SPX Update: 10-3-11; Bottom in Sight?

With the new low today, the market has finally fulfilled the move we've been expecting since early August.  We now have confirmation that a new bear market is in place -- although this has been my opinion all along.  It is important to be aware that wave v of Minor (1) has now fulfilled its minimum requirements, and as such, could end at any time.  Again, I am expecting a sizeable rally off the Minor (1) low. 

The market performed almost exactly as my chart last night had it drawn.  One thing we know with near certainty is that there is now a large rally waiting in the wings.  However, at the moment it is a challenge to decipher the market's short term intentions. In examining charts, one often finds many garbled patterns adjoining one or two clear patterns.  I call the clear patterns "triangulation waves" as they grant one the clarity to decipher the garbled patterns and fit the whole structure together.  While I've had great success predicting the short-term moves over the last month, this market has not had a clear large triangulation wave in a while.  This lack of a larger wave to triangulate makes prediction difficult when the short term waves also get fuzzy.

So the targets I have listed are low confidence at the moment, although this could change after tomorrow's action.  Since I am currently unable to make a clear call as to short-term targets, I am presently taking the stance that the decline could end at any time.  To reiterate something from last night's post:

The key thing to watch for as we approach new lows is a false breakdown of the diagonal; this is a usual function of ending diagonals, and it's designed to get a lot of participants on the wrong side of the trade.  If the market breaks down from the diagonal, then proceeds to whipsaw and rally back up into the diagonal, expect that the bottom is probably in.

If the market is oblivious to the ending diagonal, and the blue 1-2 count is playing out instead, the burden is on the market to prove that to us.  It needs to continue moving strongly downward, much like it did today. 

So while today's action has actually clarified the big picture by finally showing us the complete impulse we've been waiting for, due to the short term wave structures, the immediate future has gotten temporarily hazy.  Usually when this happens, the market tips its hand within a day or two and clarifies the shorter time frames.  My best guesses are posted on the first chart below.  Sometimes my best guesses are pretty darn good, but I always prefer to err on the side of caution.

This first chart shows my best guess for the near future.  If this is an ending diagonal, it is very close to completion (red line).  If this is a nested 1-2 series, we still have a ways to go (blue).

Next is a larger view of the same structures, diagonal marked by the red "v":

And finally, the NYA chart for comparison.  Based on the internal structure of the waves at the smallest degrees of trend, this chart actually argues in favor of the ending diagonal and an immediate bottom:

The original article, and much more, can be found at http://PretzelCharts.blogspot.com

THE BIG PICTURE: SPX Long-Term Count and Projections

As has been our long-standing tradition for a whole month now, this article presents the monthly update to our long-term view for the SPX, and our expectations going forward.   However, before we get into the nuts and bolts of the Elliott Wave count, we're going to once again don our brightly-feathered edumacationalistic capz to help our readers understand a bit more about Elliott Wave Theory.

On the surface, Elliott Wave is a unique way to understand why the market does what it does, and a detailed tool that allows us to project future price moves by extrapolating the fractals and patterns on the charts.  The theory runs far deeper than that, though.  At its core, Elliott Wave helps us to understand something much more meaningful than markets: it helps us to understand human nature.  As such, it seems to apply to patterns found not only in markets, but in the rise and fall of nations, and even entire civilizations (as well as the ebb and flow of many other things in the natural world).  The market's price movements are, after all, a reflection of human nature.  By rule of intrinsic design, human nature must be universally reflected in all human constructs, be they markets, governments, or otherwise.  Once you unveil one aspect of human nature, you are often able to locate the same common thread running throughout all human activities.  This is one of the fascinating things about Elliott Wave, and part of what makes it such an amazing and complex theory.  I have studied and applied it for many years, and continue to be in awe of its uncanny ability to anticipate the future.

R.N. Elliott originally discovered the theory through his detailed study of decades of price charts.  What he found was that the market advances its position forward (note "forward," not "up" -- advancement is relative to what the market is trying to accomplish, either up or down) in five-wave moves: wave one forward, wave two back, wave three forward, wave four back, wave five forward.  It then corrects that advance in three-wave moves in the opposite direction: A forward, B back, C forward.  The moves that advance the market's larger trend are called "motive" waves, and the moves against the larger trend are "corrective" waves.  What is most interesting is that these fractals apply across all time frames: so each advancing wave within a motive wave (waves one, three, and five) is composed of an even smaller five-wave sequence.  And each correction in a motive wave (waves two and four) is formed by an even smaller three wave correction.  Further, each advancing wave inside the corrective wave (waves A and C) is formed by a five wave motive wave; but wave B is of course formed by - you guessed it - a smaller three-wave correction... and so on, ad infinitum. 

Got it?   

