SPX, NYA, and USB: Bonds Finally Break Out, as Equities Reach an Inflection Point

On Friday, the S&P 500 (SPX) captured downside Target 2 (1822-28; published April 7).  On Monday, the Nasdaq Composite (COMPQ) captured its downside Target 2 as well.  The market has now reached an important inflection point, which we'll discuss in more detail in a moment.

Numerous major indices, particularly the high beta indices like the Russell 2000 (RUT) and COMPQ have formed clear series of lower highs and lower lows, which is the very definition of a downtrend.  It's virtually impossible to look at those price charts and find any technical reasons to be intermediate bullish at the current juncture.  Therefore, going on the philosophy of "trade what you see," I'm left with no other option but to continue to favor the bears for the intermediate term -- unless and until proven otherwise.

The bear case is technically solid, and thus has to be considered "preferred," but I'm nevertheless going to devote several paragraphs to talking about the bull case and the other side of the trade, partially because I see very few folks doing so and I feel obligated to bring some balance to the discussion.  Longtime readers know I'm an equal opportunity offender of both bulls and bears; ultimately I don't really care which direction the market goes, outside of how it impacts my current positions.

Let's discuss the bull case: bears may want to stay on their toes right now, because the charts have reached a technical inflection point, and it's significant.  Here I'm going to briefly digress from the technical discussion, but I'll return to it in a moment.

Digression: The herd is getting awfully bearish lately.  I've seen more "crash" articles show up over the past week than I have in a long time.  What's troublesome for bears isn't that these articles are being written, it's that they're being read.  Admittedly, this is very anecdotal -- but I write about this stuff, so I've picked up a thing or two over the years regarding mass sentiment and the popularity of articles.  Thus the current popularity of crash-type articles bothers me a bit because, from the perspective of market timing, the majority rarely read hardcore bear articles when they "should" -- instead, when they should be reading bear articles, they read bull articles; or articles about flowers and cute fluffy kittens (not necessarily in that order).  They usually want bear articles right before a bounce is due.

Certainly we can't trade based purely on anecdotal sentiment like that, but I felt it was worth discussing nonetheless.  From a more technical perspective, this inflection point comes about because SPX and several other indices have reached the zone where a corrective wave structure could form an intermediate base.  Let's start off with the NYSE Composite (NYA) to illustrate this.

Since I often try to foresee and discuss the market two or more turns in advance, I opened this discussion in Friday's article with the following:

One of the questions I indirectly raised earlier is:  "How might the market punish the newly-converted bears?"  There are, of course, no guarantees that it will, but it's a strong possibility.  So, instead of cluttering up the SPX chart, I've used the NYSE Composite (NYA) to illustrate two possibilities for market curveballs.

The first curveball potential is a surprise intermediate bottom in wave C.  C-waves typically reach approximate equality with A-waves, as shown by the green measured-move boxes on the chart below.
The second curveball potential is for a quick drop that captures the SPX target 2 zone, which is followed by a retracement rally (to punish the new bears).  I've shown this option in black on the chart below -- if this plays out, expect SPX to follow a similar path.  Note there is absolutely no technical reason for me to consider such an outcome, this is merely based on trying to determine what might cause the greatest amount of pain to both the bulls and the bears at the current juncture.  The black path would also leave the greatest number of options open, which is another thing the market often likes to do. 

Here I'd again caution readers to watch the crash channel on SPX, and thus not entertain these other options as long as SPX remains within that channel.

SPX broke out of the crash channel later in Friday's session.  Of note is the fact that NYA has, so far, followed Friday's proposed black path very well -- in fact, the last three directional moves tracked the black dashed line so well that the price action essentially covered it up completely (I deleted the overlap on this chart -- the original can be compared in Friday's article).

When I study NYA on the one-minute chart, it suggests the rally since Friday's low was impulsive -- and that suggests at least one more wave up is due.  I would not be at all surprised to see the black path fully realized over the coming sessions.

SPX is also hinting at a near-term bounce.  My main regret on this chart is that, on Friday, I strongly considered splitting Target 3 into two zones (due to the wave structure):  1810-14 and 1798-1804.  As a result of not following my instincts, Target 3 may have to wait.  Of note is the fact that if SPX rallies into the near-term target and then returns to break 1812, bulls are probably in serious trouble, and Target 3 would almost certainly be far too conservative in that event.

On the bigger picture SPX chart, we can see that, on Friday, SPX tested the old black trend line.  One more reason the current inflection point has to be noted and respected, at the very least.

I've spent a lot of time talking about the bull case because it's simply too obvious to ignore, and I feel it's irresponsible to only discuss one side of the trade, especially at an inflection point.  Nevertheless, I am continuing to favor the bears in equities and will treat the (projected) bounce as a selling opportunity until proven otherwise.

One of the charts keeping me in the intermediate bear camp (with equities) is the 30-year bond (USB).  Outside of calling the b/(2) bottom on April 7, there's been no change to this chart or its projections since I turned bullish on USB back in February.  Note the long bond has now broken out above the dashed red resistance line, which is the first true confirmation of my intermediate bullish stance in bonds.  Markets often become whippy around important price zones, so some backing and filling around that breakout isn't out of the question.

In conclusion, I continue to favor the intermediate bear case for equities because, given the current charts, I have no choice.  I've discussed the intermediate bull case in depth because I feel we at least have to respect it, since, for more than a year, this market has repeatedly surprised to the upside.  The bottom line is this:  Near-term, more upside would not be unusual, and I've mapped out the key intermediate upside levels as best I can.  While the bull case bears respect, until those key levels are reclaimed, I have to treat any bounces as selling opportunities.  Trade safe.

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SPX, NYA, Nasdaq: SPX Captures Three Straight Targets -- What Next?

In Wednesday's update, we examined the evidence for the bull and bear cases, and concluded that the S&P 500 (SPX) would rally over the near-term, but that bears had the edge to see new lows over the intermediate term.  The near-term upside targets were 1860-65, then 1870-74; while 1874 was noted as a key pivot.  Both upside targets were captured during Wednesday's session.  On Thursday, SPX reached an early session high of 1872.53, a point shy of the pivot, before being crushed by an onslaught of sellers.  It's now reached new lows, but there are no indications yet that the decline is over.

I expect a trip into the second downside target zone (1822-28, as published April 7), and odds are reasonable that we'll ultimately see even lower prices.

It seems like suddenly everyone has jumped on the bear bandwagon -- and that always makes me inclined to stay on my toes for an unexpected rally, since the market "wants" to inflict pain on traders who are late to a party.  Nevertheless, there are no technical signals yet for a rally -- but the first thing I'll be watching this session is the new crash channel in SPX.  A little later, we'll also examine some ways the market might make things harder on the newly-converted bears.

