Equities and Bonds: Bond Target Captured; SPX Approaches Its Next Target

Before I get into any market analysis in this update, I feel the need to briefly note the obvious: it's been a while since I've been able to write an update.  I apologize to my readers for the long hiatus; I've had difficult family issues recently, which were sapping the majority of my time and energy.  But things may finally be evening out a bit, so hopefully I can return to my regular schedule in the near future. 

With that out of the way, let's take a look at the market.  The first thing worth noting is that the 30-year Treasury Bond (USB) did ultimately capture my 138 target from February 20.  Almost immediately after it captured the target, it reversed.  And as of this moment, it's testing its 50 day moving average.  With the target capture, I'm now neutral on the long bond:  If the rally was an ABC fourth wave, then it's likely complete or nearly so, and new lows are possible from here.  On the bullish side of the coin, if the rally develops into a five-wave impulsive structure, then we'll consider the possibility that the end of 2103 marked a long-term bottom.

Moving on to equities, the last couple updates in May noted some if/then equations for the S&P 500 (SPX).  As noted on the chart below:

1.  On 5/23/14:  Sustained trade north of the blue trend line would suggests a trip to the red trend line (captured).
2.  On 5/30/14:  Sustained trade north of the red trend line would suggest a target of 1978-89 (high of 1963 so far).

While a larger fourth wave could sneak its way in here (blue "Bull (4)"), as long as support holds, then we should probably give the benefit of the doubt to bulls for the next correction to be bought higher and into the target zone, if the target zone isn't captured more directly.

The Nasdaq Composite made new highs recently, and has thus officially validated the intermediate preferred count of April 7.  I presently don't have a strong opinion about how much higher wave V will carry, though current evidence suggests more upside is probable.  The worst scenario for bears here would be if the wave I have labeled as a leading diagonal (from 2010 to 2013) was instead a nest of first and second waves (as mentioned on the chart).

In conclusion, the long bond captured February's target, so I no longer see a clear trade there -- we'll simply have to wait for more information, and for the next trade to emerge.  Regarding equities, I ended my last update (May 30) with this sentence: 


"...in the event that SPX and INDU can power through long-term resistance and turn it into support, then this could become a trend followers market again."

That's where we stand at the moment.  For the time being anyway, the bull market continues; and until bears put a dent in the long-term technical picture, there's no point fighting the tape.  Equities may be close to entering a fourth wave correction, but present evidence suggests that further upside is likely to follow that correction.  Trade safe.

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Update Schedule

Just wanted to drop in briefly to let readers know that the rumors of my death have been greatly exaggerated.  In actuality, I have been dealing with a very difficult family situation for the past week and a half.  I'm hoping to be able to return to a regular schedule at some point next week.

I apologize for any inconvenience this has caused.  Thanks for your understanding.

How Will Equities React to This Long-Term Resistance Zone?

The S&P 500 (SPX) made new all-time-highs since the last update, thereby invalidating the preferred count.  On the plus side, we were looking for a bottom when the market bottomed, and the new highs weren't too far past the upside target zone -- so things could have been worse, and there were only about 10-14 points of "whoops" involved.

Interesting to note that SPX seems to be leading many of the major indices these days.  The Dow Jones Industrial Average (INDU) has not yet made new all-time highs.  And the Russell 2000 (RUT), Nasdaq Composite (COMPQ), Philadelphia Bank Index (BKX), et al are all still trading well below their respective all-time-highs.

Before we look at the intraday charts, let's take a look at a long-term monthly chart of the S&P 500 (SPX).  This chart notes an interesting long-term resistance line, which SPX is bumping into again:

On the two-hour chart, we can see the red trend line I've talked about since March is essentially the same trend line shown on the monthly chart above:

INDU's chart argues that the current rally should probably be viewed as, at best, a fifth wave, and that may bode poorly for the market's chances at clearing long-term resistance on this attempt.  While the black count is labeled as the "or" count, at this point it should probably be viewed as (at least) equal in odds to the blue count.

In conclusion, while SPX has broken though near-term resistance, it is still within a very-long-term resistance zone, so it will be interesting to see how it reacts to that.  Support doesn't always support, and resistance doesn't always resist -- if anything worked every time, then trading would be the easiest job on the planet.  But more times than not, the market does indeed react to support and resistance, so bulls should probably stay on their toes heading forward.  Conversely, in the event that SPX and INDU can power through long-term resistance and turn it into support, then this could become a trend followers market again.  Trade safe.

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SPX and NYA: Is the Current Equities Rally the End of the Road -- or the Start of a New Move?

It's funny how, even when the market does what we think it will, it always does its best to convince us that it's going to do more.  The rally has modestly exceeded my expectations, but (of course) now it wants us to believe that it's headed "to infinity and beyond."  And maybe it is, one can never say for sure.  But, so far, the market has done a pretty darn good job of following the roadmap I outlined a week ago (Friday, May 16), when I wrote:

I suspect [the recent sharp decline] may have been an extended fifth wave.  Calling extended fifths is difficult, though, because the technical indicators literally don't work -- so it's all about "feel."  These are the types of calls I run with as a trader, but shy away from as an analyst, so do with this what you will.  If this was an extended fifth, then expect a retrace rally toward 1879-82 (the chart says 80-82), followed by a retest of the 1863-70 zone, followed by another rally leg up toward 1888.


In the wake of that update, the S&P 500 (SPX) rallied to 1886, then reversed and retested the 1863-70 zone, then indeed reversed again into another rally leg (which has since exceeded the original 1888 target).  So, in essence, there have been no real surprises yet, and last Friday's roadmap captured roughly 40 SPX points of profit.

The question now, of course, is whether this rally end of a correction, or the beginning of a new bull leg.  From a purely Elliott Wave perspective, unless and until bulls sustain trade above 1903, there is no compelling reason to treat this rally as anything other than a correction, and the preferred count remains unchanged.

