SPX and Euro Updates: Still No Change Since Thursday

There's been no material change in the counts from as far back as last year (always wanted to say that).  The market remains balanced at a short term pivot point, and there's literally been no change at all since the updates which were published for Thursday and Friday.  As of this writing, US futures markets are closed; however, the rest of the world's markets seem to be very excited about 2012.  The German DAX closed up 3% on Monday, and Asian markets have been generally positive as well. 

Although the SPX reached its target zone (1269-1310), this zone remains an active target.  On Thursday, I felt prices needed to head lower on Friday, which they did -- however, I was looking for more of a move.  I'll admit that the world market party has left me feeling in doubt about the potential of lower prices over the very short term.  It bears repeating that a break above the recent 1269 highs could lead the SPX above 1300 -- however a top could form anywhere in this zone and until the short-term picture makes more sense, it's very difficult to nail down an exact price.  Since the short term questions from Thursday and Friday haven't changed in the slightest, I'm going to focus on the larger picture tonight. 

The first chart I'd like to share is of the NYSE Composite (NYA).  This index remains a favorite of mine, due to the fact that it's a much broader index than the indices generally reported by the mainstream media.  The NYA shows the same basic Elliott pattern as the Dow, however the NYA remains well-shy of its October highs, while the Dow has bested its October highs.  This suggests that there's been something of a "flight to safety" into larger companies and dividend-yielding stock, as opposed to a broad-based recovery rally.

The chart above highlights some interesting volume trends.  Going back to the March '09 bottom, one can see that the volume was quite strong off the lows, and then surged again in July '09 as the market rebounded higher off its first correction.  Moving into the 2010 correction, one can again see that volume was trending upward as prices rose off the base.  Contrast both of these with what has happened since summer of 2011, where volume has been steadily decreasing across the board.  Some have suggested that a new bull market is forming, but in my view, the decreasing volume doesn't give much support to that thesis. 

The next chart is the SPX.  Back on November 20, this chart was the bullish alternate count, but it has since shifted into the preferred role.  I wanted to share this chart because it provides a nice view of the October top, which was erratic and something of a blow-off top.  That type of top leaves a lot of confusion in its wake, as it tends to get market participants looking "up," blows up a lot of short positions, and then reverses somewhat dramatically.  It will be interesting to see if the market does something similar this time around.   

Also note on this chart how the market behaved at the last two target zones (blue boxes) in early and mid-December -- it tagged the target zones, reversed, and then surged back into them.  We may see a similar occurence this time around.

On December 4, I published a target for the Euro, which was hit.  On December 26, I discussed how the Euro looked like it needed to make another new low, and that has also happened.  It's worth noting that the Euro has now completed the minimum expectations for lower prices in this wave, and as such, could be forming a short-term bottom.  This would imply that if the Euro corrects higher into the wave (4) target zone, then equities will probably head higher right along with it.

As I shared on Friday, the sentiment among retail stock investors is very bullish, and this suggests that the market is in the process of forming a top.  Sentiment is never a call for immediate reversal, however.  The market can always continue moving in the same direction as the extreme sentiment levels for a time -- but high bullish sentiment does tend to argue against a large and sustainable move higher.

The first couple days of January are often bullish, as money from various fund sources flows into the market.  The short-term charts remain inconclusive -- but the expectation that the Minor (2) top is forming hasn't changed yet.  Hopefully, this week will finally answer some of the questions of the short term.  Trade safe.

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

SPX Update: Is Your 401(k) Ready for a 70% Haircut?

If you knew with pretty good certainty that the market was within a few percentage points of a long-term top, how would you behave?  Would you warn your friends and family?  I would... and have. 

Could I be wrong about what's coming?  Absolutely.  But here's how I lay out the logic:

1)  If my long-term technical work is correct, the market will lose more than half its value over the coming two years. 
2)  A rally that breaks the 2011 high would prove my current outlook wrong. 
3)  At present, the Dow is only 4.5% below its 2011 high. 

