SPX and NDX Update: Market Appears Poised to Break Recent Lows

The market continues to try to convince us that it's strong, as it wallows around just below the 200 day moving average and a bevy of resistance lines.

I remain convinced that there is much more downside than upside left in this market over the medium and long term; and over the short-term, I am quite skeptical of Friday's rally.

Deciphering the shortest term counts is quite challenging right now, due to the series of gaps since November 28, which present difficulty in the study of the finer wave movements which I usually depend on to clarify structure. I have gone back and cross-referenced the overnight futures markets with a dozen different cash markets, but the structure still remains open to a high degree of interpretation.

The first chart I'd like to share is a big picture support/resistance chart of the Wilshire 5000, which is an extremely broad index that does a good job representing the essence of the entire market.  This chart shows the market remains pushed up against several resistance lines, as well as the 200 day moving average -- collectively, these things should be quite a hurdle for the market to push through.  (It's worth mentioning that the Dow Jones Industrial Average has already closed above its 200 dma, however the Dow has an "upward bias" due to the fact that it consists of only 30 of the market's strongest companies.) 

A close study of this Wilshire 5000 chart can be revealing.

The next chart is the Nasdaq 100 (NDX).  The advantage on this chart is that the top is quite clearly defined, unlike the S&P 500 (SPX) and some others.  On the NDX, the decline so far could be counted as a series of 1's and 2's. 

On Friday, I shared a chart with the TRIN and advance/decline volume ratio that has proved quite reliable over the years; and I discussed how those indicators were pointing to lower prices over the next few sessions.  If the 1's and 2's interpretation (annotated in blue and red) is correct, we should see lower prices over this week, quite possibly in the form of a very strong decline.   

If the market instead trades above the knockout level of 2343.10, then that blue and red interpretation is definitely wrong -- and the labeling annotated in black is probably correct, which should see the markets continue on up over the October highs (though my work is suggesting only marginally higher).

Virtually everything I've looked at suggests lower prices are coming this week, but the chart shown above pretty well illustrates why it's a difficult call -- the structure is still at a point where one could count it either way. 

The one (and virtually only) concerning statistic I see for bears right now is Friday's CFTC figures (commitment of traders), which revealed that the market is now holding its largest net short position in the Euro in 18 months. This suggests that large declines in the Euro may be unsustainable at the moment -- and as we observed last weekend, the Euro is driving the US markets.  However, at the moment, I am letting the wave structure override the Euro figures regarding my preferred view. 

The SPX chart shown below shows my preferred view that lower prices are due this week, one way or another.  The second alternate count says that wave B bottomed at the recent 1231 low.  My second alternate seems to be the count many Elliotticians are favoring, but I don't like it very much for a few reasons:

1)  The existing retracement was quite shallow for a B wave.
2)  My confirming indicators, such as the ones shown on Friday, continue to argue for lower prices.
3)  The short-term wave structure, although difficult to get a handle on, seems to suggest that lower prices are in order.

The knockout level is close enough that we should have an answer soon enough.

One thing I've become fairly convinced of is that even if the bullish alternate count is in play and has bottomed (the third alternate count), it probably won't amount to much more than a double-top. Given what I'm seeing currently, if the bullish scenario were to play out, I expect it likely that the indices would only make a modest new high above the October highs, and then reverse lower.  Again, I view it as unlikely that Thursday marked a bottom, and more likely that the market heads lower more or less immediately.

The final chart is presented for educational purposes, and shows how the decline off the high in the SPX could be counted as an impulse and correction.  I believe this is the correct count, and it would be confirmed by a break of the 1231 lows.  A break of the recent high at 1267.06 would prove me wrong.

In conclusion, I remain long and medium term bearish.  Unless and until the indices break their recent highs, I remain short term bearish as well.  Things could always change going forward, but given the market's current position, I simply don't see much hope for the bulls -- outside of the eventual potential of a marginal new high above the October highs, which might never come to fruition.  Trade safe.

