SPX and NDX Update: More Selling Still to Come?

While the market has been hitting all  my projections perfectly, every night I look at the charts lately seems harder than the night before.  There are a lot of possibilities on the table right now, and because it's been range-bound recently, the market hasn't given much relevant info for us technical analysts to work with.  So I'm going to present some "best guesses" today, along with some indicators which support them.

I'm just going to roll right into the charts here, because outside of patting myself on the back for my flawless record of "no QE3 today" predictions, there isn't much else to talk about.  The first chart I'd like to share is one which has nothing to do with Elliott Wave Theory, but is one of the confirming indicators I like to use to help point the way.

The chart below shows the Volatility Index (VIX), also known as the "fear index."  When the market goes down, the VIX usually goes up, and vice-versa.  This week, however, the VIX has been falling in concert with the market; and I mentioned yesterday that the majority of the time, this means the market will make lower lows.  There are two things I'd like to call attention to on this chart: one is that the VIX bumped into its lower Bollinger band yesterday, and the other is the fact that VIX formed a possible reversal bar on Tuesday.  The chart highlights the last six months of occurences of this bar, and shows that 70% of the time, it leads to a meaningful move up in the VIX.

 
If you compare the top panel to the S&P 500 (SPX) chart in the lower panel, you can see that 70% of the time, this signal is quite bearish for stocks.

So, now we have some probabilities to work with on the Elliott wave counts.  The first count I'd like to share is the one I'm favoring, and it's the most bearish possible count.  I'm using the Nasdaq 100 (NDX) to illustrate this count, because it shows an interesting fractal relationship between the current move and the beginning of the November decline (highlighted in yellow).

This count believes the "Santa rally" is over.  The bullish alternate count I've mentioned for over a month still cannot be ruled out, though.  I'm trying to take it day-by-day here, because the structure of the waves lately is somewhat infuriating -- and even though I've been nailing the short term moves of late, the market's larger intentions are still somewhat veiled.

On the NDX chart shown above, an upside break of the falling trendline would be first warning to be on alert for bullish potential, and trade above any of the second waves (the first level to watch is 2316.90) would be a huge red flag to that count. 

The next chart I'd like to share is at the request of several readers.  Apparently, a fair number of Elliotticians are now calling the decline an ending diagonal.  I have a problem with that interpretation, and the chart below shows why.  As the name implies, an "ending diagonal" comes at the end of a trend; and when we chart a market other than the SPX, we can see that this interpretation makes little sense.  The diagonal on this chart is the entirety of the new trend; which means it could be the start of a new trend -- i.e.- a leading diagonal -- but not the end of one.

The chart also illustrates what could happen if this is a leading diagonal.  Leading (and ending) diagonals are known in classic technical analysis as "wedges" and a breakouts often results in the market returning to the price level at the start of the pattern.  Significant new lows beneath Tuesday's should knock this count out of consideration; or conversely, an upside breakout above the red trendline would be fair warning that this was unfolding.

The final chart is my "best guess" on the short-term intentions of this market.  The tiniest waveforms are a bit sketchy, so use this however you see fit, or ignore it completely if you want.  My best guess is that yesterday's low was the bottom of the smaller internal third wave of the current wave, and the market still needs to form the fourth and fifth wave. 

The chart also shows how one could count the decline as a complete correction to fit the bullish alternate count.  The market has now traded markedly into the target zone for that count, and has fulfilled the requirements for a B-wave correction under the terms of that bullish count.

However, even if that bullish count is playing out, based on my VIX studies, the market still has a 70% probability of making new lows before forming a meaningful bottom. 

Please note that in the above chart, the 1230 target was already hit in the overnight futures session, and as such may be complete.  With this market, it's tough to say.

In conclusion, there has been nothing to change my long and medium term bearish stance, and the probabilities argue in favor of a short-term bearish stance as well.  Trade safe.

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

SPX Update: All Targets Hit -- Now What?

Yesterday was about as good a day as one can have in the "market projection" business.  Not only did my prediction for a new low below 1231 come to fruition, but the S&P 500 (SPX) even tagged the upper end of my target zone at 1227.  Additionally, the Euro hit the 1.309-1.322 target I published over a week ago, reaching a low of 1.316.  Now it gets a bit tricky again.