   
When we study the above chart, it immediately calls to mind two questions:

1.  What is the mysterious black alternate ("alt.") count?
2.  Why do we have "hot water heaters" when hot water doesn't need to be heated?  (This second question isn't covered on the chart specifically, but it's implied.) 

The answer to both questions is the same:  As of this exact moment, there are no clear answers to either question -- at least not on the SPX chart.  So let's take a look at another index and see if there's more information to be gleaned elsewhere.  Below is a chart of the NYSE Composite (NYA), which is an effective representation of the entire New York Stock Exchange.  On the NYA chart, we can see the bullish wave potential a bit more clearly (still no help on the hot water heater thing, though):

The reason I haven't committed to this bullish count as the alternate on SPX is because we've been stuck in a trading range for longer than it takes a tadpole to turn into a frog (I'm guessing here; I have no idea what the life cycle of a tadpole is) and trading ranges can be very deceptive.  Thus, quite simply, if SPX sustains trade north of 1903, then we know what the wave isn't, but I'd like to see the form of any breakout before deciding what the wave actually is.  For now, it's enough to be aware that there is indeed significant bullish potential energy in the chart -- but until the conditions are met, it's something of a moot point.

Before going further, at the request of a reader, I'd like to briefly discuss a comment I made in passing in Monday's update, when I wrote:  "Ironically, bulls probably have better odds if the market declines directly toward 1850 than they do if 1862 holds and it continues to rally.  (I'll discuss that in more detail in Wednesday's update if it becomes appropriate to do so.)"

Yet I didn't discuss that on Wednesday, because Tuesday was a very mixed session, and although SPX did not make new lows, several other major indices did.  And that left Monday's original thesis inconclusive; so there was nothing to discuss on Wednesday (well, more specifically, there would have been too much to discuss on Wednesday, and it likely would have only confused many people).   Instead, for Wednesday's update, I was content to simply unravel the near-term waves and project that SPX was headed to 1888-92.  Ultimately, the preferred intermediate count was and is unchanged, so we'll wrap things up with the 15-minute SPX chart:

In conclusion, while the rally has slightly exceeded Wednesday's target of 1888-92, the preferred count is unchanged, and will remain so unless and until there's a bullish breakout.  Trade safe, and have a great weekend!

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SPX, INDU, USB Updates: Market May Have Another Trick Up Its Sleeve

The market has been treating the preferred wave counts well over the past few weeks, and on Tuesday, the S&P 500 (SPX) dropped down into the 1863-70 zone, while the Dow Jones Industrial Average (INDU) made new lows.

The market has now reached a minor inflection zone, and I'm inclined to think we may see the double retrace rally I spoke about on Friday and Monday. 

While I think the intermediate term suggests this is a seller's market, the near-term is on the cusp, and there are two potential challenges for bears over the near-term:

1.  Yesterday's decline was only 3-wave in SPX, leaving open potential that the decline was corrective.

2.  The initial decline off the all-time high featured an extended fifth wave.  And extended fifths are usually followed by complex "double retrace" corrections -- thus, given the 3-wave decline yesterday, the double-retrace is still a very distinct possibility for the moment.

While we've stayed a step ahead of the action lately, this market has been hard on a lot of other traders -- by the time everyone thinks it should be bought, it should be sold; and by the time everyone thinks it should be sold, it should be bought.  While I suggested the market was a "solid sell" near 1882-88, I doubt the masses agreed.  But I'd be willing to bet they agree now -- and that might make this an ideal spot for a second rally leg toward 1888-92 (where everyone will think it's time to buy again... rinse and repeat).

I illustrated this double-retrace on Monday's chart, and so far the market has followed the projected path almost perfectly (all I had to do to update the chart was delete the line that price traded over).  It's a tough call right here, but I'm marginally inclined to give the bulls the near-term edge for that second rally leg.  The preferred near-term count would be challenged below 1868 -- if that happens we're likely to see new lows (and probably a whole lot more) more immediately.  Ultimately, new lows are expected either way.

I've also illustrated the near-term wave count in more detail on the INDU chart, and noted a key upside resistance zone  Additionally, I've illustrated the alternate intermediate-term count -- more on that after the chart.  (Also, red is the new black... or vice-versa... forgot to change the near-term alternate count to red!)

Finally, a quick update to the 30-year Treasury Bond (USB), which is now awfully close to February's target zone.  This is one of the reasons I'm giving consideration to the alternate bullish intermediate wave count in equities:  USB has rallied as expected, but blue chips haven't made much downward progress during this rally.

In conclusion, the near-term is an extremely tight call here, but I'm inclined to give the edge to bulls for a second rally leg to complete a textbook double-retrace rally in the wake of the extended fifth wave decline.  But after that, I expect new lows will follow -- so the intermediate outlook is bearish.  In the event equities are unable to reclaim noted resistance, or in the event SPX sustains trade south of 1868, then the near-term outlook would also turn more immediately bearish.  Trade safe.

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SPX and RUT: New Lows Still Expected

In Friday's update, we looked at some of the signs that bears may have more firepower.  In today's update, we'll also take a closer look at the near-term potentials for the S&P 500 (SPX).  Specifically, I'm going to elaborate on Friday's discussion regarding extended fifth waves.  On Friday, I wrote:

The way I'm tempted to view the decline, though, is as all of wave 1-down.  Instead of viewing the big drop as wave iii-down, I suspect it may have been an extended fifth wave.  Calling extended fifths is difficult, though, because the technical indicators literally don't work -- so it's all about "feel."  These are the types of calls I run with as a trader, but shy away from as an analyst, so do with this what you will.  If this was an extended fifth, then expect a retrace rally toward 1879-82 (the chart says 80-82), followed by a retest of the 1863-70 zone, followed by another rally leg up toward 1888.

