VIX and SPX Updates: The Market Weighs Its Options

If Shakespeare were a stock trader, he might poetically state that the market since August has been "full of sound and fury, signifying nothing."

Despite a fair amount of bullishness from the mainstream media, all this rally has accomplished so far is a trip back to the top of the recent trading range, as shown in the chart below.  This chart also shows my preferred view of the approximate path likely to be taken by the SPX into December:

I am of the opinion that this rally will eventually break out of that range, at least for a few weeks or so, but I think it's likely we head a bit lower first.

I always use the market action and price as my most important indicators, but there is another indicator that's worth mentioning at this juncture.  The Volatility Index (VIX) has been trading in a range since August, similar to the SPX; and, also similar to the SPX, it recently whipsawed out of that range and immediately back into it.  Whipsaws often lead to strong moves in the opposite direction (see recent rally).  If the VIX continues rising here, that would be bearish for stocks.  I'm not suggesting the VIX will return all the way to the top of its range -- however, if it did, that would obviously have very bearish implications for the broad market.

In recent sessions, the VIX has been rising even though the SPX has been trading sideways-to-higher; this behavior in itself is generally considered a bearish sign for stocks, and often signals lower prices are around the corner.  (VIX chart below)

Finally, the short-term wave counts are starting to come to light.  In the case of tops, much more so than bottoms, it can be difficult to nail the exact turn; especially when the larger preceding waves were sideways and open to several interpretations, as has been the case since August.

Nevertheless, the market has finally revealed enough structure to allow me to narrow my counts to the three most likely possibilities.  Of those three, two of the counts are apparent, and one is speculative -- and the speculative count is one we should be able to confirm or rule out fairly quickly. 

The chart below portrays the two most apparent counts, and their most likely resolutions.  I have simplified the labeling to show only the ending points of the larger waves, ostensibly to make it easier for viewers to follow (but in reality, largely because I accidentally deleted my more detailed chart!).  

The preferred count is shown in red, and argues that Wave A completed its top on Tuesday, and is now in the process of correcting down toward the 1125 zone. 

The alternate count is shown in turquoise and argues that Wave A actually completed at a lower price point (1224) than the orthodox top, and the market is now forming what's called an "expanded flat."  In an expanded flat, the b-wave of the correction actually exceeds the price high of the larger preceeding wave (see "Alt: (b)" label, which is higher than the preceeding "Alt: A" wave); and the c-wave is then disproportionately long relative to the a-wave (see "Alt: (c)" label).  If this alternate count is playing out, the 1175 zone would be the likely target zone for a bounce and resumption of the rally.  Probably not coincidentally, the 20-day moving average is also crossing approximately 1170 right now.

 
Those are the two most visibly apparent options, based on what the market has revealed thus far.  

My "speculative count" is shown below.  From a purely technical standpoint, I am actually somewhat partial to this speculation. Here's why: the wave labeled blue "a" on the chart below is almost certainly a five-wave impulse, not a 3-wave correction.  In fact, the structure of that wave is what led me to previously believe - for a couple days anyway - that October 12th (SPX 1220) likely marked the top of the larger red A wave.  Impulse waves must be followed by at least one more impulse in the same direction, and there is nothing to pair the blue a-wave with other than the wave labeled blue "c".  Hence the two impulse waves complete the pair, which in turn completes a larger wave; in this case: blue "4".  Otherwise, the blue a-wave is something of an anomaly to any other labeling of the structure.

Further, the fifth wave of red wave A should either be an impulse wave, or an ending diagonal of some type.  If we accept the labeling of blue "4," then it becomes very difficult to view Tuesday's move to the 1233 high as as a five-wave impulse to form a complete fifth wave.  It certainly appears to be a three-wave move, which lends itself to being part of a corrective sequence or ending diagonal (either the end of one, as detailed yesterday, or the start of one as shown above).

Outside of drilling-down on the technicalities of which wave is what, the other thing that an ending diagonal could accomplish here would be to work off some of the bearishness present in the equity put/call ratio, which remains very elevated. 

Of course, the rising VIX might contradict that whole theory.  Either way, this speculative count can likely be ruled out with a trip beneath 1190, and likely confirmed with a move over the recent highs.

