2013 Should Come in with a Bang

Some markets are inherently difficult to predict and trade.  They whip up and down, they make higher highs, then they make lower lows, then they reverse.  They shake everyone out of both sides of the trade -- and then, after they've messed with enough players, they run.  This is one of those markets, and it's gearing up to run.  That pattern is such that it probably shook out many bears right near the top, and has since shaken out many bulls.  Now it's almost time for it to pick a direction.

For the past week, I've noted that the market had reached an inflection point -- and while the market's reaction to an inflection point isn't always predictable in advance, these points do represent a challenge to the market, and thus always open up the potential for a change of trend.  The bears managed to seize control at that inflection point, and have not yet let up their chokehold since. 

Meanwhile, Congress has only had a year to work out the Fiscal Cliff dilemma, so of course here we are in the eleventh hour, still trying to figure out what to do about it.  In alignment with this uncertainty, it's interesting the position the market has placed itself in -- it hasn't locked-in the bearish count, and it hasn't locked-in the bullish count.  It's still floating in inflection point limbo, and it seems to be waiting for the starting gun to fire.  One thing that does seem clear is that it's going to make a large intermediate move very soon -- but the market seems uncertain on the direction yet.  When the market commits, I'll follow suit.

Everyone seems to be looking at how bearish it would be if the Fiscal Cliff deal doesn't get done -- but what happens if it does?

There are still mixed signals in the charts, and the daily chart of the Dow Jones Industrials (INDU) helps illustrate the challenge.

   
Zooming in on the INDU chart, we can see that the rally since November is only three-waves so far, but it has not yet knocked-out the critical low to lock-in the rally as corrective (corrective moves are always expected to be fully retraced).

I'll admit, many things look very bearish -- but until the market dictates otherwise, I have to continue considering the bullish wave counts as viable possibilities.  12765 on INDU and 1385 on SPX is where the bulls become severely handicapped.  Below is the S&P 500 (SPX) bull interpretation with noted levels: (continued, next page)

Publication note

Unfortunately, I had a minor family emergency occur as I was beginning the update, and it has required my full attention for the last several hours -- so the update will return on the weekend.

Good luck out there, and trade safe.

SPX, NYA, US Dollar, VIX: Inflection Point at the Edge of the Cliff

Last update noted that the market had reached an important inflection point, and that remains true today.  It's interesting how the market has aligned itself to react to the news over the next few sessions.  Obama cut short his Christmas in Hawai'i (where I reside) to fly back to Washington in order to discuss the "Fiscal Cliff" and how to avert falling off it.  The market seems to be keyed into those talks.

Meanwhile, I keep thinking of a scene from the movie Margin Call, in which Paul Bettany is standing atop the ledge of a skyscraper and says, "The fear most people feel when they stand on the edge like this is not actually a fear that they will fall.  Instead it's the subconscious fear that they might jump." 

One sometimes wonders which it is for our leaders: the desire to avoid falling... or the other.

In keeping with this theme, bears have taken the S&P 500 (SPX) right to the edge of its own cliff, and it's now teetering near the important support zone of 1411.  After the November bottom, the market suggested a "safe" target zone of 1445-1455 which it reached -- but since then, the market has kept its options open.  There is no clear answer just yet as to what its intentions are, but it is worth noting that it found a top within 1 SPX point of my bear count's expectations, then reversed solidly  Accordingly, objectively, I'm forced to give the bearish count equal weight for the time being.

Elliott Wave analysis is fractal-based, so when we work with it as a predictive tool, we're often attempting to anticipate the fractal that's being formed, in order to know where it leads.  Some fractals are quite clear and "high probability" interpretations.  Others are vague and need clarification through the market's next move.  This is one that could still go either way.

Below is the bearish interpretation of the fractal, and some keys to watch which will aid in clarifying what this pattern "is or isn't."

Next is the most straightforward of the bullish interpretations.

Since many fractals mimic others, I often look at related markets in order to try and gain insight and clarity.  I pay close attention to the currencies -- though the reality is that currencies are not always correlated to the equities markets, they are usually helpful clues.  It's generally a decent bet that a falling dollar equals inflation, which typically means higher prices in dollar-denominated assets, such as equities.

The US Dollar hasn't quite "locked in" a bearish fractal, but it's come awfully close... so no "definite answer" yet here either.  The red wave 2 high is now key for dollar bulls to reclaim, while the red b/ii low is key for dollar bears. (continued, next page)

Is Santa Bringing Coal for the Bulls or the Bears?

Christmas Eve has arrived, and now the question is: who's going to get coal in their stockings?  The bulls and the bears have both held the key levels they needed to, in order to create maximum confusion over who will own the longer-term.  I have remained intermediate bullish since November -- and still continue to slightly favor the bulls for the time being -- but this is an important inflection point, and I'm prepared to switch footing if the market dictates.

The first key levels I'm watching are 1411 in the S&P 500 (SPX) and 13010 in the Dow Jones Industrials (INDU).  Sustained trade beneath those levels would leave the market vulnerable to a larger decline.

I've drawn up a lot of charts for this update, so we're going to get right into it.

The first chart I'd like to share compares the SPX, the German DAX, and the London FTSE.  These European markets are one of several reasons I continue to give a slight edge to the bulls on this side of the pond.

Next is the SPX bull count, which is facing a test, since my mid-term target of 1445-1455 was reached and the market immediately reversed lower.  Bulls need to claim that resistance zone in order to clear the way for new multi-year highs.  At this point in the wave structure, trade above 1448 should lead to a very bullish resolution.

Below is the 30-minute view of the same count.  Note MACD is in the process of a bullish crossover.

 
As noted, this remains an inflection point for the larger picture, which means the structure hasn't closed itself to the bearish potential.  Below is the bearish interpretation of the fractal.  The bulls will become more vulnerable if the market sustains trade beneath 1411. (continued, next page)

Congress Tries to Push Santa Off the Fiscal Cliff

Last night was an interesting night to be a futures trader.  Congress announced they didn't have enough votes for "Plan B" to avert the Fiscal Cliff, and the E-mini S&P futures (ES) promptly dove 50 points into limit down.  As of the time of this writing, ES is trading about 20 points in the red.

Congress has announced they're now going to do some work on Plan C, which stands for Christmas, and are thus headed home for a much-deserved holiday break after yet another grueling week of endless yapping.

