The Long-term Implications of Tuesday's Action

[If you are new to Elliott Wave, please read The Big Picture: SXP Long-Term Count and Projections.]

Tuesday's action has, paradoxically, left the market short term bullish, but potentially more bearish in the big picture.  Let me explain:

Roughly every two or three weeks, the market throws me a curve ball.  Tuesday was one of those days.  Monday, I opined that it was likely that the market was very close to a short-term top.  I suppose "close" is a relative term, and in that sense, it was and still is "close" to a top.  However, Tuesday's sideways action forced me to re-examine my charts, and reconsider whether a top was forming... and, if not, what might the new price action mean for both the immediate future and the big picture? 

After examining the NDX, SPX, FTSE, Hang Seng, Shanghai Composite, et al, I have come to the conclusion that yesterday I committed the exact short-term error I referenced a few articles ago.  This error is one of the most common pitfalls for Elliott Wave analysts; specifically, my error was that I had advanced the degrees of trend a bit too quickly.

I am going to focus on the NDX charts for the purposes of this article, but the SPX and Dow Jones should follow a similar track.

The first chart I'm going to share is the chart I posted pre-market on Friday.  This chart will highlight the error and provide a comparison for my revised count.  You can see that the market has actually tracked the chart extremely closely, because the error was not one of actual trend, but one of degree (or position) of trend.  Since Elliott Wave is fractal in nature, and I had the larger trend correct, the predicted fractals were still correct, and thus my projections were still correct.

Below is the revised chart.  I have highlighted the error I believe I made with a red circle (I considered drawing in a frowny face, too).  You can see that this chart doesn't change the trend at all, it only shifts our position within that trend -- in other words, the blue 3, 4, and 5 have simply shifted over as a result of my revision to the count (from "3" to "iii" and so on; same waveform and fractal, but different degree of trend).  I have also posted my target price range for the top of wave 5: 2337-2380.

So, all that said, it is still technically possible that today marked the top as I predicted yesterday (as I type this article, the futures are down).  But I now view that as unlikely, and I think the odds are very good that we see higher prices over the next couple sessions.  I think it's important to stay light on your feet in this market, and to be able to admit potential mistakes quickly if the market action dictates, so as not to compound the mistakes.

So, now that we've revised the short-term count, the question becomes: what are the larger implications for this change?

This small shift in count potentially has a big impact on the structure of the NDX.   Most recently, we discussed the intermediate position of the NDX in this article.   In that article, I suggested we needed to watch the rally closely to see if it became a 3-wave rally (indicating it was a (y) wave) or a 5-wave rally (indicating it was a C-wave).  The shift in count impacts the bigger NDX count because it is now apparent that we are, in fact, in the throes of a C-wave up. 

This potentially has immediate bearish implications for the market, as outlined below. 

Below is the updated long-term chart of the NDX.  I have annotated two possible counts, to indicate my view of the most likely possibilities.  Note that the target of 2337-2380 remains the same under either count.  Also note that the projected path for both counts is similar until about mid-way up the gray line, at which point the more bearish count diverges and heads down to substantial new lows.

The first count (in red) shows the current rally as the C wave of an A-B-C rally to complete Minor (2).  If that is the case, the coming high will be a significant top.  

The second count (in gray) shows the current rally as the (c) wave of an (a) (b) (c) rally.  That would then complete wave A of a larger A-B-C.  This count expects the market to make one more cycle from the top of the range, to the bottom, and back.  This speculative labeling would constitute a shift in the degree of trend, as we discussed earlier in this article.  Further, if the S&P 500 (SPX) is in wave A of Minor (2), as discussed yesterday, this labeling shows the most likely route for the NDX to take.

So I am expecting a top soon.  Whether this will be a short-term top or something far more significant remains to be seen.  The form taken by the coming correction will allow us to anticipate whether we have one more run at the top of the range before crashing, or whether we crash more directly.

Trade safe!

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

SPX and NDX Update: Short term top appears imminent

For those unfamiliar with Elliott Wave, please read The Big Picture: Long-term SPX Count and Projections.