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

SPX Update: Finally the Breakdown -- What Next?

For a little more than a week, I've been calling a top, and talking about the roughly dozen different indicators which were screaming for this top in the 1250-1270 zone.  On Thursday, the market finally honored my incessant blabbering and broke down.  It was probably just trying to get me to shut up...  well, it won't work, Market, it won't work.  Viva la resistance!

The question now becomes: which of the two counts (which both favored a top forming in that area) is actually unfolding?  In other words: is this a short term top, or something more ominous?  To answer that question this early, I would need a new, functional crystal ball (the kids broke my last one).  So, as is par for this course, all we have to work with are general probabilities.

One thing that bothers me about the decline fitting into the immediately bearish count is that, so far, it reminds me an awful lot of the final decline leading into the October bottom.  That decline was an a-b-c waveform, which would line up with the alternate count.  The alternate count (labeled in black below) would view this decline as part of an even larger A-B-C correction, which would make a new low in the blue target box, then reverse and make a new high above 1292.  (But after that, the market would collapse.)

The blue target box indicates the most likely ending zone for the a-b-c count.  The official zone is 1198-1227 for the S&P 500 -- but if wave c is equal in length to wave a, the "exact target" would be (approximately) 1215, which also lines up nicely with a support zone.  And yes, I just said the "exact target" would be "approximately."  Gimme a break here, I work long hours on this stuff.  ;) 

I would caution bears to be careful here; protect profits, and don't become complacent.  If the market rallies from here, you'll want to have some dry powder to get short at the next major top, because it should be a big one.  To drive home this theme, I am moving my odds on the alternate count up to an even 50%.

Below, I have annotated the SPX chart with both counts.  The anticipated target zone is roughly the same under either count -- it's what happens beyond that which will determine whether bulls or bears win this short-term battle.  Once the market moves significantly into the target zone, from there, bears do not want to see it move back up through 1237.47 (ideally).  This is because the bearish count would have the market form wave (4) next -- and in this type of waveform, wave four is not allowed to cross the same price territory as wave one (red (1) on chart).  Note that this doesn't apply until the target zone is reached.

That said, there are unusual circumstances, such as a nested 1-2 count, where this price overlap would be allowed.  Those counts are less common, but the KO for a nested 1-2 would be 1246.41.  Early on in a wave, the KO's can really only be placed at the top, which in this case is 1267.06.  At this early stage, the number which would indicate the likelihood that bulls had been sighted in the neighborhood is 1247.10 -- but it wouldn't guarantee it at this point, as there are still too many potential short-term structures on the table.

Sometimes, though, you just have to protect profits so you have something left to catch the next move.  One thing we are guaranteed in the market is that it's never going to sit still -- there are always trades to be made tomorrow.  

A few readers have asked about some counts they've seen from other Elliotticians, and whether I think those counts are likely.  One popular count is that the current decline marks the end of wave e of an expanding triangle, in which case a rally is due essentially immediately.  This count is technically possible, but I don't view it as very likely (although an immediate rally isn't out of the question).  Let me explain why I view the triangle count as a major underdog.

My readers have heard me use the phrase, "I don't like to use Elliott Theory in a vacuum."  Times like this are exactly why I feel that way; because, from an Elliott perspective, both counts are completely viable.  So to sort one from the other, I turn to other indicators.

Below is a chart of the SPX, with the TRIN in the first panel below it, and the New York Stock Exchange ratio of declining volume to advancing volume below that.  I have drawn red horizontal signal lines to mark where a signal is triggered for both indicators; and vertical dashed lines which match the days where signals have been generated with the actual market. 

On this chart, you will find only one time these combined signals failed to lead to at least a moderately lower low in the upcoming sessions (it still generated a new low, but barely).  Going back two and a half years, there has been only one true failure of this indicator (not shown, in December 2010).  Those are pretty good odds... which, in my mind, virtually rules out the expanding triangle count I just mentioned, since the triangle needs to bottom more or less immediately.  Of course, this could always be one of those rare long-shot times the signal fails.  As I said earlier, all we have to work with are probabilities.