Last night, even though Congress people were fleeing the hill like ants, I managed to corner one on his way out the door.  He agreed to a brief interview, on the condition that I allowed him to remain anonymous.  I acquiesced, and asked what the next plan was.

He replied, "A year ago, we coordinated with the White House and worked out a fool-proof fallback plan to avert the Fiscal Cliff.  We'll be implementing that plan immediately."  Excited, I followed up and asked for more detail.  "It's really quite simple," he replied, "According to the Mayans, the world is supposed to end today -- so we figured, why bother with budgets?  We're only sad that we didn't spend more."  When I asked what the plan was in the event that the world didn't end, the Congressman smiled vacantly and edged rapidly out of the room.  

I plan to follow up on this if we're all still here tomorrow.

The question now is whether this Fiscal Cliff plan failure will this preclude the Santa rally I've been expecting, and the answer is: I don't know yet.  I do know that the cash charts can tolerate a drop in the ballpark of the current futures levels, and still maintain their bullish bias.  In fact, a move such as that would be completely reasonable, as shown on the S&P 500 (SPX) chart below:

I am, in fact, still inclined to give bulls a slight edge, but the real questions won't be answered until we see how the cash market reacts to this news.  I will add that it's a little bit bothersome that this happened right after my November target zone was reached, as target zones are also higher-probability reversal zones.

The SPX bearish wave count is still alive and well, even though I began discounting it back in November.  The SPX structure appears to pivot on the 1411 price point. (continued, next page)

SPX, RUT, NDX: November's Upside Targets Captured, and a Look at the Long-Term

Last update expected the rally to continue.  The market obliged and, in the process, finally reached my standing mid-term target zone (from November) of 1445-1455.  So far, everything looks reasonably good for a trip toward the next intermediate target of 1490 +/-, but if things seem to be shifting back into the bears' favor, I will try to note that in these updates.

In this update, I want to cover a couple of long-term charts, to try and see where we might be in the big picture.  The Russell 2000 (RUT) is of particular interest, because at least two of the waves which make up this structure are as close to "unequivocal" as one can ever find.  On the chart below, red wave i is a pretty clear ABC (or it's I-II, i-ii -- see chart).  Further, the wave labeled as red wave iii is almost certainly a corrective wave, which narrows down the pattern options significantly.

If we assume that both i and iii are not five wave forms, then we are left with two fairly high probability patterns:  one is called an ending diagonal; the other is a bullish nest of first and second waves.

An ending diagonal consists of five corrective waves, and suggests this is a market in the final thrust upwards before a large, long-term correction unfolds.  One nice feature to this pattern is that there is a clear invalidation level: 902.30.  Above that level and the 1-2 nest becomes higher probability.  Because 1's and 2's lead to third waves (usually the longest and strongest waves), trade above 902.30 would make the pattern ragingly bullish (starring Robert DeNiro), and suggest a market on its way to a long-term nosebleed rally.  Both potential target zones are noted on the chart. 

I believe the key to sorting the two patterns out is red wave iv.  If that wave is wave-c of a running flat (the mega-bullish pattern), then it should be impulsive (five waves down).  It appears to be corrective (an ABC), which instead fits the ending diagonal pattern; therefore I'm inclined to give that pattern a slight edge.  Both patterns are intermediate bullish, so it's something of a moot point at the moment -- but we'll keep an eye on this going forward.

Next is the long-term S&P 500 (SPX), which sports a similar wave structure.  The key long-term bull level here is 1551.11.

Since the market has performed in line with the preferred bullish intermediate wave count all month, I'm going to focus on that count until the market says I shouldn't.  The chart below details the bull count, and notes the alternate bear count.  The bear count would find a top soon, but there's really nothing to yet indicate that we should be looking for anything other than a minor top.  The caveat is that although the bull count continues to appear quite probable, do note that my November target zone of 1445-55 has now been reached, and thus an added level of caution is in order.  Traders may want to raise stops to protect profits. (continued, next page)

Here Comes the Santa Rally

Yesterday's update was unabashedly bullish across all time frames.  I noted the market was likely to find a bottom directly, and wrote, "I am currently viewing the decline as a complete, or nearly complete, c-wave lower to wrap up yet another second wave.  This suggests a strong rally is waiting in the wings."

While I felt I conveyed my bullish stance quite clearly, I later realized that I had neglected to detail (in plain English, anyway) exactly what I was seeing in the charts that caused me to turn bullish at Friday's low.  I sometimes forget that, to those just learning Elliott Wave Theory, the whole thing can seem slightly more complex than trying to build a fully-functional suspension bridge entirely out of Spam and nachos. It has a language all its own -- but I use that language so often, I sometimes forget that readers don't necessarily understand what the heck I'm talking about.

So in this update, I'm going to discuss what I saw on Friday, why 1420 lost its significance for bears, what I'm watching going forward, and why.

One of the main markets that's given me the bull bug is the Nasdaq 100 (NDX).  Yesterday, I wrote:

The NDX has formed a fairly clean five wave rally off the November print low, and that does suggest trouble for bears.  It's also now in a zone where a meaningful bottom could form.  If the count shown below is correct, this represents a low-risk buying opportunity with the potential for a great deal of upside.

Hopefully, some readers took advantage of that low-risk entry.  First let's take a look at the chart (for those following along at home), then we'll discuss why I wrote yesterday's paragraph and what it means to traders.  I've added a number of educational annotations to this chart, to help detail my views.

  
There were two simple logical conclusions that led me to view this chart as quite bullish.  In Elliott Wave, five wave rallies move in the direction of the larger trend, and they cannot exist in a vacuum (in other words, you must pair the five-wave rally to the rest of the pattern; it cannot stand alone).  So The first factor in my analysis is the five-wave rally off the November low.  That leads me to the conclusion that the market must complete at least one more five wave rally in the upward direction (at the minimum).  Two five wave rallies, separated by a corrective decline, complete an ABC.  Three five-wave rallies, separated by two corrective declines, complete a larger impulse wave (a larger five-wave form).  One five-wave rally cannot exist on its own in this position, so the rally from 2494 to 2699 must be considered as Wave-i or Wave-a.

Next, I zoomed in on the smaller time frames and counted five-waves down from 2696 to 2620, and that led me to another conclusion:  if that decline is only the first wave down and not the end of the correction, then it appeared likely that the decline would ultimately retrace beyond where the larger Wave-i/a began at 2494... and that would break a cardinal rule of Elliott Wave, which says the correction to the first five-wave rally (the correction is called Wave-ii, or Wave-b) cannot retrace beyond where the rally began.  This led me to the conclusion that it was quite likely the entire downward correction was over.