During the weekend, when I updated the short term charts, I must say it was slightly uncomfortable going out on a limb and calling for immediate upside on Monday.  However, the market obliged my projections with fervor -- almost to the dollar on the NDX; and the SPX actually exceeded my projection by about 8 points.

For those just joining the discussion, my preferred view is that the SPX low of 1074 marked the bottom of Minor Wave (1)-down of what will become a five-wave move down to dramatic new lows in both indices.  My expectation is that we are now in the process of completing the first leg of a larger counter-trend rally, specifically: wave A of Minor Wave (2)-up (see chart below).  We should see a correction down soon, followed by another leg up to new highs (preliminary projections point to 1245-1265 SPX).  The first chart (below) shows one potential path for this rally:

The market has now reached the point where the first leg of the rally could count as complete.  The most likely scenario, based on the shortest time frames, would be a last gasp higher to cap this leg -- although higher prices are not required, and an immediate reversal can't be ruled out.

Another, less likely scenario, is that we could see an extended fifth wave, which would cause the market to zig-zag its way higher more materially.  However, unless the market begins to show some sign that this is happening, I am currently discounting the extended fifth wave as low probability, based on the fact that the move already had an extended third wave and two extensions in a wave is uncommon.

A break of the lower trenchannel line (red) on the 5-minute chart (below) will be our first warning that the rally has most likely completed Wave A, and thus formed a short-term top.  The chart also shows the most likely target range for Wave B: 1120-1150 SPX.  The drawn-in gray lines on the chart below depict a simple "sharp" correction, however, B-waves are notoriously tricky and the wave could take many forms, potentially even forming a triangle or wedge.  As the price action unfolds, I should be able to narrow down the form, and the price targets, with more accuracy.

The NDX is in a similar position for the near-term.  The preliminary target range for the assumed correction is 2132-2188, as shown in the chart below.  The current expectation is that the rally will continue thereafter.  Please note that the target box isn't intended to be time-accurate; I'm just working within the available space.  By the way, if you missed the weekend update, you might want to check out how close the NDX came to nailing the projection shown in this chart.  Trade safe!

 

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

   

NDX Weekend Update: Short-term decision time

[Note: The Weekend SPX Update is posted below this one.]

Just a quick update to this post and the short-term NDX chart after Friday's action.  The projection chart I drew for Friday played out fairly closely.  Below: the projection chart from Friday is shown first; the updated chart with the actual result is shown second.

Pretty darn close.  However, the market doesn't want to let itself become too transparent and predictable... so it's given us something new to ponder.  Due to the new high of 2227 (where the gray "alt.: 5" is posted on the new chart), the market has left me considering whether that high actually marked the top of the 5th wave.  That new high does fulfill the minimum requirements for a 5th wave, however... 

I am favoring the view that 2227 is not the 5th wave high.  Nevertheless, in recognition of the fact that I am far from perfect, I have posted two counts on the chart: one to show my preferred view that the 5th wave is still to come, and one to allow for the possibility that 2227 was the 5th wave.  The counts are described below:

My preferred count (shown in blue on the chart): The wave structure at the smallest time frames seems to indicate that 2227 was probably not the 5th wave at all, but was instead the b-wave of an expanded (or running) flat -- in other words, it was part of wave 4.  If the 2227 high is indeed part of the 4th wave, we may (or may not) see a little more downside, but either way we'll head to new highs immediately after in wave 5.  Another thing that raises my confidence in the preferred count is the position of the SPX (as detailed in the SPX Weekend Update), which did not make a new high after Friday morning, yet similarly appears to need a new high to complete the structure.  The key level on the NDX is 2131.31: this is the knockout level for the preferred count, so trade beneath that price (without making a new high first) would eliminate the preferred count completely. 

The alternate count (shown in gray) opposes the blue count, and runs with the idea that the 2227 high was the high for wave 5, meaning we are now due a deeper correction.  I would genuinely be surprised if this turns out to be the case, but it is certainly possible.

So Monday's action should give us our answer, probably fairly quickly.  The red trend channel line may or may not provide some clues when the market reaches it.  Having any faith in the red trend channel is a bit of a leap at this point, because the bottom line has yet to be tested at all, so whether the market "sees" it or not is yet to be determined.

Trade safe!

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

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/