SPX and NDX Update: So Far, So Good... and What to Look for Next

On Friday, I was a lone nut in the wilderness suggesting that there was a good chance Thursday's high marked the top.  After the action on Monday and Tuesday, all the sudden a lot of folks have piled on that bandwagon.  That makes me uncomfortable; I don't like crowded trades, and neither does the market. 

I'm not saying that the top call is wrong, just because there's a lot of people joining in now; in fact, quite the opposite: I'm still favoring it.  But the market never makes things too easy... so, sometime soon, we should expect a curve ball to throw everyone off the trail.  Tuesday played out largely as anticipated, so no big surprises there --  but I'm not completely sold on the structure the market has shown us so far.  I would really like to see at least a marginal new low to give this move down a more concrete five-wave structure.

The critical level we were watching to knock out the bullish alternate count -- 1197.34 on the S&P 500 (SPX) -- was not breached on Tuesday.  The current wave down is still a bit murky at present, and could be interpreted at least three different ways:

1)  It was waves 1, 2, and 3 with 4-up in process and 5-down to come.
2)  It was a complete wave with an extended fifth wave.
3)  It was an a-b-c corrective wave.

Of those three options, I like option 2 the least because, even though it's possible, it throws the structure way off balance and I don't like the "look" of it.  So, for the bear case here, I would really like to see at least a marginal new low for this move.  After that, I would expect to see a decent snap-back rally.

The bullish alternate count I suggested yesterday as an outside-shot wasn't weakened a bit by Tuesday's action.  The move down from Thursday's high counts very well as an a-b-c in its current form, which is why I would like to see a new low, preferably below 1197.34, to knock that count out.  If we don't get a new low, calling Thursday the top will remain a little bit inconclusive for the time being.

For this update, I have drawn up two radically different SPX charts.  Chart 1 (marked by the big red "1" -- no affiliation with the movie of the same name) shows my preferred view that Thursday was the top, and an estimation of how waves 4 and 5 might unfold if that's the case.  If you'll refer back to the three options listed above, this chart shows the first two of them.  Option 1 is illustrated by the blue lines and yellow target boxes: this is my preferred view, and what I would "like" to see take place in order to confirm my underlying assumptions that this is the start of a big leg down.  Option 2 is illustrated by the black lines and black "Alt: (i); Alt: (ii)" labels.

Two levels to watch are the 1230 area, above which favors the bulls; and the 1220 area, below which favors the bears.  These two areas have been pretty important battle grounds in the past, and on Tuesday the market just bounced back and forth between these levels all day, further highlighting their importance.

Chart 2 (marked by the big red "2" -- no affiliation with the less popular, direct-to-video sequel) illustrates the alternate count in clearer detail than I did yesterday.  It came to my attention that a number of readers basically had no clue what I was talking when I suggested an "expanding ending diagonal," so this has been drawn to help clarify.  It also shows how the decline could be counted as an a-b-c.  This count still holds at 20% odds for the time being, although with a little luck it'll get knocked out completely in the next few days.

The Nasdaq 100 (NDX) is in a similar position to the SPX.  I have only annotated one chart for the NDX, which illustrates my preferred count, since the two indices should trade in pretty similar fashions.  The NDX in particular looks to me like it needs a new low to complete the move and give more weight to the bear case.  Note the island reversal top, which is formed by the exhaustion gap up on the 27th, and the gap down yesterday.  Despite being fun to talk about, island reversals are, surprisingly, not very reliable patterns for marking trend changes -- so don't read too much into this one... yet.

Beyond the charts, we have the Fed due to announce a bit earlier than usual, at 12:30 EST today.  At 2:15 EST, Bernanke will hold his press conference detailing the Fed's plans, and might even suggest some innovative new ideas on how to further destroy America.  I continue to be of the opinion that there will be no QE3 at this point in time, but, regardless of what they reveal, the market often behaves unpredictably around Fed announcements.  After the last announcement, the market initially sold off very hard, then abruptly and strongly reversed, in a bear trap.  If we got a similar result here, that could form wave 5 to complete (i)-down, then reverse into wave ii-up. 

Either way, if you're planning on playing the Fed announcement, stay nimble... and trade safe.

