USD/JPY and SPX Updates: Warnings for US Equities from the Forex Market?

In the last couple updates, I mentioned that I felt the market was ready to break away from the sideways grind, and bears were finally rewarded for their patience as the S&P 500 (SPX) had an ugly day on Thursday.

There's a lot to cover, so let's start with the US dollar/Japanese yen (usd/jpy) currency cross (or the "gopher" as it's sometimes called -- no, I'm not making that up.).  If you're an equities trader, you might ask why this Forex pair matters to you -- without going into too much detail on carry trades (which I've covered in a previous update), the most simple answer is that equities have been fairly well correlated to dollar/yen of late.  This has not always been the case historically, but for the recent intermediate past, the major turns in equities and the yen have been in sync. 

Last update I warned that dollar/yen appeared to have formed a corrective ABC rally from the 2014 low (suggesting new lows to come), and that 102.600 +/- appeared to be critical support.  USD/JPY wobbled briefly around that support zone, then early yesterday it proceeded to plummet rapidly in a waterfall decline.  At last glance, it was trading near 101.423 and flirting with rising support from the 2014 low.

The low seen on this chart (near 101.800) in dollar/yen came in concert with the February low in US equities.  If that low breaks down -- which ultimately appears likely -- then dollar/yen has lots of room to run on the downside and this could likewise bode poorly for US equities.

   

Next let's take a look at the SPX weekly chart, for perspective.  While it's been a good week for bears, in the big picture, they obviously still have work to do.  Note that weekly MACD has so far failed its upward cross and appears be forming a bearish hook, and that the 1883 high generated a substantial negative divergence in RSI.

Finally, the SPX 30-minute chart:  Last update, I noted that Tuesday's wave structure pointed to 1854-56 as a near-term inflection zone, and SPX hit that zone and then managed a 20 point bounce before continuing down.  From its current zone, it wouldn't be unusual to see another bounce materialize for the near-term.  If there is a near-term bounce, the odds favor the decline will then continue to new lows (see RSI notation).  Of course, there are also options for an immediate resumption of the larger rally -- a bull market is no place for bear complacency.

The first large wave against the prior trend from a major inflection point is always the toughest, because one still can't be certain of whether to expect an impulsive decline or a corrective decline.  So on the chart below, I've shown the bull count in black and the bear count in red, and noted the levels bears want to hold (the first such level being the 1854-55 zone).

In conclusion, as of this moment, the near-term trend in SPX is down, while the long-term trend remains up, which calls for caution on both sides of the trade.  For the near-term, bears have the ball until proven otherwise, and normally, we'd expect to see a test of the 1827-1834 zone at the minimum; I've also outlined the pivot zones where that outcome might be called into question.  Trade safe.

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Copper, USD/JPY and SPX: An Overview of Three Important Markets

Lately more and more signals have been nudging their way into "sell" territory, while the market has continued to grind sideways/down.  Last update I mentioned that a break of 1870 would suggest a first target of 1865, and that target was captured on Tuesday.  The second target of 1857-62 now appears probable -- and I'll discuss another inflection point when we get to the S&P 500 (SPX) chart.  Let's look at two other charts first, though.

One has to dig pretty deep into the archives, but it's a matter of public record that I've been bearish on copper since November 2011.  Copper has been hit hard recently, as concerns continue to mount over China's troubles, and prices have now hit multi-year lows.  Copper is generally correlated with economic growth, since it's used in construction and for electrical and communications wiring, but, historically, copper prices don't always correlate terribly well with U.S. equities.  In fact, copper fell steadily from 1995 through 1999, losing more than half its value during one of the greatest bull runs in equities history.

There are numerous reasons why copper may be getting hit hard at the moment, and China seems to be at the core of several of them.  China accounts for about 40% of the world's copper consumption, and last week China reported the biggest drop in exports in four and a half years -- so, fundamentally, there are continuing signs of economic slowdown from the world's largest copper consumer.  Some of the price drop in copper also appears related to the weaker yuan (China's currency), which makes purchasing copper more expensive for China.  And some of the price drop seems due to the fact that copper is used as collateral for loans in China:  The recent weakness in copper hit at the same moment as China's first domestic bond default (Chaori Solar).

Copper now appears to be breaking down from key price support.  Looking at copper's price chart, we can see that potential exists for (ultimately) a trip back toward the 2008 lows:

Let's take a look at a market I continue to feel is important as a correlated market for U.S. equities: the U.S. dollar/Japanese yen currency pair.  Equities bulls would like to see strength in this market, but so far, usd/jpy has only formed a good-looking ABC corrective rally to the last large decline.  While I haven't annotated a wave count on this chart, I have highlighted the zones which appear to be key support.  My instinct is that bulls probably don't want to see usd/jpy sustain trade below 102.600ish -- though, technically there are a couple last ditch support areas below that price zone (yellow and white trend lines). 

Finally, SPX has been grinding sideways/down for the past several sessions, and while it took the long way around, it nonetheless captured Monday's downside target on Tuesday.  The second target of 1857-62 appears probable, and Tuesday's wave structure has also given rise to a new near-term inflection zone at 1854-56.

If you're a new reader, you might need to read all the boxed annotations on the above chart to make sense of it -- so, in conclusion, the super-short version is that the market reached an inflection zone last week, and the outlook maintains a slight bearish bias as long as price remains below 1895.  In the event SPX sustains trade north of 1895, then the outlook shifts 180 degrees the other direction, with 100+ points of upside possible.

As yet there have still been no significant breaks in either direction.  However, in the event of a sustained breakdown, there is now some coiled bearish potential energy in the charts.  Bulls will need to recover any lost key zones quickly if they wish to create a springboard -- or risk an accelerating decline. Trade safe.

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Discussion on Trend Following, and a Striking Fractal Comparison

At some point in the bull market, virtually everyone will decide that the only type of trading system that "works" is trend following.  Folks will bash systems that try to anticipate the market, and the mantra will finally, irrevocably, become "just buy the fargin' dip, the trend is up."  We may have already reached that point.  Lately I've begun to encounter more and more bashing of predictive systems by trend followers.

What's interesting is that as recently as November 2012, some people were asking if trend following was dead.  This is because trend following is only profitable in certain types of markets; specifically (not to overstate the obvious), it's profitable in trending markets.  But not all markets trend.  Historically, markets alternate between cyclical grinds and periods of trending.

And, needless to say, trends eventually reverse, at which point many trend followers get caught on the wrong side.  (Let me preface here by saying that my intention is not to belittle trend following -- quite the opposite, bear with me a moment.)