SPX came within 1-point of the 1879-82 target on Friday, so let's take a look at a near-term chart of SPX for further illustration (more discussion after the chart):

When an extended fifth wave forms, we know to expect a retrace to wave iv of the extension, which has already happened.  This is usually followed by one or more retests of the wave-v low.  Then, after the retests, the rally will typically retrace to wave-ii of the extension (zone noted on the chart).

The alternate count, shown in black on the chart above, was also discussed on Friday:

The conventional way to view the big drop as the belly of wave iii-down of 1-down.  That would mean the bounce that began yesterday is merely a fourth wave consolidation that should be fairly short-lived.  In that count, the market is still forming wave A or 1 down, with wave v-down of 1-down still to come. 

Both counts remain viable, and 1862 is the dividing line.  The key point is that, either way, I expect 1862 will break in fairly short order, so I'd be very cautious playing with longs here.  Right now, I view this as a market where I'd short the bounces, not buy the dips.  Ironically, bulls probably have better odds if the market declines directly toward 1850 than they do if 1862 holds and it continues to rally.  (I'll discuss that in more detail in Wednesday's update if it becomes appropriate to do so.)

For more perspective on the bigger picture, let's take a look at the two-hour SPX chart:

The Russell 2000 (RUT) is one of the markets that kept me skeptical of the recent new highs in SPX.  RUT is in an interesting position right now, because it appears to be coiling for a rapid move.  This is a market in which to stay extremely nimble, because the next move is likely going to punish anyone who hangs on "hoping" while on the wrong side of the trade.

In conclusion, barring a breakout over 1903, the charts presently suggest we should remain bearish on equities until there are signs of a meaningful low.  If 1862 SPX fails, watch for a drop to 1848-53, which would also be a potential reversal zone.  Trade safe.

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Equities and Bonds: Signs that Bears May Have More Firepower

In essentially every update I've written this month, I've noted that the S&P 500 (SPX) appeared likely to rally to new all-time highs, but that rally would be a head-fake breakout doomed to whipsaw.  It's probably fair to say that was a decent call, and my only concern at this point is that it seemed so incredibly obvious and it almost happened "too easy."  (That always makes me a little nervous.)  It's certainly too soon to say with certainty that we've seen an intermediate top, but with everything going according to plan, there's presently no reason to doubt that thesis either.

The simple solution is that bulls will need to sustain trade north of 1903 to cast doubt on the bear case; so until that happens, or until there are signs of a meaningful bottom, the bear case will remain favored.  Today we'll also take another look at some of the supporting players to the bear case for equities.

The first is the US 30-year Treasury Bond (USB).  On February 20, I wrote that I felt the long bond was on its way to 138-140 -- the funny thing is, at roughly the same time, nearly 100% of economists surveyed felt that bonds were heading lower.  So that's something to consider, for those folks who view technical analysis as some kind of pointless voodoo.

The long bond is still implying a shift toward risk off, and thus hints at the potential of continued trouble for equities.

Next up is a chart I haven't updated since mid-April -- this chart tracks the ratio of the iShares High Yeild Corporate Bond Fund (HYG) to the iShares Barclays 20+ Year Treasury Bond (TLT).  I use this as a measure of risk-on/risk-off:  When the ratio heads lower, it means risk-off, which is bad for equities.  In March, I mentioned that HYG:TLT had broken through the uptrend line that began in 2012, and felt that was a warning sign.  Now this ratio is breaking down from a pretty ominous-looking head and shoulders, and this could suggest more trouble on the horizon for risk assets.

Finally, the SPX chart, and I'm going to break down the time frames separately to avoid confusion.

Bigger picture, RSI suggests new lows are on the horizon for SPX one way or another -- so whether we rally near-term or not, I'd be surprised if 1862 isn't broken in the coming sessions.

Near-term, there are two ways to view the recent decline: 

1.  The conventional way to view the big drop as the belly of wave iii-down of 1-down.  That would mean the bounce that began yesterday is merely a fourth wave consolidation that should be fairly short-lived.  In that count, the market is still forming wave A or 1 down, with wave v-down of 1-down still to come. 

2.  The way I'm tempted to view the decline, though, is as all of wave 1-down.  Instead of viewing the big drop as wave iii-down, I suspect it may have been an extended fifth wave.  Calling extended fifths is difficult, though, because the technical indicators literally don't work -- so it's all about "feel."  These are the types of calls I run with as a trader, but shy away from as an analyst, so do with this what you will.  If this was an extended fifth, then expect a retrace rally toward 1879-82 (the chart says 80-82), followed by a retest of the 1863-70 zone, followed by another rally leg up toward 1888.

If SPX sustains trade beneath 1862, then we're probably dealing with option 1.  If SPX sustains trade north of 1873, then option 2 has a decent shot.

Not shown on the above charts:  SPX recently tested the 50-day moving average for the third time in three weeks, and may thus be exhausting buyers in that zone.  If it tests the 50-dma a fourth time, then it's likely to break -- and that could spark a decent sell-off, since a fair number of traders use the 50-dma as a stop zone.  That hypothetical fits my expectation that SPX is completing wave 1 down, with the wave 2-up rally on deck -- to be followed by wave 3-down.  That third wave would coincide with a break of the 50-dma, which could provide selling fuel to power the decline.  The third wave is usually the longest and strongest of a move, so I like the overall setup.

In conclusion, while it's too early to confirm an intermediate top, everything has gone according to plan, so the preferred view will remain bearish on the bigger picture until such time as the market says we should consider other options.  Presently, the first thing bulls would need to accomplish is to sustain trade north of 1903 -- but since RSI confirmed the 1862 low, it appears unlikely that will happen immediately.  It instead looks likely that new lows are on the horizon one way or another.  And, as discussed, new lows will break the 50-dma, which could spark an extended sell-off.  Trade safe.

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US Equities Finally Reach the Decision Point

Last update expected the S&P 500 (SPX) would rally to new all-time-highs, and we didn't have to wait long for that expectation to prove out.  The market has finally entered the key upside inflection zone, so this is where things will get interesting (for the first time in a while -- thank goodness!).