NO???  Alright, fair enough, it's easier to understand when you see it on a diagram:

 
As a result of the fractal nature of the market, R.N. Elliott was also able to determine certain rules which govern price movements.  For example, wave 4 never crosses into the territory of wave 1 (except during special patterns, which I won't be getting into here since this isn't intended to be a book).  There are other rules which govern the length of waves, and so on.  Having concrete rules which govern price movement means that the market in essense "locks" itself into certain future behavior; once part of the fractal is formed, it must be completed.  This often affords a high degree of predictive value.

To glimpse the predictive value here, let's use the current SPX chart as an example.  The market made its all-time-high in 2007.  To understand where that fits in, we first had to chart various markets backwards a couple centuries... but in the interest of brevity, we're skipping the backstory.  Anyway, in 2007, it was our view that the market had completed a very large five wave sequence, called a Supercycle.  A Supercycle is a five-wave sequence spanning decades, so that meant the market was also due for a very large correction.  Indeed, this is what happened; you can see the market collapsed in five distinct waves from 2007 to 2009.  This formed the A wave of (what we believe is) Supercycle Wave IV.    

From there, the market trended up until May '11.  This bull move formed a clear 3-wave pattern, labeled on the chart as blue (a) and (b) to complete the larger red B wave.  We should mention for the benefit of initiates that wave (c) of that move is not labeled; if it were to be labeled, (c) would be placed where the red B label is.  The placement of the B label already indicates where (c) completed, which makes it redundant to label (c). 

Based on the very long-term charts, we expected and anticipated this Wave B rally even back in September '08 as the crash was underway and "the world was ending," while Wave A was still unfolding.  This anticipatory power is another benefit of Elliott Wave Theory.  In our view, May '11 marks the top to complete Wave B of Supercycle Wave IV, which means we are anticipating that Wave C down is in the beginning stages now. 

We can see on the chart that the market has now formed three clear waves in the downward direction off the May '11 high.  It is of academic importance to note that until we break the 1101 low, we have not yet formed a complete five-wave pattern... but based on the larger pattern, it is our expection that this will happen in short order. 

So with Elliott Wave, no market move exists in a vacuum.  Head and shoulders, wedges, triangles -- all of these patterns are but a small portion of larger patterns spanning the entire history of the market.  The predictive value exists because once certain price movements are formed, this then requires other movements to follow and complete the fractal.  When you understand the pattern going back hundreds of years, you are able to understand and anticipate exactly what is likely to happen next.  It is beyond the scope of this article to discuss the entirety of Elliott Wave Theory, but I wanted to give our readers a very brief overview (brief being a relative term here) of how it works and why it allows us to anticipate future price moves (sometimes with an alarming degree of accuracy).

Looking at the SPX chart, there are some additional things worth mentioning.  We are viewing the current wave down as Wave Minor (1).  Wave Minor (2) will then be a multi-month rally that retraces part of Minor (1); speaking generically, a 2nd wave retracement would typically be in the neighborhood of 40-60%.  The exact retracement will be something we can determine with more accuracy as the 2nd wave starts to unfold. 

Beyond the expected price behavior, an additional asset to one's trading arsenal is an understanding of the typical psychology of each wave.  2nd wave rallies in bear markets are usually times of great hope -- so as we rally in Minor (2), good news will be the order of the day, and the predominate view will be that the big selloff in July and August was a fluke.  Occasionally, fundamentals actually improve during 2nd waves; so perhaps there will be some aggressive action from the Fed, or the Eurozone will find some temporary fixes to their problems.  But if our analysis of the wave structure is correct, in the end it will be the good news that ultimately proves to be a fluke.

The wave which follows the rally will be the 3rd wave down.  Third waves are the "moment of recognition" for the masses.  Right about the middle of the 3rd wave will be when the majority realize that things are going very badly (think September '08).  As a result, 3rd waves in bear markets almost always move extremely fast with lots of panic selling.  From an Elliott perspective, we are likely to experience a crash even more frightening than September '08, because now we are in Wave C, which is itself a 3rd wave (at least, if my understanding of the alphabet is correct).  One can see that many of the "hopes" present in Wave A have since been proven ineffective (lower interest rates, bloated government stimulus packages, quantitative easing, etc.), so the psychology of investors is much more fragile now than it was in Wave A, and it will take less of a crisis for investors to flee today than it did in 2008.  Accordingly, the minor third wave within this larger third wave will probably be a terrifying free fall.

So, what's the good news?  Well, the good news is: if our preferred count is correct, after Wave C bottoms a strong new bull market will arise from the ashes.  When all hope looks lost and there's blood in the streets, Supercycle Wave V will arise and lead us out of the darkness. 

Unless, of course, the purple annotation which says "Alternate count: Grand Supercycle III Top" is correct, in which case we probably have another lost decade still ahead of us.  But that's a whole 'nother article!  Besides, we wanted to end this article on a high note, so be aware that we are assigning less than a 50% probability to the view that we completed Grand Supercycle III in 2007.  Much less.  Maybe 49.9778% max.  So it's all good!

