SPX and NDX Updates: Last Call for Bears!

Sometime over the next week or so, you may remember this article and decide that I'm crazy (assuming you haven't already).  The market's job over the near future is to convince you that the rally will go on forever, so you may start to think of me as an idiot perma-bear.  I'm not... well, I'm not a perma-bear, anyway; I suppose idiot is debatable. 

The market continues to gyrate wildly, almost like it's trying to compete for a spot on "Dancing with the Stars."  Projections are getting smashed more frequently than watermelons at a Gallagher show.

So what's going on?

If we are indeed approaching a major top, the market's number one priority right now is to keep everyone as confused as possible.  If the market makes its intentions clear, there will be nobody left to take the other side of the trade. Besides, if anticipating the market were easy, the money would be so simple that there wouldn't be anyone left to actually work at these publicly-traded companies.

Tops aren't obvious until they're fading from view in the rear-view mirror.  At that point, people look back and think, "Man, I wish I'd sold back then!"

If you've read my articles, you know I happen to be bearish right now, based on chart analysis, and on the conditions I see in the world.  Doesn't mean I'm right -- in fact, a big part of me hopes I'm wrong.  I would love to see a bull market driven by genuine fundamentals (in other words, not a QE Pretend Bull Market) arise here and shake off the crummy economy; and the housing market; and the demographics of the huge over-sized baby boomer generation reaching retirement; and the potential European meltdown; and the fact that our government is buried in debt up to its eyeballs; and all the other stuff.  That would make me very happy. 

But I don't see it.  So I'm bearish.  Are you?  Now is the time to decide, because the market will try to confuse you in the coming days.  The news will be good, hope will be flowing, and the market will rally.  To quote Hunter S. Thomson: "A lot of people got off the boat in those days.  But not me... and not Nixon."  The market always wants you to jump off the boat just in time to get eaten by a shark.  If this is a major top, there will be bear shakedowns... and there will be temptations to jump in long at exactly the wrong time.  Brace yourselves for it.

(If you're new to these discussions, my long-term outlook and a brief summary of Elliott Wave Theory can be found in this article.)

The alternative, of course, is that I'm completely wrong and this is a baby bull.  Maybe I'm the one about to get eaten by a shark... time will tell.  But the charts aren't giving me any conclusive reason to believe that yet; and if they do, I'll be the first one to start calling for a new bull (well, maybe not the first one: the perma-bulls take that trophy -- but you know what I mean).

Here is what the charts are presenting.  Exhibit A is the Nasdaq 100 (NDX), fresh off its recent win on "Dancing with the Charts."  I've said it before: the NDX is very close to its 2011 high. and if it breaks through, we have to start considering more bullish scenarios.  So -- if the bear case holds water -- the NDX needs to find a way to confuse the bears as it finishes this wave; but it needs to confuse without actually rallying too much higher.

Monday, I initially called for higher prices heading into Tuesday, because I saw what looked like a three-wave move up from the 2274 low.  Based on the larger structure, that meant we still needed a fourth and fifth wave.  They never came.  We instead headed straight down at Tuesday's open.  So Tuesday, I figured we had a failed fifth wave and the rally was done.  Survey says: buzzzzz!  Wrong answer again.  (Unless you've charted Elliott Wave, you can't really appreciate how difficult it can be to project in real-time some days -- especially at major tops and bottoms, where the market's goal is maximum confusion.)

On Wednesday, we get what looks like a three-wave move down, and then the market starts rallying again.  Ah, now it's starting to make sense:  my initial impression of a three-wave rally into Monday was correct (well, maybe, read on).  So now the chart shows a three-wave rally, and a three-wave decline.  Anybody know what structure ends a rally with a series of three-wave moves?  Show of hands... yes, you sir, in the back.  No, it's not called a "dimorphous linkage distributor."  It's called an ending diagonal.  I may be starting to sound like the Ending Diagonal Salesman here, continually touting the virtues of an ending diagonal forming at this juncture and how it could save the bears -- but the chart says what the chart says.  Here's the chart:

  
Take a look at the move from blue 4 to blue (i).  It doesn't take a Master Elliottician to see that's a clear three-wave move; to see it doesn't even require a particularly good set of glasses.  It does take a willingness to look at the charts objectively, though.

I have drawn-in some gray lines and a red wedge to give an idea of the form it may take.  Until we see where wave (iii) tops and wave (iv) bottoms, this illustration is just a guestimate, though.  The market could move fast here, or it could meander around a bit, to convince people that the lows are in for the year... I can't predict that.  But this diagonal satisfies many of the requirements of the time: confuse the bears; finish off wave C; keep wave C below 2438.44.  And, more importantly, it explains the three-wave rally.  There are creative ways to count the rally as a five-wave move; they do require a little more imagination, but they're possible.  So the chance still exists that the high is in already.

Either way, the final top must be very close on the NDX, if the bear market is to remain a bear market. 

If 2438.44 is taken out, all bets are off and this count has to be scrapped... along with the bear market.  If the high is taken out, it doesn't mean we won't go lower again someday, but it does mean that the entire count up to this point is wrong and the NDX is not in Minor (1) and (2) -- and there's potentially even a huge bull market on the horizon.  2438.44 continues to be critical to the bear case.

