SPX and BKX Update: Market on Hold, Call Again Later

Yesterday gave us nothing in the way of meaningful price data.  In a range-bound market, a day that stays well within that range doesn't help much.  So the crash count is still out there -- but the market has really moved no closer to it and no farther from it, as not one key level was violated in either direction (this applies even to short-term levels not outlined). 

Materially, there is simply not much to add to yesterday's counts.  The short term structure is still an ugly mess, and leaves a lot to interpretation.  The biggest challenge is that the structure is vague enough that it's very difficult to zero-in on minute knockout levels.  The key levels to validate the bear case are still 1215 and 1190, the key level for the short-term bull case is still 1292.  There has been nothing to change my opinion that we are forming a significant top.  My preferred view is that the top was made on October 27.

By now, all my readers know I have been strongly favoring a bearish resolution.  During Monday's session, crude oil added further weight to the bearish view.  On Friday, I presented some charts and a real-time update on the oil market, and opined that crude would put in a top either that same day, or on Monday.  So far, it appears I may have nailed it... we'll see if the market continues to play along.  Crude traded down throughout virtually all of Monday's session, and seems to have traced out a first wave lower.  Crude and equities have traded in pretty good lockstep for some time, so crude may well be leading the way lower for equities here. 

At major turns, there are endless potentials.  As I just mentioned, I am still favoring the bearish resolution by a large margin, as I have for several weeks.  But I must stress there has been no objective confirmation yet, since 1215 and 1190 still haven't been broken.   

Sometimes novice traders get annoyed with this type of market and demand that someone tell them whether they should be long or short.  There is a problem with this type of thinking, and it's one of the reasons 95% of traders go bust: long or short are never the only two options. Cash is a position, too, and if you, personally, are unable to trade a manic market like this, then it's usually the best position.

In range-bound markets, there is an interesting dynamic that comes into play with traders, and it can be described with something called Prospect Theory.  Prospect Theory has shown that people become risk-averse when facing a gain, but they become risk-seeking when facing a loss.  This is why many traders tend to hang on to their losers longer than they hang on to their winners.  A losing trade actually makes people take more risks than they should, and this mentality seems built-in to our psyches.  Conversely, when people gain a small profit, they become anxious to protect it.  As a result of this psychology, people tend to trade in exactly the opposite fashion of the manner that's profitable. 

The profitable manner is:  cut your losses and let your winners run.

It is this same psychology that causes this type of market to wear people out... the bears get more exhausted on every rally, and the bulls get more exhausted on every drop.  Eventually, one side -- either the bulls or the bears -- throws in the towel.  I believe Prospect Theory helps explain these types of markets, and their eventual resolution.  Here's how: 

Let's use the example of a bull who buys some stocks at SPX 1280, and the market heads down immediately after his purchase.  He is facing a loss, so according to Prospect Theory, he becomes risk-seeking, and hangs onto the trade "hoping" to get even.  Though his account is at a loss, eventually the market rallies -- and now he's getting close to even... but then suddenly the market sells off again.  Next time it rallies again, he will now be willing to sell for a loss, and a bigger loss than he would have accepted on the first run up.  The same happens in reverse for the bears. 

I think this psychology is a contributing factor to contracting triangle patterns... each time the market runs up, the bulls who rode the elevator down are willing to sell for less just to get out, and each time it runs back down, the bears who rode it up are willing to pay higher prices to cover their shorts.  So the price points gradually converge: highs get lower, lows get higher, because both sides are feeling beat up.  Eventually, when enough traders have cleared out from one side of the trade, either buyers or sellers, the market finally breaks out of the pattern.  Who wins will come down to which side has more conviction.

Alright, on to the muddled charts.  I'm not going to present all the charts I presented yesterday, so if you didn't read yesterday's update, you could do so to familiarize yourself with the potentials. 

The SPX chart is still not terribly helpful over the very short term, I'm afraid; short and intermediate term potentials are too plentiful right now.  My projected resolution to the pattern is for the market to turn south without breaking 1292.