To a trader who just started trading in late-2012 or early-2013, trend following will seem like the Holy Grail end-all answer to everything.  But, historically, it actually requires a willingness to endure a high number of losing trades (typically more losers than winners), and requires a great deal of patience.  And by patience, we're talking (at times) enduring months or even years of drawdown.

From 2009 through 2012, many trend following systems struggled, as evidenced by the performance of the hedge funds, which often employ similar systems.  From 2010 through 2012, for example, the S&P 500 (SPX) gained nearly 28% -- but meanwhile the HFRX Equity Hedge Fund Index (a benchmark of the performance of hedge funds) actually lost money over those three years.  Which is why, near the end of 2012, people were asking if trend following was dead.

Of course, as it turned out, this was just when trend following was about to shine again.

The general challenge for traders is that the system which worked best in the recent past may not be the system that works best in the future.  As mentioned, the market cycles over months and years -- and it likes to change things up just when you think you have it all figured out.  These challenges apply for every trading system on the planet, my own included.

New traders tend to expect too much from a system.  This is probably because many new traders decide to begin trading after reading a book, and often it's a book written by someone who tells the story of how they turned $5,000 into $20 million in only 18 seconds (or similar) -- because, let's face it, the books that talk about iron discipline and grinding out small profits over time just don't sell as well.  Those are the books traders start reading after they've lost their shirts attempting to emulate the 18-Second Get Rich Quick Trading System!

But I'm getting ahead of myself.  Back to our new trader:  After reading this get-rich-quick book, the new trader says, "Hey, that sounds easy, and I've got $5000 to invest!  Sure, I probably won't make $20 million in 18 seconds like that author did, but I'd be happy with 10% of that in a month!  Why not give trading a try?"

So they start trading.

Let's imagine they start trading in 2011, and decide to start with a trend following system.  By 2012, they're dead broke, because they didn't realize that $5000 isn't nearly enough of a bankroll to get started.  So in 2012, they reinvest (maybe with their new tax return) and try again -- and they're broke again by 2013.  At this point they decide, "This trend following stuff is garbage."  So they switch systems -- just as trend following starts working.  Which then causes them to miss the big rally of 2013 -- and now they're broke again and they're really frustrated.

2014 rolls around and they decide to switch back to trend following, since it seems to have been working recently.  However, due to their anxiety and frustration (and because they still haven't read the book about discipline), they simply buy the very first little dip that comes along, right at the beginning of 2014.  And, of course, then they get creamed again in the ensuing big sell-off.  If they're like many new traders, they probably further add insult to injury by selling all their long positions at the exact bottom in February and reversing short.  So now they're broke yet again after the recent recovery rally.

Nobody said it was easy.  Well, except for the guy who wanted you to buy his get-rich-quick book.

Personally as a trader/analyst, my goal is not perfection (okay, I'll admit that secretly it is, but I realize that's impossible); my goal is to be correct more often than not -- and, more importantly, to manage risk/reward.  If I manage my risk properly, then the times I'm correct more than offset the times I'm wrong.  And as long as I maintain those two disciplines, I can achieve a positive expectation over time.

In the grand scheme of things, trading isn't about being "right" -- it's about making money.

For me personally, trend following is an important piece of the analytical puzzle.  It's not the end-all to everything -- but neither is anything else, really.  It's no secret that my analysis is often based on anticipation of the market, and some trend followers would frown upon such an approach.  However, when it comes to bottom line, it's hard to find any system that's infallible.  Most honest analysts would be forced to agree that, whatever their particular system: sometimes it works quite well; other times, it doesn't.

And the broader point is this:  the market has a way of humbling the proud.  If you're feeling invincible in your trading system lately, stay aware that the market is warming up a brand new pitcher in the bullpen (or "bearpen," as the case sometimes is), and he's getting ready to throw you a pitch you've never seen before.  No one has figured out the perfect trading system (or, if they have, they certainly aren't sharing it with anyone!).

While Elliott Wave is no more perfect than any other system, one of the many things I appreciate about Elliott Wave is its ability to quantify the market's cycles through market psychology.  We can gain insight into why all systems fail at times by understanding the wave cycles:

First and second waves exist to foil trend followers:  The first wave of the new trend is assumed to be a correction to the old trend, and the second wave is then assumed to be a resumption of the old trend.  In reality, the second wave is the first correction of the new trend (read that all again if you need to) -- but few recognize that yet, so the majority are positioning the exact reverse of how they should.  Trend followers get stopped out and/or reverse as the third wave hits and defines the new trend.

Third waves can be profitable for everyone -- and they are especially profitable for folks who stick with the trend (this is where we've been in the market recently: a third wave).  Third waves are, in fact, what trend followers are waiting for (whether they characterize them as such or not).  As an Elliottician, third waves are what I trade for too, and where the meat of my profits are made.  As far as I can tell, one of the main differences is I try to position correctly in advance of the third wave.  Yes, you read that right:  I sometimes try to predict the market!  Do I get them all right?  Absolutely not.  As noted earlier, the key is risk management.  And as just one example of how well anticipation/prediction can work:  On July 8, 2013, I suggested Apple (AAPL) as a long play (it was trading in the very low-400's -- See: SPX and Apple: Apple's Worth Taking a Look at Again), with a preferred target of 510-530 (recall that this was well-before Icahn and Soros moved AAPL by announcing their long positions).  That trade was one of the most profitable of 2013 for me, and it was anticipatory and predictive -- against the intermediate trend.  In my view, bashing predictive systems when they fail makes no more sense than asking if trend following is "dead" when it fails.  Everything fails at times.   
  
Fourth waves exist to foil everyone, but ultimately, they are profitable to those who stay nimble over the near term, and who stay on the right side of the larger trend over the longer term.  For position traders, some drawdown must be endured during fourth waves, regardless of the system employed -- but in the end, the fifth wave comes along and makes the position good.  The problem is...

Fifth waves exist to suck in new trend chasers.  The fifth wave rally (or decline) is, in fact, almost solely driven by folks who are showing up late to the party.  The smart money begins distributing their positions to these newcomers, who don't realize that most, if not all (or more!), of the profits gained during an average fifth wave will subsequently be lost during the ensuing turn.

Return to start -- but now add this to the mix:  For those who are too slow to respond to the trend change after the fifth wave, the third wave will wipe them out.

I think the key with predictive systems is to understand their limitations and not get too far ahead of the market.  There's a temptation with predictive systems to overreach.  In fact, certain well-known predictive services have all but wiped out their subscribers by overreaching and trying to anticipate the market years in advance against the prevailing trend.  If one approaches market prediction with the idea that they can see so far down the road, with such amazing clarity, that they don't even need to adjust and respond to changing real-time conditions, then they're ultimately doomed to failure.