In a perfect world, I'd like to see SPX head a bit higher -- but if this breakout is a head-fake, the market is going to want to throw a few more curve-balls in here, and the rally is likely to end abruptly and unexpectedly.  I've added a bull count to the chart below, and in the event of a sustained breakout through the upper red trend line, then we'll have to consider the potential that the last few months were a coiling pattern headed for the upper-1900's or beyond.  Until that breakout comes, though, bulls will want to avoid complacency in this inflection zone.

I've updated the near-term support/resistance chart below.  There are a couple confluences of support that should help offer clues as to the strength or weakness of the recent breakout.

I've also updated the NYSE Composite (NYA) because the pattern here gives us a near-term upside level to watch for clues of market strength.

In conclusion, the new all-time-highs in blue chips came as no surprise, and SPX is now sitting inside the key upside inflection zone of 1900-1920.  If it can push through this zone, then bulls will have something of an "all-clear" signal.  But as of yet, the breakout hasn't been substantial, and we're continuing to see weakness in beta indices -- so this is no place for complacency.  Trade safe.

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Did the Stock Market Just Tip Its Hand?

Lately the market has done its best to convince traders that there are probably easier ways to earn money, such as by selling a kidney, or by stealing the Mona Lisa.  For the last couple weeks, I haven't done much in the way of near-term projections, because I felt the market was near-term "un-projectable."  I have no regrets in that regard -- sometimes the best trades are the ones you don't take, and recognizing in advance when a market should be avoided can be valuable.

Today, though, we'll consider the possibility that something recognizable may be emerging from this mess, and we'll examine a potential near-term pattern (and variations thereof).  So, without further ado (adieu?), let's get right to the charts.

The first chart is the S&P 500 (SPX), which hints at a potential triangle in formation.  This also fits the recent whipsaw nature of the tape -- for comparison, the last triangle we encountered was in March.

Stepping out to the long-term view, we can see that if there's a near-term breakout, then SPX will encounter long-term resistance soon thereafter:

The NYSE Composite (NYA) is in a similar position to SPX (via a slightly different pattern), and has already completed enough rally waves to be complete:

In conclusion, the market still hasn't laid its cards on the table, but may be tipping its hand just a little bit here.  Keep in mind that if this is indeed a triangle, then it would mean that any breakouts will whipsaw in fairly short order, since triangles virtually always form as the penultimate wave.  Either way, bears still have a good shot at gaining traction over the intermediate term, so keep in mind that all near-term bullish bets are off below 1859 SPX.  Trade safe.

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Small Caps Still Trending Down While Blue Chips Grind Sideways

During the last few weeks, trading SPX has been the equivalent of playing a game of Whack-a-Mole, as it continues to head-fake its way to nowhere.  A few weeks ago, I wrote about why I felt this market called for patience, and nothing has changed since then -- ultimately, we have to respect that we're still stuck inside a three-month-long trading range.

Trading ranges frequently wreak havoc on trader psychology (and on trader accounts), and over the past few weeks I've watched some bears turn bullish, and some bulls turn bearish.  Traders often let their imaginations run wild inside trading ranges, as they grow more and more anxious waiting for the next directional break.  Of course, sometimes we want to ignore the fact that directional breaks may remain delayed for a long time, as the market reserves the right to continue grinding sideways for as long as it wants.

That said, I suspect we're finally getting close to a directional move.  In my perfect world, I'd still like to see a new all-time-high and a whipsaw, but this market is offering no guarantees right now.  The chart below is the S&P 500 (SPX), which has not yet broken this year's high.  Not shown is the NYSE Composite (NYA), which did break this year's high -- and that, coupled with the fact that we can count five waves up off the April lows, does require us to at least consider the possibility of a failed fifth wave without further highs (I alluded to this in the last update).

On an intermediate basis, the upper red trend line is still the key zone where more bullish potentials would begin gaining traction. 

The next chart is the 15-minute chart of SPX.  Because of the range-bound market, there's little in the way of key near-term levels right now -- pretty much everything is fair game within a range.  So, don't overplay these trend lines, since range-bound markets love to whipsaw.  It is worth noting that the uptrend from the April lows (red line) was broken recently, and SPX closed right on the back-test of that line.  Bears may try to make a stand and reject the advance here.

The Russell 2000 (RUT) has recently made a new low, and continues to look weak.  This suggests that "risk-on" is still absent from the current market.  It will be interesting to see if, at some point in the future, we look back on the SPX trading range as a giant distribution zone.

In conclusion, neither bulls nor bears have been able to get anything accomplished in SPX for the past few months -- but bears are getting things done in RUT and in some other high-beta markets.  Bond bulls are also getting things done in the long bond.  And, unless something changes, those are two of the reasons why I continue to suspect the balance of power may (also) shift to bears in blue chips over the coming weeks.  Trade safe.

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SPX, BKX, USB: A Terminal Pattern for Equities?

Monday saw the S&P 500 (SPX) gap lower at the open (in an extended fifth wave), which was quickly retraced, leading SPX to close in the green.  Neither bulls nor bears have gotten much accomplished lately, and thus both sides continue to keep options open for the intermediate term.  I'm still inclined to give the intermediate edge to the bears, and, presently, the 1910 level looks to be the dividing line.

SPX appears to be in the midst of a terminal pattern.  Ideally, I'd still like to see another thrust up to a new all-time high, but it's not required.

Over the past few weeks, we've discussed the fact that the high-beta indices, such as the Nasdaq Composite (COMPQ) and Russell 2000 (RUT), are in intermediate down trends.  Another index that I watch religiously (but haven't shown lately in the updates) is the Philadelphia Bank Index (BKX).  BKX is also in an intermediate down trend, and has recently broken beneath a three-point validated uptrend line.

BKX is interesting, because it hasn't even come close to taking out its all time high, and my long-time expectation here is that it's simply forming a huge ABC correction.  At the beginning of 2013, I was very bullish on this index, looking for a trip to 72 -- but that target has long-since been captured, and there are potentially enough waves in place for the entire rally since 2009 to be complete.