The short-term bullish count I want to call to everyone's attention to again is the triangle, since it is readily identifiable.  Some added information: the triangle count posted yesterday could be complete, or could stretch out further; if that's the resolution the market is seeking here. 1215 remains the knockout level for the triangle count.  Also important to note is what I wrote yesterday:

If this is occurring, it usually plays out as a false breakdown from the triangle, in wave e (see chart), then whipsaws back up into the triangle and takes off upward in wave C. It's generally a strong rally out of the whipsaw, much like we saw on October 4. Be cautious of this, because you can see it when it happens, and there is no reason to get caught on the wrong side of a move like that (below). 

While the short term SPX is a mess, there is a potential setup in the Philadelphia Bank Index (BKX) that's worth noting.  The short-term count here seems a little clearer than the SPX, but I would still rate it at only 60% confidence.  However, if the BKX rallies Tuesday/Wednesday, this setup might be worth looking at.  The chart below describes the setup.  Within the blue target box, be aware of the large gap in the 39.40 area that could be filled before the BKX heads lower:

The 10-minute chart (below) shows the short-term targets, if this count is correct:

Beyond that, not much to add to yesterday's picture.  The market continues to run back and forth in the range, and won't provide much in the way of additional clues it breaks one way or the other.  Trade safe!

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

SPX Update: Crash Wave Still Unconfirmed; Fundamentals Still Bearish

While the crash wave setup remains "as good as it gets," the market has thus far stayed above the key levels I've outlined previously (1215 and 1190) which could actually spark a crash.  After Friday's rally, the market is now approaching the do-or-die level for these bear counts, and the market's short-term future will likely be determined by what happens on Monday and Tuesday.

Bulls received some potential "feel-good" news from Italy over the weekend, as Prime Minister Silvio Berlusconi announced his resignation on Saturday.  He was immediately approached by Greece, who, tired of being upstaged, asked him if he'd be willing to become their Prime Minister.  He allegedly accepted, but was immediately asked to resign. 

George Papandreou announced that he is available all month and, if needed, would be willing to resign from Italy, Spain, Portugal, and "any other European country that wants him."   

Italy officially approved an austerity package, which, in a dramatic and sweeping gesture, suggests that all citizens cut down their intake of Fettuccine Alfredo to "no more than four servings per week, unless it's really necessary."  Government officials voted themselves exempt from this rule.

Nothing here should be a huge surprise to the market, and it seems likely these events are priced in already.  We could see a case of "sell the news" next week. 

The silliness is: Berlusconi was not the real problem in Italy -- and how a "tip of the hat" to austerity will help a country whose debt is 120% of GDP and growing remains to be seen.  The problem seems to be one of debt vs. production, so unless Italy can actually get its economy to expand, there appears to be no retreat from inevitable default.  Italy's total debt is projected to hit $1.9 trillion Euro by year's end, which makes Italy just like The Titanic: "too big to bail."

People often boggle at macro-economics because the numbers are so huge, but it's really not very difficult to understand.  If you understand how to balance your checkbook and pay your bills, you have a pretty good start.  Imagine that you as an individual were earning $4000/month, but your bills were $4800/month.  To make up the extra $800 each month, you borrowed money by obtaining additional loans.  This might allow you to continue meeting your obligations for a time, but unless you can raise your income to meet the $800 shortfall each month, plus the new obligations you are incurring with additional borrowing, you will eventually be forced to default on your debt as the only solution.

This is the situation many countries now find themselves in.  To make things worse, their economies (their "jobs" using the individual example above) are shrinking, not expanding.  To go back to the example of personal finance, this would be the equivalent of you being forced to take a pay cut while your already-unmanageable debt was still growing.  Obviously, this would hasten your trip to the bankruptcy court; and the same is true of these countries.

Whether the stock market continues to take the irrational path of viewing this situation as somehow bullish remains to be seen.  There's an old expression: "The market can remain irrational a lot longer than you can remain solvent."