Let's take a look at the Nasdaq Composite (COMPQ), and also revisit a paragraph from Monday's update:

As I noted on Friday, the higher beta indices like COMPQ and Russell 2000 (RUT) weren't playing along with the SPX rally.  That's sometimes a warning that sentiment is shifting toward risk-off.  Looking forward, COMPQ's current pattern has a markedly bearish appearance, and is suggestive of a nested third wave decline ("nested" meaning a third wave within a third wave).  This chart tells me I'm not in a hurry to "buy the dip" just yet, because there is still significant downside potential present.

As of this moment, there has been nothing to negate that nested third wave potential. 

So the nested third wave remains alive and well and speaks to waterfall potential.  And yet, as I mentioned earlier, I'm bothered by all the Johnny-come-lately bears.  I approach the market a bit like I'd approach a chess match, which means I try to think several moves ahead of my opponents.  I try to express those strategies as best I can in these updates, while at the same time trying not to overwhelm and confuse readers.  Frankly my approach is a lot simpler in real-time, since as the market moves, it often reveals itself rather plainly.

In any case, I want readers to be aware of a couple additional "chess-match" moves the market may make here, so that readers can stay ahead of their opponents as well. 

One of the questions I indirectly raised earlier is:  "How might the market punish the newly-converted bears?"  There are, of course, no guarantees that it will, but it's a strong possibility.  So, instead of cluttering up the SPX chart, I've used the NYSE Composite (NYA) to illustrate two possibilities for market curveballs.

The first curveball potential is a surprise intermediate bottom in wave C.  C-waves typically reach approximate equality with A-waves, as shown by the green measured-move boxes on the chart below.

The second curveball potential is for a quick drop that captures the SPX target 2 zone, which is followed by a retracement rally (to punish the new bears).  I've shown this option in black on the chart below -- if this plays out, expect SPX to follow a similar path.  Note there is absolutely no technical reason for me to consider such an outcome, this is merely based on trying to determine what might cause the greatest amount of pain to both the bulls and the bears at the current juncture.  The black path would also leave the greatest number of options open, which is another thing the market often likes to do. 

Here I'd again caution readers to watch the crash channel on SPX, and thus not entertain these other options as long as SPX remains within that channel.

In conclusion, it's likely that SPX will capture the second target zone of April 7, and it presently appears to be reasonable probability that the decline will ultimately continue beyond that zone.  Considerable downside potential remains in the current patterns, and until bulls do something to negate that potential, this market continues to warrant a cautious stance.  Have a great weekend, and trade safe.

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SPX, Nasdaq, NYA: Bull Case, Bear Case, and Determining Who Has the Ball

The easy money's over for now.

Trying to anticipate what the market will do next involves vast amounts of forensic detective work.  Today, we'll try to determine whether bulls or bears have more evidence on their side.  Sometimes, the evidence is reasonably clear, which means future outcomes can be anticipated with reasonable probability.  Other times, the evidence for the bull and bear cases reaches a seeming equilibrium, which makes it difficult or impossible to come up with high-probability projections.

Last week, I felt the market would break higher from the March trading range, rally briefly, and then whipsaw, catching both bulls and bears by surprise.  Those things came to pass.  Then on Monday, I discussed what I felt were the first high-probability targets for the S&P 500 (SPX), at 1834-42, and Nasdaq Composite (COMPQ), at 4030-60.  Both of those targets have now been captured.

All that was the "easy" part.  As I noted on Monday, the target zones I published also represent inflection points, which means those are price zones where reversals become possible.  Today, we'll look at the evidence for bulls and bears and try to determine who has more weight in the market right now.

First off, let's talk about the bull evidence:

1.  SPX has reached the 50 day moving average, and, as is typical, there has been some buying around that level.  The 50 dma is a lagging indicator, but I pay attention to it because other traders pay attention to it, which means the price action often becomes heated near that zone.  So far, we can view the bounce at the 50-dma, at least in SPX (Nasdaq is another matter), as mildly bullish.  Considering that the 50-dma crosses a major price support zone, though, it's hard to read too much into the bounce yet.

2.  The Volatility Index (VIX) formed a bearish engulfing candle on Tuesday.  VIX down usually means equities up, so we can put that in the plus column for bulls as well, at least over the near-term.

3.  There's an Elliott Wave pattern called an expanded flat, which has now reached the minimum downside expectations in SPX.  Every large impulsive (five wave) decline since 2012 has been wave-c of an expanded flat, so we have to stay alert to that potential here as well.  This isn't really "bullish," exactly, any more than a potential head and shoulders that hasn't actually broken down yet is "bearish" -- it just exists as a possibility that has to be respected.  Let's look at that in more detail.

In an expanded flat in an uptrend, the market rallies to new highs in an irregular b-wave, then declines to break the a-wave low in wave-c.  SPX has completed the minimum requirements for such a pattern.  However, the NYSE Composite (NYA) has not yet broken its (potential) a-wave low, but has broken its uptrend line -- so we have to put this index as a plus-mark in the bear column for the time being, and it suggests new lows still on the horizon for the broader market.

Let's back away from the near-term view for a moment and take a look at the weekly chart of SPX.  Even though bulls have the uptrend still in their favor, there were two fairly strong trend reversal signals which came at long-term resistance.  Signals can go unrealized, of course, but until SPX breaks 1897, this chart probably argues in favor of the bears.

The Nasdaq Composite captured its target, then reversed.  This behavior does keep bull options alive, though the overall structure presently hints at new lows -- so this has to be placed in the "neutral" column.  Near-term, a bounce would be reasonable, so we'll have to rely on real-time feedback heading forward.

Finally, the hourly SPX chart does suggest at least a near-term rally.  The bounce out of the captured target zone appears impulsive, suggesting at least one more leg up over the near term.  I've outlined targets on the chart:

In conclusion, it's difficult to get too far ahead of a market like this one.  Near-term, the weight of evidence tilts toward the bulls and suggests a bounce is due.  Intermediate-term, the evidence slightly tilts in the bears' favor -- but since the bulls have the long-term trend in their favor, it's a close call.  For the time being, I probably have to give a slight intermediate edge to the bears, but I'm not stubbornly set on that by any means.  As I noted, the easy money is over for the moment -- so we'll be wise to observe how the market reacts to this first bounce opportunity, then we'll examine the new evidence in the next update.  Trade safe.

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SPX, Nasdaq, and USB: Why I'm in No Hurry to "Buy the Dip" Yet

Friday saw an ugly bearish reversal day, which likely caught most traders wrong-footed (the majority generally have to be looking the wrong direction for solid market moves to happen in the first place).  Bearish reversal days thus typically portend further selling ahead, since many traders who were trapped at the highs will look to unload longs into the next bounce, and this creates overhead resistance.