Each day going forward, the market will reveal a few more pieces of this jigsaw puzzle.  At this juncture in the market, most forms of technical analysis can't tell you much more than "the market is near long-term resistance, and 1190 is short-term support."   One of the beauties of Elliott Wave is that it's one of the only forms of technical analysis that even allows us to make detailed projections in a sideways market like this.  No one can say for sure exactly what's going to happen here, but at least with Elliott Theory, we have a pretty good idea of what to look for.  Trade safe!

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

SPX and Apple Updates: Is Apple Finally Ripe to Fall?

By now, most traders know that Apple had its tree shaken yesterday.  It missed earnings and disappointed analysts, largely due to iPhone sales coming in much lower than expected.  After hitting a new all-time closing high on Tuesday, the stock was hammered in after-hours trade, dropping just over $28 per share.  It's been exactly a month since I updated my chart and count for Apple, and with the earnings miss yesterday, now seems like a good time to bring everything current. 

I will also be updating the S&P 500 (SPX) in the latter portion of this article.

The last time I updated Apple's chart, it had closed at 411.63, and I suggested that it was getting very close to a significant top.  If Tuesday's close of 422.24 ends up being "the" top, I'll be pretty satisfied to have called it within 2.6%. 

The topping formation I am currently favoring for Apple is an expanding ending diagonal fifth wave.  Tuesday, we may have completed wave e, the final wave of that formation.  However, the potential exists for one more down-up move to a marginal new high to complete the pattern.  Either way, if this interpretation is correct, Tuesday's high should be within a couple percentage points of either an intermediate top (likely to last a couple years -- my preferred view), or a long-term top (potentially lasting much longer).  The charts seem to argue that the greater risk in Apple is now on the long side of the trade.

 On the chart above, my preferred count is shown in red, and argues that Apple just completed a massive third wave rally off the 2009 lows (or is currently completing the third wave -- it could form two more legs to the e-wave, as shown in gray).  I believe Apple's next move, starting now and running through 2012, is a trip to the lower trendchannel boundary in the 270's.  After a touch of the lower channel, Apple will again see a large rally, which should take it up into the $600's. 

However, the alternate count is more bearish.

The alternate count is shown in brown and suggests that Primary Wave 4 completed already, and we are now in Wave 5 (or just completed Wave 5), which would mean Apple is currently completing a long-term top.  I don't like this count as much, because Primary Wave 2 (red) took over a year to complete.  As shown in this alternate count, Primary Wave 4 completed in only a few months.  In Elliott terms, Primary Wave 2 was a straightforward "simple" zigzag correction.  This argues that Wave 4 should be a more complex correction, implying that it could potentially last longer than Wave 2.  It seems unlikely that it would instead be much shorter, as the alternate count shows. 

As a result, I would assign the alternate count roughly a 20% probability; assign roughly 70% to the preferred count; and the remaining 10% would be left for various other interpretations.

Regarding the S&P 500, there simply isn't much to add over what was discussed in yesterday's article.  If you're new to the discussion, it would be helpful to read yesterday's article, which focusses more on the intermediate and long-term.  Over the short term, there are numerous potential resolutions to the current structure, and the market has yet to reveal which one it has chosen.  I have updated the ending diagonal chart I suggested yesterday as one potential resolution.  The market behaved in accordance with the projection as shown in yesterday's chart, although it reached the target a bit faster than anticipated:

 I continue to believe that the market is not going significantly higher until it experiences more of a correction.  If this ending diagonal is the correct interpretation, we should finally breakdown beneath the 1190 support zone.  However, caution is warranted, as discussed below.

The first new possibility that Tuesday's action has opened up is the potential that the sideways correction the market just experienced was actually the 4th wave.  I view this as a very reasonable possibility, and sustained trade above Tuesday's high would shift my preference to this count.  The chart below shows how it might play out:

A second potential I want to call your attention to would be another formation unfavorable to bears, at least over the short-term.  It is possible that the market is already in the B-wave.  As I stated in a prior article:

B-waves are tricky and somewhat unpredictable.   B-waves can actually retrace up to 138.2% of the prior move, and still be within acceptable guidelines.  They often form triangles or other difficult-to-predict patterns.  B-waves are the Claus von Bulows of the Elliott world. 