The charts continue to indicate that the market's next move should be lower -- however, Friday's action raised more questions than it answered, and the mask caused by Wednesday's gap down continues to present a challenge to the clarity of the counts. 

Before the open on Thursday, I warned bears not to get complacent and presented a possible ST bullish count.  This possibility has certainly gained some favor after the action on Friday (original chart shown below):

Compare that hypothetical chart with the current actual chart (below), and you can see why we are now forced to give this more weight as a possibility.  Another thing that adds some appeal to the alternate count shown in the chart above, and in black below, is the potential for a head-fake triangle breakout.  By now, every chartist on the planet has seen the potential triangle I talked about intra-day on Friday.  A head-fake would be a great final-confuser to the move, and ironically, a fake-out like that would actually strengthen the bear case -- as long as it stayed below 1292.66.

While it's certainly possible for the market to roll over directly at the open on Monday, the structure seems to need a little more upside, either to complete blue wave 2 within the blue target box (as shown, it may already be complete), or to complete red wave (ii) (shown by the black "Alt: (ii)" label). 

Sometimes, though, the futures will do the work of completing a pattern.  So the futures could rally at their open, hit the top line, and fall back down, leading to a negative cash open -- which could be the start of the roll-over.  A down-day that breaks 1245 would add confidence to the view that the rally has rolled over. 

It will be interesting to watch what happens here. 

Of course, the potential exists for an upside break to be more than a head fake.  While I continue to only give 20% odds to the bullish alternate counts, 20% still means they can't be ruled out, and the October 27 high remains the line in the sand.

I often compare trading to poker, and one of the examples I've used is Texas Hold 'Em.  Imagine you are dealt a pair of pocket aces -- your odds of beating someone who's holding 2-7 off-suit are fantastic.  Given those odds, you would be correct in playing that hand very aggressively against your opponent; however, that's no guarantee you'll win.  In fact, to the contrary, the odds actually guarantee that sometimes you'll lose.  In trading, that's why you must always take steps to protect yourself. 

Below is the "2-7 off-suit" count.  Whether this count will draw a miracle card on the river here remains to be seen.  This bullish count could stretch the rally up as high as the 1330's.

There is also another chart I feel obligated to share.  While I continue to view these bullish resolutions as unlikely, the market often does what it wants, so it is necessary to be aware of them and play accordingly.  This second bullish alternate is one that generally plays out in a recognizable fashion, and gives fair warning if it's underway.  This would be the option of a wave B triangle. 

If this is occurring, it usually plays out as a false breakdown from the triangle, in wave e (see chart), then whipsaws back up into the triangle and takes off upward in wave C.  It's generally a strong rally out of the whipsaw, much like we saw on October 4.  Be cautious of this, because you can see it when it happens, and there is no reason to get caught on the wrong side of a move like that (below). 

Wave e is completely unpredictable though, so there's no guarantee it will break down.  It could end as early as the mid-point of the triangle, as shown by the yellow target box -- if this scenario were to occur.

So the market has done its best to add confusion to the picture.  As I talked about on November 2:

I'm not saying that the top call is wrong [referring to October 27], just because there're 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.

Now we have the curve-ball from the market -- and the more bullish short-term possibilities, which have never been ruled out, still remain open.  So the question the market has refused to answer remains: is this just a curve ball, or something more?  The key levels to watch for validation of the bear case haven't changed: 1215 and 1190 below it. The key level to watch for the bull case is still the October 27 high.  While I remain in favor of the bearish counts by an 80% margin, deuce-seven off-suit is always out there lurking.  Trade safe.

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

The Shanghai Composite... or something

The SSEC is a bit of a challenge for me to tackle, as I have no access to detailed intra-day data.  Without a look at a 30-minute chart at least (preferably a 5 minute chart), I am unable to differentiate between the short-term structures, and am left with some blind guessing.

The long-term structure appears reasonably clear.  It would seem that 2008 was an A-wave crash, and 2009-2011 have been a B-wave triangle.  The triangle counts reasonably well, and demonstrates the correct 3-3-3-3-3 structure.  Without intraday data, where I run into difficulty is the short-term picture.