Do note on the above chart that there are examples of this signal which lead to a "lower-high" bounce, and then new lows a few sessions later (see November for an example) -- so it's not a guarantee of new lows immediately in the next session.  And it's not really a "guarantee" of new lows at all; there's no such thing in this game.  It's just a really good probability.

In conclusion, I remain very bearish long term and medium term.  I am also bearish over the very short term.  However, the market is approaching a critical inflection point.  If it bounces significantly in the coming sessions, it could rally up to new highs before the big leg down.  Conversely, if it doesn't find support in the blue target box, then that's probably all she wrote and our next stop will be in the 1000-1050 zone.  I expect the market to eventually find this zone one way or another, but for the moment the question remains: now or a little bit later?  Trade safe.

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

SPX and Dow Update: Just the Fax, Ma'am

Alrighty then.  Apparently, the hours I'm keeping have become too much for my body these last few days.  Many apologies.  Here's the charts I finished last night before falling asleep at my computer for the 3rd night in a row.  :(

The first is a big picture SPX chart, and shows what the market is up against at this level:

The second is a chart of the Dow, which shows my preferred view of the current market.  I believe the market has formed an ending diagonal here, and the next move should be lower -- ideally into the blue target box. 

What I've been unable to determine is whether the rally is a three-wave move, or a five-wave move.  The three-wave interpretation would imply that the November lows will be taken out in the near future (shown as the blue 2).  The five-wave interpretation would imply that there's a correction coming, followed by more upside (shown as the red A).

Below is a close-up of how to count the Dow chart and rally as being part of a bearish corrective three-wave move.  The gap open on December 5 does create something of a question mark within the count.

Below is the SPX chart, which reflects similar ambiguity, it is also labeled to reflect the three-wave interpretation -- in other words, it shows how to count the diagonal as part of a three.  In both cases, assuming my ending diagonal labeling is correct, there are lower prices due immediately.

So, in conclusion, I remain long and medium term bearish, and am now solidly short-term bearish as well.  The form taken by the (assumed) coming decline should help determine whether the recent highs are all she wrote, or if there's one more new high coming before the big leg down starts.  Trade safe.

SPX and US Dollar Update: Clues in the Dollar?

This week, we've looked at about a dozen indicators which seem to be suggesting that the market is forming a top.  We've looked at divergence indicators, candlesticks, past market history, Elliott patterns, sentiment, and numerous other things.  I'm just about out of arguments at this point; the market either makes a top here, or it doesn't. 

Yesterday the market formed yet another potential reversal candlestick, this time in the form of a spinning top (long upper and lower wicks, small real body).  This was a white spinning top on SPX, which is not a terribly reliable reversal pattern, unlike several other patterns it formed this week which were "more" reliable, yet failed to work.  Maybe the less reliable pattern will emerge as a winner. 

The action Tuesday also formed an inside compression bar (all trading took place within the prior day's range).  This suggests that buyers will show up above Monday's prices, and sellers will show up below Monday's prices.

One short term pattern I feel I've finally potentially unlocked is that of the short-term dollar.  The long-term dollar count I believe I nailed some time ago, but I had been wrestling with the short-term count for about a week, and I feel I've finally got it pinned.  I believe the dollar recently completed wave (i) up of wave iii up (see long term projections).  The question in my mind is whether the wave (ii) correction in the dollar is over yet or not.  The pattern has fulfilled its minimum corrective requirement, and as such, could launch into a solid rally above the recent highs.  If this is wave (iii) up now unfolding in the dollar, we would expect to see a strong rally develop over the next week.  Obviously, any trade below the recent lows would indicate that wave (ii) is still unfolding.