I wrote about this setup on March 31, and added this on Wednesday, April 2:

If the market is indeed plotting the head-fake whipsaw I talked about on Monday, then we're likely to see a significant sell-off afterwards, as most traders will be caught wrong-footed.  This is because classic technical analysis would see a breakout here as very bullish, with targets in the mid-to-high 1900's. 

The above paragraph also indirectly describes one of the reasons I feel Elliott Wave Theory is an invaluable tool for trading and market analysis.  Back on March 31, Elliott Wave allowed me to project that the S&P 500 (SPX) would likely rally directly out of the range, in a false-breakout, which would then reverse (See: SPX and USB:  Equities May Be Plotting a Head-fake Whipsaw).  Without Elliott Wave, I probably wouldn't have been able to foresee all that -- especially from the vantage point presented before the breakout had even occurred.

Being aware of the likelihood of a pending reversal can be invaluable for protecting profits on existing positions, and/or for avoiding badly-timed entries on new positions.  Of course, one must carefully balance projections with real-time market feedback, and continue to respond to changing conditions in a fluid manner.  The "danger" of projecting the future is that one can become too rigid in one's expectations, and thus fail to recognize either opportunities or perils in the present moment.  But ultimately, "forewarned is forearmed" as they say -- so I think if one can balance foreknowledge of likely potentials with a present-based trading approach (and, of course, solid risk management), then it creates many more opportunities for protection and expansion of capital.

Moving on to the current charts, I'd like to start off with a detailed look at the Nasdaq Composite (COMPQ).  As I noted on Friday, the higher beta indices like COMPQ and Russell 2000 (RUT) weren't playing along with the SPX rally.  That's sometimes a warning that sentiment is shifting toward risk-off.  Looking forward, COMPQ's current pattern has a markedly bearish appearance, and is suggestive of a nested third wave decline ("nested" meaning a third wave within a third wave).  This chart tells me I'm not in a hurry to "buy the dip" just yet, because there is still significant downside potential present.

In SPX, so far bears have accomplished everything they needed to, short of a sustained break of the black trend line.  The near-term outlook will remain bearish until either 1898 is claimed to the upside, or until there are signs of a bottom.   

Notice SPX is currently in a near-term crash channel (the thin black channel) -- the first step for bulls is to break out over the upper boundary, but usually the first break of a channel this steep is merely a deceleration of the near-term trend, as opposed to an immediate reversal.  So, more often than not, the first breakout is then sold to new lows.  Consequently, there is almost no reason to bet against the near-term trend when the market's still within such a channel -- so again, I see no reason to be in a hurry to get long, as of this exact moment.

Looking forward on SPX, the target zones also represent inflection points, which means we'll be wise to observe how the market reacts to them (assuming they're reached, of course!).  One ugly day can't tell us if this decline will be an intermediate decline or not, though it does have all the ingredients for one.  Intermediate decline or not, on a near-term basis, this drop shows no signs yet of an impending bottom; so I think any pending bottoms will need to come from lower prices.

Not shown today is the NYSE Composite (NYA):  On Friday, NYA rallied into its median channel line, then reversed from that line, almost to-the-penny.  I'd noted on the chart that we should watch that zone carefully, because "fifth waves often stall near median channel lines" (just another reason why my first love in charting is still Elliott Wave Theory).

In place of NYA, which appears it will follow a similar path as SPX and would thus be redundant today, we'll take another look at the 30-year bond (USB).  USB has reached a near-term inflection point for wave b/(2), meaning the long-bond appears likely to have bottomed in the recent session.  If so, it's now embarking on wave c/(3).  Interestingly, if there's a breakout over the dashed red trend line, then classic technical analysis would view USB as a flag pattern -- and the target for this classic TA flag pattern now aligns with the 138 Elliott Wave target from February 20 (more aggressive TA methodology would actually suggest a target beyond 139).

Stocks and bonds have demonstrated an inverse correlation at many points in the past, and have shown this correlation with some consistency since 2012 -- so a rally in bonds would hint at trouble for equities.  The key for bond bulls, of course, is a breakout over the red resistance line; while a breakdown of the recent lows would suggest a more complex correction still unfolding for b/(2).

In conclusion, Friday's reversal came within a couple points of the projected reversal zone, and was strong enough to suggest that the head-fake whipsaw thesis was indeed correct.  Last week thus made an excellent bull trap, and almost certainly caught the majority of traders looking the wrong direction, since the upside breakout from March's extended range-bound consolidation is something many trading systems would have viewed as bullish, especially in light of the strong bull run that preceded it.

In my experience, trader psychology is subject to the laws of inertia -- so the initial tendency of traders who were bullish last week will be to remain bullish into the decline this week, possibly leading to premature dip-buying.  Regarding this psychological component, I'd like to quickly refer back to something I wrote on Wednesday, April 2:

I think one of the goals of trading ranges is to wear everyone out -- and in doing so, ranges sometimes serve the function of making traders a bit sloppy afterwards.  While the range is underway, everyone becomes hyper-focused on the near-term charts; then some feel thrilled or relieved when the range finally breaks.  Trend followers sometimes even become strangely complacent afterwards, due to the emotional release of stored tension that was generated by the range.

Based on some of the trader talk I heard last week, I suspect there was a lot of "release of tension" complacency in the wake of the breakout (sometimes this "I weathered the correction!" psychological relief even reaches extremes, and manifests as arrogance).  Thus it appears there was significant complacency at the all-time high, which means many traders were positioned "long and wrong" on Friday -- and that makes this a great setup for a continued sell-off.  In the meantime, we'll rely on real-time feedback from the price charts to tell us when buying the dip might again see better odds.  Trade safe.

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SPX and NYA: The Interesting Headline Generator is broken again...

On Thursday, the S&P 500 (SPX) made another new all-time high early in the session, then reversed and tested support near 1883 before recovering to end the day slightly down.  Even though yesterday's candlestick was technically a minor bearish reversal candle, I don't think much can be read into it yet, because so far support has held.  That said, sometimes these types of minor bearish candles function as early warning signs of a pending reversal from higher prices.

Meanwhile, although SPX and the Dow Jones Industrials (INDU) grab most of the headlines, higher beta indices like Nasdaq Composite (COMPQ) and the Russell 2000 (RUT) are still trading below their March highs.  It's possible we'll begin to see markets even-out a bit now that the Fed is hitting stride with the QE taper, and 2014 may end up having a different character than the frothy 2013 market.

Overall, there's been no material change in the outlook since Wednesday, other than to note that we can finally take the diagonal off the table since SPX broke through 1887.  I've also updated the near-term pivots to reflect the latest price action.  As a result of there being no change from Wednesday's more detailed analysis, today's update will require few words and I'll let the charts do most of the talking.  (If you missed Wednesday's update, please refer to SPX and NYA:  Equities Face Long-term Resistance).