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

SPX and NDX Update: Bulls Running Out of Options

On Friday, I assigned roughly a 50% chance that Thursday marked the end of the rally, and the top of Minor Wave (2)-up.  Today, I would move that probability up to 80%.  As far as I can see, there is really only one "last hope" for the bulls at this stage.  But before talking about alternate possibilities, it's more important to talk about what's most likely, so I'll discuss that last hope in more detail a bit later.

The market has now given us solid confirmation of the bear case with the break below 1256 SPX.  If we are now in the beginning stages of Minor (3)-down, this wave should ultimately turn into a waterfall decline to substantial new lows.  First target for Minor (3)-down would be in the area of SPX 800 -- but that target could easily move lower as the move progresses.  But, obviously, it's not going to move straight down, there will of course be bounces and rallies along the way -- so first things first.  The charts below reflect the early targets for this smaller wave within the larger Minor (3) wave.  The SPX chart is first, NDX is second:

The structure off the highs is anything but clear-cut, so I am generating these targets using my assumptions of what that structure is.  The first target zone for the SPX is 1194-1220; and for the NDX 2274-2320.  Unless the market is even weaker than I'm anticipating, we should see some type of bounce in these areas.  Tomorrow, we can look at the next target levels.

It's always tempting to get excited when the market follows your predictions, especially when you were a bit off the beaten path making those predictions in the first place.  The problem with excitement is: I think emotion is the killer of most traders, and it's very easy to become too subjective and start trying to fit the market to your expectations, instead of objectively seeing what's really there.  So I continue to challenge my views, even when they seem to be right.

While doing so tonight, I came up with a "last hope" short-term pattern for the bulls.  I don't consider this pattern likely, but it's not impossible.  The bulls last hope here would be an expanding ending diagonal pattern.  Under this pattern, the SPX would put in a bottom somewhere north of 1197.34 and rally back up to a new high.  Expanding diagonals are one of the only patterns where waves 1 and 4 are allowed to cross into the same price territory, which these waves have already done.  That's why I view this pattern as the last hope for the bulls... because there is little else that's possible given the technical damage that's now occurred.

The chart below is annotated with my preferred count in blue and red, and the bullish alternate count in black:

The bulls last slim hope, as I currently see it, vanishes with trade beneath SPX 1197.34.  Please realize that I'm only assigning a 20% chance to this alternate pattern unfolding -- but as I said, it's still not impossible.  However, if there's one entity that can take a low-probability pattern and make it reality, it would be the Fed.  I'm not expecting any game-changing fireworks out of the Fed meeting, and I firmly believe that QE3 won't happen right now... but, ultimately, that's just my very strong opinion.  So, in the event I'm wrong, there's the alternate count.
 
Assuming my big picture view of the situation is correct, and so far it's played out very well, then the market is in the early stages of becoming extremely hostile to long-term buy-and-hold investors.  If the big picture view is correct, the markets could ultimately see levels that most would consider impossible.

As an additional quick update, my call for an imminent bottom in the US Dollar could not have been more timely.  I posted the dollar update on my blog on Saturday, and the dollar went parabolic on Monday.  After reviewing the wave structure in the dollar, I can say with 95% certainty that the bottom is in for the US Dollar, and last week's low should hold for a long time to come. 

Beyond that, it's getting ugly out there... trade safe.

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

SPX and NDX Update: A Disturbing Look at Fundamentals, and the Rally Explained

John Mauldin, whom I have a great deal of respect for, put forth a very convincing and enlightening argument this weekend in his free Thoughts from the Frontline newsletter.  I'm going to try to summarize his argument as succinctly as possible for my readers, but do note that the credit for this information goes to him.

Basically, his argument helps explain what stretched out the historic melt-up rally in equities (the Dow Transportation Average is having its best month in 72 years -- that's pretty historic).  His argument revolves around the announcement which came out of Europe on Thursday, and why it impacted the equity markets.  As most realize, it had nothing to do with "good news" from Europe.  Pretty much anyone with half a brain looked at the European summit and said, "Greek bond holders taking a 50% haircut isn't good news... why is the market rallying like crazy?"

What it boils down to is this:  when the banks agreed to a voluntary 50% write off on Greek debt, that agreement caused credit default swap clauses not to be triggered.  If the write off is "voluntary," it is not considered a default, so no CDS.  Once it became apparent there would be no CDS event, the parties involved no longer needed to hedge their risk on CDS counterparties through short positions.