But they will not fail due to their system -- they will fail due to their arrogance.

Anyway, for those interested in trend following, here's a starting place, via an indicator I've published previously.  I believe trend following is a powerful tool that one should add to their trading arsenal -- of course, you'll have to decide personally to what degree you wish to employ it (assuming you don't already).

Next is the current S&P 500 (SPX) chart, which is materially unchanged since March 5, though I've added a few signals and levels to watch.  The market has traded in a narrow price range for about a week, and remains paused at the current inflection point.  I suspect we've chewed up enough time and price here that the market will break away from this range in short order.  Do note the market could stretch wave (5) a little higher here without creating any issues for the bear count: As mentioned previously, if we see sustained trade north of 1895, then we'll start to suspect bulls have found a second wind.

Finally (as far as I know, anyway) this next chart is wholly original.  I'm actually a little surprised I didn't spot this analog sooner:  The fractal similarity between the current bull market (linear scale) and the long-term SPX chart (log scale) is somewhat remarkable.  Note the very long-term chart I'm using ends in 2008 -- I used it anyway because it was the right scale and we all know what happens in the missing portion of the chart.

Incidentally, the 1929 analog so many were tracking went off course -- possibly because too many people were aware of it. 

The most interesting part about the fractal below is that the wave counts are basically the same.  On the very long-term chart, the massive bull market at the end of the 20th century was an extended fifth wave of Supercycle Wave III.  The current market is assumed to be in the fifth wave of Intermediate Wave III.  If the current market extends this fifth wave, it could make a similar move as the very long-term chart (relative, of course).  However, if the current market's fifth does not extend, then there are already enough waves in place for a large fourth wave correction to begin (the bear market of 2000-2009 was Supercycle Wave IV).

In conclusion, SPX remains paused at the inflection point I've discussed over the past week.  Inflection points are not, of course, "guaranteed" reversal zones; they are zones where trend reversals have higher odds of occurring.  Bears still have a solid shot at generating such a reversal here, so stay nimble -- and trade safe.

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Decision Time for SPX -- and RUT Captures 2012 Target

Friday is a non-farm payroll day, which usually leads to a wild pre-open.  The recent history of NFP days is bullish, with 14 of the last 15 ending in the green.  What's happened in the recent past with some regularity is that futures sell-off immediately on the bad payroll number, then everyone suddenly remembers: "Hey, bad payroll is good for continued QE!  And continued QE is good for equities!" At which point the futures rally to recover all their losses and then some.  It will be interesting to see if a good jobs number leads to the reverse effect or not.

There's really no significant change in the outlook, and the S&P 500 (SPX) remains poised at an inflection point.  Not to overstate the obvious, but I think the biggest challenge for bears is the fact that we're still in a bull market, and bull market surprises are almost always to the upside.

In the last update, I discussed the details of the market's inflection point, so today's first chart is an interesting look at how inflection points work.  The chart below is the Russell 2000 (RUT), and it was originally published (exactly as reprinted here) on December 19, 2012 (See:  SPX, NDX, RUT:  November's Targets Captured, and a Look at the Long-Term).  This chart illustrates the value of identifying, and respecting, inflection points.

I'm also republishing this chart because an interesting thing has happened since that 2012 inflection point:  On March 4, 2014, RUT finally captured its 1200 target, with an intraday high of 1212.82.  By virtue of the wave structure, the 1200 target was identified as an "if/then" equation in the event RUT exceeded 902.30.  Needless to say, 1200 represented a 25% gain from that level -- which sounded incredible and unbelievable at the time.

This was one of those "unpopular" bull articles I referenced recently -- a grand total of four people shared that 1200 projection on Twitter in 2012.  I use this stuff as my personal, admittedly anecdotal, gauge of sentiment, because we all have a tendency toward confirmation bias.  We surround ourselves with information that matches our beliefs; we like people who agree with us; and we usually only share articles that support our views.  In fact, an Ohio State University study concluded that we'll spend 36% more time reading an essay if it agrees with our opinions (more on this after the chart).

For this reason, I sometimes get nervous when my projections seem to be in line with the majority of analysts and readers.  This is probably one of my personal challenges this late in the bull market.  Being bullish when most were bearish suited me fine -- but now it seems "everybody" is bullish, and that makes me uncomfortable.  I get uncomfortable not because I'm a crazy rebel, but because the market often likes to disappoint the majority.  I have to keep reminding myself that the latter stages of bull markets can be the exception to that rule, and the majority are "allowed" to get on board for a while.

Anyone who was trading back in the late-90's knows exactly what I mean:  In 1999, stocks were so universally loved that books titled Dow 800,000,000! were flying off the shelves; teenage fry cooks at McDonald's frequently offered hot, unsolicited stock picks which later turned out to be winners; and even my grandmother's dog had a profitable portfolio (of stocks the dog had chosen himself, up 12% in 1999) -- and yet the market just kept running higher and higher anyway.

It took a long time for that sentiment to see judgement day; much longer than many thought possible.  So while the wave structure supports the idea of a turn, we can't simply blindly ignore the possibility that a similar "endless rally" endgame could occur this time around, too.

I think if we want to be better traders, we have to rigorously and continually challenge our own assumptions, lest we develop tunnel vision.  Our tendency as humans is to come up with a hypothesis and then work to prove ourselves right.  We sometimes ignore or gloss over information that contradicts our hypothesis -- but that type of "ignorance is bliss" approach can be deadly for traders.  I think one of the best ways we can judge a good hypothesis is to work to prove it wrong.  If it still holds up to that kind of hard scrutiny, then it's probably solid.

So here we are again, at another inflection point.  Not quite the same magnitude as the aforementioned 2012 inflection point, but significant nonetheless.  We can count five waves up; RUT has reached its long-term target; and there are negative momentum divergences across multiple time frames.  Basically, bears have everything working for them -- except the actual trend.  And that's the most important factor.

Bears need to make a stand directly to wrap this wave up, or risk watching a subdividing rally extend toward 2000.  1895+/- remains the pivot zone for this inflection point, so in the event bulls can sustain trade above that zone, then we'll simply have to keep playing the "everybody knows it's a bull market" trend game.

Near term, SPX has formed five complete waves -- but I've learned over the years that these can be (for lack of a better term) "traps" for fractal-based systems like Elliott Wave.  Five waves marks a complete wave, but it does not tell us if that wave will subdivide into five still-larger waves.  It's a probability play, and it's one of the reasons that identifying key levels and watching other indicators in conjunction with the wave counts is important.
 