At this point, trade below 2620 would create a problem for that outlook, so that's the key level to watch for anyone who positioned long at yesterday's open.

The room for error lies in the fact that the market rarely forms "perfect" waves -- so it's always possible that my interpretation of Wave-i/a as a five-wave structure is incorrect.  If it's not a five-wave rally since the November low, then the above points are moot, my preferred outlook is wrong, and the market is free to decline below 2494.

For now, we're going to assume that my interpretation is correct.  Let's take a look at NDX daily to illustrate why NDX probably presents a problem for SPX bears.  The bottom line is, it appears likely that NDX is headed to another rally leg of at least equal length to the leg from the November lows.

And if SPX follows suit and builds another rally leg of equal length to its previous leg, it will break above 1474 -- which then takes the bear count completely off the table (because of the retracement rule discussed regarding the beginning of first waves).

The next chart I'd like to examine, partially for educational purposes, is the S&P 500 (SPX) bearish wave count.  The scenario shown on the chart below is not my preferred read on the market for the intermediate term -- it's my first alternate outcome if I'm interpreting the higher degree wave structures incorrectly (in other words, if some of the waves I'm viewing as five-wave moves are actually three-waves, and/or vice-versa -- as I noted, the market rarely forms "perfect waves" and the majority of the work is left to the analyst to uncover and interpret).

Again, the market finds itself in a position where the bull and bear counts are both pointing in the same direction (up) presently, and this count also suggests higher prices still to come.  Bulls do need to break the 1438 swing high to confirm -- hence the black "alt: (1)" annotation.

Now to cover why the market dictated this chart be adjusted in-between Wednesday and Monday.  The overlap at 1420 created an issue for the old bear count -- which depicted a higher-degree c-wave rally -- and that issue is based on the fact that c-waves are always 5-wave moves.  Within those 5-wave moves, waves 1 and 4 cannot cross paths (except in special cases, called ending diagonals).  An ending diagonal appears highly unlikely, based on the shape of the move.  So once the potential wave 4 moved into the price territory of wave 1 (below 1420), that told us the c-wave was off the table, and I changed the labels to reflect the next highest probability bear pattern.  I have adjusted the labeling again slightly since yesterday (since the bear outlook remains my alternate, I am not really focusing on this chart in most updates).  (continued, next page)

SPX and NDX: Will Bulls Seize This Opportunity?

Wednesday's update noted that the market was approaching an inflection point, and to watch the SPX 1440-1455 zone for signs of a reversal.  Later in that same session, the S&P 500 (SPX) reached an intra-day high of 1438.59 and reversed strongly.  This is again a very interesting position for the market, because the decline has unfolded in an apparently impulsive fashion, and can now be counted as five complete waves down.  Normally that would suggest at least one more leg lower, of at least equal length -- but I have my doubts for a number of reasons, and suspect the market may find a bottom fairly directly.

I am currently viewing the decline as a complete, or nearly complete, c-wave lower to wrap up yet another second wave.  This suggests a strong rally is waiting in the wings.  I'll cover a couple reasons for this view, beginning with the SPX chart below.  I'll caveat with the note that this is a very vague wave structure on SPX, though, so the possibility does exist that a larger decline is beginning.  Once the market sees its first decent bounce and retraces somewhere in the 50% zone, we'll be able to consider the prior swing low as important to the near-term bull case.

The chart below is the interpretation I'm presently leaning toward, and suggests a bottom fairly directly, followed by a strong rally to new highs.

Examining the hourly chart yields a slightly different perspective on the alternate potential.  The odds favor that bulls will find a bottom directly, but if they can't, then the shape of the previous rally would force us to consider the possibility that the present decline is part of the larger wave (2) which could retrace 50-62% of the total rally.

While I'm favoring an intermediate bullish resolution, the bears do still have hope.  I've noted 1434 as the key bullish pivot for some time, and the market was unable to sustain trade above that zone, which keeps bears in the running for the time being.  Accordingly, I'll update their chart with the bear potential.  While I still consider bears the underdog here, the market always reserves the right to change my mind. (continued, next page)

SPX, INDU, BKX, and US Dollar: Market Approaching a Key Inflection Point

Last update (Friday) noted that trade above 1416 would suggest a first target of 1422 and a second target of 1433.  Both targets have since been reached, amounting to 17 points of profit.  Of note, the S&P 500 (SPX) exactly tagged (to the penny), and reversed from, my "critical bear level" of 1434.27.  It remains to be seen if bulls can sustain trade above that zone.

I am continuing to give the edge to the bulls for the intermediate term, but the SPX has reached/is reaching another interesting potential inflection point.  Since November 29, my standing target for SPX has been 1445-1455, and we've come within 11 points so far.  This is a zone bears may attempt to defend, so longs should stay nimble going forward.

Beneath us, I would watch the 1420 area as the first important support zone, and sustained trade beneath that zone would serve as a warning to bulls, at least over the short-term -- with the possibility of a more bearish intermediate outcome.  Until then, as long as bulls maintain that support zone, the market is cleared to keep moving higher.

The next two charts help outline the importance of this inflection point, and the outcome here will help define the bigger picture.  According to Elliott Wave Theory, the market moves in three-waves when it's moving opposite to the direction of the next larger trend (correcting), and in five-waves when it's moving with the larger trend.  I'm continuing to favor the bulls for the intermediate-term, because the decline from 1474 counts better as a three-wave move, which suggests it was a counter-trend correction to the long-term uptrend -- but it's still not a clear-cut picture, and thus both possibilities remain valid.

The first chart is the bullish count, though it's important to keep in mind that there are different paths the market can take to reach these targets -- and very few markets move in a straight line.  I try to adjust the projected paths when possible and as needed.

PLEASE BE AWARE OF THE TYPO ON THIS CHART, WHICH SHOULD READ: "I'd more strongly favor the BLACK count with sustained trade beneath 1420."

The next chart shows the hourly count when viewed through a bearish lens.  The bears want this to be a three-wave rally (an ABC), which would make it a correction to the prior decline.  Bears will need to make a stand soon to maintain their hopes, and the market has almost reached the zone where a corrective rally could expect to be rejected.