Another thing a B-wave can do is actually exceed the top of the A-wave; in those cases, the market moves sideways-to-higher while it's correcting.  For example, if this is a B-wave triangle, the market may trade sideways above 1190 +/- throughout the entire correction, then end with a fake-out beneath 1190 which whipsaws (much like we saw at the recent 1074 bottom), and from there launch directly into the C-wave.

There is some logic to this possibility:  I don't feel this rally has been driven by bulls so much as it's been driven by short-covering.  I base this opinion on the fact that there simply isn't much liquidity present in the system; and bulls need liquidity to sustain rallies.  Trapping the bears above 1190 would provide another burst of fuel for the rally if/when the market finally breaks out and triggers the many stop-loss buy orders which are surely lurking somewhere above the recent highs.

The short-term support level which has formed around 1190 is therefore becoming critical for the bears.  In the upcoming sessions, pay close attention to the way the market behaves around this level; sustained trade below 1190 would rule out the B-wave triangle and lend credence to the ending diagonal shown in the chart above.  Conversely, another solid bounce off that level would increase the odds that a triangle is forming.

So, over the short-term anyway, the market is still in the "no crystal ball" zone.  Trade safe!

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

SPX and NDX Update: Bears Defended the Critical Levels on Monday

Nobody ever said picking tops was easy (or if they did, they need a stern talking-to).

Yesterday, I discussed the fact that the Nasdaq 100 (NDX) had previously gapped directly into my target zone, and that the bears needed to hold the line there.  They did, and the market reversed.  But bears aren't out of the woods yet (on second thought, do bears really want to be out of the woods?  The woods are a bear's natural habitat, and probably where he feels safest.  Maybe I should say, "But bears aren't into the woods yet"?)  As a quick reminder, the bears need to keep the NDX below 2438.45.

Even though the market reversed, over the short-term the market has yet to tip its hand.  The assumption is that we are in Wave B-down (see updated 60 minute chart), but there's no confirmation yet.  The one-minute charts simply haven't yet completed enough wave structure to be able to anticipate the market's short-term intentions with pinpoint accuracy.  If this is, in fact, Wave B, the preliminary target zone for the NDX is 2170-2250.  For the S&P 500 (SPX), the preliminary target range is 1130-1167.

Since the market hasn't given me much short term structure to work with, I'm going to focus more on the big picture for the SPX.  At the end of the article, I'll also present another possibility for a top formation, in the event that Wave B hasn't yet started.

In the big picture, there are two scenarios I'm currently tracking as the most probable outcomes.  (If you're just tuning in, it would be helpful to familiarize with the really big picture, as outlined in this article.)  The first probable outcome is one I initially suggested on October 4th, when I published this chart:

 
This chart has tracked ridiculously well -- even down to the dates, which I honestly wasn't anticipating.  Clearly, after drawing this chart, I should have just entered my sell orders and gone fishing for a couple weeks. 

The updated chart, shown below, continues to anticipate that we are in the correct zone for a top, and may have topped already:

The count shown above remains the preferred count for the moment.  Under this view, the market has completed, or will soon complete, the first leg (Wave A-up) of a three-leg countertrend rally.  The SPX should have a correction coming soon, which will likely retrace 50-62% of Wave A.  The rally has been so fast and steep, that I would expect a fairly deep retracement before we get any significant launch higher.  After the retracement, we should then make a new high -- a test of the prior head and shoulders neckline looks likely -- to complete the rally, which I am labeling as Minor Wave (2).

Once the rally is over, the market should then begin working on Minor Wave (3) down.  Minor Wave (3) will, at some point, almost certainly take the form of a waterfall decline to substantial new lows.  Under Elliott Wave Theory, third waves are usually the longest, and never the shortest waves.  Third waves often travel a minimum of 1.618 times the length of the first wave.  In this case, the first wave from the May high of 1370 to the October low of 1074 was 296 points; so we can anticipate the odds are good that the third wave will travel 479 points or more.  Third waves can sometimes even extend by as much as 4 to 6 times the length of the first wave.  For a recent example of this, look at the 60 minute chart of the SPX, where the market produced a dramatic extension of the red Minute Wave iii vs. the length of red Wave i.