Note that the dollar is sitting on potential channel support, and could start rallying as early as today:

The SPX is more of a mixed bag.  There are now at least five different ways to label the current structure, and all of them have different expected results.  We're simply going to have to wait for the market to clarify before any level of accurate short term projection will become possible.  I continue to believe the next move is down, the question is really "how far?"

One possibility to be aware of is that the market could be forming a smaller scale redux of the last rally, shown below:

While I continue to favor a bearish resolution over the medium and long term, the short term picture is quite hazy.  However, due to the large number of top indications, I continue to favor lower prices over the short term, as well. 

But as a result of the limited market movement of the prior five sessions, the bearish and bullish immediate potential resolutions are both still standing.

The bear count is shown below, and would have us in the process of a significant top:

The count above would probably need some fairly strong downside action sometime over the next few sessions to remain in contention.

The bullish short-term count is shown below.  Please note that B and C paths are simply hypothetical at this point.

With a little luck, maybe the dollar will give early indication of the market's near term intentions.  I'm seriously hoping that the market will do something today other than trade within the recent 25 point range, and will thus grant some clarity -- beyond "I think the next move is down" -- in the form of projections tomorrow.  Trade safe.

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

SPX Update: WHAT? No NDX Chart?

In yesterday's article, I laid out the case for the market forming a top.  This case continues to strengthen the longer the market hangs around at this level.  Calling tops or bottoms is essentially the most difficult aspect of technical analysis, and it's always easier to be wrong than right -- because you're trying to anticipate a completely new direction in price movement, based only on circumstantial evidence.  So, despite the prevalence of indicators, I could always be wrong.  Please manage your trades accordingly.

Listed below are some new and continued indications of a top.

The Volatility Index has now traded outside its lower Bollinger band for the fourth straight day.  This is a pretty rare signal, and has only happened nine other times since 2004.  In 6 of those 9 times (67%), this led to prices falling below the price at which the signal occurred -- however, sometimes after one or two days of the market trading higher than the signal price.  In 1 of those 9 times, this signal marked a major peak: in May of 2008, when the S&P 500 was trading at 1440.  The market ultimately went on to decline all the way down to 666; and this peak has still not been bested since.

The market also formed its third reversal candlestick in a row.  This time, a black reversal bar -- which is formed when the market closes below the open, but the close remains above the prior close.  This is the third day in a row that the market has seen an intraday reversal lower; usually, this is a bearish signal. 

It seems like the main thing holding this market up right now are the overnight futures.  In fact, of the 108 points the SPX rallied off the 1158 low, from the standpoint of price advancement, approximately only 20 of those points have come from the cash market.  Even as I write this, the futures are trying to reverse Monday's selling.  I'm dubbing this "The Buyerless Rally."
 
Anyway, in the daily chart below, I've highlighted every occurrence of a black reversal candlestick going back to April, and you can see that Monday's candlestick is almost always found in the vicinity of market reversals:

The next chart is the preferred count, which was updated first thing on Monday's open at my website.  The market followed the projected path perfectly for an expanding ending diagonal.

Now, the challenge remains that this rally could still be labeled impulsively.  I believe it counts better as an ending diagonal, as shown above -- but it's not a clear-cut 100% "oh yeah, that's it fer sure."  Below is the bullish labeling, and for the moment, the haziness remains between counts.

Both counts are expecting downside in the very near future, and the preliminary target for either count is the 1225 area.

Any new highs above Monday's would further favor the bullish alternate count shown above.

Apologies are in order for not completing the NDX chart, which one reader was very insistent on seeing over and over and over.  I'll try to get to it tomorrow.  ;)

In conclusion: it remains a trader's market, as so far every break of important support or resistance has led nowhere.  I continue to favor the bearish short term resolution, as well as the bearish long and medium term views.  Hopefully, we'll gain more clarity on the short term picture soon -- three days of the market doing essentially nothing hasn't helped much, though I do feel the bearish ending diagonal count is quite viable and somewhat superior to the more bullish impulsive labeling.  Trade safe.

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

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