Finally, the long bond (USB) has held its breakout (as anticipated), and seems to be making a run at February's 138 target -- but, of course, blue chip equities are still holding their own.

In conclusion, right now the near-term charts resemble my four-year-old's refrigerator art, so there isn't much in the way of sure-fire near-term targets at the moment.  Looking at the bigger picture, though, the intermediate charts still suggest equities may be in a vulnerable position.  Until blue chips signal the all-clear for bulls, I will continue to treat this as a terminal rally.  Trade safe.

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100-year Chart of the Dow Jones Industrials Shows Equities at a Major Inflection Point

Wednesday and Thursday's sessions consisted of much sound and fury, but very little price progress.  So today, we're going to step back from the near-term, and take an in-depth look at the very-long-term wave count on the 100-year chart of the Dow Jones Industrial Average (INDU).

First, the good news:  Relative to the last hundred years, it appears most likely that the market will ultimately recover from its next large correction, and continue to rise over the course of the coming decades.  Okay, well, if nothing else, that's probably good news for our kids.  Looking at the immediate future, though, this chart emphasizes the gravity of the current inflection point and the coming inflection point.

The current inflection point is shown in black by the "or A of IV," etc., which considers the potential of a massive expanded flat forming within the blue megaphone pattern.  I first discussed this option back on February 8, 2013 (at that time, I was bullish and noted we should expect a rally toward 1750 SPX at the minimum) -- and that pattern is still on the table because there are only three rally waves complete so far (three waves is the requirement for a B-wave).

The three-wave rally makes this an inflection point.  If the market breaks though that inflection point, then the assumption will be that it's currently within Cycle V of Supercycle III.  In that event, the next decent correction will be a "small" (relative to the last hundred years!) fourth wave down, which would be labeled as red iv.  From there, the market would ultimately rally to new highs, in Primary (red) v of Cycle (blue) V.  That scenario would put the true end of the bull market out at least a year or two into the future.  At the end, though, things would have the potential to get very ugly.

Once Cycle V completes, we'll enter a massive fourth wave correction at Supercycle degree.  How massive?  Well, this pending Supercycle fourth wave would pair with the 1929 crash.  The chart shown below is in logarithmic scale -- which is really the only way to view a century-long price chart in context -- and notice that the 2007-2009 bear market (as nasty as it was) was only a hiccup relative to the 1929 crash.  Supercycle IV would likely make 2007-2009 appear mild in comparison.

That's still a ways off, though -- so no reason to stock up the bomb shelter with extra Fig Newtons just yet (actually, there's no reason to stock the bomb shelter with Fig Newtons at all) -- and the good news is that we should ultimately recover from Supercycle IV in the Supercycle V rally.

The more immediate concern revolves around the potential for the recent bull market to be B of IV, and to complete in the relatively near future.  A c-wave decline at Cycle degree would certainly not be something to take lightly.

The temptation with charts like this is to focus on the negative, and I would strongly caution against that approach.  If the market is going to form a c-wave decline at Cycle degree, then it's not going to Dow 5000 tomorrow.  It's going to take some time to get rolling, and there should be ample warnings along the way.  In the interim, let's stay open to both possibilities:  We've all seen what the "perma-bear" approach can do to investors, and it isn't pretty.


An interesting side note about the chart below is the way price resistance and RSI resistance have collided near the market's recent levels. 

I should also note that, in the past, I've referred to 2009 as the bottom of Supercycle IV, but I've shown that as the alternate count on this chart.  Basically, the last time I worked up a long-term count with this level of detail was 2007, and I figured six years of additional experience made it worthwhile to reexamine the whole thing.  So I dropped my presuppositions and went from "scratch" this time. 

On balance, I think the 2007-2009 bear probably pairs better with 1937's Cycle II than it does with 1929's Supercycle II -- which is why I landed on 2007-2009 as Cycle IV instead of Supercycle IV.  Ultimately, it's a judgement call, and one could potentially view red i and ii as the fourth wave that pairs with blue I-II, which would make everything since part of an extended fifth wave (and put SC IV back where I had it in prior labelings, at 2009).  I'm pretty evenly split on the two options, but would probably give a modest edge to the preferred/alternate counts as labeled here.

(If you're new to Elliott Wave analysis, understanding this chart would be aided by my quick primer on the subject: Technical Analysis: Understanding Elliott Wave Theory)

NOTE:  To bring up the chart at full size, right click with your mouse and select "Open in New Window."

   

Let's take another look at the Russell 2000 (RUT) chart, which shows the small caps remain in an intermediate down trend.  Investors are still avoiding risk and, as I discussed on April 23, this represents a marked shift in the market's behavior from 2013.  This is one of the reasons I've been advocating caution recently.

Back in February, I turned unequivocally bullish on the long bond, and more than a few folks thought I was nuts.  But in the meantime, the long bond has continued to outperform, and appears headed for my targets.  This is another reason I've been advocating caution in equities.

Recently, I've observed a lot of traders shifting back and forth from bullish to bearish and vice-versa, which is a function of the trading range that blue chip equities have been stuck in for the past few months.  Trading ranges can really play on a trader's emotions -- which is why "neutral" is sometimes the best stance when the picture gets muddy.  Always remember that cash is a position, too; it's usually better to be "out wishing you were in," than "in wishing you were out."

When I look at the current chart of the S&P 500 (SPX), I view it as a fool's errand trying to assign probability to the patterns that have emerged from within this large trading range, since I've learned over the years that giving too much credence to patterns that form within a range is often a losing proposition.  So I apologize to readers if that's frustrating at the moment, but I'd rather say nothing than make a hard call that's patently ill-advised.