In conclusion, the market remains poised at the inflection point discussed in Wednesday's update, and no key levels have yet been claimed by either side.  The market has ground around in an upward-sloping range for long enough that a decision should be close at hand, likely within the next couple sessions.  In the event bears are going to force a turn, then now's the time.  Trade safe.

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SPX Reaches Critical Inflection Point: A Look at the Bull/Bear Battle Lines

Well, we have an interesting market now.  I don't trade news, but everyone who does has had a bad news event to sell, followed by a good news event to buy, both within the prior few sessions.  And both basically the same event.

So, those bulls who were waiting for a "good news event" as the signal to go long have gotten it, and should now be long. (The really good news, of course, is the fact that Taco Bell has finally resurrected their Chili Cheese Burrito.  Do not let me get started on this topic...).  Other bulls have been waiting for a breakout to new highs as the signal to go long, and they've gotten that, too.

The question now is: How many buyers are still left to chase the market higher here?  It's decision time.

One of the things that bothered me about the turn at 1867 was the bad news event that came with it.  I'm always suspicious of "bad news" tops -- the best tops are made on good news, in order to pull in the last buyers and trick everyone into continuing to look upwards.  A good top isn't one where people are shorting the bounces afterwards -- it's one where people are buying the dips.  In other words:  "bad news" tops are usually too obvious to work, and they're too easy as a contrarian play.  The exception to this is tops which are marked by incredibly major, world-altering events -- but, interestingly, those events usually seem to come weeks or months into a turn, after the market has already topped on a good news event.

Back to the present (no relation to the direct-to-DVD sequel, starring a much-older Michael J. Fox):  I can see both sides of the trade here, and they strike me as pretty even at this exact moment.  Bulls have a breakout and back-test of falling support in their favor; but at the same time, so far there's been a bit of "failure to launch" -- each prior breakout has been turned back rather directly and the breakout levels have failed to act as support.  That behavior needs to change for bulls to gain momentum. 

The upside for traders is that this has turned into a massive inflection point for the market.  I discussed this in passing at the end of last month, but the near-term charts are now helping to clarify some of the key levels.  So today we'll look at the bull/bear battle levels -- and the targets which are suggested for the victor of those battles.

First up is the S&P 500 (SPX).  The two highest-probability wave counts here (and minor variations thereof) are 180 degrees reversed from each other.  The bear count has the market within a topping process (bottoms are often "an event," but tops take time).  The bull count has the market on the verge of a third wave rocket launch.  1895ish appears to be the dividing line between the two options.

 
For more perspective, let's refer back to the long-term SPX chart I published on February 28.  The chart below is materially unchanged since then -- but as outlined above, the near-term chart is now helping to point the way in identifying the key levels.

A related signal chart, which I've posted a few times in the distant past, is the ratio of high yield corporate bonds to the 20+ year treasury bond fund (HYG:TLT).  This ratio serves as an effective barometer of the market's current appetite for risk.

In conclusion, the market has bent and stretched the wave structure a bit recently, and this has created a nice inflection point for traders.  The market now appears to be on the verge of a big move, and the noted key levels should help point the way.  Trade safe.

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Bears Make a Stand in US Equities

Last update was a bit tongue-in-cheek regarding my anecdotal sentiment readings, and my personal opinion that there was currently too much bullishness prevalent.  I also noted that I felt the top was closer than the bottom for equities, and that wave (5) appeared to be complete or nearly so.  I outlined the zones where I felt that thesis would be challenged; bulls were unable to reclaim those key zones.

On Friday, the S&P 500 (SPX) made a final thrust upwards, which fell about two points shy of "Target 2" for the bull count (as noted 2/14 on the daily chart -- at the time it was noted, it was contingent on 1850 being reclaimed), and also fell shy of the bull/bear divider noted on the chart.  This now appears to be a complete five-wave rally at multiple degrees of trend, which suggests a meaningful correction is underway.  Granted, one reversal day does not a decline make (though it's a good start) -- so the first important support zone for bears to reclaim is the 1839-40 area.

The count not shown (an ending diagonal) was noted on 2/26 -- that option remains possible (if less likely) and would lead to one last-gasp bull thrust higher.

Bigger picture, there are now five waves up at multiple degrees of trend.  This is one precursor to a larger correction.

The Dow Jones Transportation Average (TRAN) is one of the markets that's kept me looking for a top in SPX recently, and the bear count remains alive and well in TRAN.  The levels bears (and bulls) need to reclaim also remain clear, and are noted on the chart.

In conclusion, this is an excellent opportunity for bears to take control of the market and force a larger turn.  All the ingredients are in place -- now it's simply up to the market to either make it happen, or to find a way to disappoint the bears yet again.  Next I'll be watching to see whether the decline takes the shape of an ABC, or a larger five-wave structure to add confidence to a larger trend change (and then we'll all keep our fingers crossed that it's not yet another expanded flat c-wave -- a favorite poison of this bull market).  Trade safe.

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Yes, Virginia, It’s a Bull Market – but is It Entirely Immune from Corrections?

In terms of market sentiment, I find anecdotal evidence interesting at times.  I've mentioned this in the past, but one of my favorite personal anecdotal stories dates back to January 2013.  In the articles I wrote that month, my tone and projections were rabidly bullish, and I barely gave any airtime to the bears.  What's interesting to me anecdotally is that those articles weren't very popular with readers at the time.  I found myself throwing in bearish "what if" long-shot discussions, simply as an attempt to retain readers, most of whom seemed uninterested in bullish things.  More recently, my articles have been focusing on the intermediate bear case -- and those haven't been terribly popular either.  Not exactly scientific, I know; but food for thought nonetheless.

I'll be the first to admit I like bear markets better than bull markets.  For me, they've always been more profitable to trade -- and frankly, they're just more fun.  Bear markets are volatile, and volatility provides profit opportunity.  They're also more fun to chart and write about.  Bull markets are, to put it bluntly, kind of boring: "Today the market went up (again!), as investors cheered Janet Yellen's announcement that during all future Fed meetings, Fed governors will henceforth address each other only as 'buddy'."

I mean, c'mon.  How fun is that stuff to write about (or read)?  Not very, I can tell ya'.  It reminds me of the movie LA Story in which Steve Martin plays a Los Angeles weatherman who prerecords his weekend forecast ("more sun!") because the weather is so incredibly consistent.   

Anyway, as of this exact moment, we're still in a bull market -- so today, we're going to look at the long-term in a bit more detail via the 20-year chart of the S&P 500 (SPX).  I didn't label the first portion of it, which is shown mainly for perspective.  The chart discusses the rest, including the bull/bear conundrum at the current inflection point.