The chart below depicts an ending diagonal (c) wave.  A related option, not shown on the bull chart above, is that of a leading diagonal first wave, which would play similarly over the short-term.  A leading diagonal or ending diagonal would make one more quick thrust up before a strong reversal toward 1385-1400.  The difference between the two is that the leading diagonal would still be intermediate bullish, and march higher after that decline.  Thus, we should watch the 1440-1455 zone carefully for any signs of reversal -- the chart below notes some signals to keep an eye on.

Those are the caveats for bulls regarding the current price zone.  The caveats for bears are different.  One problem for bears, as I see it, is that once the market sustains trade above 1434, we're back into a thinly-traded range (between 1434 and 1464), and there may not be much in the way of resistance until the upper edge of that range.  This would jive with the bullish interpretation of a third wave higher (blue (3)) underway.  Third waves are pure trending waves, and are unforgiving of traders who cling stubbornly to wrong-sided positions.  

Looking down the road a bit: If the market can get through the congestion zone, then we reach the old resistance zone from 1464-1474.  The market was rejected from that zone on three prior occasions.

There's an old trading adage that says, "The more often resistance (or support) is tested, the stronger it becomes."  My belief is the exact opposite:  "The more often resistance (or support) is tested, the weaker it becomes."  The logic behind my statement is that with every trip into resistance, more selling is exhausted.  With every trip to support, more buying is exhausted.  Eventually, the market chews through all the sellers or buyers in a given zone, and then simply breaks through and runs.

Moving back to the charts, the Dow Jones Industrials (INDU) briefly overlapped its key bullish pivot, then reversed from that zone.  When we look at this chart, we are again confronted with the three-wave rally into the 13367 print high (the "tell" I noted way back on October 8) -- and thus I have to continue giving decent odds to the view that new highs beyond 13367 will be reached over the next couple months.  Bears have work to do if they want to change that viewpoint. (continued, next page)

Publication note...

My apologies, but unfortunately, this week my schedule is largely filled with some very time-consuming personal matters to attend to -- so publication for this week will be spotty.  Trade safe.

SPX Update: Just the Short-term, Ma'am

Last update noted that the rally might be due a breather, but the price action since has been inconclusive.  I get bugged when I can't reconcile the charts at the 5-minute time frames and below, and that's the case right now.  The 5-minute SPX chart makes sense in two contexts, but the contexts are diametrically opposed from each other.  Basically, either my last read was correct and the market is forming some kind of screwy expanded flat 2/b (blue), or it's just completed the first wave of a new leg up.  The expanded flat makes more sense in the context of the price action that came before, but it just doesn't quite jive with the move since 1415.

I pretty much despise nights like this, because I've now spent roughly 7 hours charting, but feel like I have little to show for it.  The chart below discusses a few levels to watch, and some potential targets, but I'm hesitant to get too married to anything here.  Stay nimble if you try to trade this mess.

 
Next is the INDU chart, which performed well per the last update and came within a few thousands of a percent of reaching the first target -- but the wave seems to have become more complex.  The interpretation below jives reasonably well with the blue SPX count above -- so maybe my sense of frustration is misplaced... it's always possible I've got this reconciled perfectly and the market will perform exactly according to plan.  As I said, though, stay nimble here.

In conclusion, last update I warned about the possibility of a confusing and frustrating trading range forming, and that may well be what's going on.  A clear break of the range (especially on INDU) should help lead the market into more clarity.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.

SPX and INDU: Rally Due for a Breather?

Monday's update expected the S&P 500 (SPX) to head toward the 1426 +/- level, and noted that price zone should be watched for a possible turn.  SPX reached nearly 1424, and then reversed into a 20 point decline.  That decline does appear to have been impulsive, but there are presently two equally viable ways to fit that impulse into the surrounding structure, as shown on the chart below.  The chart also notes a pending bearish sell trigger if SPX sustains trade below 1403.

  
This has been a pretty sloppy market for the last couple sessions, and try as I might, I cannot yet reconcile the rally from 1385 as an impulse wave (a five wave move).  This means it's either incomplete and will head to new highs (black, below), or it's the b-wave of a larger expanded flat (shown below in blue), which will culminate in a decline toward 1384 or lower.  Sustained trade below 1400 would more strongly favor the expanded flat.
  

The next chart shows why I slightly favor the idea of a larger correction here.  SPX, RUT, Nasdaq, and NYA have all back-kissed the underside of major trend lines, and it would be unusual for them to simply power through without more of a pause. (continued, next page)

NYA Update: No Material Change

Just a quick update tonight since there's not much to add to yesterday's comments.  I spent a lot of time charting tonight, but have selected to share just one chart for the sake of illustrating the point.  Below is the NYA, which suggests bears aren't out of the woods just yet.  I'm sharing NYSE Composite (NYA) because the apparent triangle in SPX doesn't work on this chart (nor does it work on INDU -- see yesterday's short-term SPX chart) -- this is because the wave which would be labeled as "e" in the triangle (8235.23) exceeds the apparent "c" wave bottom (8235.89), which invalidates a triangle for this index (which, in case you forgot, is the NYA). 

The rally into yesterday's high appears to be only three waves, at multiple wave degrees.  In other words, the main question this chart poses is: higher prices now, or higher prices later?  Watch the invalidation levels for clues. 

Note the future wave notations aren't intended to be time-accurate -- I'm simply working in the available space of the chart.  Trade safe.

SPX Update: December Means It's Time to Start Throwing "Santa Rally" in the Title...

Will bulls get their Santa Rally?  Let's look at the evidence...

Last update noted that some new intermediate buy signals had triggered and expected that the rally still had/has further to run.  Friday appeared to be a triangle consolidation, so there's been no material change, and I still expect higher prices -- however, I have spent some ongoing time deciphering long-term charts (somewhere in the neighborhood of 400,000,000 hours during November), and believe I may have finally unlocked the intermediate wave structure.

When the correction first began in September, I was initially viewing it as a fourth wave decline -- largely because the structure appeared to need a fourth wave, and most of my indicators suggested that 1474 was unlikely to mark a major top.  But then the decline continued past the fourth wave invalidation level, and that raised questions for the bulls -- however, all throughout the decline to 1343, I continued to feel that the decline was most likely a corrective structure (meaning new highs are/were still out there for this market).