Imagine you were a big player who sold a CDS on Goldman.  You would then short Goldman stock to help hedge your risk exposure, and protect yourself in case you actually had to pay out on that CDS.  When the CDS event was voided due to the voluntary write-off agreement, that risk exposure evaporated.  And those shorts got covered.

In the interest of brevity, suffice it to say that this "voluntary" agreement out of Europe caused many short position hedges on the SPX and financials to be covered, which then squeezed the short hedge funds and caused them to cover, which then got picked up by the algorithm bots who added more fuel to the fire, followed by momentum traders, followed by John Q. Bear who had his stops hit or his margin squeezed, etc.. 

Before you know it, the SPX gaps right through the neckline of the old head and shoulders pattern like it isn't even there.  I am simplifying things a great deal here, but I think my readers are smart enough to get the basic picture.

The bottom line is: the government changed the rules in the middle of the game.  Imagine if you were a football player who returned a kickoff 100 yards all the way to the endzone, then spiked the ball and started celebrating... at which point the officials came running in and said, "Sorry, no touchdown.  In fact, it's a fumble.  We just moved the endzone out to the parking lot.  By the way, grab us some hot dogs on your way back."  That's basically what happened to the credit default swap players.  Changing those rules had a major impact on the "private" equity markets, and caused the melt-up.

This is another thing that always interests me about Elliott Wave: had the rules of the game not been changed, it seems more likely that the counts I posted on Wednesday might have panned out better.  The market sometimes forms patterns which "keep their options open."  The patterns can, in essense, morph into something different if influenced enough by an outside force.  This is another reason no analyst can be right 100% of the time -- you make a call based on your best analysis at the moment, but outside events can transform a pattern from something that appears to be a low probability potential, into a reality. 

I have sometimes compared trading to poker.  You might have a very strong hand (i.e.- a high probability pattern), but that strong hand can always get cracked by some long-shot hand that hits a miracle card on the river (i.e.- a low probability pattern). 

Nothing is guaranteed -- the best we can hope to work with are probabilities.  I get my money in when I've got the odds on my side, and I get it out when I don't.

The situation in Europe is still far from bullish.  There is simply too much debt in Greece, Italy, Ireland, Spain, France, and Portugal for the Eurozone to recover from unscathed.  Meanwhile, the United States is running into debt problems of its own. The U.S treasury market is deeply dependent on foreign central banks (FCBs) for support... and lately the bids on U.S. debt are drying up.  My associate Lee Adler at the Wall Street Examiner compiles one of the most comprehensive reports available on the Fed and US Treasuries.  The data and analysis he provides is incredibly comprehensive and useful.  Put simply, it's a champagne report for beer money.

The following is reprinted, with Lee's permission, from his Wall Street Examiner Professional Edition report:

FCBs are in a short term cyclical upturn in their buying pattern, but this turn comes from an unprecedented level of weakness and the numbers coming off the low are pathetic, and still deeply negative.  If this is the up phase, I can't wait to see the next down phase.  It will be ugly.  But we probably will not have to deal with that for at least another 6 or 8 weeks if typical timing holds for this buying cycle.  On the other hand, unless FCBs step up to the plate much more than they have in the past couple weeks, either the Treasury market will collapse, or the stock market rally will fizzle, or both.  We're not there yet, but if these trends continue, make no mistake, the balance will tip.

The chart below is also from the Professional Edition, and is again reprinted with his permission.  It shows the FCB holdings and activity going back to 2007.  You can see the 4-week moving average has broken down to unprecedented levels:

It appears that the governments are running out of money to lend to each other.  We all know that real wealth cannot be generated by a printing press.  The nature of money is the same as every other commodity: the more of it there is, the less it's worth.  So the governments can print until their hearts' content, but ultimately they're not actually creating anything, other than higher prices out in the real world.  They're really only shuffling pretend money around in a type of gigantic shell game... or Ponzi scheme, whichever image you prefer.  The real world knows that true wealth is only created through production.

And production is something the world currently lacks.  Right now, the entire world economy is riding on the backs of an estimated 87 workers who make Widgets at an industrial plant just outside Beijing.  (I realize I'm overstating the situation here -- but not by much.)

It seems to me that this grand experiment in economic design is getting very close to running its course.  I think it will be terrifying when it all starts collapsing in earnest, and the public realizes that not only does the emperor have no clothes, but even his pretend clothes were insolvent.  (Okay, maybe I'm trying to stretch that one too much...  you get the picture.)  I will end this thought with a quote from F.A. Hayek:

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."      

