SPX Weekend Update: Short term decision time

Before I get into the short-term wave structures and price projections, I am reposting my long-term chart, which I have updated to reflect my preferred view that Minor (1) down is officially complete.  This chart is especially helpful for those new to Elliott Wave, as it provides a baseline to help understand my larger view of where the market is headed.  Think of it as one of those "You Are Here" maps you find at the mall.  The article explaining the chart (as well as Elliott Wave Theory) in more detail can be found here.

So the expectation is that we made a minor bottom at 1074, and we are now in the process of forming the first leg of what will ultimately be a three-leg (A-up, B-down, C-up) countertrend rally.  The three legs of this countertrend rally will combine to form wave Minor (2)-up.  After Minor (2)-up completes, expect a waterfall decline to eventually form in Wave Minor (3)-down.

Now, regarding shorter-term projections: there are a couple possible short term views for the current leg of this rally.  My preferred view is that the S&P 500 will see a bit more downside (see 1-minute chart) before reaching up to tag the 1175-1187 zone.  That down-up move would complete what I believe will be ALL OF Wave A-up of Minor (2)-up.  After that, I would expect a larger correction in B-down -- although if we look at the long-term chart above and follow a similar track as we did in 2008, B-down might be more shallow than I'm anticipating.  After B-down finishes, we should see one more good rally leg up toward 1245-1265 to complete C-up, and thus complete the entire Wave Minor (2) counter-trend rally.

The alternate view says that Friday's high marked the top of the first portion of the first leg up and we will now correct down into the 1110-1135 zone before we see new highs for this move.  This is the view which seems to be favored by most of the other Elliott technicians out there, however it is not currently my preferred view.  One thing I have learned over the years is that most Elliotticians have a tendency to advance the wave degrees far too quickly.  A good example to illustrate what I'm talking about would be my call from Wednesday, October 5th, when I stated "it appears that we are still forming the third wave of wave 1-up"  -- most Elliotticians had already advanced their counts to place us in the fifth wave up on Wednesday, meaning the rally was nearly over (to be fair, in the past, prior to learning this lesson, I might have done the same).  If we had been in the fifth wave going into Wednesday, the rally would have likely ended near 1150.  Obviously, that view would have missed out on another 20+ SPX points to the upside -- and if my preferred count is correct, possibly even more.

The other factor which plays into my decision to say this leg isn't quite done is the fact that the SPX shows a subdividing 1-2 series (October 4th) leading into the rally (see chart).  Again, most technicians are labeling this whole structure as one wave -- but that labeling ignores a cardinal rule of Elliott Theory: wave 4 cannot cross into the territory of wave 1.  To label the whole move as one wave, you must conveniently ignore the overlap of what would be waves 1 and 4 (labeled 1 and ii on my one-minute chart) -- so my view is that this structure is not wave one, it is a series of first and second waves.

No doubt after all this explanation, I have virtually guaranteed that the other guys will end up being right, and I'll be wrong -- and my preferred count will get flushed into the toilet of stock market history, to become one more fetid mound of charts clogging up the septic tank of missed predictions.  Murphy's law, right? 

Anyway, those are the two most apparent possibilities I see in the charts.  For the record, I'm not ruling out the possibility that this portion of the first leg is over, I just consider it less likely.  However, I considered it likely enough that I closed my ES longs (opened at 1105) at 1169 Friday morning.  Whether this is the small correction I'm favoring, or the larger potential correction, positions can always be reopened when the market reveals its intentions.  And, after all, cash is a position, too.

Beyond that, the market has so far given us no reason to alter our preferred view that this is indeed Minor (2) up -- so after the next correction down, the rally should continue.

In the one minute chart below: 

1) The preferred count (blue) is that wave 3-up of A-up of Minor (2) up has completed.  We are now correcting in an a-down (blue a, completed), b-up (blue b, completed), c-down (labeled by the blue "4?" in process) to form wave 4-down of A-up.  4-down has fulfilled its minimum requirements, and may or may not be finished.  Once 4-down completes, the market should then move to new highs to form 5-up and thus complete A-up.  Once A-up completes, we should see a larger correction.

2) The alternate count (gray) is that we have completed ALL OF wave i or A ( whether this is i or A is to be determined) and are now in the process of forming either ii-down of A-up, or B-down of Minor (2)-up (again, to be determined. If this is i-up, it will be ii-down; if this is A-up, it will be B-down.  The labeling is largely academic at the moment.).  This coming bottom in the gray count would be immediately followed by a large rally.