SPX still faces long-term resistance in the upside target zone:

The NYSE Composite (NYA) has reached the first upside target zone.  Incidentally, if you're wondering why I frequently chart NYA, it's because this index is a much better representation of the total market than SPX or INDU.  Generally speaking, SPX and INDU tell folks if their blue chip portfolio is gaining or losing, but NYA tells us the health of the overall market. 

In conclusion, beyond updating the near-term pivots, there's very little to add to Wednesday's update.  It's worth noting that today is Non-Farm Payroll, which sometimes brings volatility.  Trade safe.

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SPX and NYA Updates: Long-Term Resistance

Monday's update anticipated that the S&P 500 (SPX) was headed directly to new highs, and confidence in that view was added during Monday's session, when SPX broke, back-tested, and held 1867.  Tuesday's session closed at a new all-time high.

In today's update, we'll discuss the bull and bear cases and the zones to watch for each. 

On Friday, I wrote: "Due to the larger trend, this is probably bears' last shot to break these markets down, so any strong bounces from here would likely lead to new highs."  That now applies to bulls in reverse (sans larger trend, of course). 

If the market is indeed plotting the head-fake whipsaw I talked about on Monday, then we're likely to see a significant sell-off afterwards, as most traders will be caught wrong-footed.  This is because classic technical analysis would see a breakout here as very bullish, with targets in the mid-to-high 1900's.  After we examine the preferred count and the arguments in its favor, we'll also delve into those more bullish potentials in a bit more detail.

The preferred count continues to see this pattern as a triangle, which has either taken the form of a symmetrical triangle or an ending diagonal.  The pivot between those two options is 1887. 

Here's a more detailed look at the potential symmetrical triangle, using the NYSE Composite (NYA):

SPX reached the key 1885-87 pivot yesterday, but in the event it sustains trade north of 1887, then the symmetrical triangle is in play.  Interestingly, the textbook target for the symmetrical triangle also represents a long-term resistance zone.

I think one of the goals of trading ranges is to wear everyone out -- and in doing so, ranges sometimes serve the function of making traders a bit sloppy afterwards.  While the range is underway, everyone becomes hyper-focused on the near-term charts; then some feel thrilled or relieved when the range finally breaks.  Trend followers sometimes even become strangely complacent afterwards, due to the emotional release of stored tension that was generated by the range.

But I'd suggest we stay alert even if there's a sustained breakout over the 1887 pivot, because we have resistance showing up on the long-term chart, right near the symmetrical triangle's target zone:

So, put simply, the preferred count currently still anticipates that the new highs will turn into a head-fake and whipsaw -- but let's talk about the more bullish option as well.

Prior to the development of the apparent triangle trading range, I had been viewing the bull potential as wave i-up of v-up complete, with the correction as ii-down of v-up (now also complete), and iii-up of v-up still to come.  The series of apparent three-wave moves which created the trading range gradually drew me away from that wave count.  At the moment, I'm no longer favoring it -- but because three-wave moves aren't always what they seem, my original bull count isn't dead and I still have to continue to respect as a viable option.  That option will likely regain favor as the preferred count if the market sustains trade north of 1914. 

In conclusion, the preferred triangle count accurately predicted the end of the trading range and the immediate new highs, which gives some additional credence to that count.  Of course, we don't want to get too far ahead of the market or too rigid in our expectations, but the pivots continue to bear watching as potentially-important reversal zones.  For the time being, I'm continuing to favor the view that the anticipated new highs are part of a terminal pattern.  Trade safe.

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SPX and USB: Equities May Be Plotting a Head-Fake Whipsaw

On Friday, I mentioned that I believe the market is finally close to breaking out of the month-long trading range, and after studying the charts further this weekend, I increasingly believe that break will happen over the next few sessions.

I've done things a little differently today, because the chop zone of the past month has left open at least four fully-valid near-term wave patterns -- and trying to talk about four different options would simply confuse most readers.  So instead of doing that, I've simplified the S&P 500 (SPX) chart down to the key price pivot zones, and the next targets if those zones are broken.

I suspect the market is setting up for a whipsaw head-fake break from this range, so watch carefully for the first directional range break to reverse near the pivots.  I'll discuss this in more detail after the chart.

While calling direction from the middle of the range in a choppy market like this is virtually impossible, if I had to pick a direction here, I'd say we rally first to run the bear stops, then reverse.

Let's talk about where these price pivots come from, why those pivot levels could mark reversal zones, and thus why (ironically) bulls probably want to see SPX head directly lower, while bears probably want to see it head directly higher. 

Disclaimer: If you're easily confused and/or have a short attention span, you might want to skip the next four paragraphs.  I've noted where to pick up again.

If SPX heads directly higher, there are two wave counts that remain in play -- and both have intermediate bearish potential and hint at a reversal to follow.  The basic issue for bulls is that an immediate rally would suggest that the three-wave structures of the past month have been part of a triangle.  That triangle has two possible forms:

1.  The most bearish is the potential ending diagonal rally (discussed last week), which is invalidated north of 1887.  Ending diagonals (as the name implies) are terminal patterns.
2.  The second option (a standard triangle) is more near-term bullish, but bearish on an intermediate basis.  Triangles most often occur as the penultimate wave in a pattern.  The thrust out of Elliott Wave triangles is generally strong and fast -- and then reverses nearly as quickly.

So (as noted last week) I think bears want to see prices head directly higher from here, and then watch for whipsaws starting at either 1885-87 or 1900-1910.  Both price zones have the potential to mark intermediate turn zones.  There are, of course, also more bullish options that would remain in play on a breakout, and those come to the fore if SPX can sustain trade north of 1910 +/-. 

As I discussed a week ago, the problem for bears is that the three-wave rally into the all-time high strongly suggests that the final high isn't in yet.  So, in the event of an immediate break lower, the first option for bulls is for an ending diagonal C-wave down.  That pattern is invalidated below 1832.82 (hence the 1833 pivot), which, probably not coincidentally, lines up nicely with the 50 day moving average at 1834.

NOTE:  Fed governors start reading again here.

If SPX sustains trade south of 1832.82, then a host of bearish potentials open up.  So, even though bulls have the three-wave rally into the highs in their back pockets, I would not want to be long south of 1832.  The potential for drawdown beneath 1832 is significant.  As an extreme example: the 2011 mini-crash came on the back of a three-wave rally into the 2011 high -- and while the market ultimately recovered and exceeded that high, there was much more money to be made on the short side for several months.

Conversely, in the event of an immediate rally, do keep in mind that this is a bull market; which means bears should choose their entries and exits selectively and cautiously, and not stubbornly fight the tape.  The wave iii of v count discussed at length during March is still alive and well.

Recently, I've had a few readers request updates on bonds, and there's really very little to add since my last bond update of February 20.  Near-term, the 30-year bond (USB) may still be working on wave B/(2).  Ultimately, I still expect prices to test 138, though bullish bond bets are off below the key overlap.