Not shown is the bearish alternate count of a more complex long-term expanded flat, which would have the market revisit the C-wave low.  A little more than a year ago, I was equally split on whether SPX would rally "only" to 1750 or into the 2000's -- needless to say, the bear count 1750 target was exceeded, so at this point, fortunes would need to reverse rather abruptly to breathe life back into that long-term bear count.

Next is the 30-minute SPX chart.  Barring the noted signals on the chart, I'm still inclined to believe the market is wrapping up a five-wave rally which will need a downside correction.  The question which lies at the time frame beyond that is as noted on the long-term chart: short-term top or intermediate correction?  Given the market's performance of the past year-plus, one could be forgiven for starting to think that intermediate corrections have been outlawed (probably why it's not popular to discuss them lately!).

The Dow Jones Transportation Average (TRAN) continues to have a nice clean pattern to watch for broad market clues over the near-term -- and does still suggest downside is pending for the broader market.

In conclusion, the market has given no signals yet that it intends to extend the rally too much farther, and I'm still inclined to believe that we're in, at the least, a short-term topping phase.  The TRAN chart, and noted signals on the SPX chart, provide clear signposts as to where that thesis would be challenged.  Trade safe.

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Mmm... Crow

On Tuesday, the S&P 500 (SPX) made a new high -- and I'd promised if that happened that I would eat crow.  Turns out they're actually not too terrible if you use a lot of hot sauce.  While munching, I was prompted to look into the metaphor, and found this on Wikipedia:

Crow is presumably foul-tasting in the same way that being proved wrong might be emotionally hard to swallow.  The exact origin of the idiom is unknown, but it probably began with an American story published around 1850 about a slow-witted New York farmer.   

This then prompted me to look up something I wrote to the traders on my forum, back on January 29:

This is the crummy thing about this wave -- SPX probably counts best as an expanded flat off 1849... so now we'll get an impulsive decline in the C-wave down, and all us Elliott Wave guys will probably have to favor another leg down. Then it will never come, and we'll be left holding the bag again. 

So, given the fact that I felt SPX counted best as an expanded flat, one might wonder why I didn't favor the expanded flat (which suggested new highs) to begin with; perhaps, subconsciously, I've always wanted to try crow?  I'll be addressing this one internally for a while, as it seems like maybe I wanted to prove myself right about being wrong.  There's a broader lesson here about life in general and trading specifically, and I suspect all of us do this to ourselves at times -- but I'll leave it to the reader to figure it out beyond that.


At this point, of course, the objective is to move forward with the market.  After a mistake, I believe our goal is to define the mistake, as opposed to letting the mistake define us.  In this case, my mistake came by ignoring the wave count which I felt was objectively the best (the expanded flat) in favor of the wave count in which I became emotionally invested.  My apologies to readers for this.  To a large degree, I'd become trapped by my prior analysis and public statements, so the upshot is that the market has freed me from that (if you've never published a widely-read public analysis, you probably haven't given much thought to the weight, pressure, and sense of responsibility that comes with it.)  

(And for a lot more thoughts on the psychology of overcoming mistakes, please see:  3 Common Psychological Mistakes Traders Make, and How to Overcome Them) 

So -- let's look at the charts with fresh eyes and see what we come away with.

First off, the Dow Transportation Average (TRAN) has actually tracked quite well with February's projections, and appears to have completed the anticipated ABC correction within a few points of the target.  The best feature about TRAN is the wave structure has clear levels, which should help define some of the more ambiguous structures currently seen in other equities markets.

SPX broke the all-time high, then turned within the 3-point zone that I felt would be an important inflection point.  Near-term, I expect a trip toward the noted targets -- of course, bearish bets are off in the event of sustained trade above 1859.

The reality is that every form of market analysis is merely an attempt to assign probability.  There is no certainty and no absolute perfection.  My goal with these updates is to try and narrow down the market to the top two probabilities (the preferred and alternate counts), then to try and locate the inflection points and levels which appear key to those counts. 

For the intermediate term, there are two main options heading forward:

1.  If the rally marks all of wave (5), then we're in for a prolonged correction.
2.  While I've been talking about topping signals for the past few updates, we do have to give consideration to the potential that the topping signals may be short-term.  In that event, the rally is only wave i of a subdividing wave (5) -- which would make the (assumed pending) decline a second wave, and yet another BTFD ("Buy the Fargin' Dip") opportunity.

At this exact moment, I don't have much of a preference between the two counts, and will simply have to see how related markets perform (yen currency crosses and U.S. bonds, for example), along with the structure of the next decline, to begin assigning higher probability to one of those options.

In conclusion, bears appear have the ball for the near term -- and TRAN appears to be providing the clearest near-term structure at the moment.  I thus believe that chart is important to monitor for clues during the coming sessions.  Trade safe.

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SPX Update: Intermediate Upside Potential Still Appears Limited

Markets like this can make it a challenge to keep the updates interesting and not overly repetitive, redundant, and redundant.  There's very little to add on a material level -- in fact, I considered simply republishing the last update, but I accidentally spilled coffee on it.

Big picture, the S&P 500 (SPX) still appears to have fairly limited upside potential.  In Elliott Wave Theory, five waves forms a complete fractal, at which point a trend reversal becomes higher probability.
 

The near-term is ambiguous -- if the bear count is in play, then the top is probably in.  If the market is going to form five waves up for the fifth and final wave at higher degree, then it needs another small wave up.  At higher degree, both counts are basically bear counts, since the wave patterns suggest upside is limited.  From a classic TA perspective, that expectation may not fit with the potential cup and handle double-reverse v-bottom "papa bear, my soup is too hot" pattern, as it's sometimes called (when I'm trying to keep the updates interesting, anyway).  That pattern potentially targets 1900-1910 -- so in the event there's a breakout with increasing momentum, the wave counts may need to be revisited.  Presently I'm not anticipating that result, but any new signals would need to be respected as and if they occur.

There are two ways to view the current price action:  Bulls would say SPX is consolidating the recent rally; bears would say SPX is retesting a resistance zone (the all-time high).  Both descriptions are accurate, yet one of them is more correct -- pick your poison.  

The Dow Jones Transportation Average Unexceptional and Mediocre (TRAN) required some minor adjustments after the expanded flat count found a bottom at the previously-noted inflection point:

In conclusion, this market may to be trying to lull everyone to sleep.  I'm suddenly reminded of an old cheesy and cliche movie line: "It's quiet out there.  Too quiet."  It seems like most everyone is expecting new highs at this point, but, personally, I have very little desire to buy SPX near the all-time high, and I'm starting to see topping signals appear on some of my indicators.  Unless and until there's a convincing breakout, short -- or stand aside -- look like more reasonable positions to me.  Trade safe.

