SPX and NDX Update: Retracement Rally Hits Targets; Top May Be In

While the rally keeps hitting my targets perfectly, it is doing so in a very "ugly" fashion, and has now made charting the next move a bit difficult.  Some moves are clean and a pleasure to chart... other moves make you want to take up a new career; ideally one that involves counting things that are really large and not open to interpretation, like elephants.  This is one of those moves.  But I hear the Elephant Wave Theory field is flooded with applicants right now, so I guess I'm stuck.

The top may be in, but with the wave structure so messy, it's hard to predict a direct and immediate reversal.  After cross-studying a number of indices, I'm open to the idea that there's one more new high coming -- but I'd give maybe 55% odds to the new high, and 45% odds to the rally being complete.  If you forced me to give exact targets for any new highs, I would say 1267 SPX and 2385 NDX -- so it’s probably safe to say that the rally is, effectively, over. 

The rally retraced right into my target zones, so whether it reverses immediately or continues slightly higher, I'm content with that for now.

If by some chance you're just joining the discussion, it would be helpful to familiarize yourself with The Big Picture chart, which has tracked well enough so far that I haven't felt the need to update it in over a month.  That article also contains a brief introduction to Elliott Wave Theory (unfortunately, however, it contains nothing on Elephant Wave Theory).

The first chart is the SPX chart, with the best-fitting way I can find to label the jumbled mess that has been this rally.  On this chart, you can see that it appears the SPX is in its final wave up, so it may have topped yesterday.  Just going off this chart, one could be fairly convinced that the rally is over.  The NDX chart (the last chart shown) looks like it might need another high, which is one reason I’m split on the two views.

If this is indeed a second wave retracement rally, the only rule by Elliott standards is that it doesn't exceed the top; i.e.- last Thursday's high.  Second waves are allowed to retrace 100% of the prior move (but not over)... so the targets posted are my preferred view, but the rally is free to exceed them if it wants.

For several days, I have also been showing the chart which has the alternate bullish interpretation of the current wave structure.  I remain disturbed by the fact that the decline off last Thursday's high can count so well as an a-b-c... however, if that's what it was, it was a very forceful correction... but C-waves are known to trick people, even technicians, into believing the trend has changed.  I am still giving this alternate count (chart below) about 30% odds.  A move below 1197 SPX will knock this count out.

One more chart of the SPX, then I'll move onto the NDX.  The next chart shows a longer-term view of the SPX and how it has once again gravitated back into the area of the head and shoulders neckline.  Depending on how one draws the neckline (intra-day lows or closing lows), we are either there already, or a few points away.  It will be interesting to see how the SPX responds to this area now that it has been violated once previously.  Theoretically, this area should still be a battleground and potential reversal zone.

The final chart is the short-term NDX chart.  The NDX is also in the zone where we could expect a reversal.  On this chart, I have sketched in a possibility as to what may happen today/Monday, if a new high is coming.  It appears possible that the NDX might be in the midst of a small wave iv.  IF that's the case, and due to the wave structure, that's a big "if" -- the market would start the morning off with some sideways/down action, which should eventually resolve to the upside.  Again, the NDX has already hit its expected targets, and the rally may be fully complete, so additional upside may or may not be forthcoming. 

If we head down hard at the open, and particularly if the NDX trades below 2347, I would no longer expect new highs.  Of course, that would be barring some even stranger pattern formation going forward, such as the (z) wave of a triple three or zigzag.  Triple zigzags are pretty rare, though.

Again, if the preferred count is correct, the ultimate resolution to all of this will be new lows on all the indices.  Beyond that, not much to add over yesterday's article.  Trade safe!

SPX Update: Slight Adjustment Still Leaves the Big Picture Bearish

As I opined many times in the past, there was no new Quantitative Easing program announced by the Fed on Wednesday.  In fact, the Fed announced only one new program yesterday, titled "Operation: Huh?"  Under the terms set forth in "Operation: Huh?" the Fed has finally agreed to start openly admitting that it's basically clueless about everything.  I, for one, think this is a huge step forward, and possibly the most helpful program to come out of a Fed meeting in at least fifteen years.

The charts suggested ahead of time that there would be no fireworks on Wednesday, and both the S&P 500 (SPX) and Nasdaq 100 (NDX) wandered their way up into the target ranges I had posted in Tuesday's update.  The NDX barely squeaked in, tagging my suggested target range by only one point.  Yesterday's targets were, relatively, easy; now things get a little more complicated.

After spending a lot of time last night and this morning on cross-market studies of other indices, currencies, and a few commodities, I have switched yesterday's alternate count into the preferred role.  My preferred view is that this is wave (ii) up, instead of wave 4.  The wave 4 count has now flipped into the alternate position, and is shown on the chart by the black "Alt" labels.  If this is the fourth wave, a marginal new low should follow this rally.  If that's the case, the market is less likely to stage a deep retracement of the prior decline; in fact, any trade above 1264 would knock this count out.

If the indices are forming a fourth wave, there is no telling what they'll do.  To give you an idea of why I say this: the trading range from August until the October low was a fourth wave (of much larger degree, obviously).  If you look at a six month chart, you can see that the only thing that was clearly defined about that move, in retrospect, was the trading range.  Other than that, the indices meandered about for months, almost in a seemingly random fashion.  Due to their somewhat unpredictable nature, fourth waves can be difficult trading environments.

The two targets I like for the preferred wave ii count are 1256 and (if 1256 is violated convincingly) 1267.  I've also drawn up a simple support/resistance chart showing some areas that may create battlegrounds in the future.  This chart also highlights why I like 1267 as a possible target.

I am forced to forego the NDX chart in this update, because I simply ran out of time -- however the NDX should trade roughly in concert with the SPX.  The last chart I'll present is my more bullish alternate count, which is still hanging in there, and has actually moved up a notch to 30% odds.  Unfortunately, the market never reached the level required to knock this count out, so it continues to remain viable.  This count suggests there's one last rally to new highs unfolding now.

In all of the above cases, the expected resolution after the rally ends is a deep decline to new lows.  Once the top is in, I can start calculating targets for the each of the coming legs down.  Trade safe!

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

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