Without further ado, here is the S&P 500 (SPX) chart which I believe unlocks the intermediate structure.  If you're new to Elliott Wave Theory, the most basic concept is that the market moves in five waves when it's headed in the direction of the next larger trend, and in three waves (or combinations thereof) when it's heading against the next larger trend.  I believe the rally counts best as five waves, and the decline from September counts best as two three-wave structures.  This would mean the long-term trend is still "up."

I've been giving a slight long-term edge to the bulls for a while, and while the market hasn't yet reached the point where we can say the bears are out of the running, unless the market starts declining in a true five-wave impulse, I think we have to give serious consideration to the wave count shown below.  Note that the decline found support almost exactly at the 61.8% retrace, which is perfect for a second wave decline.  This count suggests the market is on the cusp of a massive rally -- a third wave up at Minor degree.  About mid-way through a third wave, the masses recognize what's happening and jump in -- and momentum continues in a relentless fashion.

I'm still not ready to say this count is "the one" -- but my gut likes it a lot.  Now it's up to the bulls to prove it with some key level breaks (noted later).

 
Zooming in a bit, the count below currently appears to be the most viable short-term interpretation:

And zooming in even more, here's an attempt to break down the smallest waves, along with a whole bunch of info on some key price points.  1426 +/- should be watched as a possible turn level. (continued, next page)

SPX Update: Intermediate Buy Signal Triggered

Yesterday's update expected further upside, which the market provided, though it spent most of the session moving sideways.  Of note, more of my intermediate indicators have shifted to buy signals.  The Dow Jones Industrials Bullish Percent Index (BPINDU) shown below has now given an intermediate buy signal, and we can see from the chart that these are generally pretty solid.

I have been marginally in favor of a bullish intermediate outcome for some time, and, given what's occurring in the indicators, I'm close to shifting to a more bullish footing -- but I'm going to give the market a couple more sessions to prove itself here.  A lot can happen in a day or two in this crazy central-bank-driven market, so I'd like to see these intermediate indicators firm-up just a bit before getting too far ahead of the price action.  With these types of buy signals, if they're going to fail, they generally fail almost immediately.

Both the bull and bear count remain pointed at higher prices before a meaningful top, though there are several paths the market may take to get there.  Below is an hourly chart of the S&P 500 (SPX).

I've shifted my preference on the short-term count back to my original read (my first read is right more often than not), which was that the 1377 swing low marked the bottom of wave (iv) of (1).  The market always reserves the right to force me to adjust it again, depending on how the next few sessions develop (some of this stuff is sooooo much easier in real-time, as the market can knock certain options off the table right at the open).  The next mid-term target of 1445-55 is unchanged, though the intermediate target has been adjusted higher. 

Note the potential of the black alternate expanded flat:  sustained trade below 1400 would suggest a target of 1379-85.

Finally, the bearish intermediate count is still viable.  There are several factors still keeping this count on the table for the time being.  The next upside target for this count is 1426, which is close-by -- so that would be an interesting target for bears to try and kill the fresh buy signal. (continued, next page)

SPX Update: Near-term Rally Likely to Continue

Last update expected the correction to continue over the near-term (though I published no official target for a bottom), and also noted that the rally to that point appeared impulsive, suggesting that the next-larger-degree trend was still up.  Yesterday, the S&P 500 (SPX) found a bottom at 1385 and put in a very impressive bullish reversal.

On one of yesterday's charts, I included a very specific annotation: "Trade below 1391 that holds above 1377 and subsequently breaks above 1409 is likely to lead to a relentless rally for several sessions."  This is exactly what happened yesterday -- so the up-trend is thus expected to continue over the near-term.  The market has now allowed me to calculate some new, additional upside target levels to (hopefully) tack on to the 30+ points we captured on Thanksgiving week.

From a longer-term perspective, I still believe the bulls have a slight edge, but there's yet no key markers to eliminate the bearish wave count, so we'll continue to track its progress and expectations for the time being.  Bears should take note of the strength and speed of this rally, which is eclipsing the last decline, and indicates that bulls may have more firepower in reserve than bears do.  What's really nice is that both the bull and bear long-term counts are again aligned over the near-term, which is always helpful for trades utilizing shorter time-frames.

First up is the daily chart of the SPX, which notes a few key trendlines, and shows that the long-term uptrend since 2009 still remains intact (indicated by the blue trendline, which goes back to the 2009 lows).  The lower red trendline is now a three-point validated trendline, and thus likely the key support for bears to break in order to take control of the long-term.

Next up is the bullish wave count, along with the next-tier targets for that count.  It appears the 1445-1455 target zone has become reasonably good probability. (continued, next page)

SPX and NDX: Intermediate Signals Remain Mixed

Monday's update noted that the charts indicated that at least a minor top was probable, and so far Friday's print high of 1409.15 has held for two sessions.  The questions still abound about the intermediate term, however.  In this article, I'm going to cover a few things to watch going forward.

The first chart I'd like to call attention to is the Dow Jones Industrials Bullish Percent Index (BPINDU), which has yet to relinquish its intermediate sell signal.

 
Next is an attempt to decipher the Nasdaq 100 (NDX) long-term chart.  Note that daily MACD has now crossed over onto a buy signal (this is true on several other indices as well, including SPX), and is rising from an oversold position.  Also of note, it is difficult to count the rally since 2009 as a complete wave structure, which suggests at least one more wave up is due before a long-term top.

The question this chart poses is whether the current decline is part of a complex fourth wave correction (black) or has now marked a complete intermediate low (gray).  It is, of course, possible that the 2012 print high marks the end of the line for the long-term, but that simply doesn't reconcile as well -- though the trend line breaks are of concern to the bull case.  Note the nice three-point validated green trend line that's formed, indicating that it's likely important for bulls going forward.

For the moment, I remain long-term neutral on equities, since (as the charts above hint at in a "tip-of-the-iceberg" sort of way -- there are a lot more charts I'm watching and not publishing), there are still too many mixed messages out there to gain a clear read.  Accordingly, I've decided to split the S&P 500 (SPX) charts into a bull chart and a bear chart (which makes my job a little more work, but should make the charts easier to follow for readers).  Each chart notes some key levels, signals to watch, and projected outcomes.