The 60-minute chart (2nd chart below) only shows the preferred count.

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

SPX and NDX Update: 10-7-11; A little more room to run?

(For those new to Elliott Wave, please read The Big Picture: SPX Long Term Count and Projections.)

There is an interesting scenario developing between the Nasdaq 100 (NDX) and the S&P 500 (SPX). The NDX appears to have completed its 1st wave down well ahead of the SPX.  Obviously, we're not likely to see a situation where the NDX drops 600 points while the SPX rallies -- so the SPX has some "catching up to do," so to speak, to bring the two indices into similar positions.

I first noted the discrepancy in this blog post back on September 19th, when I posted the following chart with projections:

As you can see from the updated chart (below), the NDX has tracked that projection amazingly well -- however, we are again facing a scenario where the NDX is leading the SPX by a bit too much.  If my preferred count for the SPX is correct, we should have a decent rally on our hands.  My expectation is that the SPX is in the process of forming the first leg of that rally.  At some point we should have a nice scary correction down, then one more leg up to complete the rally, and thus complete a 3-wave move.  The NDX has already completed its first leg up and 2nd leg down (A and B), and is now on its 3rd leg up.  So how can we reconcile the two indices?

The most obvious solution would be if the NDX is forming what's called a "triple zigzag."  A triple zigzag consists of a 3-wave move (in this case: up), labeled (w); followed by an intervening drop, labeled (x); followed by another 3-wave move up, labeled (y); followed by another drop, labeled (x) again; followed by one more 3-wave move up, labeled (z).  In the NDX chart above, this scenario is represented by the gray lines (the red lines show the NDX would drop hard below the recent lows once this rally completes -- the gray lines adjoin the red and show the path it would take instead of continuing to drop).

Zooming in on the NDX, the short term structure looks like it needs a bit more movement up, then some sideways-down movement, followed by a final lunge higher to complete a five-wave move.  However, if this is ultimately going to become the (y) wave as hypothesized above, it will probably see a deeper retracement soon before proceeding higher (one-minute chart below, (y) wave count not shown):

Since we are talking about the NDX, I want to share one more chart quickly, this time of the Nasdaq Composite (below) before we move on to the SPX.  This chart shows a long term view of the Nasdaq, which I originally posted a couple weeks ago.  What the chart doesn't show is that the blue trendline runs all the way back to 1974.  We have now back-tested that trendline twice and failed to rally above it, which is a pretty bearish sign for the Composite.

On to the S&P 500.  The SPX validated my call from yesterday's update, when I wrote: In a perfect world, we would see [the SPX] at least tag the 1150's before completion, although it looks like it might even want to reach all the way up to tag the top line of the ending diagonal (in blue, low 1160's).  The SPX closed the day at 1164.97, right where the blue line of the diagonal crossed.  The rally in the SPX is now reaching into territory where, if it doesn't reverse pretty quickly, we are likely seeing ALL OF wave A-up of Minor (2)-up unfold now.  That scenario would also serve to speed things up in the SPX and give it a chance to catch the NDX -- again helping to bring the two into comparable positions.  I have posted a new chart below to reflect the possibility that ALL OF wave A is unfolding now.  For an alternate view, see yesterday's chart. 

Other than the two falling trendlines, there doesn't seem to be much in the way of resistance for the SPX until we reach the prior wave iv high at 1195.  So, if the count for the short-term NDX chart is correct, the SPX should follow a similar track.

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

SPX and BKX Updates: 10-5-11

The market gave us a follow-through day yesterday, which is appropriate if Minor (1) down has indeed bottomed. I am still assigning a 95% probability to the view that Minor (1) down has completed; however, we are unable to confirm this with 100% conviction until we have a complete 1st wave up on the smaller time frames, and then see the form taken by the first move down.  The move up so far appears impulsive, which would then indicate the next larger trend is up.  [Apologies for the typo on the 5-min SPX chart; the annotation should read "1074 print low," not 1174] 

Assuming Minor (1) has indeed bottomed, that places us in wave 1-up of A-up of Minor (2) up.  One-minute charts seem to indicate that wave 1-up of A may have a little more room to run.  In a perfect world, we would see it at least tag the 1150's before completion, although it looks like it might even want to reach all the way up to tag the top line of the ending diagonal (in blue, low 1160's).  The normal retracement for wave 2-down would be 40-62%, which, if wave 1-up topped right here, would place the retracement target range in the 1102-1119 zone.  Obviously if 1-up still has more legs, then that range will accordingly be pulled higher.