A chart that bears watching is the ratio of high yield corporate bonds to Treasury bonds (HYG:TLT), which has broken its up-sloping channel for the first time in nearly two years.  The bond charts may be warning that there's trouble on the horizon for equities, but as yet there have been no definitive red alerts here, only hints and allegations.

In conclusion, while SPX is still within the trading range, I'm anticipating it will break from this range in short order.  I further suspect that the first break will be upwards, but would stay very cautious for a head-fake and whipsaw shortly thereafter.  The market, of course, reserves the right to do something else entirely -- so the key levels should help point the way.  Trade safe.

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SPX, NYA, and QE Updates: Distribution or Consolidation?

I'm a firm believer that the recent bull market has been driven largely by money-printing from world's central banks, and specifically by the Fed's quantitative easing programs.  I've given verbose arguments in this regard many times, but the short summary of the argument is that the printing press creates liquidity, and liquidity drives the market.

Let's look at a chart of the S&P 500 (SPX), since a picture is currently worth 18,967 words (remember back in the 80's, when you could buy a picture for a thousand words?  Yet another example of inflation.)  The chart below highlights some of the central bank programs which seem to have been intimately linked to the five-year bull market.

I originally published this chart back in November 2012, as part of (what was then) my long-term bull argument for equities.  The question now is: What happens in the coming days, as the Fed tapers the QE program?  Based on prior history, we can assume that as Fed money-pumping slows, so will the market.  But I think we also have to look a step further and ask:  If/when the shrinking liquidity pool hits the tipping point and the market reacts negatively, what will the Fed then do in response?  I mention this because a lot of bears are looking forward to the end of QE, and the presumed resumption of a "natural" market -- but the Fed can, of course, always reverse policy again if it doesn't like the results.

When we look at current charts, we can see SPX has been in a trading range (or "chop zone") since February.  The challenge is that near-term chop zones can turn the charts into the equivalent of a Rorschach ink blot test:  Bulls see bullish patterns, bears see bearish patterns, dogs see patterns that look like bacon, Cookie Monster sees cookies, etc.

This is one reason I would strongly caution against reading too much into the classic technical patterns that seem to materialize within a trading range -- and especially caution against trying to ride them to their classically-expected price targets.  Trading ranges do funny things, and the main success I've ever had with them comes in identifying them early enough, then selling the high end of the range and buying the low end.  That works until it doesn't, at which point your profits should trump the money you lose when the pattern finally breaks and you're stopped out.

Due to the near-term chop zone and the myopia it induces, I want to look at a broader view of SPX.  I'm not going to republish the 30-minute SPX chart in this update because there's been no material change therein, so please refer to prior updates if you missed it.

Not shown on the chart above:  The 50 day moving average on SPX currently crosses 1834.  In the event of a breakdown, that zone is worth watching simply because other traders pay attention to it -- and in a bull market, that means there are often standing buy orders near the 50 DMA.

A couple other charts not shown in today's update that bear honorable mention:

1.  Nasdaq's volume declining has spiked to the highest levels since October 2012.  It's not unusual for volume declining spikes to indicate an approaching bottom.
2.  The Dow Transports (TRAN) invalidated the bullish triangle count.  The first meaningful resistance zone in TRAN is now 7480 +/-.


Next I want to look at the NYSE Composite (NYA) because, of all the chop zone charts, this one may have the cleanest wave structure.  The red trend lines are where nimble traders might play, but we still have to respect the larger range.

In conclusion, SPX and NYA are both near the lower end of the trading range.  Due to the larger trend, this is probably bears' last shot to break these markets down, so any strong bounces from here would likely lead to new highs.  In the event of a sustained breakdown of the 1834 zone, then SPX's pattern could be seen as a double-top, which suggests a textbook target south of 1800.  Trade safe.

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SPX Update, and Avoiding Tricks of the Trader Brain

"It's not what you look at that matters, it's what you see."  -- Henry David Thoreau

While I realize Thoreau was not referencing trading, have truer words ever been spoken in regards to charting the market?  Ever trader on the planet has access to the exact same charts and much of the same information -- and yet if everyone "saw" the exact same things, then there would be no market at all; we would have only buyers on one day, and only sellers on another.

We don't have everyone on the same side of the trade, though, because we all see the market differently.  One aspect of successful trading is the ability to see things that the majority do not.

Another key is to see what's really there.  While that sounds simple enough, "seeing what's really there" is easier said than done -- partially due to our biology.  It might come as a surprise to learn that our brains aren't actually designed to see what's really there.  This is because our brains lack the capacity to process all the information that comes in through our senses, so one of the functions of our prefrontal cortex is to act as a filter against that constant flood of stimuli.  Without that filter, we would suffer from sensory overload.

Here's where things get interesting:  Scientists have recently discovered that there are neurons in our prefrontal cortex whose sole and specific purpose is to suppress information that we aren't interested in.

Read that again, and then consider the implications for a trader.  We all know that "bullish or bearish" biases can be account killers -- and part of the reason appears to be that our brains are hardwired to actively suppress information that counters our biases.  While science has only discovered these special "information suppressing" neurons within the past few years, I think many of us intuitively realized our brains work this way long before science made it official.

It really is amazing how much information we miss on any given day.  Moving from the scientific to the anecdotal:  When I was 9 years old, my father gave me an impromptu demonstration of this fact  He and I were walking out of a shopping mall in Pennsylvania, when we noticed a beautiful rainbow.  The rainbow wasn't directly in front of us, but was something we spotted with our peripheral vision as we exited.  Rainbows this gorgeous were not commonplace in the Lehigh Valley, so my father took this opportunity to teach me a life lesson.

Instead of heading straight to the car as we'd planned, he directed me to sit on a bench near the mall exit and told me, "Watch people's eyes as they leave the mall.  Count how many people notice the rainbow." 

In the time I sat there, 36 people walked out of the mall, and, as far as I could tell, everyone who noticed the rainbow reacted in some way, even if just to turn their heads and look at it.  Finally my father asked me the results of my tally:  Out of the 36 people who exited, a total of only four had even looked in the direction of the rainbow.

"You see," my father said, "most people are so wrapped up in themselves that they end up completely missing life.  As you grow older, it will become harder not to be that way.  Never lose your sense of wonder."

Keeping an open mind to all possibilities is one way to help instruct our brains not to ignore information.  As I've said before:  Your toughest opponent in trading, and the hardest one to overcome, is yourself.