From my point of view, that's a potential risk of more than 50% loss vs. a potential gain of less than 5% --  define "no brainer."  And in actuality, my technical work suggests the market could lose much more than this, likely in the neighborhood of 70%.  Investors sometimes forget that if one's portfolio suffers a 50% loss, one then needs a 100% gain just to break even.  In other words, your portfolio has to perform twice as well to earn money as it does to lose money.  Bear markets can be hazardous to one's wealth.

Let's take another quick look at my long-term chart.  This chart is drawn using a technique called Elliott Wave Theory.  Elliott Wave was derived from decades of back-testing; during which R.N. Elliott discovered that the market's price movements create patterns in the form of repeating fractals.  Market prices are of course shaped by investor psychology; and people tend to respond to situations in similar and consistent ways, which is what forms the patterns.  In other words: history repeats itself.

A key factor on this long term chart is the wave which lasted from 2007 to 2009, labeled with the big red A.  This structure is called a "motive" or impulse wave, meaning its fractal consists of a structure formed by five smaller waves (see chart).  Under Elliott Wave Theory, this particular motive wave must be paired with another five-wave structure of similar size, shape, and direction.  However, there is currently no wave to pair this A-wave with -- so the implication is that its "mate" has not yet arrived.  This type of understanding is what gives Elliott Wave Theory its predictive value.

The current wave, blue Wave (2) could end anywhere within the turquoise target box, and may in fact have already ended.

 
The chart above represents the 10,000 foot view.  Moving into the shorter time-frames, the hunt is still on for the exact top of Wave (2).  The market appears to be in the process of completing this top, but there are still numerous paths it could take over the short term. 

Yesterday really didn't help much in eliminating any short-term possibilities, and in fact formed an inside compression day -- meaning prices never traded outside the range of the previous day.  The implication of this type of day is that buyers will show up at prices above Wednesday's highs, and sellers at prices below Wednesday's lows. 

My short-term target box was hit, and the expectation now is for Friday's session to end in the red.  An interesting seasonal fact is that the last trading day of the year has ended in the negative on 9 of the previous 11 years.  The lower blue box represents the next short-term target; however, this target would be invalidated with trade above 1269.37.

The market is still living within the black trendchannel on the chart above and that suggests the possibility that wave 4 of the black alternate count was completed on Wednesday.  I don't believe that's the case, but that's what KO's and stop losses are for.

The next chart I'd like to share is a sentiment indicator, in the form of the ISEE put/call level.  ISEE excludes the options purchases of market makers and big firms, so their numbers are specifically indicative of small ("retail") investors -- the investors who, more often than not, are the ones getting burned at the casino.  When ma-and-pop investors become heavily bullish, the smart money knows it's time to start betting the other way.  After all, Wall Street pros make their livings taking money from the little guys.  Oh, you thought their goal was to "help" you invest?  Sure it is!  And someday trained antelopes will pilot the Space Shuttle. 

This chart below illustrates the last 3 times ISEE sentiment reached these levels.  In two of the cases, it was at the July top, right before the mini-crash.  The third case was in September, when the market bounced, then made a new low. 

AAII sentiment numbers were also released yesterday, and bullish investors came in slightly above the long-term average (40+%).  Both of these sentiment indicators are at levels which have been consistent with bear market tops.

In conclusion, my long-term view for this market is quite bearish.  Given the fundamental stresses, such as international debt levels, LIBOR rates, the economic slowdowns in Europe and China, and the overarching threat of sovereign default, it appears to me that the charts are once again leading the news.  The TED spread has been at "financial crisis" levels for over a month, and is still rising -- so the stock market's continued elevation appears to represent some degree of suspended disbelief in all the real-world problems.  It seems to me that something has to give; and given the fact that the world's problems aren't likely to be cured overnight, that "something" is much more likely to be the stock market.  Trade safe.

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

SPX and RUT Update: Are We There Yet?