The second count I am tracking is much more immediately bearish.  This is my alternate count, which means I consider it to be less likely than the preferred count shown above.  This alternate count explores the possibility that Wave Minor (2)-up is in the ending stages right now, and Wave Minor (3)-down is lurking like a -- well, like a big angry bear -- right around the corner:

The alternate count shown above came into being as a result of the strength and breadth of this rally.  Under Elliott Wave Theory, different waves exhibit different characteristics.  Certain waves, such as A-waves, are usually somewhat faltering and unsure of themselves; they generally back-and-fill a lot, and meander their way to their destination.  Other waves, such as C-waves, are strong and determined; they are rapid, powerful moves that convince the masses the prior trend has changed.  If this rally off the 1074 low is actually an A-wave, as shown in the preferred count, it is an unusually powerful one.  If this is Wave C of Minor (2), the patterns should alert us to that fact before the actual crash starts.

I also promised you a chart with a possible alternate top formation.  The current rally may have traveled too far, too fast; and moves like this often end in a formation called an "ending diagonal."  An ending diagonal is an atypical waveform which violates the normal rules of wave formation: waves which normally can't cross into the same price territory (such as wave 1 and wave 4) often overlap in an ending diagonal.  This final chart is a simpified count which hypothesizes an ending diagonal top formation.  This formation would cause the market to trade sideways for most of the week, which may be consummate with this week being options expiration.  Please note that this is purely hypothetical at this point, and the current assumption is still that we are in Wave B-down:

In conclusion, the big picture is still bearish, and I am expecting the short-term picture to clarify further over the next few sessions.

Trade safe!

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

Dollar on the Cusp of a Huge Rally; Gold Due to Correct Further?

[Note: stock market update is posted below this article]

The G20 met this weekend and announced that later this week it will detail plans to recapitalize Europe's banks and install a "firewall" to protect the rest of the Eurozone from Greece's problems.  (However, there was no mention of what steps, if any, the G20 will take to protect the rest of us from the after-effects of Greek Ouzo -- so it's hard not to consider the summit a miserable failure.)  France and Germany are under the gun this week to try to resolve their differences and come up with a "comprehensive plan" to resolve the sovereign debt crisis. 

Will the new plan work? 

The dollar chart is strongly suggesting that, whatever this forthcoming plan may entail, the market won't like it.  On September 3rd, just before the dollar rally started, I presented a very long term chart of the dollar in which I suggested that the 2008 print low marked the end of a multi-century correction which began at the dollar's inception.  I further suggested that a rally in the dollar was imminent.  This prediction has indeed come to fruition, which gives me greater confidence in my count and view of the dollar's current position.

The chart below suggests that the dollar is in the process of basing Minute Wave ii, which should lead to a strong third wave rally.  The current wave ii-down has satisfied its expected requirements, and could base at any time, but short-term charts suggest the base may come later in the week (perhaps coincident with the Eurozone announcement?).  This has been one of the things which has long fascinated me about Elliott Wave: the charts almost always seem to lead the news.  France and Germany themselves may not even know yet what their new plan will be, but the charts seem to think it will be disappointing.  It will be very interesting to watch what happens here.

Gold, on the other hand, looks like it needs another move to the downside -- not surprising, if the dollar is on the verge of a big rally.  Gold currently appears to be in a fourth wave.  Fourth waves are complicated sideways affairs, and difficult to predict short-term.  My chart isn't intended to indicate what's going to happen today, it's a more intermediate picture.

The long-term gold chart is a little trickier to interpret, and certainly much less clear than the dollar.  My preferred view is that gold has topped, and will now correct for some time to come.  However, I consider this probability only slightly more likely than my alternate view that we have only topped Wave 3, meaning this correction will ultimately pay off the gold bulls who are accumulating long-term positions.  So, since the big picture on gold is a bit hazy, for the time being, I am focussing on the closer time frames.  Over the near-term (the next several weeks), it appears gold needs one more leg lower into the yellow target box, to complete an a-b-c off the 1917 high.  This move should be followed by a nice rally:

The position of the dollar, which appears poised to launch a massive multi-year rally, is one of the circumstantial factors that leads me to favor the view that the recent highs in gold may hold for some time to come.  However, in particular with gold, I feel I need to see a few more waves in order to make an accurate long-term call.  It will be interesting to see how this all plays out, and if, at some point in the future, the dollar and gold begin rising in tandem.

Trade safe!