I have also drawn up a 1-minute chart of the Philadelphia Bank Index (BKX).  The BKX was a fantastic leading indicator during the 2007-2009 bear market, so it may be helpful to track it now.  It's hard to label the structure in the BKX as anything other than impulsive (an impulse wave moves in the same direction as the next larger trend, so this structure seems to confirm our view that Minor wave (2) up has started).  So the BKX sports a pretty well-defined five-wave move up, which still looks like it needs a couple more up-down sequences, followed by a lunge higher, to complete (see chart).  If this count is accurate, the SPX should follow a similar track.  A break of the lower red trend-channel line (shown on both the SPX and BKX charts) will likely be our first clue that wave 2-down of A-up is starting. 

I do want to stress that these counts are all preliminary: the first portion of major swings in trend is always the toughest, since there are no larger waves yet formed in the new trend to use for comparison.  Also, it appears that we are still forming the third wave of wave 1-up... so combining that fact with the lack of larger waves makes it difficult to assign targets with a high level of confidence.  The best analysis I'm able to apply to the charts (given the limited wave form) says wave 1-up of A has a little more to run before completion -- but my gut says that there may be enough fuel in the form of short-covering to drive it even higher.  Whipsaws like the one we had on Monday can sometimes surprise to the upside.  Once the move gets a little more mature, the targets will become more accurate.  Trade safe!

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

SPX Update: A multi-month counter-trend rally begins, 10-4-11

It appears highly likely that the Wave Minor (1) decline ended today at 1074.  From here, I expect a large counter-trend rally, which will ultimately become Wave Minor (2).  My preliminary target for Minor (2) is 1265, but as the wave unfolds, I will be able to narrow that projection down with more accuracy.

The ending diagonal I first suggested on 9-22, which we have been watching ever since, appears to have reached its conclusion today.  Below is the chart I posted on 9-22.  Not too shabby! 

The chart above illustrates yet another reason why I believe that there is no tool more powerful than Elliott Wave to anticipate the market's future. So while we have been tracking this diagonal for two weeks, I hope that I further prepared our readers for the potential end of Wave Minor (1), and the rally, when I warned yesterday and over the weekend: "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."
 

The overthrow of the pattern, and the violent rally which ensued afterwards, constitute an almost perfect textbook ending to this pattern... so this gives me high confidence that Minor (1) down has indeed ended.  To be fair, the smallest wave structures have not yet given us full confirmation that Minor (1) is over, but I would be very surprised if the structure doesn't soon confirm the rally.  We should have absolute confirmation within the next few sessions.  For now, I would assign a 95% probability to the view that Minor (1) down has bottomed.

For those new to Elliott Wave theory, it would be helpful to check out the article The Big Picture: SPX Long-term Count and Projections.

For the next chart, I'm going to focus on the intermediate picture, and the form Minor (2) up might take.  Keep in mind that as the actual wave structure of Minor (2) unfolds, we will be able to use that structure to guide us to more precise targets.  The best I can do with no wave structure yet to draw from is approximate, based on the larger patterns.

As noted on the chart, I would expect the first leg of this rally will rapidly retrace to the prior wave ii (of v) high near 1220.  That will likely form the A-wave of what will become an A-B-C rally to form Minor (2); so our first official target for A of (2) is 1195-1220. 

Keep in mind that the psychology of investors will probably become quite a bit more positive in the near future, so that by the time we reach the Minor (2) peak, the majority will be bullish again.  It always helps to anticipate the mood, because after Minor (2) completes, we will be presented with what (I believe) may prove to be one of the greatest shorting opportunities of our lifetimes (but due to the psychology, by the time Minor (2) peaks, no one will think shorting is a good idea anymore -- just as most don't think going long is a good idea right now).  I expect Wave Minor (3) to ultimately become a rapid waterfall decline to substantial new lows, although it will probably start off relatively subdued as it traces out the first couple waves.   

I will continue to update the charts daily as Minor (2) unfolds and begins to present us with some accurate short term targets.

(NOTE:  There is a typo on the chart -- "1174" should read "1074")

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

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.  :)