SPX and Euro Update: Euro Still in the Driver's Seat

There are now so many indicators suggesting the market is forming a top, I'm beginning to lose count.  Of course, past performance is no guarantee of future results and all that, but let me lay out the case for a top:

1) Friday was a non-farm payroll bearish reversal day.
2) There are now two bearish reversal candlesticks in a row on the daily chart (not shown).
3) The Volatility Index (VIX) has traded outside its lower Bollinger band for three days in a row.
4) Retail investors, as measured by Rydex fund flows, are again very bullish.
5) "Everyone" is expecting a seasonal Santa rally.
6) The wave structure seems to support a top (see charts).
7) The Euro, while open to some interpretation, could be on the verge of a major breakdown (see chart).
8) The market now has a fourth apparent rejection at the 200 day moving average.
9) The 1158 bottom was not formed very well, as far as bottoms go (here I'm tempted to make off-color jokes about "well-formed bottoms.")

I've spent roughly 40,000 hours this weekend charting and re-charting, so I'm going to get right to those charts.  The first chart I'd like to share is a big picture chart, and compares some similarities between the current market, and the market earlier this year.  I'm using the Wilshire 5000 for form; the chart explains the rest:

The second chart shows my revised count for the short-term structure of the S&P 500 (SPX).  I've never been entirely satisfied with the prior labeling of the decline, and the entire sideways correction in early November was also a big challenge.  The count I'm about to show is one I haven't seen anywhere else, which is another thing I like -- it always worries me when too many technicians are on the same page together.

This new labeling accomplishes two things:

1) Shows indicator confirmation of the internal third wave, which didn't match using the prior labeling.
2) Explains the violence of the rally.

This is one of those "either I'm a genius or a madman" charts.

Anyone even passively familiar with Elliott Wave Theory will see why the decline was so difficult to label in real-time -- the wave peaks don't always line up with the price peaks.  While I did get the direction of the decline consistently correct using real-time charting -- and did anticipate the rally potential at the correct time -- I failed to anticipate a rally this massive. (Which is why it's important to always protect profits.)  This type of rally is consistent with a first-wave leading diagonal, and the revised count reconciles well under this interpretation:

Do note that the above chart raises the knockout level for the bearish count.  This count seems to suggest that the top was made on Friday.

The next chart is the intermediate picture Euro chart.  I spent a ton of time on the Euro charts this weekend -- in fact, I've now reached the point where if I spend any more time staring at Euro charts, I'm going to feel compelled to start wearing a Speedo.

I feel the Euro is hugely important here, because it's been perfectly correlated with the SPX since September.  If the Euro bottoms, the market bottoms.  The challenge here is there are also two completely viable interpretations of the Euro chart.  One indicates a short-term bottom is coming (brown alternate count), the other indicates a big decline is coming (red and blue preferred count). 

Both do seem to agree that lower prices are needed in the short term.  Neither count foresees a long-term sustainable rally in the Euro.

Note the blue vertical lines, which show how every bottom in the Euro now correlates with a rally in SPX.

And finally, the bullish (short term) alternate count, which remains with us at 35% odds.  While the market did trade into the target zone for this count on Friday, the structure for this count would look much better with a new high above 1260.  A new high would also serve to clear out some of the stops sitting above Friday's high, to then make way for a correction.

In conclusion, I remain medium and long term bearish -- and bearish over the very short term, due to the preponderance of indicators which are screaming for a top now.  The market hasn't clarified the case for a Santa rally yet, and we may instead see Santa falling down the chimney.  I continue to favor a bearish outcome across the board right now, but there are clearly a number of reasons to merit a cautious approach here.  In a perfect world, this portion of the picture would clear up soon -- obviously, a lot depends on what the Euro does in the near future.  Trade safe.

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

Important Interview with Kyle Bass

Here's a thought-provoking and sobering interiew with Kyle Bass.  He talks about the consequences of "kicking the can down the road," and the potential ramifications of sovereign default -- and many other things, such as the fact that the nations collectively have the largest accumulation of debt in world history. 

He also talks about how Europe is in a much worse position than the US, although the EU leaders seem to be in denial of this fact.

Pretty sharp guy if you're not familiar with him.  If you have any questions about the fundamentals backing the bear case, then watch this interview.

Embedding is disabled on this video, so all I can post is the link.  (Thanks to KWave for the link!)

AC2011 Session 1.2 Come Undone: Kyle Bass redux

SPX Update: Topping Again?