Last update expected the market would correct lower over the near-term, and Monday's opening pop was sold to new lows immediately.  Two wave counts were shown, and both remain viable, with the additional note that if the ending diagonal is unfolding, there are now enough waves in place for new highs.  The bullish pivot level, and invalidation level for the diagonal, is 1895.  This level invalidates the diagonal because wave (v) of the diagonal cannot be longer than wave (iii) of the diagonal.  Interestingly, this now aligns perfectly with the 1895 pivot zone identified on March 5, long before the potential diagonal formed.

On March 21, I mentioned:

This pattern is starting to look a bit like a triangle, so be cautious of sideways whipsaw action developing.

We can now clearly see the potential of an ascending triangle on the above SPX chart -- and we can find triangle-shaped patterns in many other markets as well.  The Dow Jones Transportation Average (TRAN) shows this pattern as well as any:

In conclusion, last update I opined that the wave structure suggested SPX would ultimately see new all-time highs.  There are enough waves in place now for a complete correction, so it is possible for those new highs to happen directly.  The first key level for bulls to reclaim is 1884, while the second is 1895.  The first meaningful zone for bears to claim is now 1849, but the low end of the trading range (near 1839) is more important.  Trade safe.

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SPX and BKX: Equities Market Reveals Its Intentions

Friday saw a bearish reversal day, as prices opened higher and made a new high, then reversed to close lower.  Normally a day like that has some follow-through on the sell side.  The new high in the S&P 500 (SPX) has created a potential problem for bears on the longer time frames, though, as it strongly hints at an incomplete upwards wave structure.  There are a couple ways we can get there, which I'll outline below.

I've noted the 1883-84 zone as resistance more than a few times in the recent past, and the market demonstrated that it needs a bit more coiling before breaking through.  The form this coiling takes will tell us a lot about how strong the rally will be once resistance is reclaimed.  The chart below outlines two options in detail:

1.  In black and blue is the option of an expanded flat.  The minimum expectation for an expanded flat is a decline south of the black A wave low at 1839.  If the market bottoms there, that would likely mark the bottom of wave ii of v and lead to a strong rally toward the high 1900's in iii of v.  The intermediate structure allows for wave C to be one degree higher and lead to a much deeper correction, but we don't want to get too far ahead of the market, so we'll cross that bridge if and when we come to it.

2.  In green is an ending diagonal.  The ending diagonal is near-term bullish, but much more bearish on an intermediate basis.  This means that, ironically, bears want to see the market rally sooner rather than later.

Both of those counts anticipate the market will do some backing and filling here before rallying much higher.  However, in the event of an immediate rally that overtakes 1908, then it's probable the market is already in the midst of wave iii of v.

For the long-term picture, SPX has remained undecided and continues to keep its options open.  The question has been unchanged for nearly a month:  is the fifth wave completing, or will it extend?  SPX has refused to give a definitive answer so far.

Speaking of long-term charts, on Friday, the Philadelphia Bank Index (BKX) captured its long-term target of 73-74.  This target dates back to nearly a year ago, and its capture represents the potential of a nearly-complete long-term correction in BKX.  Keep in mind that this is simply a potential to be aware of at this stage -- this market hasn't broken any key downside levels (obviously, since the target was just captured), or given any signs of doing so yet.  In fact, the 10-minute chart suggests it's unlikely the final high is in for this market.  Nevertheless, it's worth watching -- and if you were long BKX since 59-60 (or lower), then the target has been captured.

In conclusion, bulls have now created a wave structure which strongly suggests that there will be new all-time-highs in the market's future.  What happens in the next few sessions will help detail how soon and how much higher.  Trade safe.

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Understanding Cycles and the Importance of Trading Systems; Plus USDJPY and SPX

Trading can be difficult, and all of us make mistakes at times.  Some mistakes are small, and easy to forget.  Other mistakes are more costly -- and the more costly a mistake, the more difficult it is to live with afterwards.

The irony here is that, quite often, our biggest mistakes are not really "new" mistakes at all; they're mistakes we've made countless times before.  Few big mistakes suddenly materialize out of nowhere (though they often seem to) -- in reality, they are almost always the result of patterns or habits that we've acted out for many years on a smaller scale.  Since the small versions of our mistakes never cost us much in the past (and thus never caused us much pain), we overlooked them, or ignored them, or never even noticed them to begin with.

Big mistakes offer a unique opportunity to learn and grow, because they can usually be traced back to a core error within our thinking that has previously manifested countless times in little ways.

One of the worst things that can happen to a trader, especially a new trader, is to be rewarded for a mistake.  I have to assume this has happened to all of us, in various ways -- some examples of mistakes that can end up as "winners":

1.  We may take a very high-risk entry that ends up paying a profit.
2.  We over-leverage at exactly the right time and win -- when a move the other direction would have wiped us out.
3.  We buy or sell based on "conviction" and not based on the objective evidence of our chosen trading system -- and end up in a winning trade anyway.
4.  We commit a huge percentage of our capital and end up huge winners, when we could just as easily have lost everything.
5.  We exit a trade based on anxiety and not on objective evidence, and it ends up being the best move afterwards.

These are just a few examples of the mistakes every trader has almost certainly made at some point in his or her career.  The "lucky" ones lose right away, and learn from it -- but the unlucky traders are rewarded and profit handsomely.  Having been rewarded for bad trading behavior, these unlucky traders will not recognize their behavior as erroneous.  Eventually, these traders will be wiped out -- probably in a more painful fashion than if they'd simply lost right at the beginning and had the opportunity to learn and correct their behavior.

Just because something worked before doesn't mean it will work again.  How solid is your personal approach?  What are your rules for entering and exiting a trade?  How do you manage risk and position sizes?  What is the minimum risk/reward ratio you'll accept?  What would cause you to exit a trade early -- or late?  What are the rules that govern exit behavior?  What amount of your trading behavior is arbitrary?  These are just a few of the questions with which traders must continually challenge themselves.

Some years ago, I had a trader friend who was a diehard perma-bear, and it just so happened that he got very lucky in the NASDAQ crash of 2000.  When NASDAQ crashed, he had literally just started trading, and he put his entire account (roughly $25,000) into various NASDAQ puts, immediately before the tech bubble burst.  He kept rolling his puts over as the crash continued, and he ultimately emerged from the crash as a multimillionaire.

Unfortunately for him, he got very lucky on his first trades.  His trading "system" (which basically consisted of "buy puts") seemed to be a huge success.  And indeed, that's a great trading system to have during a crash!  But what do you do when the crash ends and you have no other strategies to employ?  At that point, you really have two options:

1.  Take your profits and walk away.
2.  Learn to employ additional systems.

But my friend chose neither of those options (no pun intended) and simply continued with the put-buying system that had made him a millionaire.  After all, why would he change strategies at that point?  He had been handsomely rewarded for his behavior, so what on earth could possibly motivate him to even consider another strategy?  Tragically, by 2004, he had given all his profits back, plus his original capital.  He went from multimillionaire to flat broke.