Those of you who've been following along know that there are two main counts still on the table.  The first is the immediately bearish count which maintains that the S&P 500's high of 1292 was a major top which will not be bested for a long time.  The second is a count with some short-term bullish potential, which believes that there is one more marginal new high still waiting out there in the not-too-distant future.  Yesterday did nothing to eliminate either count -- and, even worse (at least, for those of us who have to come up with something interesting to share with everybody each day), it made the short term outlook a bit hazy as well.  This is one of those times that another day or two of market action would be very helpful for clearing up the picture. 

So today's article is going to depart a bit from "the beaten market path" and instead focus on something completely different.  Instead of talking about trading, today we'll be discussing the virtues of using bright paint colors to liven up your living spaces!  Of course I'm kidding! 

Actually, let's take a minute and talk about QE3-- since once again all eyes are on the Fed meeting, and everyone (including Martha Stewart) is talking about QE3 again.

The last two times this came up, I opined that there would be no QE3.  I remain of this view for several reasons, most of which I've outlined previously, including this one:  In 2010, when the Fed announced QE2, they demonstrated that they have a pain threshold relative to the stock market -- and they showed us right where that level is. The Fed's pain threshold equates to the SPX 1000 mark, give or take fifty cents.

Additionally, due to political reasons, the Fed is not really able to be proactive; so it is reactionary instead -- and there simply is no clearly-defined crisis to react to at the present moment, at least not in the mind of the average American.  Beyond that, they've been able to accomplish their agenda by employing Virtual QE3, which is where the Fed governors run around talking about how QE3 is ready and waiting and, by golly, the greatest thing to happen in America since Ben Franklin invented fire.  (What do you mean, America didn't invent fire? Whatever.)  So far, this QE3 "dirty talk" has been enough to keep the bulls excited about the market.  So again, I would be shocked if they decided to launch it now.

Alright, on to the charts.  The first chart I'm presenting shows the bullish alternate count.  I'm showing this one first because it portrays a bigger picture look at the market and highlights some support/resistance zones.  Plus it's been a series of dead-on hits since November 20... so it continues to bear watching.

Even though the target zone (for both counts, actually) was hit on Monday, I am favoring some further new lows over the coming sessions.  But it's another challenging call here.  I'm using the wave structure which seems to be present in the E-mini futures (Symbol: ES) to make this call, since Monday was another big gap down and reveals nothing.  I dislike applying Elliott Wave to the futures markets, because the extreme leverage in futures tends to distort the charts.  

Let's zoom in to the one-minute chart, below.  It's possible that Monday's low was simply the third wave of a five wave structure, which would target 1220-1223 for the next bounce.  There are two other possibilities, though:

1)  Monday's low was the end of another first wave down and the rally into the end of day is part of a second wave.  This would target the 1190 area next.  If the move starts to accelerate after a break of Monday's low, look for this possibility to be unfolding.

2)  Monday's low was the bottom of the B wave of the alternate count (I give this low odds; I don't think Monday's low holds).

Too deep a retracement rally (above 1246 or so) would rule out the fourth wave, and narrow it down to the two options above.

It does appear that some more upside is needed to complete the current retracement rally.  The two areas to watch for clues that new lows are unlikely would be the down-sloping trendline on the first chart (in red) and the recent high of 1258.21.  If the trendline is broken, that would be the first clue of underlying strength, and if the 1258.21 high is broken, that would tend to favor the bullish alternate count and new highs.

Another reason I favor more downside in the coming sessions is that the Volatility Index (VIX), which generally trades inversely to the SPX, also traded down on Monday.  Over the past four years, this type of action has led to new lows (not necessarily immediately, but at some point in the coming few sessions) more than 70% of the time.  It also tends to presage a big move down, typically in the range of 2-3%.  This might argue for option 1 listed above: the 1-2 count.

Something else that bears mention is the fact that the market is still trading in a large range, the bottom of which is 1115.  The market has now run through practically every penny of this range at least ten times since August, and that type of trading tends to weaken support and resistance zones, which can lead to a phenomenon known as "range racing."

In conclusion, I remain very bearish over the long and medium term, and at present, I am still short-term bearish as well.  Fed meeting days can be quite volatile (as opposed to the mild volatility we've seen in the recent past -- ha ha), so expect some possible whipsaws.  Also, I would strongly suggest you consider repainting your living room.  Trade safe.

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

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