SPX and NDX Update: When the Rally Finally Reverses, Things Could Get Ugly

This Energizer Bunny rally continues to surpass every target I've set thus far.  My expectations leading into it were, quite frankly, wrong. 

The one consolation I can take is that -- while my price targets are being blown through on the upside and short-changed on the downside -- my short term direction calls for the upcoming day, based on the preferred count, are hitting 75% for the month. 

But getting back to expectations: a wise man once said, "Your expectations shape your reality."  When I called the Minor (1) bottom back on October 4th, I was expecting an A-B-C rally into December.  On that day, I posted the following chart with my rough expectation of how this might unfold.  On the chart, you can see I was anticipating that we would have three distinct legs to the rally, drawn in gray.  I wasn't at all expecting one giant leg like we've had.
 

You can also read the annotation "My time expectation for the Minor (2) peak is December."  I have often pointed out to people that Elliott Wave is not intended to predict time, it is based on price movement only; yet here I was, doing that very thing.

My expectations for all this were based on certain presuppositions about the preceding wave structure.  Yet clearly things haven't played out as I expected; so the logical conclusion is that my underlying presuppositions were wrong.  Forensics time... 

All the way back on September 18th, I talked about the wave structure of the NDX, and how it appeared to be further along its count than the SPX.  At that time, I posted this projection chart:

In the meantime, I began looking for ways to reconcile the two counts.  I gave more weight to the SPX than I did to the NDX, because I simply had a hard time foreseeing how the SPX could "catch up" rapidly enough to meet the NDX.  The thought never occured to me that the SPX might launch a 17% rally over the course of only three weeks... that's probably understandable.  But as a result, I was expecting the NDX to "slow down" and find a way to reconcile its chart differences with the SPX; not the other way around.  Nevertheless, as you can plainly see in the two charts: the NDX performed exactly as expected, while the SPX did not. 

This leads to the next logical conclusion:

It now seems that the SPX has done the work required to reconcile the two structures, and as a result -- assuming the big picture presuppositions are correct -- Wave Minor (2) up is probably in its final days.  If the big picture view is correct, and this is indeed Wave Minor (2), then the beginning of the Minor (3) crash wave is just around the corner.   Below are some further arguments for this case.  

The first is sentiment: investors are finally shifting away from the extreme bearishness of recent months, and new polls are suggesting they are now marginally net bullish.  Here's what I wrote on October 4th:

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.

In just three weeks, the core psychology of the trading community has shifted... a 17% rally which breaks out from a multi-month rectangle will do that.  So the second wave has done its job regarding sentiment.  It has also done its job in terms of price.  The NDX is approaching its 2011 highs, and the SPX is now within spitting distance of the head and shoulders neckline. 

Sentiment and price are where they need to be for a second wave top -- which is not to say they can't go higher, only that the second wave has so far done what it needed to do.

Further, we have a potentially big news event on the immediate horizon: on Wednesday, the leaders of the European Union will announce their plans to save Greece; protect France from downgrade; and insulate their largest banks from failure, among other things.  Certainly no small task, and one which could remind everyone that, even though we just had this wonderful technical breakout from a trading range, the world is still in pretty miserable shape.

So where do we go from here?  Here's what the charts are suggesting.  First, the 60-minute NDX chart:

Something that should also be mentioned here: The structure which runs from the red (1) to the red A on this chart requires more imagination than I can muster to label it as a motive wave.  The fact that it's a corrective rally implies new lows in the future... however, the red B-wave correction did hold above the 2035 low, so the possibility of other interpretations can't be objectively ruled out. 

Here's the other key point regarding the NDX: if wave (2) doesn't end very soon, below the 2438.44 high, then we have to start considering the possibility that everything we've seen so far has just been part of a bull market correction.  I'm not ready to consider that yet; I simply can't see it against the backdrop of the current fundamentals.  Granted, bull markets aren't driven by fundamentals -- they're driven by liquidity, as demonstrated most recently with QE/QE2.  But I don't yet see the source for the liquidity a new bull would need, either.  Doesn't mean it's not out there somewhere, but the market is going to have to prove it to me first, by breaking that prior high.

Should be interesting to watch, because the wave structure on the NDX looks like it want to run up very close to that prior high.  When I did some calculations on the wave structure -- barring a failed fifth wave up -- the number I came up with as a target was 2432.

Then there's the SPX and its ending diagonal count.  I first proposed this ending diagonal as a hypothetical potential back on Wednesday, based on a couple minuette wave forms I was having trouble reconciling.  I keep trying to kill this count off, but everytime I think I've driven a stake through its heart, it comes roaring back to life like the cheesy-special-effects monster in some cheap horror movie.  Monday's action could be part of a five-wave impulse up still in progress, which would finally kill off the diagonal -- or the move could fit nicely as an a-b-c, with two roughly equal waves separated by a correction:

I honestly don't think the diagonal is likely at this stage, but it can't be completely taken off the table yet... and as the chart says, the move could still end up forming a bearish rising wedge.  The 60-minute chart below has been updated to reflect the fact that the alternate count has now become the preferred count, and this is C of Minor (2):

After a little bit of consolidation, the SPX looks like it definitely wants to take a crack at 1260; then maybe at the head and shoulders neckline.  Again: barring a fifth wave failure, which could be news driven.