There's a reason for the saying, "Easy come, easy go."  If we don't "earn" the money in the traditional sense of hard work and discipline, then we rarely have any idea of how to keep it. 

In the end, "strategies" like the one my friend employed are no different than gambling; and true gambling usually generates similar results:  Sudden great fortune almost always ends in catastrophe.  In fact, the National Endowment for Financial Education estimates that 70 percent of people who unexpectedly come into large sums of money end up broke within seven years.

One factor in this is human nature: the more we have, the more we tend to consume.  I'm not going to delve into that aspect here, though; instead we're going to look at how this ties into the nature of the stock market.

Every bit of observable evidence suggests that virtually everything in the universe experiences cycles.  Consider this statement in terms of the seasons; or the life cycles of all living things; or the "life cycle" of an inanimate object (such as a mountain, or a star, or a galaxy).  In fact, I challenge you to find something that does not experience cycles of some kind.  I personally cannot think of anything in the observable universe that does not undergo a build-up toward a zenith of existence, followed by a decline away from that zenith.

For example:  Humans are born weak and defenseless, but build toward physical zenith as they mature.  At some point, humans reach a peak level of health and strength (the "prime of our lives" as they call it) -- and then we start down the other side of that hill, gradually losing strength and ultimately ceasing to exist (yes, the human condition stinks).  Virtually all living things follow a similar arc.  Even stars have a "prime of their lives," but later reach an age where their energy output decreases and they begin to grow colder -- eventually either burning out or exploding (on the plus side, very few humans explode at the end of their life cycles).

Cycles are so prevalent that certain human concepts exist only to quantify the cycles we observe:  Winter, spring, summer, fall; day, night -- not only are these examples of cycles, but those words wouldn't even exist if we lived in a static, cycle-free world.  If not for the cyclical nature of our climate, we'd have just one name for our only season:  "Sprallter."  "Gonna be another lukewarm Sprallter this year!" people would randomly remark to strangers on the street, "Yep!  Always is!"  

Things such as seasons, and day and night, are obvious examples of cycles that experience a build-up, a zenith, and a decline.  A simpler (and more thermodynamic) way to express this might be to say that everything in the universe is either gaining energy or losing energy -- some things faster than others, but virtually nothing in the universe is static.

It appears that, for the most part, we personally cannot control the massive cycles that govern our existence.  How does this apply to trading and investing?

Let's consider a gambling analogy:  If we sit down at a slot machine, put all our money into it, and simply push the "spin" button endlessly, then we do not control our destinies even slightly: the slot machine does.  Our financial fate becomes tied to the "fate" of the slot machine, and we become completely subject to the laws of chance.  Free will essentially vanishes.  Our fortunes will rise and fall purely based on the cycles of that slot machine.

Some investors and traders approach the stock market in a similar fashion, endlessly pushing the "spin" button, as my unfortunate friend did.  That type of approach gives an illusion of control, but ultimately, it has none.  Entering trades largely at random doesn't control the market any more than pressing the spin button controls a slot machine. 

So how do we separate our financial fates as individuals from the fate of the market?  How do we give ourselves a true advantage over blind chance?

We accomplish this by developing trading systems.  Having a trading system is, in essence, an expression of free will:  it allows us to link our fates to the market when we see an advantage, and disconnect when we don't.  Without a system, we might as well just buy an index ETF and ride the market out wherever it goes.  Obviously, very few people who are reading this (type of) column would have an interest in a buy-and-hold approach.  Likely the very reason any of us sought a system in the first place is because we had an instinctive desire to pull away from the herd, and thus to separate ourselves (and our families) from the destiny of the collective.

I don't have space in this article for a comprehensive discussion of trading system specifics -- that's often the topic of entire books.  My goal was more to address why there's a need for such systems.  In closing that thought, it's also critical to remember that after one develops a trading system, then one must further develop the discipline to stick to it.

Moving on to the charts, let's look at usd/jpy first.  On Wednesday, usd/jpy captured my target of 102.600 (from March 17, reiterated March 19) and as promised, once that level was captured, I switched from near-term bullish to "neutral-leaning bearish."  The bear count can still withstand a bit more upside in dollar/yen, but things become ambiguous with sustained trade north of 102.800ish.

This market is a good example of where a trading system can allow one substantial profits.  Unlike SPX, I've felt the wave count recently was pretty clear in dollar/yen, and this market has performed as expected since I outlined the key zones on March 12.  If you've traded the preferred count and key zones in usd/jpy with discipline for the past 9 days, then you're sitting on more than 200 pips of closed profit, and another (roughly) 30 pips in open profit (for those of us bold enough to close longs at the 102.6 target and reverse short in front of the freight train).  For the risk averse, stops on shorts can be moved to roughly break-even with little remorse.  There's always the next trade, and no reason to give back profits if dollar/yen starts entering ambiguous territory.

SPX has shown resiliency since 1839, and on Wednesday, bulls grabbed the ball right at the key trend line outlined earlier that day.  This pattern is starting to look a bit like a triangle, so be cautious of sideways whipsaw action developing.  Thursday's session was an inside day (all trade remained within Wednesday's range), but that can be interpreted in different ways.  On some occasions, an inside day at the end of an uptrend indicates buyer exhaustion; other times, it simply marks a consolidation.  In all cases, it does indicate some level of indecision in the market -- so it's difficult to draw a conclusion from a pattern that suggests the market itself hasn't drawn one.

In conclusion, we've seen a fair amount of volatility recently -- but, in the case of equities, that volatility has simply created a trading range, and trading ranges are notorious devoid of information.  The key levels have become more critical to the next sustained move.  Have a great weekend, and trade safe.

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Recent Market History Gives Warning for Today's FOMC Day

Today is FOMC day, which is typically a great day for traders who enjoy volatile whipsaw markets and feelings of righteous indignation.  Recent market history suggests it may also be something more.

In Monday's update, I discussed that I felt the market had reached an inflection zone, and it had the potential to put together a decent rally.  The S&P 500 (SPX) has since rallied to within 10 points of the all-time-high, which is an important resistance level.  And now things get interesting again, especially since this week we have March options expiration (OpEx), in conjunction with the FOMC meeting.  During 2013, there were three FOMC meetings that fell during OpEx weeks, and all three led to major turns (plus or minus only one trading day).  I've highlighted this on the long-term SPX chart which follows.

The long-term SPX chart shows that there are two potential intermediate counts in play, and a clear victor still hasn't emerged yet.  If bulls can sustain trade above the up-sloping red trend line (on the chart below), then the market will likely take aim at the 2000's.  For the moment, though, the all-time highs and said red trend line must be respected as resistance.

It's also interesting to note the prior decline found support after a perfect test of the dashed red median line, and is now testing the blue trend line.