In the S&P 500 (SPX), I've actually been looking for an ending diagonal for a week now.  At times, it seems to materialize into existence and then, moments later, vanishes into the ether... only to reappear somewhere else.  Maybe it's due to the proximity of Halloween: the ghost diagonal.  Anyway, I think I may have started looking for it a bit early.  It's possible that the wave (iii) label is actually wave (i).  In fact, I view this as likely, based on the NDX... and the fact that shifting the wave 4 position allows the SPX to reach up to tag the head and shoulders neckline. 

You may recall that Elliott rules state that wave three cannot be the shortest wave.  Since wave three is already shorter than wave one, wave five must be even shorter still.  Now, the following assumes my count is correct, of course, but wave three's length was 82.84 points and wave four bottomed at 1197.34 -- so that puts a hard cap on this fifth wave of 1280.18.  That allows it to tag the head and shoulders neckline, and even overshoot it by a hair to suck in the last buyers before reversing.  Here it is on the sixty minute chart:

The chart above reflects the shift in my preferred count for the ending diagonal; in other words, the chart above is the view I am favoring.  I have also updated the 10 minute SPX chart we've been watching with the preferred labeling.  The old count is still shown in gray, so that readers have a reference point: wave (v) of this count would go where the blue (iii) is.  After Wednesday's price action, the old count is still possible, but I am no longer favoring it.  However, again my view remains that the top is much closer than the bottom here. 

Please please please note that the gray ending diagonal lines as drawn are purely hypothetical, wave (iii) could top anywhere south of 1280.18.

Also notice how well the simple support and resistance lines I drew worked.  The market bottomed right at first support and topped right at first resistance.  Sometimes, when the market confuses the Elliott Wave counts, traditional technical analysis can save the day.

I haven't presented a Dow chart in this article, but the hard cap there is 12,093.50. 

Any violations of the hard caps listed for the NDX, SPX, or Dow would mean that my preferred counts are wrong. 

And there are certainly other interpretations of the wave structure.  Many Elliotticians are labeling my wave 4 as wave B, which allows for much higher prices.  I don't prefer this interpretation for a series of reasons:

1) The NDX would almost certainly exceed its 2011 high under their counts.
2) The strength and tenacity of the rally to 1220 was too strong for an A wave.
3) The targets under my count line up with the key levels: the NDX yearly high and the SPX head and shoulders neckline -- and the Dow's hard cap is about 1% above its 200 day moving average.
4) My preferred count is NOT what most are expecting... which I think makes it more likely.

So these are the levels to watch.  If the market holds below these key levels, the prospect of a crash in the next few weeks to months looms large (understand that Minor (3) down will likely start off as a series of lower highs/lower lows, sharply lower, but not an insta-crash).  If the market breaks through these levels, the NDX starts signalling there may be a new bull market in the cards.  The coming days will probably be filled with news noise, and there will be confusion and gnashing of teeth on the bear side.  Personally, I'm still bearish and will remain so until objectively proven wrong by the NDX.  I'm looking for a major top soon -- now I'm just trying to nail down exactly where it will be.

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

SPX and Dow Update: Is the Top In Place?

Sometimes you just spend too long staring at charts.  Yesterday, on my blog, I warned of the possibility of a fifth wave failure in the NDX and SPX.  After the close Tuesday, I took a much needed break and spent some time with my family, then came back and looked at the charts with fresh eyes.  After reviewing the charts again, I don't think we had a fifth wave failure, I think we had an extended fifth of wave 5, meaning my labels yesterday were off by a degree... what I was labeling as iii yesterday was likely v.

The chart which still seems to be the clearest is the Dow chart.  On this chart, you can see a well-defined 5-wave move off the wave 4 low.  The move exceeded the targets I posted over the weekend by about 40 points, but more importantly, it held below the critical 11,993 level.  With the exception of the 40-point overshoot, it is exactly what I was looking for to end this rally:

Calling tops is always much more difficult than calling bottoms.  But the move on the Dow is perfect for a top -- if my wave count is correct.  This Dow chart shows my preferred count; the SPX chart shows my alternate. 

I was expecting a ramp up to at least backtest the head and shoulders formation, but I'm posting this so late that the futures have already ramped to where it's not going to look like much of a prediction. ;) 

Interesting anecdote: I was talking yesterday with several of my more experienced trader friends, and without exception, all of us were warning that the bears "shouldn't get too excited yet."  Later, I got to thinking: "Isn't this exactly how a top should feel?"  Even bears are afraid to go short, and are looking upwards for "one more leg up" to get short from.  That's a contrarian indicator if ever there was one.

Before the open on Friday, I predicted we would break out of the trading range, then whipsaw back in; and we've done that... but, before I go patting myself on the back too much, I need to state clearly that there is enough room for interpretation in the wave structure that I can't call a top definitively yet.   So what I've done is drawn up a chart with major and minor support/resistance lines to give readers an idea of what to look for on the SPX:

Interestingly, the potential ending diagonal I've been talking about since last Wednesday is still alive and well.  If the ending diagonal is real, we should see another new high.  This is part of what I meant when I said there's still room for interpretation in the charts. 

In a perfect world, the highs will hold, and the Dow chart and my preferred count will ride off into the sunset as the credits roll.  But we all know: this ain't a perfect world.  So it remains to be seen if my call from Friday's pre-open will go down in history as one of the great top calls... or not.  Obviously, any move above the recent highs would indicate that the current wave up is still unfolding.

The Dow chart is also annotated with three key levels to watch.  For complete confirmation of a major trend change, we need to see the blue wave 1 high broken, but there are two other levels that will be very good early warnings: the red trendchannel, and the wave 4 bottom (the wave iv bottom is another, but isn't annotated).  Trade safe!

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/