You could call this a crash count -- although third waves down generally sub-divide into one or two nice tradeable bounces before declining relentlessly.  But, as I see it, the rally has been too strong and too fast for anything other than a C wave... or part of a bull market, and as I said, I'm not quite ready to go there yet, unless the charts say we have to.

Once the rally peaks, we'll start analyzing the form it takes as it declines, to see if this crash count is the real deal.

The last thing I want to mention is very important in regards to yesterday's article.  A reader called my attention to the potential of a fourth wave triangle in the Dow, which is important because it raises the maximum possible price for the Dow (under the preferred count) by slightly less than 1% -- from the 11,993 discussed yesterday to 12,093.50.

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

SPX and Dow Update: Stocks at a Critical Inflection Point

Here's what I know for certain:  there's a big move coming.  

With the new high on Friday, stocks have reached a critical inflection point which could drastically change the expectations and projections going forward.  Since the rally began, I have been anticipating a moderate-to-deep B-wave retracement.  If we don't reverse before reaching the price levels outlined below, that prior expectation will be nullified.

In Elliott Wave, you must evolve your counts as the market dictates.  Just as in life, you must actively change with the changes, or be left behind.  Some Elliotticians find a count and stick to it, no matter what the market is telling them... in fact, this is a much easier approach for the technician as he can chart much more quickly each day.  If this is the approach you are looking for, then my updates are probably not a good fit for you.

My approach is to continually challenge my assumptions each and every day, as new price information becomes available. I then report my findings here.  I will strive to communicate when my previous interpretation was wrong, and when the assumptions have changed.

The short-term wave structure presented to us by the S&P 500 (SPX) and other indices has been a challenge to decipher.  My best guess, which I presented in the last two updates, was that we had completed wave 4 as a sideways correction and were due one more lunge to new highs, which would then whipsaw.  I am still favoring this interpretation.  However, time and price are running out for the market to honor this.

The good news is, the drop-dead level for this count is not too far away.  I have charted many different indices this weekend in the search for greater clarity.  After studying countless charts, I believe the Dow may hold the key to deciphering this move.  See chart below:

The best thing about the Dow is that it's very close to the knockout level for this count.  Due to the length of the third wave, and the rule under Elliott Theory that the third wave cannot be the shortest wave, the knockout level for this count is 11,993 (11,992.37 to be precise).  Thus, we should have a definitive answer on this count in short order. 

The Dow has completed five clear waves to the upside, so the move up could end at any time... but, based on the one-minute charts, I am anticipating a little more upside to complete the move.  Futures are down slighly as I write this, so it remains to be seen.  We know which levels to watch on the upside; here are some concrete things to watch for on the downside:  a move below the bottom line of the red trendchannel would be the solid warning of a trend change, and a move below the blue Wave 1 high would be complete confirmation.

The updated SPX chart is shown below.  The labeling on this chart is slightly different than the Dow, and shows a potential ending diagonal, which I first proposed on Wednesday.  The ending diagonal may or may not hold true.  If we were to label this chart in a similar fashion to the Dow (see gray "alt: 4" annotation), then the ending diagonal becomes unnecessary.

So that's my preferred interpretation.  I am still expecting a whipsaw here, but the charts are far from definitive -- which is pretty much always the case at tops and bottoms.  However, in the event that I'm wrong, I feel it's important to show an alternate, more bullish interpretation.

The more bullish interpretation would be that we already completed the B-wave.  This is certainly technically possible, but the structure just doesn't look right to me, based on the smallest waveforms... however, the possibility can't be confirmed or ruled out yet.  The chart below is the bullish alternate labeling for the SPX:

    
It's probably safe to say that, at this point, most traders believe this rally is going to continue.  And it well may.  But at this moment, based on my best interpretation of the wave structure, I continue to be of the opinion that this is a fake-out. 

As I said earlier, though, the good news is the answer isn't far away.  If we trade above 11,992.37 on the Dow, then my prediction of a whipsaw will be off the table, and I will have to give weight to the more bullish alternate count. 

The charts are telling us there's a big move coming.  Since we know the levels to watch, the next few sessions should hold the answer as to which direction that move will be.

(**Please note there was a typo in Friday's article regarding the Russell 2000 (RUT): the text states that 731 should contain any rallies in the RUT based on the count shown on the chart; it should read 739.)

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

Some Speculative Charts for Weekend Discussion

The regular Weekend Update will be posted before the open.

Important note for the general public:  These charts are for speculation and discussion, they are not preferred counts.  In other words, they are possibilities/potentials which exist, but which I am not currently favoring as the most likely.  It helps to be aware of as many potentials as possible, because if/when a move starts behaving contrary to your previously held view, you know what to look for, and are thus able to adapt to the changes much more quickly.  They are posted mainly for academic discussion; if these charts confuse you too much, just ignore them. ;)

Here's a few charts I've been working on here and there.  This stuff isn't really fit for the general public (i.e.- my Minyanville articles), but I wanted to share them for the other technicians in the audience.  Two of them are different/speculative interpretations of the market, one's just a monthly SPX chart.