First up is the bull chart: (continued, next page)

SPX Update: Looking a Step beyond Global Uncertainty

Humans hate uncertainty.  We want guarantees, we want warranties, and we want insurance policies.  We want to know the future, and we want promises (preferably in writing) which assure us of that future.  And yet, what else is life but a constant, ever-shifting drama of uncertainty?  The irony behind our desire for certainty and security is that the very tension of uncertainty is the same psychological force that so often drives our greatest gains in personal, and societal, growth.

Our extreme discomfort with uncertainty pushes us to invent, to learn, to grow, and to try and expand our understandings.  It pushes us to become better people; to become more than we are today.   

Global uncertainty can make the stock market seem like it should be an unpopular place -- and yet, always bumping against that global psychology and in opposition to it, there is personal uncertainty that makes the market appealing.  Why do people invest in stocks?  There simply is no other reason to invest, except the quest for financial security and expansion -- which is really just the quest to leave uncertainty behind.

Of course, we can no more eliminate uncertainty than we can become physically immortal; uncertainty is an intrinsic part of life (and of the universe itself, even down to the quantum level).  Despite the obviousness of that fact, the majority of us spend our lives fearing (and often running from) the uncertainty of the unknown, in a perpetual state of low-grade anxiety.  Thoreau described this perfectly when he said: "Most men lead lives of quiet desperation."

I believe understanding this psychology is a key to understanding the market.  So often, people look at the seemingly ever-deteriorating world and say, "How can anyone buy stocks right now, with so much global uncertainty?"  The problem is, this view only accounts for half the total psychology of uncertainty.

The traditional market wisdom says people buy and sell based on fear and greed.  That's true on a simplistic level -- but I believe that if one looks a bit deeper, one finds that both fear and greed (in this case) stem from the exact same psychological source: the quest to overcome uncertainty and gain more security (even for people who don't seem to "need" more security -- we're rarely satisfied at a plateau, and more security for some can equate to additional wealth/power).  So we're fearful when we're running from it, and we're greedy when we're chasing it -- but it all ultimately traces back to the same base desire.

This is why even when the world looks bleak and "everyone" is fearful, people are still buying stocks:  at that moment, their desire to gain personal certainty/security is greater than their fear of global uncertainty.

This is one reason I think it's a mistake to look myopically at global uncertainty when deciding whether to buy or sell for the long-term.  The fact is: there's always something going wrong with the world.  And if that's all there was to consider in the psychology, then we'd do nothing but sell stocks short.  Don't forget to consider the other side of that equation.

Speaking of uncertainty, the market is still in a position that leaves the intermediate-term unclear.  Last update expected higher prices, though the S&P 500 (SPX) exceeded the upper edge of my target zone by a few points.  Several of my intermediate indicators have now switched to buy signals, but others still remain on intermediate sells. 

There are some indications that at least a minor top is due, but this rally has shown a lot more legs than virtually anyone expected, and that always leads me to believe that front-running is a bad idea for inexperienced traders.  The approach I usually take at such times is to make a few quick stabs at low-risk entry zones, but with very tight stops.  If I get stopped out, I have limited my risk -- but once I catch the turn (assuming I protect profits properly afterwards), it almost always makes up for the small losses I've taken along the way.    

Disclaimer:  The above is not trading advice, and may or may not work for you.  Consult your broker, your accountant, your lawyer, and your know-it-all in-law (the one who was driving you nuts over Thanksgiving) before doing anything at all, ever.  Ask your doctor if you're healthy enough for trading.  Side effects include high blood pressure, blurred vision, nail-biting, intermittent feelings of hopelessness and inadequacy, and the nagging sensation that you left the stove on.

It's worth noting that the rally has recovered 50% of the two-month-long decline from 1474 in only five sessions, so I'm giving a slight edge to the bulls here for intermediate-term odds.  However, as mentioned, neither the bull nor bear intermediate case can be made with fervor yet -- so the chart below details both options, and notes the key invalidation levels.  Sustained trade beneath 1365 would favor a retest or besting of the 1343 swing low, and a break of that swing low would almost certainly be huge trouble for bulls. 

Below is a bit more detail on the bull case.  The decline counts very well as two three-wave corrections lower.

The Philadelphia Bank Index (BKX) has also overlapped it first important upside level, but not its key intermediate upside level yet.  Note that there is a lot of potential energy coiled in the present pattern. (continued, next page)

SPX Update and a Little Bull/Bear Thanksgiving Humor

No material change since yesterday's outlook, though I have outlined the two most likely short-term paths from here.  Odds are good that at least a minor top is nearby, but it appears reasonably likely we'll see slightly higher prices first.  The chart below shows that as long as bulls can hold above 1382, they have a good shot at moving the S&P 500 (SPX) into the mid-to-high 1390's. 

The SPX hourly chart notes that both bull and bear intermediate possibilities remain alive.  Worth noting: virtually none of my intermediate indicators have given buy signals yet and the intermediate trend is still technically "down."  The preferred count sees a correction beginning in the next few sessions, then (most likely) another leg up. (continued, next page)

Monday's Targets Reached; Will Bulls Hog the Whole Turkey?

I admit the article title is a weak attempt toward being cute by invoking the Thanksgiving holiday -- and I realize I'm mixing metaphors with "bulls" "hog" and "turkey."  This is making me hungry (though when I really want to eat bull, I just turn on the TV during a Bernanke speech).  Anyway, I'll try to do better on a Thanksgiving-related title tomorrow. 

Yesterday's update expected a rally, with a first target of 1378-1390 SPX.  The S&P 500 rallied with furor to 1386.87, and closed at the session highs.  The big question now is whether this is simply a bull trap, or a more meaningful turn.  Later in this update, I'll cover some of the key upside levels for bulls to reclaim.

Monday showed strong internals, and that suggests this rally will be more than a one-day wonder.  In fact, the strength seen yesterday is often associated with significant bottoms, as shown on the chart below:

 
My first upside targets were all reached, and the wave could count as complete, but it's entirely possible this leg has further to run.

Given the five-wave impulsive nature of the rally and the strength of market internals, the odds presently suggest that more upside will follow after the first correction.  As noted in yesterday's update, the market reached an inflection point on Friday -- though of course, nothing significant had developed as of the time of publication.  But now we can see that bulls have responded to that inflection point with fury, and this leaves open the possibility that an intermediate low has formed, though presently the intermediate trend should still be considered "down."  The chart below details the near-term path for the bull prospect, as well as the bearish prospect, and notes the key levels for bulls to reclaim.  Sustained trade below 1360 will favor the bears.  (continued, next page)

SPX, US Dollar, Gold: Charts Point to at Least a Near-Term Rally

Last update noted that the market was in a dangerous position and oversold, but that there were some indications that a fourth-wave relief rally was due.  Bulls managed to find support where they needed to, and the charts have now solidified the view that at least a near-term rally is likely to develop in equities.  Also of note, there are QE-Infinity liquidity injections coming on Monday and Tuesday which will total about $23 billion, and which should help put a bid under equities.