Beyond that bit of insight, the market finally did me a favor on Friday and allowed me to relax a bit over the weekend (well, at least as far at the charts go... still had this article to write!).  There's been no material change in the counts since Friday's update, so I am still anticipating two likely resolutions to this historic rally:

1)  Thursday was a blow-off top and the rally is over.

2)  Thursday was wave 3 of C, and the rally will ultimately end in the zone of SPX 1305-1330.

Due to Friday's sideways action, there isn't much to update in the charts (for once).  Friday could have been the b-wave of an a-b-c correction, in which case the market should find support around SPX 1265-1270 before rallying higher... or it could have been the start of something more ominous. 

The key levels to watch are still: Thursday's high, above which would indicate that option 2 is unfolding; and 1256, below which would indicate that option 1 is unfolding.

(Also check out the U.S. Dollar Update to see how the dollar and stock charts may be lining up together.)

The NDX also did nothing noteworthy on Friday, and I am still considering the ending diagonal as a possible final resolution of the NDX rally, though it is certainly not the only possible conclusion.  Two alternate conclusions for the NDX revolve around the black "Alt: 4" label on the NDX chart.  If that alternate label indeed marks the end of the 4th wave, the two most likely outcomes are either:

1)  The NDX rally is over.

2)  Thursday was wave 1-up of 5-up. 

First warning that the NDX rally is over comes with a violation of the rising red trendline off the October lows; second warning is a violation of 2274.49; confirmation comes with a violation of the blue wave 1 high, around 2220.

As I talked about on Friday, I am still equally split between the idea that the rally ended on Thursday, and the idea that there's one more marginal new high coming.  The bulls are now openly gloating, and many of the bears I talk to have either capitulated, or are nearly there... so the sentiment is right where it usually is at the end of a bear market rally.  It sure looks to me like the top is a lot closer than the bottom now.   

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

US Dollar Update: Zero Hour Approaches; Bottom Appears Imminent

I think that short positions on the dollar right now are very high risk.

Two weeks ago, the dollar gave some false signals, apparently indicating that it was nearing the end of its correction.  At that time, it appeared to have formed an expanded flat, with wave C-down in process and close to completion.  That turned out not to be the case.  It now looks likely that wave ii is not an expanded flat, but a simple A-B-C zigzag sharp, which means wave C-down of two weeks ago was actually wave A-down.  C-down, the final wave of the correction, is either in process now, or has already bottomed.

The dollar is now rapidly approaching its adjusted targets under this count.  If C = A, then the target for the bottom is 74.06.  If 5 =1, the target would be 73.66 (see final chart to understand which waves I'm talking about).  However, wave ii has already staged an extremely deep retracement, having now passed the 78.6% retracement level, so these targets may or may not be hit.  Given the deep retracement, it would not be surprising to see wave 5 truncate, and put in a bottom without reaching these levels.  Under my alternate count (see "Alt: C" label on final chart), the dollar already bottomed.

So it is my belief is that the dollar could bottom anywhere between its current position (75.06) and 73.66. 

Based on this count, I also maintain that the dollar is about to begin what will ultimately become a massive rally.  The key level to watch, though, is 73.42.  If the dollar bulls can't hold that level, all bets are off.  My personal belief is that they will hold that level.  The target for the bottom of wave ii lines up nicely into the time window of the Fed meeting -- but again, wave ii-down has done enough work and even though Uncle Buck could still head toward 73.66, further declines are unnecessary. 

In regards to fundamentals: I am almost certain that there's no QE3 coming right now, so that might be a good "reason" for the dollar to rally.  Besides, the Euro still doesn't look any better after the "solutions" presented at the European summit last week.

The first chart I'd like to present is my multi-century dollar chart (I haven't updated this chart since September 3rd, because it took me forever to put it all together in Photoshop in the first place).  This chart uses the dollar-relative-to-gold as the proxy for charting the first few hundred years, since there was no dollar futures market back then.  It is my preferred view that the dollar based Grand Supercycle Wave A in 2008, and thus the 2008 print low should mark the bottom for a long time to come.