Comments and feedback would be very welcome!




This first chart is a completely different interpretation of the move since August, using the NYA for form:

A couple things I like in this chart:

1)  It accounts for why this rally has felt like a C Wave, without introducing Minor (2)/(3) into the equation yet.

2)  It would throw just about everyone for a loop.

3)  It allows the SPX (et al) to travel down to 1000 +/- to bounce at the neckline and complete the head of a large daily/weekly (potential) head and shoulders top before we get the Minor (2) rally (see monthly chart).

Okay, so that's three things, not a couple.  The alternate count would run counter to my preferred long-term count, and change the red iv to B and the red iii to A. 


The next one is just a monthly SPX chart, which shows the potential head and shoulders at the turquoise line.  That's some friggin' monthly candle we're on!  At its current size, it's the largest white candle body in the entire history of the SPX.  Kinda argues for a correction soon...

The last chart shows a potential expanding triangle in the Nasdaq.  Haven't thought much about how this would fit into anything, just thought it was worth sharing:

Is Today's Market Going to Sucker You into the Wrong Side of the Trade?

What if, today or Monday, the S&P 500 (SPX) suddenly broke out of the trading range it's been in since August? 

Weak bears would likely cover their shorts immediately, and bulls would almost certainly add to their positions.

But what if the break-out was a fake-out? 

A false break to the upside here would certainly shift a lot of people to the wrong side of the trade, and as every trader knows, the market loves to do that.  Take a look at what happened on October 4th, when the market broke down out of the range, and then whipsawed right back into it:

 
Whipsaws almost always lead to strong moves in the opposite direction, because the technical breakout (or breakdown) causes traders to go long into a downtrend, or, conversely, to short into an uptrend.  In the case of October 4th, the higher the market moved after the whipsaw, the more bears were forced to cover... so the higher the market moved.  Rinse and repeat. 

Could a whipsaw happen in the opposite direction now?  Obviously, if it was really easy to predict, nobody would get caught on the wrong side of the trade.  I can tell you it is very possible right here... and I can also tell you that my readers weren't caught by surprise the last time it happened.  I had actually been warning about the possibility for weeks.

Yesterday, I suggested, hypothetically, that the market might form an ending diagonal here.  At the time, there was little in the charts to suggest the possibility.  After Thursday's action, there is:

There is, as yet, still no clear indication that this is happening; however, the potential is certainly there.  (I presented a detailed argument supporting this count in yesterday's article.)  A move above 1233 would be the first warning to be alert for the ending diagonal; trade above 1237 would be the second, and would activate an upside target of 1247, which is my current target under this count -- though it could end anywhere within the yellow target box shown on the chart.

The more conventional counts are shown below.  These are the counts being favored by most Elliotticians, which in my mind is actually an argument against them.  Under contrarian guidelines, the more people who are predicting a move, the less likely it becomes.  But at present, there's still nothing technically wrong with these counts.

Other than the ending diagonal update, there's been no material change in the SPX counts since yesterday. But because I value my readers, I also wanted to present another chart in this article. 

The Russell 2000 (RUT) actually presents an extremely clean chart -- much cleaner than either the SPX or the NDX.  On the chart, you can see a perfectly formed trendchannel off the October low (blue); that channel was broken yesterday.  You can also see that the sideways correction this week has formed another beautiful channel (red):

The rally on this chart counts very nicely as a 3-3-5 correction: red a-b-c to black (a); red a-b-c to black (b); red 1-2-3-4-5 to black (c), to complete red A.  The blue and red channels are the reason I've labeled this chart the way I have; the existence of these two separate channels argues that these are two separate waves.  If that's the case, this count probably argues against the ending diagonal formation on the SPX.

That said, it is not impossible that the green alternate labeling (1-2-3-4) is correct.  Under that labeling, the low yesterday would mark the bottom of green wave 4, and the RUT would now rally to a nominal new high in wave 5.  Despite the two channels, this is a real possiblity; fourth waves sometimes breakdown out of the primary channel, and then rally right back up into it. 

I am expecting the RUT will rally up to test the underside of the blue channel today, so what happens when it reaches the channel will be important for clarifying this count.  If the channel rejects the RUT's advance, then the red A wave label is probably correct.  If the RUT can instead rally back into the blue channel, and also rally above the red channel, then we are probably looking at the alternate count unfolding. 

And, if this happens, it also argues in favor of the ending diagonal on the SPX.

If the RUT breaks though those channels, it is probably on its way to a new high.  In the case that it does break the prior high of 713.36, then that will trigger an upside target of 722 for (what would be) green wave 5.  722 is my preferred target, and the rally has a maximum upside of 739.  Due to the length of the previous waves, 739 should act like a steel beam to contain the rally.

The gray dashed horizontal line just below the red channel is the knockout level for the alternate count. Any trade beneath 675.74 eliminates the green alternate count from consideration, and with it the prospect of immediate new highs.  Trade safe!

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/