Let's start with the long-term view.  I have superimposed the SPX in line-form behind the SSEC, to show that they sometimes trade in concert, and sometimes trade opposed.  Note the SSEC actually led in 2008, but has lagged since.  In fact, one could say the SSEC's "bull market" only lasted a few months (can anyone say "no QE2 in China"?); it has not made a new high since summer of 2010:

Regarding the short-term picture, I cannot overstate the importance of having intra-day data.  Okay, that's not completely true -- I could easily overstate the importance of this.  For example, I could say, "A lack of intra-day data is the leading cause of slow and painful death in North America."  That would be a definite overstatement.  But, as far as the counts go anyway, it's pretty important data.

So I have fumbled around with the charts as they are, and have two to present.  The first shows the current move down as part of a nested 1-2 series.  Both first waves are complete, however, I have literally no clue on whether the current wave ii is complete, nearly complete, or something else entirely.  That's where I really need intra-day data.  Also, I can't reconcile the rest of the count without it.  Also, it's the leading cause of slow and painful death in North America, as shown in this chart:

The second short-term chart is an ugly way to count the entire leg down as one wave.  I don't like this count as much, because it doesn't really balance very well.  In fact, when I look at the count this way, I am again inclined to think it counts better as an A-B-C. 

The problem is, if the larger count is correct -- and there's no reason to think it's not, it's a pretty good triangle -- then the current wave down should be part of red wave C.  And C-waves are never A-B-C's; they are always 5 wave moves.

But almost anything is possible, since I have no intra-day data.  Anyway, here's the other ST chart.  As we can see on this chart, I forgot to save the chart I was working on, so I have to go re-do the whole thing.  I realized this after systematically uploading four charts to this article, which were all wrong (not shown). 

(30 minutes later...)

Luckily for you, I'm only going to show the correct one I just recreated (below) and spare you the agony of my personal hell:

I have seen some people try to count the whole wave as a leading diagonal. This doesn't really work, since leading diagonals, unlike ending diagonals, usually break up into 5-3-5-3-5 moves. Allegedly, they can also break up into 5-3-5, although the reference materials offer no further detail than that (in this regard, the literature is a bit like a cookbook which says, "You need to bake this for 5 hours. Or 3 hours, whatever." with no additional instruction). I suppose you could count this as a 5-3-5 fairly well, with an ending diagonal inside the leading diagonal, and a partridge in a pear tree.

So that's what I've got.  Again, without ST data, it's a bit like throwing darts at an effigy of a politician while blind-folded... without the tell-tale "OW!" you'd get from the real thing, there's just no way to know for sure if you've hit it or not.

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

(Quick) Crude Oil Update: Top in Sight?

NOTE:  Friday's regular stock market update is posted just below.

I was just expanding my crude oil charting, and it looks as though crude may be within a couple dollars of the Wave C of (ii) top.  This is, of course, assuming my preferred count is correct.  If my count is correct, crude may be putting in a significant top either today or Monday.  If it exceeds the $100.62 mark, my ST count is off.  My confidence in this count is reasonably high.

60-minute chart below.  I didn't label the smaller wave forms, because it's very time consuming in Photoshop, but everything reconciles properly:

The big picture chart is posted below.  Under my preferred count, crude is in the process of completing wave c of (ii), and will soon reverse hard from these levels.  The long-term target is $25 +/-.

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

SPX Update: Crash Wave Ready; Confirmation Still Pending

There's been no material change in the counts since yesterday's update, however, I have narrowed down some possibilities for the current retracement rally.

(If you're new to the discussion, or to Elliott Wave Theory, it would be quite helpful to familiarize yourself with The Big Picture long-term market projections, which have played out quite well so far.)

The retracement rally off the 1226 print low has fulfilled the minimum requirements for a second wave.  While there are several options for the structure to take from here, two possibilities jump out at me as the most likely:

1) We have seen most, or all, of the Wave 2 rally.

2) Thursday was part of an a-wave leading diagonal (see chart, below).