Yesterday the market did absolutely nothing to clarify whether the short-term bullish (long-term bearish) count or heavily bearish count is in play, but there is a good possibility that a top is forming under the terms of either count.  While it's always possible that something completely unexpected is going on, the odds favor a top in progress -- with the question appearing to be one of degree: will the top be short-term, or something more significant?

While it is difficult to look much beyond the immediate horizon when the picture has so many potentials, the indications that a nice tradeable top is coming are outlined below.

Obviously, if the blue wave 2 count is playing out, this would be an exceptionally meaningful top -- but I do have my doubts about that scenario now.  The market has traded very close to the knockout line on the SPX chart (below).  I'm not going to show the Dow Jones Industrial Average chart, but the DJIA is even closer to its KO -- so for reference, the number on the Dow is 12186.98 (1266.98 SPX).  Any print above those levels, and we can KO the count shown below.

The bullish count appears to be close to topping as well; this count would anticipate some more upside before a correction.  Until the top is actually made, it's difficult to say exactly what shape the correction will take, but I have a theory that it might be fairly deep.  The recent bottom seems to need a retest to give it any validity, since it simply wasn't formed the way most bottoms are formed.  There are of course, always exceptions to every rule, and this bottom could be one; but I have a suspicion that the market could take a crack at a deep retracement.  The caveat there is that the market could do a shallow B-wave and zip on up right into the C-wave, and then form the deep retracement -- which would ultimately break the low.

The chart below grants a solid target for wave 5 of A, represented by the blue target box.  After that, the remaining lines are speculation -- once wave A tops and the correction begins, I can give some more accurate projections for (assumed) B and C.

Another interesting factor which supports some type of top forming is the Volatility Index (VIX).  The last two sessions, the VIX has traded outside its lower Bollinger band.  No indicator works 100% of the time, but in the majority of cases, this indicates a top is nearby.  Sometimes the market tops the next day; sometimes it tops a few days later.  And every now and then, it just keeps going up -- but that's the exception.  The last two times this setup happened are highlighted on the chart below:

In conclusion, I remain medium and long term bearish.  I'm waiting for the market to clarify the short term picture in more detail -- though with the VIX confirming the wave structure, it does appear that a top of some type is quite close.  What happens over the next few sessions should provide more clues as to the significance of this assumed top.  Trade safe.

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

SPX Update: Uncle Ben Saves the World?

Once upon a time, in a land far, far away from Europe, there lived a very generous Central Banker named Kindly Old Uncle Ben.  One day, Kindly Old Uncle Ben was happily cleaning his printing press, while humming the theme song from The Apprentice, when suddenly a powerful sorcerer appeared before him.  The sorcerer's name was Evil Lord Keynes. 

Evil Lord Keynes wanted to gain control of Uncle Ben's vast financial resources, but Uncle Ben staunchly refused.  Upon hearing this refusal, Evil Lord Keynes became very angry, and decided to place a curse on Kindly Old Uncle Ben.  Lord Keynes took three steps back from Uncle Ben and shouted his magic words: "Caveat Emptor!"  As his green cape billowed and coursed with the Infinite Powers of Fiat Currency, Evil Lord Keynes waved his magic wand (made of gold-plated plastic) and with a flick of his wrist, forever cursed Kindly Old Uncle Ben.  This wicked curse forced Uncle Ben to lend money, print money, and just generally throw money around at random in an almost compulsive fashion.

Which is pretty much where we find ourselves today.  (It all makes sense now, doesn't it?)

Needless to say, by now everyone who doesn't live in a geodesic dome somewhere in the Montana wilderness knows that yesterday, the Federal Reserve led an effort to coordinate six Central Banks in order to make it easier for everybody to borrow more US dollars.  Well, everybody except you, of course.  Especially if you're a middle-class American. 

No, this American money isn't really for Americans.  It's for foreign entities who -- if you can believe this -- have even less fiscal discipline than we do.  Basically, the Federal Reserve has reaffirmed its willingness to operate as the World's Largest Payday Loan Company.  The big difference between them and a real payday loan company is that the Fed's interest rates are way better.  Also, in order for you to borrow money from the Fed, it's not required that you actually have a paycheck coming at some point in the future.

Anyway, the market was quite excited by this news, and the Dow rallied approximately 20,000 points in the first five minutes.  That's how I remember it, anyway.  I think it sold off a bit later, though, and only closed up 400-something.  Maybe I should look at a chart.

The challenge with any type of analysis is that it's based on probabilities.  Technical analysis and Elliott Wave are ways to increase your probability of being on the correct side of the market.  However, no form of analysis is a crystal ball, due to the complexity of the system being analyzed, and the fact that not all circumstances can be foreseen. 