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

Yes, Virginia, This is Still Just a Bear Market Rally

The strength of this rally has so far been quite impressive.  Many bears are beginning to express great angst; and I even received a few e-mails asking if this could be the start of a new bull.  Well, sure, it could be... I don't have a crystal ball or an "inside connection" at the Psychic Friends Network -- but there's still no real indication that this is anything other than a bear market rally, albeit a strong one.

I have spent most of the weekend poring over charts until my eyes blurred.  Hence, I'm presenting a battery of charts in this article, to allow you to draw your own conclusions.

The first chart is an update to the chart I presented about five weeks ago.  It shows the closest support/resistance zones in the SPX, as well as some confirming readings from the RSI and MACD which argue in favor of the bear case.  It is worth noting that the SPX is right now challenging a major resistance band -- the chart doesn't go back this far, but this current zone has been a bull/bear battleground for the past 14 years.  We may or may not bounce around here for a bit, but I would be shocked if this zone doesn't stop this leg of the rally dead by mid-week at the latest.

The second chart shows the SPX in the top panel, and the McClellan Oscillator (NYMO) in the bottom panel.  The McClellan Oscillator is a market breadth indicator which evaluates the rate of money entering or leaving the market.  It is traditionally used to anticipate overbought/oversold conditions, and it's one of the few indicators that I trust for that purpose.  It is pretty consistently accurate at identifying short-term tops.  I've highlighted, with red horizontal lines, the last four times the NYMO reached the current levels.  You can see in all four cases that the market headed south, not immediately, but shortly thereafter:

The next chart is the Nasdaq 100 (NDX), updated from my article on Tuesday, when I first posted my target box for this portion of the rally.  The NDX gapped into this range on Friday, so we're now right where we "should" be for a reversal in the very near future. 

Quite frankly, it's do or die time for the bear case in the NDX.  I have two possible counts posted on the chart; and both would be invalidated with trade above the prior high at 2438.44.  With Friday's close, the NDX now sits only 66 points away from this level.  If this is, indeed, Wave Minor (2)-up, then this close-shave is not unexpected, and could even get closer in the sessions to come.  Second waves can retrace up to, but not over, 100% of the prior move and still be within guidelines.  The job of a second wave is to give everyone hope that the prior trend is still intact, so the waves usually retrace heavily.  The official knockout level for this count is 2438.45.  More about this chart below.

The red labeling on the chart denotes my preferred view that we are in wave C-up of Minor (2)-up.  C waves, being third waves, are usually quite powerful -- so the strength of this move is very consistent with that interpretation. 

Something I've mentioned before is the need to reconcile the fact that the NDX appears close to completing Minor (2), while the SPX is apparently just getting started on Minor (2).  The problem is obvious: we're not likely to see the NDX crashing while the SPX rallies, so the two need to be tracking in similar fractals.  There are several ways to reconcile the indices: one is shown by the gray lines and labels in the NDX chart above.  I would now like to present another option.

The chart below shows another interpretation of the SPX.  It's one I've been kicking around for a while, but I felt the scenario shown was so remote that it wasn't actually worth publishing... until now.  The preferred view has been (and still is) that the SPX is in Wave A (of an A-up, B-down, C-up three-leg rally) of Minor (2)-up.  This chart explores the idea that this rally is not Wave A, but is, in fact, Wave C-up of Minor (2).  Under this interpretation, this isn't the beginning of a multi-month rally -- it's the end of one. 

Please note that this is not, as yet, my preferred interpretation.  However, the strength of this rally is exceptional for an A-wave; it is actually far more consistent with a C-wave.  And, from a psychology standpoint, it seems like the rally ending abruptly would come as a surprise to many traders (which is what the market usually tries to do); so I've decided to present this count as a potential for us to track going forward, at least as long as it continues to remain viable. 

I do expect that whether this is Wave A of Minor (2) or Wave C of Minor (2), we are almost certainly entering the reversal zone.  The blue circle on this chart highlights two lines: a horizontal resistance line, and a rising resistance line.  This is also the same area I mentioned with the first chart, and it's a major zone of support/resistance going back 14 years into the past.  The Dow is in a similar position.

The final chart I'd like to share is a one-minute chart of the Philadelphia Bank Index (BKX).  This chart argues that the BKX has already started its correction (the BKX usually leads the other indices).  The wave action within the blue triangle is almost certainly corrective, and should ultimately result in lower prices.  We might bounce around for a bit before heading south (likely) -- or we could head down immediately on Monday.