So, near-term, here are the main options, for what they're worth:  There are enough waves in place for the rally to be complete, though there may be one additional fourth wave decline and fifth wave rally pending.  At this point, I'd almost rather see the latter, which would lead to a near-term decline, followed by a trip into the 1905-1920 zone (to get the trend chasers back on board, and to get everyone to forget about "sell in May and go away"), followed by a surprise whipsaw into an intermediate correction.  But frankly, none of my systems, signals, or indicators are giving me a solid answer one way or another here.

In conclusion:  At the present moment, the song remains the same as it has over the past week or so, and the message from equities is still "caution."  If you held my feet to the fire, I'd say I'm more inclined to be intermediate bearish here than intermediate bullish, based on the weight of the current evidence.  Ultimately, I'm simply patiently waiting for the market to give us a more solid signal.  Trade safe.

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Blue Chip Equities: Still Reasons for Caution as the Market Awaits the Fed

Monday's update noted the market had reached an inflection zone and could bottom in short order.  The 1858 downside target was captured (and exceeded, as I suspected it would be) during an ugly whipsaw session -- and as of Tuesday, the S&P 500 (SPX) was again testing the 1880-85 resistance zone.

The Fed wraps up a two-day meeting today, and will announce its decision on interest rates.  The consensus expectation is that the Fed will also reduce QE asset purchases by another $10 billion.  Any surprise deviations from that number could generate directional fireworks.  ADP releases its monthly report on hiring today; and the government's Bureau of Made-Up Statistics (BOMUS) will release its initial estimate of first quarter GDP (this number will later be revised approximately 347 times, but no one will pay any attention whatsoever to the revisions, regardless of how dramatic they are).

Looking at the price charts in equities, I'm inclined to simply say that upside potential presently appears fairly limited.  There are two things that could change that:

1.  A sustained breakout over key resistance.
2.  A positive surprise from the Federal Reserve.

The Fed is the ever-present market-moving wildcard, and they're simply going to do whatever they're going to do -- so I'll wait for the announcement and leave it to the economists to speculate in that regard.  Chart-wise, I've broken down the intermediate wave structure in the Dow Jones Industrial Average (INDU) to illustrate why I'm not terribly bullish with prices at current levels.

I should clarify that I'm not exactly full-on bearish here either, because I do respect the fact that the market is in a long-term uptrend, and betting against the trend is always risky business.  I'm not screaming "top" here, because there's nothing screaming "top" in the charts yet -- it's more like there are whispers of the potential for a top, and I'm respecting that.

By way of further clarification:  The blue chips have been stuck in a trading range for months now, so that doesn't give us much to work with there -- yet beta indices have been in intermediate down trends, and that's a shift from the way things have been for the majority of the bull market.  I've also talked about the long bond in prior updates, and I'm still inclined to think the bond rally has farther to run.

On the long-term INDU chart, we can see that five rally waves may be complete or nearly-complete.  The x-factor is still the potential of a subdividing fifth wave extension, which is entirely possible, but difficult to anticipate.  Until INDU sustains a breakout over resistance, it's a moot point, and obviously I can only draw from what's in the charts as of this moment.  

  
At near-term degree, INDU appears to be in the process of completing five rally waves.  There are already enough waves present in the structure for the rally to be entirely complete, but there's potential for an expanded flat (shown as the blue (A)/(B)/(C)) for one more push up to a marginal new high.

Since it's a Fed day, one option is an early drop in red (4), followed by an "announcement pop" toward red (5), followed by a reversal (the first directional move out of the Fed announcement is often a fake).  Again, though, there are already enough waves for a complete structure, so there may be no "pop" forthcoming.

So that's the long-term and the near-term; now we'll look at the SPX chart for a middle view:

In conclusion, the equities market faces substantial resistance near current levels, and high-beta indices and the long bond are both still warning that caution is warranted in blue chips.  If SPX and INDU can sustain a breakout through resistance, I will of course respect that development accordingly -- but until then, this is a "show me" market.  So while I'm not full-on bearish here, I'm presently inclined to think bears probably have better prospects.  Trade safe.

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Update to US Equities and US Bonds: The Big Picture Implications Behind the Market's Current Inflection Point

Elliott Wave Theory is based on the concept that markets are not random, but instead follow patterns that are fractal in nature. Markets often seem to move in a structured way, and those patterns replicate themselves across all time frames.  There are times when patterns stand out on the larger time frames, and the market thus broadcasts its intentions for the weeks or months to come; one recent example of this comes from the update of March 31, when I noted that the pattern suggested the market would break out in a head-fake rally, and then whipsaw.  Other times, the larger patterns are a bit more veiled and only the near-term patterns stand out (such as last Wednesday).

Since the market is of a fractal nature, we can anticipate what it's going to do if we can identify the fractal that's forming.  At times we can do that, but ultimately, it's a probability game, and none of us can identify every single fractal in advance.  Which means there's potential danger in overstepping our bounds at the moments when things aren't clear.

Many years ago, when I first started trading, I followed a subscription service that was almost always "quite certain" of what the market would do next.  They rarely offered alternate possibilities to their subscribers, and things were generally discussed in the cut-and-dried tone of "here's what the market's going to do next, and here's why we're perfectly sure of it."  Yet despite their very certain-sounding approach, they were frequently wrong.  By a huge margin.  I've come to believe that some analysts take the "sure-sounding" approach not because they're actually sure, but because it impresses people.

After all, if you're going to pull in new subscribers for your market newsletter, you'd better at least sound like you have a handle on things -- right?  As humans, this is often how we choose people, and this approach works for certain physical things, because most macro physical things are not probabilistic (it isn't until we get down to the quantum level that we encounter probabilities).  Since we exist in a physical world, we become conditioned toward thinking of things as concrete.  For example, a car either "is" or it "isn't."  So we expect concrete statements from people, and we take our car to the mechanic who sounds like he knows what he's doing.  Then later, we gladly pay the $495 he charged us to "rebuild the solenoid linkage distributor," plus the $186 for a "brand new starter belt."  The problem is, the market doesn't work that way (neither does your car, incidentally -- but your mechanic might!). 