I'm happy that at least my charts from Monday and Tuesday were pointing to further upside, so hopefully not too many readers got caught wrong-footed.  But even I didn't see a move this strong coming.  Needless to say, the market blew through my projections, and all lines of resistance, as if they didn't exist.

The long-shot bullish alternate count I've been mentioning each day has suddenly become less of a long-shot.  There are a few things holding the old preferred count together, but in order for it to remain viable, the market needs to slow its advance and reverse very soon.

The preferred count didn't have any key levels violated on Wednesday -- however, its odds have to be adjusted to reflect the strength of the rally.  There are a couple other things that, in my mind, allow it to remain on the table for the time being, as follows.

One is the possibility that Wednesday was an exhaustion move, similar to October 27.  If you study the charts, you will see several similarities between the two moves.  In an exhaustion bar, the majority of the buyers get sucked in all at once, and the fuel gets spent so quickly that the market falls down shortly thereafter (sometimes after another day or two of sideways/up movement).

Another is the fact that, despite the joyful news from Kindly Old Uncle Ben, the TED spread remains at its highest level in more than two years, which is an indicator of continued systemic financial stress.  And a third is the fact that the "bottom" wasn't formed with too many of the usual factors that make bottoms.

That said, this count could be eliminated quite quickly if the market doesn't oblige (see chart below):

The bullish alternate count has of course, roared into the spotlight, and could in the end prove to be the correct count.  I have illustrated on this chart one potential way for this count to unfold.  Please note that this illustration is largely speculative at this point, based on similar situations in the past (chart below).

I feel I have to increase the odds of this (short-term) bullish alternate to 35%. 

At this point, despite the massive three-day rally, there are still a few unanswered questions.  I remain medium and long term bearish, while the short term picture has become a bit clouded.  Things should clarify over the next few sessions, as the market gives us more information.  Trade safe.

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

SPX Update: A Bit More Rally Still to Come?

There's been no material change in the counts since yesterday.  The expectation remains that new lows will follow this rally.  The primary question in my mind right now is whether that was it for the snap-back rally, or if there's one more new high coming.  The rally has not yet hit my preferred target range of 1209-1225, so I have a sneaking suspicion there's probably more to it.

On Monday, I talked about money flow, and how it was negative on that 3% up day, which indicates that the big money players were selling into strength, as opposed to accumulating positions.  This is not at all consistent with a meaningful bottom in the market.  The market cannot generate a sustainable rally unless the big money is buying, because obviously John and Mary Lunchbucket are not going to "move the market" this week by contributing eighty-seven dollars to their 401K.

For this reason, I would like to present a couple more follow-up charts on money flow.  The first one is from yesterday, and on this chart you can again see that "da Boyz" were in distribution mode:

The second chart is presented for contrast.  This chart is from October 5, and illustrates how the big players were accumulating stock after the last major bottom in the market:

I'm not going to show fifty-seven different examples of this, but it's a pretty consistent pattern.  Even near important short term bottoms, the heavy hitters are accumulating shares, not distributing them.  This would appear to be further evidence to support the preferred view that the rally is nothing more than a dead-cat bounce, and the primary trend is now down.

Again, the main question in my mind is whether the rally's over, or if there's more to it. 

The rally consisted of three waves up, and as such, could be complete. However, there is an interesting Elliott Wave phenomenon at work in this particular case, because the decline counts best as an extended fifth wave. Extended fifth waves have specific retracement targets, and they often perform complex "double" retracements. There are never any guarantees, but there are reasonable odds that we have only seen the first leg up of this type of double retracement.  A new high would also serve to turn sentiment around, and get more investors "bulled up" and believing that we just made an important low. 

Unfortunately, there is simply no way to say for certain exactly how the correction will play out.  By nature, corrections are much less predictable than impulse wave patterns.  The market already made it into the blue retracement target box, so until I see more clues from the market, all I can talk about at the moment is further probabilities  The chart below roughly depicts the two most likely possibilities.  Either the top of the rally was made on Tuesday, and we head down directly from here -- or we have one more leg up in store.

My preferred target for this bounce remains the same as it was yesterday: 1209-1225.  Specifically, 1222, but we'll see how close that comes.

In both cases, I am anticipating lower prices on the horizon.  My first short-term target after the rally ends is 1130-1140.  Medium term, I expect the SPX will head down toward 1000-1050.

Sustained trade above 1225-1230 would call this count into question, and if that happened, serious consideration would have to be given to the bullish alternate count, despite all present signs to the contrary.  Currently, I remain in favor of the view that this rally is short-term.  Trade safe.