 
The next chart brings us in at the daily level.  My preferred view is that the coming rally is part of a nested 1-2 count, but it's also viable that red wave 2 instead bottomed where the gray "Alt: 2" label is placed.  Both counts are very bullish for the dollar:

The final chart takes a look at the short-term picture.  We can see a very clean five-wave move for wave A, a pretty solid triangle formation for wave B, and three waves down complete for C.  Wave 4 of C appears to still be in process, with the fifth and final wave yet to come.  The alternate count says wave C bottomed last week.  If that's the case, the rally has already begun. 

The triangle adds some confidence to the idea that the dollar is about to (or has already) put in a bottom.  Under Elliott rules, triangles only form as the penultimate (second to last) wave.  Assuming the triangle interpretation is correct, wave C should be the final wave of this wave ii correction, and the dollar should put in a base and begin a strong rally in the very near future. 

 

 



Either the dollar holds the key levels and rallies, or there may be major trouble brewing on the dollar's horizon.  My preferred view is that it will hold and begin what will ultimately become a massive rally.  This has all the potential to be a historic turn week in the markets.  Trade safe!

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

SPX and NDX Update: Key Levels Which Could End this Historic Rally

Sometimes you get the bear, sometimes the bear gets you.

Thursday saw the rally extended even further, once again blowing through my upside projections like an over-achieving marathon runner.  Thursday had the distinct feel of a "buying panic."  All the sudden, people are no longer afraid of losing money on a decline -- they are afraid of missing the rally.  Rallies often climax with these blow-off type moves.

The Fed meeting is fast approaching, and the Fed has been floating more innuendos of Quantitative Easing.  QE is now so firmly entrenched in the psyche of investors, that the Fed doesn't actually need to implement QE3; all they need to do is hint at it.  Investors have become a bit like chastened dogs... all the Fed needs to do is roll up the newspaper of QE while giving investors a menacing glare, and investors obediently cower in anticipation of being struck. 

I sincerely doubt there is more QE forthcoming, as was my opinion the last time this rumor floated, back in September.  The Fed is between a rock and a hard place here: more QE at this stage would be a good move only if the Fed's intention is to convert the dollar into a competitive brand of toilet paper.  The last Fed meeting brought us Operation Twist; I see no reason why they would suddenly decide to scrap that program for more QE... especially with the market in rally mode and the current massaged economic numbers hovering well above crisis levels.  No, if there's ever to be QE3 in 3D, they'll need to save it for after the crash.

Investor sentiment is now reaching what could be considered as decidely bullish levels, as shown in the screenshot on right.  You can see that the bullish sentiment is about 4% above the long-term average, while bearish sentiment is 5% below the average.  This is what we would expect to see near a second wave top.

On a less exciting note, a couple of my preferred counts are now piles of smoldering ash on the market floor.  Yesterday I warned:

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.  

Apparently, I didn't anticipate myself being one of the confused.  After apologizing to my blog readers for blowing the count, I sat down and wrote a letter:

Dear Abby,

The market has rallied a lot stronger than I expected.  The Dow Transportation Average has staged its most impressive rally since 1939, and the S&P is having its best month since 1974.  Am I crazy to keep insisting this is a bear market rally?

Signed,

Bearish in Hawaii

I received a reply almost immediately (probably because I wrote it):

Dear Bearish in Hawaii:

First of all, you're even crazier than you think, because I don't do this column anymore, my daughter does.  Second, this is exactly the purpose of bear market rallies.  Investors need to believe that the trend has changed.  This clears the majority of buyers out of the way, which then makes an unobstructed path to new lows when the selling kicks back in.

  

Well, that made a lot of sense to me.  The other thought I had was that if this is, indeed, the bear market rally which precedes a generational crash, it is probably appropriate to have a generational rally.  With those thoughts in mind, I re-drew the charts of the SPX and Dow. 

The main error I made in my preferred count was assuming this was all one wave off the October 4th low.  I based that on the idea that the strength of the rally argued for the interpretation that it was a C wave (note to other Elliotticians: I was actually viewing the rebound off the August low as (w) (x) (y), with (y) being an expanded flat; this wave being c of (y).  I annotated the whole correction as a simple a-b-c so as not to confuse my readers any further).  Apparently, either that interpretation was incorrect, or my placement of waves 1 and 3 was incorrect.  It's largely immaterial at this point. 

Several articles ago, I listed a few alternate counts, including the possibility that we were in an A-B-C rally off the October low, with A and B complete.  This now appears to be the more likely case. 