Personally, I'd rather try to help people protect and expand their capital than impress them with tough-sounding talk.  Which is one reason why (largely as a result of my early trading experiences) I almost never ignore alternate possibilities in these updates.  Granted, there have been a rare few occasions when the future seemed so clear that I did ignore alternate potentials -- but I think my public track record on those occasions is pretty close to 100%, so my judgment there isn't too terrible.

Anyway, since the market is fractal in nature, we try to anticipate the future based on the expected form of the completed fractal.  And, obviously, when we don't know what fractal the market is trying to form, we have nothing to base anticipation upon.  At those times, I watch the zones that I call "inflection points."  This term is probably best explained with an example:  If the market forms one five-wave decline in the course of a session, I now know that probability suggests another five-wave decline will form and take the market to new lows.

Two five-wave declines makes a corrective ABC fractal, while three five-wave declines makes an impulse wave.  So, the first five-wave decline tells me to expect at least one more -- but what I may or may not know yet is whether to expect two more declines.  Thus once the market has competed two five-wave declines, that represents an inflection point.  If the market only wanted to form a corrective ABC, then it will bottom after that second five-wave move is complete.  Sometimes we know the market is intending an ABC based on the larger fractal, and sometimes we know it's intending to form an impulsive decline.  But when the larger fractal is unclear (or low probability), then inflection points should be treated with additional respect.

Presently, I feel the larger fractal is a bit unclear.  I know lots of folks are "quite certain" they know what it is, and undoubtedly some of those folks will end up being right.  Personally, I intend to take this market one session at a time for the moment.

I don't always know how the market will react to an inflection point, but I'm generally reasonably accurate in identifying those points.  So, all that to say:  Until the bigger picture clarifies more, I'll continue to note the near-term inflection points (those places where turns become higher-probability), but until something jumps out at me, I'll leave it up to the reader as to what to do with that information.  If one is bullish, then one could wait for declines to reach inflection points before going long; and if one is bearish, one can wait for rallies to reach inflection points before going short.

I discussed all this at length because the market has reached its next inflection point.  Below is the chart of the NYSE Composite (NYA) which illustrates this very well:

In prior updates, I've discussed the bond market and how I feel that the long bond is going to rally further over the intermediate term -- and that makes me wonder if there is trouble on the horizon for equities.  Ultimately, though, I do have to respect that the equities market is not inseparably linked from the bond market -- and, even if it were, I could always be wrong about the long bond.  The chart below is the US 30-year Treasury Bond (USB):

SPX has reached an inflection point similar to NYA.  1884 SPX looked like a "no-brainer" short to me, which is why I was near-term bearish last week; however, the risk/reward equation is different at today's prices -- and if one is inclined to take long positions, then this inflection zone is a place to consider that.

In conclusion, if the market was trying to form an ABC decline, then odds are reasonable that it's complete (or nearly so), which would mean a resumption of the rally.  If the decline continues more than a little further, then that would be a clue -- one which may indicate that bears are in control of the intermediate time frames.  The next few sessions should thus be enlightening.  Trade safe.

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The Long Bond vs. US Equities: Is One of These Markets Lying?

Wednesday's update ended with the conclusion that I was "near-term bearish with a chance of bigger thunderstorms."  The S&P 500 (SPX) failed to make a new high in the two sessions since that update, so the "near-term bearish" call was a hit; today we'll look at some of the key levels which should help indicate if those "bigger thunderstorms" are going to show up or blow over.

Let's talk about the bull case first, which is pretty simple:

1.  It's a bull market.
2.  Virtually all the major equities markets are still within long-term technical uptrends.
3.  It's a bull market.

Now for the bear case.  I monitor anecdotal sentiment with some frequency, and one thing that should bear consideration is the about-face so many traders have done from bearish to bullish in such a short time.  Many traders were extremely bearish at the recent bottom, as I wrote about at length back on April 15:

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.

As noted, many of those same traders are now very bullish -- right as the market is hitting intermediate resistance.  I've been observing sentiment throughout this entire bull market, and this is the fastest I've seen sentiment reverse with this level of conviction.  I assume it's because, at this point, "bullish" has become a Pavlovian response for traders.  The market has recovered from each and every prior decline (that's what bull markets do, after all), so traders are finally programmed to expect it.  It's interesting to me because, in the instances prior to this, the market has recovered by climbing the proverbial "wall of worry," and has rallied into heavy trader skepticism.  It seems that this time, it's rallying into hope.  People are literally scared to be bearish -- and that's the type of mentality we see near tops (at bottoms, it's the same thing in reverse: folks are scared to be bullish).  I, of course, can't promise that the market is building a top, and I remain open to both bull and bear possibilities at the moment.  But here again, I felt it worth discussing.

One of the charts that continues to keep me on my toes in equities is the 30-year bond (USB).  The long bond has recently broken out over resistance and, barring an immediate whipsaw, looks to be headed toward my February targets.  Sometimes when bonds turn bullish, equities turn bearish, so this chart leads me to wonder if there will be a shake-up in equities in the reasonably near future.

As noted last update, SPX is at an inflection point, where it has to decide if it wants a five-wave rally, or if it's already completed a three-wave rally.  Though not shown on the chart, keep in mind that fourth waves are often complex, and a fourth wave could continue modestly lower without creating any technical issues.  I suspect there's more downside in store, at least for the near-term.

There's nothing new to add on the long-term SPX chart, but it's shown again for reference purposes:
 

In conclusion, nothing of intermediate significance has happened since the last update, so there's little to add in that regard.  I suspect there's more downside in store for at least the near-term, and a breakdown at 1870 does have the potential to generate bigger fireworks in SPX.  Trade safe.

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SPX, RUT, and NYA: "Risk On"? Not Quite Yet...