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

SPX Update: Sell the Bounce

The markets finally got some relief from the selling on Monday, bouncing from within the target zone of the extended fifth wave count.  I am now favoring that wave interpretation going forward. 

Most of the rally work was done by the futures market, after a short-covering panic was sparked by the (apparently unfounded) rumor that the IMF was going to attempt to bail out Italy by holding a huge raffle and a bake sale.  The rumor came under suspicion when it was discovered that the first place raffle prize allegedly being offered (described by the IMF as "a beautiful summer home") was, in fact, the Vatican.  The rumor was finally completely quashed when Christine Lagarde held a press conference and vehemently denied allegations that she had arranged the purchase of "massive quantities of pie shells and marshmallows."  The IMF indicated that its annual Winter Carnival and Face Painting Event would still be held on schedule.

Despite my disappointment upon learning that my hopes of winning a beautiful new home had been crushed, I continue to expect that this bounce will be short-lived.  There are a number of reasons for this expectation, described in detail as follows.  The first is that the bounce fits well very within the expectations of the extended fifth wave count.  In fact, not only did the bounce come from the target zone, but the area indicated on yesterday's chart is exactly where the rally ran into resistance. 

This count anticipates there is still a little bit more upside left, with the preferred target range falling between 1209 and 1225 SPX.  This target range assumes that the move down yesterday competed the b-wave of blue wave 2 (see chart below).  It's difficult to say if the b-wave completed though, so a little more downside is certainly possible before we move above yesterday's high.

I should also note that, given the market's position, it would not surprise me if these counter-trend rally targets were missed.  If my big picture count is correct, the larger waves pressing down on this market could compress the smaller waves and create upside failures, as they seemed to do earlier in the month. 

Another reason to be skeptical of the rally is that the money flow yesterday was negative, particularly in large block trades.  This indicates that the big money players were selling into yesterday's strength, while the retail investors were buying.  Negative money flow on a 3% up day is a sign of underlying weakness in the market.  Below are the numbers showing yesterday's money flow:

The next chart depicts my preferred count's expectations of what could happen when the rally ends.  I believe we have only completed the first wave (blue 1) of red wave (iii) down.  The current rally is blue wave 2 of red (iii).  Blue wave 3 should follow the rally, and carry the market rapidly to new lows.  My medium term view has been, and continues to be, that the market will ultimately knock out the October lows.  If my preferred count is correct, blue wave 3 now has the potential to test the October lows all by itself, which means we could approach new lows quite rapidly after this rally ends.  And there would still be more downside to follow after another correction in blue wave 4 (not shown).

Sustained trade above 1225 would call this count into question, and would lend credence to the bullish alternate count shown yesterday.

Of some note, the psychology of sudden hope among investors and traders on Monday is consistent with a second wave.  Second waves at all levels are times of hope, either a little hope (such as in a small second wave, like now) or a lot of hope (for a larger second wave, like in October).  The next wave is a third wave down, and -- as I've talked about many times in the past -- that suggests a "point of recognition" is coming for the masses.  If my preferred count is correct, bad news will soon be received very negatively.

In conclusion, my expectation is that there might be a little more upside tomorrow to wrap up the snap-back rally.  But whether the market reverses immediately tomorrow, or bounces around for a couple days, I expect new lows below 1150 on deck very soon.  Trade safe.

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

US Dollar Update: More Upside for the Dollar?

[NOTE:  The Weekend SPX Update is posted immediately below]

[My long-term dollar count/charts can be found in this article (which also nailed the bottom last month)]

This is a quick dollar update, since so many markets are tied to the dollar right now. 

The dollar appears to have completed a five wave sequence on Friday, to wrap up wave (3).  It is now due to correct down toward the 78.880-78.925 level in wave (4).  In a perfect world, dollar bulls would see a rally develop from this zone, which would carry the dollar up toward the 80.5-81 level.

The critical level to watch is the wave (1) high at 78.605 -- a break there would indicate something else is going on.  A break of 77.840 would be a fatal blow to the preferred count, and would indicate the alternate count was likely to be unfolding, which would see the dollar attempt a retest of the recent lows at the wave ii/Alt: A label.

The preferred count agrees with the current equity market counts, which indicate a correction is due for both markets.  For equities, that means a brief rally, and for the dollar, a brief decline.  The dollar will hopefully provide some early warning if the equities rally is to become more than a correction --  but currently, there is nothing to indicate any medium or long term trend changes in either market.  Trade safe.