I am slightly favoring the leading diagonal interpretation, simply because it counts a little better given what the market has revealed so far.  However the rally could also be counted as a series of zigzags, which makes for an unpredictable short-term outcome.  It reminds me a lot of the beginning of the rally off the November 1 lows; it's simply an ugly structure.  So the third option is that it will evolve into a similar type of rally as the previous one -- although, this being a smaller degree wave, it won't retrace as many points.

The critical knockout level for my preferred count remains the October 27 high of 1292. 

I continue to feel that the important support levels are 1215 and 1190 SPX.  If the bulls can't hold those levels, we will almost certainly see a rapid drop to the next meaningful support zone near the SPX 1000-1050 area.  This first leg down would then set up a much larger crash wave, which could ultimately take the SPX as low as the 400's.  The chart below reveals the intermediate picture, if these critical support levels don't hold:

The bullish alternate counts are still floating around out there at 20% odds.  However, given all the bullish sentiment; the fundamental mess the world is in; the double-failure at the 200 day moving average and head and shoulders neckline; and the cross-market comparisons I've been publishing for a couple weeks (the Dollar, copper, Apple, etc. -- Apple and the Dollar, incidentally, are so far performing exactly as projected.), I continue to have a difficult time viewing this as anything other than an important top.

As a result of all these studies, I believe it's highly likely this crash wave will occur, and am favoring it at 80% odds.  But it's not like I've never been wrong before (just ask my wife, she'll gladly verify this).

In any case, it's a bit of watch and wait right now.  The market is perched on the edge of a cliff, and what happens next could determine this market's future for a long time to come.  Trade safe.

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

SPX Update: Looking for Confirmation of the Crash Wave

On Tuesday, my readers and I were pretty much all alone, looking for a top.  How things can change in a day!  All the sudden, the masses seem to be waking up from the drunken euphoria of Wave (2) and realizing the world doesn't look as good without the beer goggles of Central Bank intervention.

I want to talk about the psychology of different waves for a moment, so readers understand why I will be telling them: at this point, it's okay for the masses to get on board with our top call.  Before we get to the present, let's take a quick look at the past.  Back on October 4, when I predicted the S&P 500 (SPX) would rally from 1074 to 1265 (close!), I wrote about the psychology we should expect going forward off the low:

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 think it's safe to say that the psychology detailed above pretty well matches what most investors were thinking on Tuesday.  Tops are made a little differently than bottoms.  Due to short covering panics, bottoms tend to be fast and furious v-shaped affairs; tops take a little more time.  In my preferred view, Minor Wave (2) actually peaked on October 27 -- but this secondary, smaller Wave (ii) peak, which likely completed on Tuesday, helped stretch out the top and further fulfill the psychological requirements of Minor Wave (2).

AAII investor sentiment (right) was released on Wednesday, and again came in at elevated levels; bullish sentiment is almost 6% above the historical average.  Add that to the other sentiment indicators we've been looking at for several days, and you get some pretty frothy bullish sentiment, consistent with an important top. 

If my preferred count is correct, we are now in the very early portion of Minor Wave (3) down.  I liked being alone when calling the top of both second waves, but now for the third wave, I'll welcome company.  Third waves are the moment of recognition for the masses.  This is the time people will (again) start waking up to the world around them, and realizing what a mess it is.  Third waves are not waves in which to be contrarian; they are waves in which more and more people will pile on the bandwagon as the move accelerates. 

At some point, that bearish sentiment will become extreme (in fact, more extreme than is generally considered acceptable), and at the very bottom of Minute Wave 1 (the first leg of Minor (3)), people will believe the world is ending.  Then something will come along that is perceived as really good news: maybe QE3; or the announcement that the European Central Bank has been purchased by China and will be converted into an outlet store.  This good news will come concurrent with the Minute Wave 2 bounce, during which sentiment will recover slightly -- however, not nearly to current levels.

But I don't want to get too far ahead of the market here, so we'll examine these things again when the time is right.