We should always assume the trend remains the same until proven otherwise -- and recently the intermediate trend, at least, has been down.  I continue to believe this is a dangerous market for bulls as long as it hangs around beneath the key price levels, but recognizing that danger is not the same as being completely sold on a long-term bearish outcome for equities -- and the fact is, I'm not yet sold on the long-term bear case.  That said, until some key levels are reclaimed, there's no real reason to be intermediate or long-term bullish either.  I've been driving myself to distraction trying to interpret this market's long-term intentions, and the bottom line is:  there simply isn't enough information yet to form a well-reasoned long-term stance.  So, for the moment, I've decided there's enough ambiguity in the charts that the only rational long-term stance is equities neutral.

Something purely anecdotal that bothers me on a contrarian level:  I swear I've seen at least 10 articles recently which are predicting an imminent market crash.  I know it's anecdotal, but that seems like too much rabid bearishness.  One of the basic rules of the market is that the majority are usually on the wrong side of the trade.

Anyway, let's discuss a couple things I'm watching to provide clues which should help tilt the playing field in one or the other direction.

One of the key markets that has yet to tip its hand is the US Dollar.  On July 19, I noted that caution was warranted for dollar longs, and even shifted my stance on the dollar from long-term dollar bullish to long-term neutral... and the dollar dropped like a rock immediately afterwards.  Then on September 20, I noted it could find a bottom in that zone and wrote that "I've finally started to take quick stabs at long dollar positions again."  It has been rallying ever since.

The dollar has finally reached another key inflection point, and I think risk is shifting again and is now increasing on dollar longs.  If the dollar can go on from here to form a five-wave rally (it needs a fourth wave down and fifth wave up), then that would be an all-clear for dollar bulls (and likely for equities bears).  But presently, the move up from the September bottom is still a three-wave rally, which is now facing resistance, and which may be just about complete.  I have to give a very slight intermediate and long-term edge to dollar bears here, because the larger rally from May 2011 counts better as a corrective wave than an impulse wave -- bulls need it to become impulsive to help confirm my original read that the dollar bottomed its Grand Supercycle wave at the 2008 print low.  In any case, I believe the dollar is a crucial market to watch going forward, since if the dollar heads lower, then equities will be "worth more" as measured in dollars (aka: inflation).

Another unclear market is gold, which has traded in a large range for more than a year.  I've outlined some buy/sell triggers for gold on the chart below, but I should note that the 200 point trigger is quite aggressive -- so I would suggest traders remain cautious of any whipsaws occurring around the trigger point (if and when we get there, of course).

Next is the S&P 500 (SPX) intermediate bearish wave count, with the bull count noted in green.  I'm presently projecting at least a short-term rally to the 1378-1390 zone, but sustained trade above 1403 would be the first warning to bears that the (assumed) rally could grow some legs. (continued, next page)

SPX and RUT: Still a Dangerous Market

Last update, I warned that the odds strongly favored lower prices, and the market has obliged.  Most markets are now below major support levels and the decline has given little sign of abating.  As I've warned for several updates, this is not the type of market to front-run bullishly: this market continues to meet the definition of trying to catch a falling knife.  At this point, I'm waiting for price to actually find some type of bottom before considering holding any intermediate long positions.

The chart below shows that most major markets have now broken their primary uptrends, as well as broken secondary support zones:

The Russell 2000 (RUT) chart emphasizes why the bullish wave counts have now become lower probability.  With the key level breaks that have occurred in RUT, it is all but impossible to count the summer rally as an impulse wave -- which suggests that rally will be fully retraced before the market finds a meaningful bottom.

Accordingly, for the S&P 500 (SPX), I'm going to focus on the bearish wave count until the market can find support and give some signs of a turn.  All indications are that the market is still within a nested third wave decline -- and third waves are not to be trifled with, except by the nimblest traders.  In third wave declines, indicators often reach oversold and stay there, with only minor bounces along the way. (continued, next page)

Treasury Throws a Wrench into QE-Infinity

Tuesday was an interesting day as the market gapped lower, reversed strongly higher, and then retraced most of the rally by the end of the day.  The market remains balanced at a key support zone, and the market is very oversold, so while those conditions could lead to a rally, oversold by itself doesn't mean anything.  As I've noted on several occasions, crashes generally begin when a market is oversold, not when it's overbought.  A lot hinges on what happens next.

I've poured over many charts this week, and I continue to feel this zone is critical for bulls to defend.  Below this level, and there's simply a lot of air.  I'm watching the charts for the market to declare its intentions, but there are two fundamental issues which could compound the technical situation and combine to create a "perfect storm" if support fails:

1.  We are again facing the "fiscal cliff" dilemma.  This was a precursor to the 2011 crash.

2.  Bulls have been banking on roughly $26 billion in QE-Infinity liquidity injections, due to start hitting the Primary Dealer accounts on November 14, to provide fuel for equities.  However, there has been a potential last-minute game-changer for this month.  The Treasury announced on November 13 that it will auction $25 billion in Cash Management bills on, you guessed it, November 14.  That auction will absorb much of the pending QE-Infinity liquidity.

A failure of support here thus has the potential to compound a selling-panic, because bulls may capitulate en masse if it's perceived that Fed cash isn't back-stopping equities as expected.

So this remains a dangerous position for the market, as I warned when SPX 1425 failed, and warned again when SPX 1403 failed.  Bulls who got out then can always get back in if and when the market starts giving more signs of a turn.  A wise old trading adage:  "Better to be out wishing you were in, than in wishing you were out."

A favorite chart of mine recently (below) shows that most markets are sitting right on support zones.  Bulls need to hold these zones, or the market could easily go into free-fall.  Be aware that markets often become very whippy around major support and resistance, as they try to shake traders out and/or get them positioned wrong.

The S&P 500 (SPX) daily chart is shown below, and little here has changed from last update. 

 
I also want to again note the Nasdaq Composite long-term chart.  Interesting to observe how the market was firmly rejected at the top of the base channel, which was the resistance level I discussed throughout August and September. 