(the original article, and much more, can be found at http://pretzelcharts.blogspot.com/) 

SPX Weekend Update: 10-1-11

Friday gave us the downside follow through we were expecting in Thursday's post, however the structure is potentially more bearish than anticipated.  The market has left itself in a very interesting position with Friday's close. 

To clarify things, there are two main counts we are watching at present: 

The first count is shown on the 5 minute chart, and also shown in gray on the 60 minute chart.  This is the potential nested (or "subdividing," if you prefer) 1-2 count; and it's as bearish a setup as you'll see.  If this count is correct, the market should start a waterfall decline in the very near future, almost certainly as soon as Monday.  We will likely have our first clue immediately, as the index should open markedly down if this count is to play out.  The preliminary target for this count is 1000 +/-.

The second count is the ending diagonal.  This count allows for a more gentle decline, and may or may not bounce around a bit before proceeding to break 1101.  It even allows for a bounce back up to test the blue falling-wedge trendline.  With ending diagonals it's a little trickier to catch the exact bottom, because ending diagonals do not follow the usual rules of structure.  Our preliminary target for this count is 1060.  The key thing to watch for as we approach new lows is a false breakdown of the diagonal; this is a usual function of ending diagonals, and it's designed to get a lot of participants on the wrong side of the trade.  If the market breaks down from the diagonal, then proceeds to whipsaw and rally back up into the diagonal, expect that the bottom is probably in.

We are still viewing the larger wave as wave v to complete wave Minor (1).  A multi-month rally should ensue after this wave completes. 

Be aware that all targets quoted are preliminary: as the waves get closer to completion, we will have more structure to draw targets from and should be able to narrow them down to more pinpoint numbers.  We will adjust any targets, as dictated by the price action, in our daily market updates.

You may want to check back later this weekend or Monday morning, as we will likely post additional charts/articles if the muse strikes us, and/or if we have time.  :)

SPX Update: 9-29-11

In my 10+ years of charting Elliott Wave, I have rarely encountered a market as challenging as this one. Fourth waves are notoriously difficult trading environments, and I know many Elliotticians who simply refuse to trade at all during a fourth wave.  While the true intentions of this market on the larger time frames remain somewhat veiled, we can take heart from the fact that we have thus far called virtually all of the turns accurately using shorter time frames and kept our readers on the right side of the trade since early August (even before we started this blog, we were posting accurate turn forecasts on other sites).

Yesterday's action followed our 1-minute chart very well, however it created a situation where the potential first and fourth waves overlapped.  This has caused us to shift the preferred labeling from a simple wave (ii) to a complex a-b-c wave (ii); specifically, a running flat (blue labels).  If this view is correct, it should complete anytime within the red target circle (meaning it may already be complete, or nearly so), and turn down sharply from there.

The price action has also unleashed a flurry of other potentials, the front-runner being that we just saw a leading diagonal first wave (gray labels). 

I am not going to address all the other possibilities until the market gives us more reason to, however the move needs to begin accelerating downward very soon for the blue nested 1-2 count to maintain viability.  If the 1-2 count is occuring, that would put the target destination for the third wave in the 1090 neighborhood.  Sustained trade above the blue channel on the 1-minute chart would be our first clue that the 1-2 count has likely been negated, and preference would shift to the gray count, which would have us forming a larger rally into the 1175 area before resumption of the downtrend.  Sustained trade above that area would give warning that one of the other myriad possibilities still present in this clusterf*dge market is likely to unfold... but as I said earlier, we'll burn that bridge only if we come to it.

I, for one, am looking forward to the larger wave finally ending, and the return of clarity to the market structure. ;)

SPX Update: 9-28-11

There's not much to add on top of last night's update.  We did get the brief pop and continuation down we were looking for; as posted in last night's 9-27-11 update:

It looks likely that we made the newest top to the straight up/straight down moves that have defined the range since the 1101 low, because yesterday's move down appears impulsive -- which means it should continue lower after a bounce or two. 

This continues to hold true for the market: as yet, there is still no way to count the move down as complete.  The current waves on the smallest timeframes indicate the market is now trending down.  Futures are basically flat right now, but I am expecting another brief pop tomorrow, likely in the morning, and then further downside (see 1-minute chart).  Since there is no way to count the waveform as completed, further downside from this level is virtually guaranteed -- whether it comes tomorrow or Friday/Monday.

We are still favoring the ending diagonal here for wave v, as discussed yesterday.  I have added a 1-minute chart to illustrate what is currently the most reasonable interpretation, and expectation, for the next few days.  Please note that the blue lines I have drawn in to represent the future moves are not intended to be time accurate; I am simply working to illustrate within the available chart space.  These moves could all happen tomorrow, or (more likely) stretch out over a few days. 