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SPX and TRAN Updates, while US Bonds Try to Build a Base

In the last update, I noted it was do or die time for the bear count, and yesterday the bears managed to turn the market where they needed to in order to keep hope alive -- for the time being.

Before we look at equities, I'd like to update the chart of the US 30-year Treasury bond (USB).  I haven't updated this chart in about 6 months, because there's been no reason to -- back in June and July of 2013, I was bearish on the long bond and remained so until recently.  However, the wave structure here has now reached an inflection point which could have long-term implications.  The long bond has formed a nice ABC decline into 127, and is trying to build a base.

The inverse correlation between stocks and bonds has been reasonable for the past few years (stocks up/bonds down), so if the long bond is successful at building a base here, this could also have intermediate implications for equities.  If the long bond was forming a simple ABC correction, that would mean new highs are in store -- and in that event, there are potentially long-term implications for equities.  We'll burn that bridge when we come to it, and the first thing is for bonds to complete this base-building attempt.  The pattern does suggest higher prices for bonds after the current correction completes, and next key resistance is near 135.  The only way I can see this pattern as a complete bearish wave is if the market formed a somewhat-uncommon running flat; I've noted the levels to watch.

Looking at the S&P 500 (SPX) at the intermediate level, I continue to have a difficult time envisioning the market heading much higher.  In the event we reclaim the all-time high, the most probable count still appears to be that SPX is completing a fifth wave -- meaning that another correction will follow on the heels of new highs. 

I should note "Target 1" is only in the event that the all-time highs are reclaimed -- i.e., the alternate bullish count.

I've outlined a few zones to watch on the SPX 30-minute chart:

One of the gross laggards recently has been the Dow Jones Transportation Average (TRAN), which has continued to behave like its in a corrective rally.  TRAN performed in line with the expectations of the preferred count (an ending diagonal) as outlined on February 14.

Not shown is the head and shoulders topping pattern that's formed on TRAN's daily chart, and which projects down to 6500 if 7000 fails.  If TRAN can instead break out here, I may be forced to become more bullish on the broad market.

In conclusion, given what's in the charts as of this exact moment, I'm still having difficulty finding any patterns that would make me mega-bullish on an intermediate basis.  I ran into this same issue at the beginning of the year.  Certainly things can change heading forward, though, so I'm keeping an open mind to the idea that the patterns could shift into something more promising.  As one example: The usd/jpy currency pair also seems to be trying to build a base (chart not shown) -- if that's successful, equities could see more a sustainable rally. 

The bottom line is that there is a degree of fracturing among markets right now, and I'd prefer to see more agreement before committing to an intermediate bull case. Trade safe.

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Why Traders Erroneously Assess Risk/Reward -- Plus Extended Fifths, and the Moment of Truth

Friday saw the rally continue, and there's not much to add in that regard, so today's update is going to focus on a couple of (hopefully) educational things which go beyond the charts of the moment.

To lead into the first of those, I'm going to refer back (once more) to something I wrote on February 10:

There is only one thing bothering me for bears here, and that's the fact that my preferred count has us presently retracing an extended fifth.  Extended fifths frequently form impressive "double" retrace patterns -- if that happens here, the current rally will retest the all-time high before dropping to new lows.

Today I'd like to share a chart example of a double-retrace, so readers can understand why (despite all the bullish signals) I've continued giving the bear count airtime.  Below is a Forex chart of US dollar/Japanese yen, and it shows an extended fifth wave (in this case, an extended fifth wave to the downside), followed by a complex double retrace.

We can see the first leg of the rally retraced back up to roughly 101.400 -- from there, the bottom was retested (and broken slightly) before the second leg of the retrace formed, to new highs.  We can also see that the retest of the low was faster and seemingly more powerful than the first leg of the rally.  We can also extrapolate that a number of traders were whipsawed at that double bottom -- which then helped provide fuel for that second leg up.

The potential of a similar chart pattern on the S&P 500 (SPX) is literally the only thing that's kept me from committing whole hog to the bull case.  My main regret for readers is that I didn't immediately focus on the fact that a retest of the high was reasonable and probably even likely (I regret it because, early on, I did give strong consideration to going that route publicly).  Considering the strength and speed of this rally, pretty much any call since February 5 that even entertained notions of selling turned out to be the wrong call.

(Here I should insert a segue to the next topic, but I don't have one -- so this sentence serves as the segue!)

There are many ways to approach trades, but let's quickly discuss two of those ways:  One approach is what I refer to as "confirmation trading" -- an example of confirmation trading would be shorting a breakdown of a head and shoulders pattern.  The pattern breakdown in essence "confirms" the trade, and suggests the direction of the market.

Another approach, and one that's loaded with pitfalls for new traders, is to try and be a bit ahead of the market.  I utilize both approaches, depending on what the market gives me, but use the second approach when my wave counts support action against a resistance/support level, and the next two criteria are also met:

1.  There are clear ways to mitigate risk via stop levels.
2.  The reward is significant vs. the risk.

The most recent real-life example of this second approach would be February 5:  The wave counts suggested a fifth wave bottom was potentially at hand, and there was a nearby support zone which could function as a stop level.  In that update, I both specifically warned newer traders against front-running, and also suggested experienced traders might take a crack at it, as long as they approached with extreme caution.  So why did I warn off inexperienced traders?

The front-running technique tends to be harder for new traders, for several reasons:

1.  Many have a difficult time letting go of losing trades.  (Some trading wisdom from the movie Rounders: "Throw away your cards the moment you know they can't win.")
2.  Many tend to let go of winning trades too quickly.
3.  Many tend to erroneously assess risk/reward -- both theoretically and practically.

The third tendency can stand alone in the theoretical sense; but in the practical sense, it's frequently the result of the first and second tendencies combining.  Many newer traders consistently under-assess their actual risk -- since they hold onto losing trades longer than they "know" they should, the true risk is actually higher than it looks on paper.  At the same time, they frequently over-assess their reward -- since they let go of the winners too quickly, the intended reward goes unrealized.

For example, if I take a trade thinking I'm risking 5 points to potentially make 50 (an excellent 1:10 risk/reward ratio), but instead exit after I make 5 points (due to anxiety or otherwise), then my risk/reward wasn't really 1:10, it was 1:1.  And on the other hand (when that trade goes bad), if I fail to honor my 5 point stop and don't actually exit until I've lost 10 points, then my risk/reward is, in practice, nowhere near my intended 1:10 -- it is, in reality, an abysmal 2:1 (risking 10 points to make 5). 