Interestingly, the observations I posted in the article a week ago on Wednesday were causing me to look for more upside at a point when many Elliotticians using the A-B-C count were still looking for more downside... but yesterday, the shoe was on the other hand (or whatever that saying is).  I was looking for more upside, followed by a reversal, while the A-B-C count watchers were just looking for more upside (not sure how many were expecting the amount of upside we actually got). 

The market is fickle... we all take our turns being right or wrong.

So... water under the bridge.  At this point the goal is still to try and identify the top.  We'll take a look at the changes that have to be made to the SPX count in a moment, but first I want to focus on the one index that behaved exactly as I anticipated: the NDX.

Despite the fact that the NDX performed as projected, I hate surprises.  So I went back and scrutinized the NDX chart as well, searching for other possibilities.

One very important observation I made while re-examining the counts is that there is another interpretation of the long-term NDX count.  Under this newly-discovered interpretation: it is possible that the NDX has not actually started its bear market wave yet.  It may instead be rallying off a fourth wave low, in the process of completing a fifth wave up -- meaning it could make a new high for the year, and then officially kick off its bear market from there.  I am still favoring my original interpretation of the NDX chart... however, if the NDX breaks its 2011 high, it will prove that this alternate count is probably the correct one. 

On the chart below, I have primarily annotated the alternate count, to highlight the changes and share what I'm seeing.  The preferred count is shown in green, but only the major turns are annotated. 

Interestingly, the NDX was something of a laggard yesterday, ending the day less than half a percent above its prior swing high.  It also shot up right into the hypothetical resistance indicated by the ending diagonal drawn on the chart.  The NDX has followed my projections very well almost continuously since September 18th.  That's a pretty good run, so hopefully I've got this one pegged a little better than the SPX and Dow.  We'll have to keep watching and see if the end also plays out roughly as expected (assuming of course, that we are nearing the end of the rally).  The good news is that the large-cycle alternate count allows for some wiggle room, and also allows the NDX to break its 2011 high without causing any significant technical damage to the big picture outlook. 

Another fun fact is that the ending diagonal works fine in this position for either count, because C waves and fifth waves are both five-wave motive waves, so the sub-minuette count functions the same for both.  The chart below is labeled with the preferred count, with the alternate from the last chart only noted once, by the "Alt: B" label:

Despite the lingering question of whether the NDX is in wave (5) or wave (2), my short term NDX count generates high confidence that the top is likely very near.  Nailing it down to the penny is more the question. 

There is always the potential that the black "Alt: 4" label is correct, which eliminates the ending diagonal and leads to two possibilities:

1) Thursday's high was it, and the top is in.

2) The NDX will form a larger fifth wave.  If one were to consider shorting, the safe way to play this move is to wait for a decisive break of the lower red trendline before shorting.  Trade beneath the "Alt: 4" label will almost certainly confirm the trendchange.

If the NDX is in the final two waves of an ending diagonal, be aware that the final wave up in the diagonal can end short of the prior high or overshoot it.  The behavior of the last wave in a diagonal is pretty much impossible to predict.

On to the SPX.  For simplicity of explanation, the SPX has forced me to shift to the view that this is, in fact, a three-wave a-b-c rally.  As I see it, there are two likely possibilities on the SPX:

1) The ending diagonal I was favoring was right all along, but we had an exceptionally large wave (v) overthrow.  This count would mean the top is in place. 

2) We are forming a garden-variety five wave impulse up, with a target of 1305-1330.

What I like about option 1 is that it reconciles better with the preceeding wave structure.

What I like about option 2 is that the Thursday rally looks impulsive, which doesn't fit the diagonal structure -- and this option draws the rally out roughly into the time window of the Fed meeting, so the market can sell off after Bernanke announce there will be no QE3.  Also, this option would further break the will of bears, and turn more participants bullish. 

I am very slightly favoring the view that the rally is finally over, but I'm pretty evenly split here on the two counts -- so I've marked the key levels to watch on the SPX chart: a break of Thursday's high on the upside would favor option 2;  a break of 1256 on the downside would virtually confirm option 1.  First support comes in around 1267-1270.

        

So the possibility exists that the top is now in place.  We have key levels to watch for breaks to the upside and downside -- now we just have to wait for the market to tip its hand.

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

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!