Different?

Well, after a whole year of waiting, the new year has finally arrived.  2014, allegedly.  Which means we're now exactly 30 years past George Orwell's ghastly vision of the "future" in 1984.  We're 15 years past the Moon leaving Earth's orbit in Space 1999.  And we're 13 years past discovering the obelisk near Jupiter in 2001: A Space Odyssey.    Frankly, I'm not entirely convinced the calendar's right.

Weren't we all supposed to have flying cars by now?  Consider this: In only five more years, Los Angeles will experience a major problem with a band of rogue Nexus-6 replicants from the Off-World Colonies -- and we've yet to train even one single Blade Runner.  I suggest we all write our Congresspersons and demand they either get cracking with funding, or they roll back the year to something which better fits our current technology, like 1986.

Speaking of years, 2013 is going to be a tough act to follow for the preferred count, which was rabidly bullish on the very first trading day of 2013 -- and on February 8, projected a target of 1750 for the S&P 500 (SPX).  November and December then closed out the year in banner fashion, with seven straight target captures and zero misses, grabbing more than 130 SPX points over those 2 months.  If 2014's preferred counts perform three-quarters as well as last year's, I'll be pleased.


While 2013 started off crystal-clear and suggested the beginning of a powerful third wave rally, 2014 is starting off with a bit of ambiguity.  We're in a much different portion in the wave structure now, and theoretically, we're presently wrapping up the fourth and fifth waves left over from 2012 and 2013.

Accordingly, the SPX chart below has intermediate bearish potential, but there's been nothing from the market which grants that potential much reality yet.  We have a market that's bumping up against trend resistance, and possibly a complete (or nearly complete) wave structure, but no key downside level breaks.  The first level for bears to reclaim to rule out the most bullish possibilities is the peak of the prior wave (shown as red 3 on this chart).  

If the wave count below is correct, then we're approaching an intermediate correction, which would be expected to travel down toward the mid-1600s.  Again, though: Presently this must be treated as a potential, not a sure-fire projection.  It's far too early to confirm a turn at this wave degree, as the market has not yet formed an impulsive leg down from the all-time-high, and all uptrend lines remain intact.  

Part of trading is knowing when to do nothing.  I'll generally take ambiguous trades only if I can find low-risk entries (by buying or selling the retest of a key level, for example).  I'll take higher-risk entries if I'm high confidence on direction.  But -- and I realize this sounds ridiculously obvious -- I try my best to do nothing if all I'm offered is low-confidence, higher-risk entries.

Below is another look at the long-term, but using a different index (the Wilshire 5000: WLSH).  Note RSI suggests odds are good for a correction, though RSI alone makes no guarantees of depth of said correction.  In a perfect world, I'll be able to arrive at some solid targets after the market provides a bit more info -- but as yet, given the present pattern, I cannot even confirm a trend change and it's entirely possible there is another wave up still pending at micro degree.

Looking at the bullish argument, WLSH has broken out over several trend lines, and bulls will be hoping the next dip is simply a back-test of those lines.

The 30-minute SPX chart notes a potential triangle in blue.  If this is a true Elliott Wave triangle, then Monday will open with a small bounce that stays below 1838.24, which will then be sold to new lows.  Trade above 1837.20 would indicate this is not a true Elliott triangle, but merely a triangle-shaped pattern -- which would thus open up bullish potential. 

The market was relatively "easy" to anticipate during November and December, but it goes without saying that not every day in the market is so clear.  Such is the case now:  It's possible to count the wave from 1767 as complete, but it's ambiguous enough so as to be unclear whether another wave up remains. 

In conclusion, SPX captured (and slightly exceeded) my November target.  With the market in its present position, there are no new high-probability near-term targets -- but ideally, the next few sessions will add some key information to help determine if we are indeed close to an intermediate trend change, or if the rally has farther to run.  In the meantime, trade safe.

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