Oh, we have also made it easier for readers to post comments.  Feel free to comment or ask questions at any time!  Trade safe!

9-27-11 Update: The Clusterf*dge Market

Charting this market has been an exercise in patience lately.  Remember way back in August when wave iv was obviously a triangle?  And then it wasn't.  Remember the head and shoulders pattern that whipsawed?  TWICE? 

It has finally become apparent that the market has formed the rare but reliable WTF is This Crap? pattern.  Edwards and Magee describe the pattern thusly:

WTF is This Crap? Pattern:  This pattern occasionally shows up as a consolidation after a mini-crash.  It is recognizable by the fact that it is largely indistinguishable from utter chaos.  The main defining characteristics of this pattern are that it trades within a broad range, and all other patterns formed within the WTF is This Crap? Pattern are utterly meaningless and will ultimately fail.  If you find yourself staring at a chart for hours, after which you finally remark, "WTF is this crap?" you have probably just come into contact with this pattern.

I drew the following chart to help highlight the obvious lines of support and resistance:

Ha ha, just a little Technical Analysis humor there, designed to elicit angry responses from everyone.  Anyway, on to what I may have actually uncovered after staring at the charts for literally hours today and saying to myself, "WTF is this crap?!"

The SPX is truly a challenge to count right now.  It looks likely that we made the newest top to the straight up/straight down moves that have defined the range since the 1101 low, because yesterday's move down appears impulsive -- which means it should continue lower after a bounce or two.  It also looks reasonable to assume that the market will form the ending diagonal we hypothesized previously. But it's a very garbled pattern since the 1101 low. So after staring at a multitude of SPX charts in various timeframes for an hour or two, I finally said to myself, "Screw this."  And I went and charted the Wilshire, Dow, and NYA.

Unfortunately, the other indices aren't crystal clear either.  The Dow and NYA both made new lows last week, while the SPX and Wilshire haven't. 

I decided to focus on the NYA to check for possible alternates.  The first interesting note is the way the NYA has honored the down-sloping trendchannel.  It has traded almost perfectly within its channel, and for the entire month has bounced between the top line of the channel and the median line.  I decided to try an "experimental" count to reconcile the NYA as a way to search for other potentials.  I call the count experimental because it requires the use of two unusual waveforms (infrequent patterns) to fill in the blanks.  However, this market has been nothing if not unusual (consider the failed technical patterns of the triangle and h/s), so perhaps unusual waveforms are appropriate.  

The bottom line is: I would give a 70% probability to the ending diagonal... but there are definitely other possibilities, which should be clarified in the next few sessions. 

I've posted the SPX chart to reflect the preferred view that an ending diagonal is forming.  I've labeled an alternate count, but the wave formations on the labeled alternate count would be appropriate only if the market is gearing up for a big, swift move down of 20% or more. So the alternate labeling becomes hard to justify in the context of wave v of Minor (1).  Wave v could support a swift move down, but it's unlikely to be a move much greater than 10%.  The big move becomes possible to justify if what we're seeing isn't part of Minor (1) at all, but is instead Minor (3) down beginning to unfold -- so I've labeled that as an alternate on the NYA chart.

 

On the NYA chart, I've posted the "experimental" wave labels, which don't violate any rules, but do take a bit of creative license with the structure.  The alternate count on the NYA chart says we've seen Minor (1) AND Minor (2) up already, and we are now starting Minor (3) down.  Minor (3) will knock 20% or more off the indices, so that would make far more sense in terms of viewing the recent waves as a 1-2 structure.   

We'll have our answer in the next few sessions.  Sorry if your head wants to explode after looking at the alternate counts.  If your head actually DOES explode, you'll have an idea of how I felt earlier this evening.  But don't worry too much about the alternates right now; instead keep your eye peeled for the ending diagonal, as that seems most likely, and should spark a multi-month rally.  Trade safe!

 

SPX Update: 9-26-11

The market rallied today, right into our target range of 1155-1170, as we projected in the Weekend Update -- despite Dennis Miller's continued insistence that the market would decline because it was "acting worse than Kim Cattrall in Big Trouble in Little China."

The corrective movement of the rally is making the squiggles a bit difficult to label, but it looks like it may actually be targeting the gap fill at 1182.  As I said, though, it is difficult to count.  The rally has fulfilled its minimum requirements, so it is our view that the rally could end any time between now and 1182.   

After this rally ends, we should move down to at least test the 1101 low.  Sustained trade below 1150 should indicate that the move to 1101 and beyond is underway.  As the wave unfolds, we will start to get some indications, based on the form it takes, as to whether the market will make an ending diagonal or continue down toward SPX 1000.  I have updated the chart to reflect both possibilities, and I will keep you posted as the waves start to clarify which route the market has chosen.