As Yogi Berra once said, "In theory, there's no difference between theory and practice, but in practice, there is."

If you're a new trader who's struggling with the usual "Why isn't anything working?" this might be one area to examine.

My point is that trying to front-run turns (in either direction) only works if one has a system for it, and then remains consistent and disciplined -- and often those are skills new traders struggle with.

Moving on to the charts:  Before I address the current SPX chart, I do need to mention that the Russell 2000 (RUT) broke through its apparent pivot zone (as discussed previously) which thus creates a potential thorn in the bear counts.  While I remain skeptical of the sustainability of this rally, outside of the discussed double-retrace, there is nothing in the charts that's actually bearish at the moment (one reason for my earlier discussion on front-running -- do with that what you will).  To the contrary, SPX has powered through every resistance zone it's encountered so far, and is now staring down the important zone: intermediate resistance at the all-time high.
  

On the SPY chart, there's some additional discussion of the (B) wave potential.  While there is (unfortunately) no hard and fast invalidation level for a (B) wave, there is still common sense.

In conclusion, in Friday's update, I discussed some of the more bullish options and potential targets, and nothing has changed in that regard.  SPX is into the zone where it's time for bears to make a stand if the ABC count holds any water.  So it's time for patience at the moment of truth -- but looking down the road, in the event bears can't get it done here, then we'll be wise to put away the bear claws until such time as the next bearish signals arrive from the market.  Trade safe.

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Looking at Both Sides of the Trade

Elliott Wave Theory is forward-looking, while much of classic technical analysis is backward-looking.  And as the S&P 500 (SPX) continues to power through resistance and moving averages, classic TA is giving buy signals left and right.  The final arbiter, of course, is price, and price currently still hasn't reclaimed (decisively or otherwise) the all-time high -- which thus says the market hasn't given the "all clear" just yet.

That said, bears dropped the ball during Thursday's session.  They had a chance to push through a number of key levels, but failed to even sustain the opening gap, which was quickly bought up and filled -- and SPX ultimately closed at new highs for this leg, directly inside Wednesday's 1827-1832 target zone.


Frankly, top calling in a bull market is a nightmare and possibly the toughest analytical gig there is.  Tops almost never look like tops, except in the rear-view mirror -- otherwise, who would be buying them?  As the old expression goes, "They don't ring a bell at the top."  So it can be a bit of a trap trying to call them at all, since you almost have to ignore certain bullish things.

In the last update, I promised to eat crow if the bullish signals ended up trumping the bearish wave count, and that's beginning to look like (an even more) distinct possibility.  But we're not quite there yet.  Biggest problem is, a few months ago I promised to eat crow if the near-term preferred count was wrong, and it ended up being right -- but I made the mistake of preheating that crow, then threw it back in the freezer.  Which means that now it's freezer burnt, and I'm quite certain it will be particularly bitter this time around.  I've definitely learned my lesson in that regard, and from now on plan on stocking only Mrs. Paul's Microwavable Crow.

Not too long ago, there was a lot of talk of the January Barometer -- essentially the theory that "as goes January, so goes the year" for equities.  An interesting study by Hennion & Walsh concluded that, since 1986, the January Barometer has worked 77% of the time.  The flip side of that coin is that the average total return for the 23% of "signal failure years" was 16.5%.  Something to keep an eye on.

While no one can deny that the price action has been unabashedly bullish, I'm still not entirely sold on the sustainability of a bull move here -- but I've added more detail to the bullish alternate count nonetheless.  I'm also moving it up to 49% odds from its initial appearance on the chart (on February 7).  This does call to mind one of the values of Elliott Wave, even when not everything pans out perfectly -- the wave counts accurately identified the intermediate inflection point at 1737 well before the rally had made much actual headway.

Next up is a closer look at SPX via the 30-minute chart.  This next part is a bit premature, and hopefully doesn't get too confusing:  Until the all-time high is reclaimed, the most bearish count of wave i down (which has never been my preferred count -- wave A has been my preferred count) remains alive.  Wave A does not actually invalidate at the all-time high, due to the option of a large expanded flat B-wave rally.  Just north of the all-time high sits what appears to be another important inflection point, as noted on the chart.  If we make it that far, watch that zone carefully, as it could theoretically put an end to the rally and take us back down in a C-wave to new lows.  More on this discussion will be presented in a future update if it becomes relevant. 

Near-term, 1824 is the first key zone for bears to reclaim -- and while there's no official "sell trigger" in that zone, it could certainly be used as a pivot.  Incidentally, we're finally starting to see some negative divergences in RSI.

Finally, there are a few indices racing ahead of SPX, such as the Nasdaq Composite, and still a number of indices lagging significantly, including the Dow Jones Industrials (not shown) and the Dow Transportation Average (TRAN).

In conclusion, I'm well aware of the bullish signals which have dominated the action in SPX this week, and I'm certainly not blindly ignoring them.  Again I'm left deciding between favoring the forward-looking Elliott Wave, or honoring backward-looking TA.  For the record, I'm still giving marginal odds to the bear count -- but ready to eat my bitter crow directly if necessary.  Trade safe.

Follow me on Twitter while I try to figure out how to make practical use of Twitter: @PretzelLogic

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Bulls and Bears Battle in US Equities, while Indicators Conflict with Elliott Wave Counts

Long-time readers know I'm not a "perma" anything when it comes to equities.  Outside of how it impacts my account (and yours), I really don't care whether the market goes up or down.  I let the charts dictate the probabilities, then trade in the direction that seems like it's going to pay the most.

We have an interesting situation now, because a lot of traders will have systems that have switched to buy signals on the recent rally.  That means the majority will be expecting upside follow-through, and many will be expecting new all-time highs (in fact, I've heard numerous perma-bulls gloating already, as if new highs are simply a given).  Some of my indicators are on buy signals as well, and I have to respect that -- but I also have to respect the wave counts.  These are the most difficult moments for me as an analyst, because I have conflicting signals between my preferred wave count, which is bearish, and my indicators, which are bullish.

So I've combed the charts extensively for clues, and in this update, I'll present a few things which may help as signals.

While the S&P 500 (SPX) has rallied basically straight up, a number of indices are lagging by a significant margin, and we're going to look at two of those today.   First up is the Russell 2000 (RUT), which has a bit different wave structure than SPX, as shown below:

    
Next is the Dow Jones Transportation Average (TRAN).  TRAN's rally so far appears quite anemic in comparison to SPX (shown in the lower panel).  Note that TRAN has run into resistance.  Also note that the first upside target (this is not a target that was discussed previously here, it was one I calculated near yesterday's open) for SPX (1823) has been reached.  Not shown on this chart is the fact that hourly RSI (for SPX) confirmed the 1823 high with no divergences. 