So my expectation this week is that we'll see the indices correcting (or worse).  We could still stretch to the upside a little bit more -- but in particular with the NDX, there's not much room left to run.  If, by some chance, we do violate the prior high on the NDX, I'm going to have to go back to the drawing board on that index and maybe even start giving the bulls some airtime.  I don't anticipate that happening, but it's do or die time over the next few sessions.  Should be an exciting week!

Trade safe!

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

Rally Enters Corrective Phase; Signals New Price Targets for the Top

Sometimes as you're charting, you just have to stop and shake your head in wonder. 

If you've been following my articles for a while, you may have heard me refer to the aesthetic nature of the markets, and of Elliott Wave in particular.  I'm going to use this article as the perfect opportunity to not only discuss my projections, but also to illustrate how I reached those projections, and with that, the aesthetic I presently see in the charts. 

As a result of Thursday's price movement, the market has now given me two new data points to use toward refining my projections for this rally.  Amazingly, this small amount of new data steers the projections almost perfectly into the confluence of two very meaningful market events:

1) The successful back-test of the old falling trend-channel (at roughly 1160, then again at roughly 1140).

2) The successful back-test of the neckline on the head and shoulders top (around 1275).

Below is the 60-minute SPX chart with the new projections drawn in.  To me, there is a sense of harmony in these projections.  If we are (as I believe) currently forming "the rally that fools the masses," then this chart surely illustrates a perfect way for that rally to unfold in such a fashion that the price action alters the landscape of investor psychology.  Below the chart, you'll find my play-by-play describing each projection, along with my commentary of the psychological function each phase might serve.  Most of the math I've left for the end (the math is dry, and might be better left for Ben Stein.  Right, Bueller? Bueller?)

The initial projection leads to a back-test of the old falling trendchannel.  I arrive at this by using a very common Elliott tool: Fibonacci wave extensions.  In corrective moves, such as the move it appears we are in, wave c generally reaches a length either equal to wave a, or equal to 1.618 to 1.75 times the length of wave a.  To help everyone follow along, I've drawn a one-minute chart with annotations, shown below:

Regarding investor psychology: it can be anticipated with reasonable certainty that a successful back-test of the old trendchannel will turn some traders from bearish to neutral, and others from neutral to bullish. 

After the retest, the market should rally briefly (gray wave (b)-up, sixty minute chart), until the bears step in again.  From there, wave (c)-down should drive the market toward a second successful test of the falling trendchannel.  This drop below the (assumed) 1160 swing low will also serve to shake out the weak bulls, which will be necessary for the market to generate another strong rally leg.  Further, the successful test and bounce will then convert even more bears.  That will mark the bottom of the larger Wave B-down. 

From there, the market begins the big Wave C-up, which is the final leg of the Minor (2) counter-trend rally. C waves traditionally serve the function of getting the masses to errantly believe that the larger trend has changed. We can imagine that as the rally continues and the market breaks out of (what will by then be) a three month trading range, many will start to believe that the worst is over.  At that point, the market will likely consolidate for a bit (in the fourth wave of Wave C), just above the prior range -- this movement will give institutional investors a chance to distribute at higher prices; and the consolidation should serve to turn many small investors bullish again.  And then, to cap the rally, we get the final "sucker lunge" up to tag the head and shoulders neckline.  When we fail to rally through it, look out below, 'cause here comes the crash wave: Minor Wave (3)-down.

Beautiful, isn't it?

So that's my speculation.  Here's the math that got me there, which is actually fairly simple.  I already explained the first retest when we looked at the one-minute chart.  The second retest is based on wave (b)-up of B-down completing a common 50% retrace of wave (a)-down (see gray annotations on the sixty-minute chart).  Gray wave (c) down is then based on the traditional Elliott formula of (c) = (a); and then from the Wave B bottom, the large gray Wave C-up of Minor (2) is also calculated based on the same formula.  And there ya' have it!  So easy, even an early Hominid could do it. 

What's amazing to me isn't the commonplace math; it's the way the math adds up to perfectly target the bottom of the head and shoulders neckline.  It's almost as if the market already had the whole move mapped out beforehand, and we're just now catching a glimpse of the map. 