On the 30-minute SPX chart, I've outlined the bull/bear key overlaps, and the bearish pivot zone.  I've also revisited the near-terms wave structure slightly in order to explore how the decline could be counted impulsively -- this is largely an academic exercise with this type of ambiguous structure, as opposed to being predictive (as it sometimes is).  The rally off the low is three waves so far.

Finally, let's update the USDJPY Forex chart.  I'm still inclined to lean near-term bullish on this pair until my target of 102.600 +/- is reached on the upside (at which point I would become neutral leaning bearish), or until dollar/yen sustains trade beneath 100.750 (at which point I would become bearish).

The first meaningful level is 101.200:  A quick whipsaw would be okay, but sustained trade south of 101.200 would suggest a retest (or break) of 100.750 (shown as the gray alternate count) -- and the same rules then apply to the 100.750 level, but on a larger scale.  As with many charts, the first key level (101.200) provides warning that a trip to the next level is likely.

In conclusion, I was bearish early in March and remained so until Friday's close, at which point I shifted to near-term bullish.  I would currently label myself as neutral for the following reasons:

1.  The intermediate wave structure has a bearish bias until the noted levels are reclaimed; this conflicts with the intermediate trend, which is still bullish.
2.  Price is clearly in a bullish near-term trend for the moment.
3.  Both trends face resistance at the noted key levels -- meaning those price zones potentially have the power to stall or reverse the trend.  If the market instead sustains trade above those key levels, then odds are good the trend will accelerate.

It will be interesting to see if the FOMC meeting today, in conjunction with options expiration week, generates a major reversal as it has on the past three occasions.  Trade safe.

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SPX, TRAN, USD/JPY: Bull Case, Bear Case, and the Key Levels

Sometimes the market presents patterns and wave structures that allow for high-odds predictions (or "high probability trades," use whatever terms you want here) of where price is headed -- other times it doesn't.  Friday, I felt that new lows were high probability, and the market indeed made new lows.  But as of the close on Friday, the situation has changed.

The market has now completed certain requirements of the wave structure, and has thus transmuted into a pattern that I believe can only be "predicted" if one makes assumptions and accepts certain presuppositions.  Personally, I don't see any reason to make assumptions here.  It appears to me that the market has reached another inflection point, and it may be a big one -- so today I'll discuss some of the things bulls and bears need to accomplish heading forward.

One of the markets I've been discussing a lot recently is the US dollar/Japanese yen Forex currency cross; not coincidentally, usd/jpy is also poised at an inflection point in conjuncture with equities.  A breakdown at the key price zone could easily lead dollar/yen to 97-98, which would suggest "risk off" was taking over, and that would be bad news for equities.  Since this is an important juncture, let's discuss what would constitute a breakdown in dollar/yen.

Traditional Elliott Wave wisdom would look at the usd/jpy chart and say that 101.201 is the key overlap to "guarantee" the last rally was a corrective ABC rally -- however, I've traded this particular Forex pair quite frequently, and I've seen usd/jpy violate this same type of "guaranteed" pattern on many prior occasions without consequence (i.e.: break below an assumed B-wave low, only to then reverse and hit new highs).  When we get to the chart, I'll illustrate the wave count which makes said violations technically possible.

After studying both sides of the trade, I would say 101.201 is the next bull warning level, and a break there would add some confidence to the bear scenario -- but, based on my prior experiences with this market, I cannot in good conscience say that level would be the end of the road for bulls.  100.756 is, in my opinion, a better "all clear" level for bears; and, as noted, a sustained break of 100.756 should likewise spell trouble for equities. 

Currently, the exact key level is a bit of a moot point, as neither of the above-mentioned levels have yet been violated.  Dollar/yen has been rallying off the recent test of 101.200, and is (as of the time of publication) approached a back-test of the yellow base channel.  Also note the potential head and shoulders pattern that's forming with 101.200 as the neck line.

The chart below illustrates both the bull count and the bear count, and shows why 101.201 could be briefly violated without creating any true technical issues for bulls.  These two counts run in diametric opposition to each other on an intermediate basis, which is one feature that helps define inflection points -- but near-term, they may be in agreement.

As long as this market doesn't sustain trade below the key 100.756 pivot, a rally back toward 102.600 +/- would be reasonable for both the bull and bear counts.  For the bear count (red), 102.600 fits the expectations of the retrace for an extended fifth wave decline, and would also make a nice right shoulder for the potential head and shoulders pattern.  For the bull count (white), the rally in usd/jpy would, of course, ultimately exceed 102.600 and head back toward 104.

Note the bull count could bottom anywhere north of 100.756.  If 100.756 is violated, then at best, bulls get a quick new low that leads to a large second wave rally before a monster third wave sell-off -- we'll discuss that in more detail as and if it becomes appropriate.  The key point is that I think this market is as important or more important to watch than equities at the moment.  Forex tends to be "smarter money," and often leads equities. 

Let's look at another market that's reached an inflection point:  the Dow Jones Transportation Average (TRAN).  TRAN has so far formed a three-wave decline, and decisive new lows are needed to start giving the decline an impulsive appearance.  I've noted the first two bull/bear pivots on the chart.

On Friday, the S&P 500 (SPX) reached the anticipated new low, but has not yet reached the (implied) target.  The 1854 level, which I noted was the key overhead pivot for Friday's session, did contain all rally attempts -- but it's valuable to mention that since new lows were achieved, that level is no longer important.  If bears are in control, that level could, of course, still act as resistance, but it's no longer a key overlap that technically damages the bear case.

SPX made two lower-lows during Friday's session, and both came with bullish RSI divergences (see red annotation box below).  This entire wave may still be part of a fourth wave, but we can't automatically make that assumption at this juncture.  If the market's intention was simply to form a correction to the prior large rally, then there are now enough waves for that correction to be complete.  And since we can't say with certainty yet what the market's intention is at intermediate degree, the bull option must be respected here.  How the market behaves at the pivots and key levels will provide the next bits of concrete information.

If we assume we're dealing with an impulsive decline, then a rally toward gray "4?" followed by a decline toward gray "5?" would be the outcome -- but I can see the bull argument here quite clearly, so I can't see how we'd be justified in making that assumption.  Better to let the market point the way.

There's an option I haven't shown on the chart above: It's technically possible the market is nesting a series of bearish first and second waves, which would mean it's setting up for a waterfall decline.  The bear count on dollar/yen supports this potential as well.  So, because that's still a very real possibility at the moment, I would be inclined toward caution and nimbleness on long positions until SPX sustains trade north of the key bullish pivot.  That's certainly not trading advice, and your personal risk tolerance may vary.

In conclusion, early in March the market reached an inflection point, which proceeded to generate a reversal and decline.  By virtue of the wave structure, it has now reached the next inflection zone -- and what happens next, especially in usd/jpy, should have big-picture implications for both bulls and bears.  Trade safe.

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