From a near-term perspective: If SPX makes a low below 1818.38 before it breaks above 1821.32, then it would suggest we've formed at least a small impulsive decline against the 1823 high -- which would favor that at least one more leg down (of similar length or longer) would follow the next small bounce.

Finally, the SPY chart.  As I mentioned a moment ago, many of my own indicators are now bullish -- so in order to understand why I'm still favoring the bearish wave counts over the bullish indicators, we need to revisit something I discussed on Monday:

There is only one thing bothering me for bears here, and that's the fact that my preferred count has us presently retracing an extended fifth.  Extended fifths frequently form impressive "double" retrace patterns -- if that happens here, the current rally will retest the all-time high before dropping to new lows.

From an intermediate perspective, we are currently retesting the all-time high.

In conclusion, this is one of those times when you almost hate to make a call, because you know that if you're wrong, you're going to berate yourself for ignoring your own indicators.  Yet I have to honor my own system, and feel I owe it to readers not to be wishy-washy here (and I'm fully prepared to eat crow if necessary!). 

The toughest part of trading and analysis is when the probabilities don't line up with the actualities -- and although this happens in everything in life (as you know if you've ever uttered the words, "What are the odds?"), when it happens in trading, it costs us money.  Ultimately, we simply have to see that as "operating cost."  No venture in life is without risk -- and even something as simple as driving five minutes to the local drug store can turn into a life-altering event.  I use this example because I almost had a head-on collision on the highway last night, when I rounded a blind turn and came face to face with a car in my lane who was trying to pass in a no-passing zone.  I ended up coming to a full and complete stop in the middle of the highway (from 50+ mph!) in order to avoid hitting him.

Trading is sometimes no different.  This is one reason why risk-management is an integral part of any system (yet one that's often over looked by newer traders) -- when the probabilities don't go as planned, make sure you're at least wearing your seat belt.  Trade safe.

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Bulls Finally Get a Turn in US Equities

Trading requires us to have a both a shorter memory than we want to and a longer memory than we want to.  I've spoken about this before, but often at roughly the same moment the market convinces everyone it's headed one direction and one direction only, it reverses.  Markets rarely head straight up or straight down, so getting bullish or bearish based on the immediate past is exactly what the market "wants" you to do -- it wants you to buy when you should be selling, and it wants you to sell when you should be buying.    

Remember way back when it was the End of the World?  I had trouble remembering the exact dates myself, so I referenced an online historical calendar, but it looked like too many days to count -- so I broke out the calculator, and using a few esoteric formulas (calculating for leap years and such), I was able to figure out that it's been almost a whole week since then.  Yet I've already heard a great deal of talk about how the market's headed "straight to new highs."

And maybe it is, who knows for certain?  But one can't help but be amused by how quickly we go from complacency to omg panic!!! to complacency again.

VIX fell 23% over the span of Thursday and Friday, which represents a massive shift in sentiment, from fear toward hope (and complacency).  From a technical standpoint, historically a drop of this magnitude in such a short time in VIX suggests the equities market will encounter a pullback within the next one to two sessions.  

Along the lines of sentiment:  Even after roughly two decades of charting, one of the things that sometimes still "gets" me about Elliott Wave is that it's so often counterintuitive -- yet it works.  On Thursday night, as I was working on Friday's update, the wave counts gave me a first target of 1788 for the S&P 500 (SPX).  At the time, futures were trading slightly red.  I looked at the cash chart and saw gobs of resistance between Thursday's close and 1788, and I thought, "How on earth is this market going to get to 1788?"  But I went ahead and annotated the chart -- then later (after a wacky whipsaw pre-open) the cash market gapped higher through resistance, hit 1788, and reversed.  By the close, it even went on to best that level.  The the moral of the story is that Elliott Wave pointed the way higher through resistance, despite the fact that such an outcome seemed counterintuitive at the time.

In my opinion, the most probable wave count is still pointed toward lower prices over the intermediate term.  And that probably seems counterintuitive after Friday's strong rally.

In other news -- from the standpoint of potential market-moving events -- on Tuesday, in what is sure to become an exciting semiannual tradition, Fed Chairperson Janet "Gellin' Like Janet" Yellen gives her first semiannual testimony on monetary policy.  It's expected she will reassure Congress that she's planning on bringing QE in for a soft landing with a gentle slowing of stimulus, as opposed to suddenly abandoning ship and throwing bankers overboard into the frigid waters of a tighter Fed.  Be sure to bring the whole family to D.C. for this "can't miss" Winter event; hot dogs will be served, and there will be free balloons for the kids! 

The first chart I'd like to share is a ratio chart, of SPX to the Proshares Short S&P 500 fund (SH).  Notice the difference between the most recent bottom, and every other bottom of the past two years:  Price broke the last swing low.  You will see this same theme repeated across the charts in most major markets, and this type of occurrence is usually a warning to bulls that the party is ending.

Next is the long-term monthly chart of the Dow Jones Industrials (INDU).  To say MACD is a little overbought is like saying Miley Cyrus has "a few" emotional problems.

It's also time to revisit our canary, the NYSE Composite (NYA).  NYA counts best as an impulsive decline, and while there are bullish options in the form of a similar expanded flat as was discussed for SPX on Friday (an expanded flat is an irregular waveform where the B-wave high exceeds the start of the A-wave -- it's one of the only patterns in which you will find an isolated five-wave structure that isn't followed by another similar wave), the probabilities currently still favor another leg down.

NYA has retraced 50% of the decline; the 50% retrace is frequently a resistance zone.

Finally, the SPDR S&P 500 Trust (SPY), which is effectively a 1/10th scale version of SPX.  There is only one thing bothering me for bears here, and that's the fact that my preferred count has us presently retracing an extended fifth.  Extended fifths frequently form impressive "double" retrace patterns -- if that happens here, the current rally will retest the all-time high before dropping to new lows (shown as "alt: (B)").  Note the chart is a little smaller than usual -- this is because Stockcharts was giving me grief and wouldn't let me save the edited chart, so I had to take a screenshot of my work-in-progress.

In conclusion, a snap-back rally was expected upon completion of wave (5), and that's what we've gotten.  While there are a few early signs of encouragement for bulls, the rally has not yet done any significant technical damage to the intermediate bear case, and there is thus no reason to abandon the preferred count.  In a way, becoming bullish here would be the "easy" trade; and more often than not, the easy trade is the wrong trade.  Trade safe.

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