Will it shape up exactly as described?  Obviously, I have no way of knowing for sure.  But I have found over the years that when the aesthetic and the math are in harmony, the projections are often correct. 

Either way, I never cling to my speculations with an iron grip.  If the market starts deviating significantly, then it's back to the drawing board.  But as I studied the charts, counted the waves, and worked the math, I found a certain beauty in this that I felt was worth sharing.

Trade safe!

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

Are We There Yet? The Messages of the VIX, SPX, NDX, and BKX

The market is giving some mixed messages right now.  The Volatility Index (VIX) and Nasdaq 100 (NDX) seem to be saying that the rally needs a breather.  The S&P 500 (SPX) and the Philadelphia Bank Index (BKX) seem to be saying, "Maybe. Not so fast."  Let's look at each one in more detail.

Wednesday's high fell 5 points short of my target range for the NDX (2337-2380).  However, the wave structure can be counted as complete, so I'd assign a fairly good probability that yesterday marked the top of Wave A-up of Minor (2) up.  But the waveform allows for some more bullish interpretations, so I cannot yet rule out a last gasp high up into the target zone.

(If all that sounds like mumbo-jumbo to you, and/or you're new to Elliott Wave, it would be helpful to read The Big Picture: SPX Long-Term Count and Projections.)

In the intermediate picture, it does appear reasonable to assume that the SPX and the NDX have both completed the first leg (Wave A-up) of the expected counter-trend rally (Wave Minor (2)-up).  Minor (2) should ultimately have three legs (A-up, B-down, C-up).  There are several indications that the second leg (Wave B-down) may be starting now. 

The first chart I'd like to share, which supports the view that B-down is starting, is of the Volatility Index (VIX), also known as the "fear index."  The VIX generally trades inversely to the cash market, so when the VIX goes up, the market goes down; and vice-versa.  This chart shows that the VIX has been trading in a range since early August; on Wednesday, it successfully tested the bottom of that range, and the range held.  If this level continues to act as support, we can expect the VIX to now rally; meaning the market should now fall.  I have also highlighted the RSI indicator on the chart, which shows that in the past, each time the RSI fell below 30 and then reversed back up through 30, the VIX has rallied:

 
The second chart is the 1-minute NDX chart.  I've been updating this chart each day for several days, and was pleased to see that my hypothetical trendchannel seemed to be validated by the price action on Wednesday, as the market broke through it, then back-tested it and failed to rally above it.  The waveform which I've been labeling and projecting in real-time now appears complete.  My only lingering concern is that the market fell just a bit shy of my projection of 2337-2380, so I'm not ready to state with unequivocal certainty that the this leg up is over... however, I would assign a 70% probability that it's complete.  Obviously, any move above the 2331.91 high would indicate that the current wave up is still unfolding.

I have posted a preliminary target box for Wave B-down (note that it's not a time-target -- I certainly don't expect Wave-B to complete tomorrow).  The minimum work expected of a B-wave would be a 38% retracement of the prior move, which equates to roughly 2220.  B-waves are tricky and somewhat unpredictable, though.   B-waves can actually retrace up to 138.2% of the prior move, and still be within acceptable guidelines.  They often form triangles or other difficult-to-predict patterns.  B-waves are the Claus von Bulows of the Elliott world.  As the wave unfolds (assuming this is B), I should be able to come up with more accurate projections.

The SPX may also have completed this leg of the rally, but unlike the NDX, it hasn't broken out of its channel yet.  To confirm that a waveform is complete, the channel break is almost a requirement in Elliott Wave.  Impulse waves usually (but not always) travel in channels formed by either the peaks of the 1st and 3rd waves, or the troughs of the 2nd and 4th waves.  5th waves often fail near the median line of the channel and complete the move.  The channel break then acts as confirmation that the current wave is over, and the next wave is underway. 

The same issue holds true for the BKX: it is still within its channel.  The move did peak with a brief throw-over of the median line, so that looks very promising -- but with the BKX in particular, there is some question in counting the move as complete.  So I'm going to let the lower line of the channel be my indicator in that regard: since the BKX has actually tested its channel many times, that gives it much more weight as a meaningful support line.  When the BKX breaks, expect the rest of the market to do the same. 

Trade safe!

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