Onto the charts.  While there are never any guarantees, the setup in the charts is as good as it gets for the beginning of a third wave down.  If the market takes out 1215 on a closing basis, many indicators will roll decisively.  If it takes out 1190 below it, these indicators should accelerate to the downside.  You can also see in this first chart that if the market breaks below 1190, there is no meaningful support until the low 1100's.

Additionally, the market is falling down from double retests of both the 200 day moving average, and the head and shoulders neckline.  Both tests have failed; it's hard to imagine that the market would feel the need to test these levels a third time, but stranger things have happened.  Add these facts, and the bullish sentiment, to all the other charts we've looked at recently, such as the dollar, copper, oil, and others, and it's hard to imagine that the setup could get much better.

But as yet, there is not any real, objective confirmation of the preferred count.  It is more a case of strong circumstantial evidence.  For this reason, I have presented an alternate count as the final chart, and despite the near-perfect setup currently, I would suggest remaining aware of that alternate potential.

There are, of course, still bullish alternate counts.  Collectively, I would give the bullish counts roughly 20% odds.  Because of the fact that this new wave structure has generated a number of different bullish potentials, I've decided it's no longer prudent to focus on only one single bullish knockout level.  Instead, I think the two levels to focus on are those just mentioned: 1215 and 1190 SPX.  Either of these levels breaking could spark a waterfall decline; these are really the last lines of defense for bulls until roughly 1115.  Below 1190, and a trip to the 1074 low is almost a given. 

If this is black subwave 1 of Minor (3) down (as shown above), it should eventually take out the 1074 low.  Assuming my preferred count is correct, I anticipate that the market will probably test the 1000-1050 zone before it finds any type of meaningful bottom. 

The next chart is the short-term SPX chart.  I have tentatively labeled the move as a nested 1-2 count, which means we've seen waves (i) and (ii), waves 1 and 2, and waves i and ii.  This count would imply a strong acceleration of the move once the market sees sustained trading below the recent low of 1226.

However, I must stress that this labeling is tentative.  I had to go study the ES futures to gain any insight into the possibilities, due to the fact that the wave structure in the cash market consists primarily of one giant red candle, which is indecipherable by itself.  The reservations I have with using ES for the count is that the futures, being a highly leveraged market, are susceptible to wave distortion.  So the count below is my best guess.  Basically, trade above the 1251.82 swing high would rule out the blue wave i and make it more likely that the whole move was one wave, depicted as the black "Alt: 1" and corresponding "Alt: 2" label and target box.

There are three KO levels marked on the chart; each one KO's the successive degrees of second waves. 

There is always the temptation, especially when things go almost exactly as predicted, to become lazy and complacent.  I therefore want to offer up a third possibility.  The challenge of Wednesday's move is that (again, using ES futures) it could be counted as a three-wave structure (we've seen this movie before -- several times over the past week); the problem here is that there's virtually no visible structure in the cash market, other than a clean five-wave move at the end, which could conceivably be a "c" wave.  So I would again mention that there is no confirmation yet, and present this alternate possibility (below). 

I would suggest being cautious of this potential only if the market were to trade above the 1251.86 swing high.  If trade stays below that level, then this count really isn't even a concern.  Even above that level, I would give this count low probability, unless we start to see internals strengthening considerably. 

 

So in conclusion, my preferred view is that this is indeed the start of wave (iii)-down of 1-down of Minor (3)-down.  It really can't look much more promising... well, it could, if we could decisively eliminate the potential of the 3-wave move shown above.  Barring the low-probability alternates, I would expect a bounce today for Wave 2, and a reversal either today or Monday.  Keep on your toes, and trade safe.

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

SPX and Crude Oil Update: Rally Ready to Roll Over for Good?

I'm going to keep this update short and sweet.  Yesterday, the charts looked muddled, and to some extent, they still do -- I've noticed over the years that this almost always happens in the charts when the market is making an important top.  I was looking for a reversal yesterday, but I usually tend to be a day or so early for those, at least when I'm calling tops before they actually happen.  Did the same thing on October 27; I was a day early.  Maybe one day I'll figure out how to compensate for that.