Especially given recent word of today's Treasury auction, I can't overemphasize the need for caution here, and the chart below outlines the "conservative" bear case if support fails. (continued, next page)

How Will Equities React When QE-Infinity Liquidity Hits This Week?

Liquidity is the main driver of equities prices, since excess liquidity usually finds its way into assets, while a paucity of liquidity usually necessitates their sale.  The QE-Infinity liquidity will start hitting the market this week.  The first MBS purchases are scheduled to settle on November 14, so now we'll finally see how this will impact the market.  As noted on Friday, several markets are hovering near long-term support levels, but this zone is a key inflection point, and breakdowns of support here could lead the market into a rapid drop.

The chart below outlines several markets, and the bottom line is bulls need to make a "last stand" here or risk a panic sell-off.

The S&P 500 (SPX) chart below notes the potential air pocket beneath this price zone.  This results from the overlapping summer price range -- markets can race rapidly through such ranges, so a failure of support here could drop SPX quickly into the 1320's.

So... is there any reason for bulls to have any hope here?  This is a dangerous position for the market, so while I'm not encouraging front-running, there are a few signals that bulls could capitalize on, which I'll outline below.  It's a case of potential energy, but it's up to bulls to grab the ball and run with it.

In addition to this price support zone, there are a several reasons for bulls to feel all is not yet lost.  The first is the fact that, as noted, the QE-Infinity liquidity begins reaching the Primary Dealer accounts this week, and that usually translates into an inflationary reaction (equities up; dollar down).  Notably, the potential does exist for a complete (or nearly complete) corrective fractal from the 1474 print high (noted below as the double-zigzag).

Also interesting to note the US dollar seems to be forming a rising wedge, which is usually a bearish pattern: (continued, next page)

Bears Close-in on Claiming the Market for the Long-Term

Thursday's decline captured the target of 20 SPX points from the bearish sell trigger outlined on Wednesday (1403 to 1383).  In fact, all the bearish sell triggers I've outlined since the 1474 print high have now been captured.  The failure of support at 1403 caused significant technical damage to the market, but in this update we're going to examine both the remaining bullish potential and bearish potentials in detail.

The market has reached another inflection point, and further downside from here could spell long-term disaster for bulls.  The odds that the market has seen a major trend change at the 1474 high are increasing daily, and the chart below shows why this zone is important.

Most major markets have broken the long-term uptrends from the October 2011 lows, but are now reaching possible support levels concurrently. 

As promised yesterday, here is the intermediate bullish interpretation that remains standing, shown on the S&P 500 (SPX) chart below.  This would make for one heckuva surprise from bulls here.  While this count is still completely viable, I continue to have no intention of front-running this decline except at low-risk, tight stop entries, since the trend is clearly down at the moment (I trade primarily futures, so am rarely subject to huge gaps down as cash traders can be).  Front-running is only for the very nimble now, because of the danger of the bear count (shown later) which suggests a nested third wave decline -- which means it can go days without coming up for air.

If SPX can generate an impulsive (five wave) bounce, we can run with this count as a more significant and "safer" potential play.  Above 1434, and we can start favoring this count.

Honestly, the charts look horrible for bulls right now, and this count is becoming the underdog -- but there are three things which are causing me to continue considering the bullish wave count:

1.  The QE-Infinity liquidity injections, which start on November 14.
2.  The three-wave rally into the 2012 print high on the Dow Jones Industrials (shown later).
3.  Big money sentiment is quite bearish.  This is often bullish.

The bearish interpretation has been steadily gaining traction, and the rough expectations of the bearish count are charted in detail below.  This should probably be considered as the narrow odds-on favorite at this point in time.  There is a nice symmetry to this interpretation. (continued, next page)

Bears Caused Technical Damage on Wednesday

Wednesday's strong sell-off created some potential technical problems for the bulls, particularly in the Dow Jones Industrials (INDU), where the decline overlapped the wave (1)/A high.  I literally ran out of time while charting last night, and I'll simply have to publish what I have now and fill in the blanks in the next update.  It's not helping that I came down with the Martian Death Flu yesterday, and feel severely under the weather.

The first chart we'll look at is INDU, since this is where a potential key price overlap has occurred.  Note the decline has now overlapped the blue wave A high.  I suspect a snap-back rally is close at hand (toward black (2)) -- though this is purely anticipatory, based on the five-wave decline... the bulls need to break above the head and shoulders neckline and the red falling trendline first; until they do, the charts maintain a strong short-term bearish bias.

This chart has a lot of annotations on it, and only outlines the bear count -- I'll outline the remaining intermediate bull potentials for INDU in more detail tomorrow; for now, I've discussed them only on the final chart of the Nasdaq 100.

   
The next chart is the S&P 500 (SPX) bear count, which can't be locked-in yet, but which seems to be gaining traction.  SPX did not overlap its key wave (1)/(w) high yet, so it is still conceivable that this is a fourth wave correction.  Again, this chart only outlines the bear potentials.

The hourly SPX chart has a bit more detail, and notes my preferred short-term path.  This market meets the definition of "trying to catch a falling knife" and it should be strongly noted that trying to anticipate a bottom after a decline like yesterday's is quite difficult and often ill-advised.  Nevertheless, I wanted to share my thoughts and observations on what appears to me to be a reasonable short-term path.  Don't bank on this, though, as the decline could simply continue unabated.

Finally, the Nasdaq 100 (NDX) chart does have a bit more detail on the bullish intermediate potential still in this chart.  The rally from the June lows appears to be a five-wave impulsive form (meaning it is in the direction of the larger trend, though it could be the final wave of that trend).  So far, the decline is still a three-wave form.  This leaves open the option that this is a second wave decline (and INDU/SPX still share this option), which would be allowed to create the price overlap witnessed in INDU.

NDX could provide some key tells going forward if the decline turns into a five-wave structure (noted by the gray (4) and (5)) -- and if that happens, it will suggest the trend has indeed changed for the long-term.

In conclusion, the bears have done some important technical damage in INDU, and the potential we've been discussing over the past couple months for a more bearish outlook now has to be seriously considered.  The bulls could always pull out a last minute stick-save, especially with the QE-Infinity liquidity due to start hitting the market on November 14, but as long as the market hangs around these price levels, it's in a dangerous position for bulls.  Trade safe.