The S&P 500 (SPX) has continued to power higher, largely unabated, and has now reached the zone that qualifies as a retest of the all-time-high.  A lot of folks have now jumped back on the bull bandwagon, because, after all, it's a bull market.  However, there are still numerous markets showing that "risk-on" hasn't entirely returned to the menu yet.

Among other things, the high beta indices like the Russell 2000 (RUT) and Nasdaq Composite (COMPQ) are still lagging the blue chips.  The chart below shows RUT in the top panel (log scale) and SPX in the bottom panel:

Part of the "among other things" not shown in this update is the chart of the 30-year bond (USB), which is back-testing its recent breakout.  I remain bullish on the long bond for a trip toward 138.

SPX is retesting the all-time-high -- a "retest" of an intermediate level isn't an exact price, but is more of a price zone which extends slightly above and beneath the exact price.  SPX has also reached a specific resistance point at 1884.  At least a near-term correction from here would be pretty normal.  In the event there's no immediate correction and SPX breaks the all-time-high, then the red trend line is still the next pivotal resistance level.  Take a look at the long black trend line, which began back in May 2013, for an example of a similar pivotal level.
 

The NYSE Composite (NYA) is in a similar position, and the current price zone qualifies as the next big inflection point.  The last time I mentioned the market had reached an inflection point was on April 15, when it bottomed -- I was near-term bullish on that day, but in hindsight, was not bullish enough.  

In conclusion, there are essentially three stances one can take as an analyst: bullish, bearish, or neutral.  Neutral is probably the least popular with the crowd, because people naturally crave resolution (nobody likes it when an episode of their favorite TV show ends with "To be continued.")

But the reality is:  Some markets beg to be anticipated, some beg to be reacted to, and some beg for the patience of limiting oneself to only the lowest-risk entries in both directions.  The market has now reached another inflection point, which means it hasn't quite closed the book on either the bulls or the bears just yet.  I think bears have a good shot at turning the market here, at least for the near-term -- so, for the moment, just put me down as near-term bearish with "a chance of bigger thunderstorms."  Trade safe. 

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SPX, WLSH, Nasdaq: A Monkey Wrench in the Ointment

In the last update, I noted the market had entered something of a no-man's-land.  I also talked about the S&P 500 (SPX) level of 1873 as key resistance.  That level has not been claimed yet, and today we're going to look at another aspect of the argument.

Personally, there are times I don't like attempting to predict the market, because it's simply "too close to call," and I think getting too attached to outcomes at times like that can be dangerous.  Certain types of markets call for nimble trading and flexibility of opinion, and I think the current market qualifies.

As I've looked across markets, there are two charts that cast some doubt on any bull case.  One of these is the Wilshire 5000 (WLSH), which is basically the entire market represented in index form.  WLSH throws a wrench into the ointment (I enjoy mixing metaphors) for bulls because the recent low took the shape of a three wave decline, as shown below.  

On the other side of the coin, the Nasdaq Composite (COMPQ) captured the target I noted was most probable (back on April 7), then bounced off the 200 day moving average and the blue trend line that I scribbled on this chart a few months ago.  Bears have done what they set out to do here for a potential fourth wave, so further decline is not required -- though it's not yet clear if the decline is finished. 

Finally, the S&P 500 (SPX) chart.  Due to WLSH and a few other markets, I'm officially recanting 1873 as a key overlap.  I still think it's important resistance, but no longer believe that a brief break of that level would represent the end of the road for bears.

In conclusion, the market remains in a no-man's-land.  Sometimes markets are clear and high probability targets present themselves (as evidenced by five captured target zones so far this month), but other times, staying nimble is our best weapon against the market.  I'm slightly inclined to favor the bears on an intermediate basis, but this is as much an instinctive call as anything; with the market in its current position, one thing which won't serve either bulls or bears is complacency.  It is worth noting that I've observed some level of complacency on the bull side recently, so it will be interesting to see if the market chooses to address that in the near future.  Since it's unlikely the market will hang around current levels for long, a clearer picture is likely to emerge quite soon.  In the meantime, trade safe.

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SPX, NYA, and HYG:TLT: Bulls Keep Hope Alive for the Moment

Tuesday's update noted that the market had reached a significant inflection point, and anticipated that the S&P 500 (SPX) would rally over the near-term, with a target of 1840-48.  That upside target was reached early Tuesday, which led to a deep retrace and retest of the low.  The upside target zone was then exceeded in Wednesday's session.  SPX also cleared the noted 1850 pivot and broke out of the down trending channel.

As I covered in detail in the last two updates, I was concerned that sentiment had become a bit too bearish, and that a rally might be needed to "punish" the newly-converted bears.  Frankly, the rally in SPX exceeded my expectations -- punishment indeed, and it certainly must have been painful for those traders who weren't expecting any rally at all.  Bears have now been forced into a final stand at the key resistance zone of 1873. 

The NYSE Composite (NYA), on the other hand, has only marginally exceeded its second upside target zone (10,440-490).  The two wave counts detailed on Friday, which warned of a potential bottom near 10,250, are also both still standing.  The key pivots are noted on the chart.

The bond market continues to hint that there may be underlying stresses in play, and the ratio of High Yield Corporate Bond Fund to the 20+ Year Treasury Bond Fund (HYG:TLT) is now poised at an inflection point:

In conclusion, last update covered the intermediate bull argument in detail and was, in fact, bullish over the near term -- but ultimately concluded that treating the bounce as a selling opportunity (essentially until proven otherwise) was a reasonable stance.  Bulls have certainly added some excitement to the game, since the upside targets were reached and exceeded.  Nonetheless:  Rules are rules, and the key 1873 (intermediate) level has not been reclaimed yet.  While I have a few indicators on early buy signals, ultimately, price trumps indicators.  Therefore, the bear case still stands as preferred for the moment.

Bears will need to reject the rally rather directly and defend 1873 to avoid facing yet another new all-time high -- and while I can't say for certain that's what will happen, the very short-term charts do suggest that as a distinct possibility.  The next few sessions should be revealing.  Trade safe.

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