Anyway, as a result of yesterday's action, there are really two main counts I'm focussed on now: the preferred count I've stuck to since late October, which says October 27 was a major top; and the alternate count which suggests the S&P 500 could make a slightly higher high for the move. 

In both cases, I am of the view that this is a bear market rally; and it should get ugly fast when it rolls over, as hoards of Johnny-come-lately bulls will be jamming the exit doors trying to get out.  If you're just joining the discussion, it's helpful to review my big picture outlook for the market.  Note that I haven't updated that article's long-term chart since October 3, largely because I haven't really needed to. 

Over the past few days, I have presented several indicators regarding sentiment, and discussed how these indicators were arguing that a top was being made.  In the market update for Monday, we examined Rydex bull funds (retail investors), which had reached record money flow levels.  In Tuesday's update, we looked at the ratio of money flowing into the Nasdaq vs. the NYSE, which had also reached record levels.

The point I really want to stress here is that this level of extreme bullish sentiment is simply not consistent with a bottom in the market.  Let me repeat that: bullish sentiment is not consistent with a baby bull market.  Remember March 2009?  People were convinced the market was going to zero.  Even at the October 4 low (remember way back then?  Like a month ago?), most were convinced the market was going to crash, not put together a monster rally.  Compare that with today, when there's more money going into risky stocks and bullish funds than ever before.  This type of sentiment is consistent with a top, not a bottom.  The market is all about fear and greed.  When the market reaches extremes of either emotion, a reversal is usually nearby.

This first chart shows my preferred count.  With the additional puzzle piece of Monday's price action, I am now about 70% convinced that this latest counter-trend rally is over.  There could be one more quick drop followed by a marginal new high (see blue "or (c)?" label), but I'm not favoring it.  However, the level on this chart which is critical for the bulls first defense is 1238-1240.  Until bears break those levels, new highs can't be ruled out.  But if those levels go, that will almost certainly leave the bulls in trouble.  And if this formation is an ending diagonal, those levels will probably get tested pretty quickly when it breaks.

One reason those levels are so critical is because breaking them will eliminate the option that this formation is a leading diagonal.  A leading diagonal would be consistent with the bullish alternate count (shown below), which considers the possibility that the market is in the beginning stages of wave c up to new highs (early targets are for 1305-1330).  If the bullish alternate count is unfolding, then this diagonal is wave 1 of red c on the chart below.

I should also note that breaking 1238-1240 still can't eliminate the bullish alternate count.  I don't know that it would help to launch into a huge and confusing explanation as to why, so you're just going to have to trust me on this: 1197 is the level that eliminates the bullish alternate. 

Even though the market has pushed up close to the knockout level for my preferred count (above), I continue to only give 30% odds to this bullish alternate (below).

One last chart to add; I'm sharing this primarily because a number of readers have requested it.  The chart is an update to my long-term count of crude oil.  The last chart I posted was on September 9, but if you check the old chart, crude has played out pretty closely since -- however, the old chart did require some slight adjustments to the labeling. 

From the looks of it, crude is currently in the process of backtesting the broken blue trendchannel, in the mid-$90 range.  If the preferred count shown on this chart is correct, crude is forming a nested series of first and second waves, and could collapse dramatically when it turns. 

I am currently favoring the preferred count by a 90% margin, based on my analysis of other markets, such as the dollar, copper, and equities.  However, the black alternate count cannot be ruled out yet, and, strangely, results in the exact opposite effect from the preferred count.  So, one way or another, crude is likely gearing up for a monster move.

To sum it all up, I think this rally is almost certainly over... but pay attention to the levels listed above for confirmation.  The next leg down could be brutal.  Preliminary targets for the first leg of the next move down are in the mid-1100's, but that could change as it unfolds.  Once we get some confirmation, I'll start refining the targets.  Ultimately, the larger-degree wave should take the SPX into the 800's or lower, although that will take some time, and there'll be rallies along the way.   Trade safe!

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