In studying the charts tonight, one conclusion is certain:  the market has no intention of making this one easy right now.  I can see at least half a dozen viable short term counts in the charts tonight.  And then, just as I was about to publish this article, I caught something which is potentially very revealing in the Russell 2000 chart... so this article has a lot of charts, and a fair number of short-term possibilities are reflected herein. 

I simply need more price information at the moment.  The next couple sessions should let me weed some of them out.

Let's start with something I'm reasonably confident of at the moment:  Wednesday's low won't hold.  The very short term counts are suggesting a possible bounce, and then further declines.  That's my favored view of the very short term.  The slightly bigger picture is sloppier, though.

The hunt for the Minor Wave (2) top is still on.  The earlier technical breakouts have now whipsawed, and the market is currently set at a potentially important pivot point.  Significant follow through to lower prices could lead this market into a deep and extended decline -- more on this later.  Conversely, if the bulls can reverse the SPX higher before it breaks 1229.51, the projection up to (as high as) 1310 will remain on the table.  The one-minute chart shown below highlights the key KO levels for the bull and bear counts shown on this chart.  The blue target box represents the expected rebound level for both of these counts.

I want to expand a little on the short-term alternate count shown in passing on the chart above.  I have no way of knowing for sure what the market will do tomorrow, so if the recent highs are broken, the chart below shows how the alternate count could unfold.

The reason I'm favoring the count shown above verses the alternate count below revolves around the technical breakouts on low volume and the subsequent whipsaws during Wednesday's session.  Usually, whipsaws lead to strong moves in the opposite direction.  Nevertheless, there is no confirmation of either count yet, so I thought readers might find this illustration helpful.  The blue wave 2 bottom is the knockout level for this scenario.

The expectation of a large sustained decline is starting to sound like a pipe dream to some bears, but I believe that's exactly how it needs to be.  At several points in the past, I've mentioned that if the market is roughly following the 2008 script (which I believe it is), it needed to start throwing some curveballs.  The repeat trips back up into the mid-1200's have certainly thrown many bears off, and have made the counts challenging at times.  It sometimes pays to remember that bear markets try to take everybody's money -- even the bears. 

Let's see what else we can discern of the market's intentions.

The indicator below is one I've shared before.  It's a combination of the TRIN and down-volume to up-volume ratio (high levels in this ratio indicate heavy distribution).  When the two indicators fire off a signal simultaneously, there are extremely good odds that the market will make a lower low over the coming sessions.  On Wednesday, this signal was triggered again (below):

The next chart shows an interesting potential on the Russell 2000 (RUT).  The information on this Russell chart is potentially explosive, because it argues that the C-wave many Elliotticians think we're in the midst of hasn't even started yet.  The Russell counts fairly well as a triple zigzag off the October lows, but argues that the market is forming a b-wave flat in b of (z).  This means we'll have a retest of the December lows, which will fool everyone into going short again, and then launch back up one more time to finally complete Minor (2). 

Below is how the SPX will look if this situation unfolds. It's a bit premature to worry about, since the market hasn't broken any key levels yet... but this is going to be one to watch very closely if Wednesday's decline continues. 

Just in case this isn't enough charts for everyone, I also want to touch on an alternate count which several readers have asked about.  This alternate has the same intermediate-term impact as my preferred big picture count -- namely it takes the SPX down below the October lows.  But this alternate triangle count wouldn't entail the devastating drop I ultimately foresee down into the SPX 400's.  I'm not too concerned about this count at this point, because as I see it, we need to see where the exact top comes in first, and see the SPX break the October lows -- so I feel this is putting the cart before the horse.  But nevertheless, I'm presenting it due to popular demand.

One factor which does fit the count above is that volume has been steadily decreasing since October, but let's see what happens over the next few sessions before we get too invested in this count.

My conclusion is that the top, if not already in, is much closer than the bottom.  We're trying to sift through the pennies here to nail it down exactly, but my view is that we're dealing with limited upside potential at these levels (low 1300's) and major downside potential (below 1000).  The rally is starting to look a bit worn overall, and buyers may be reaching exhaustion.  Let's see what information the market gives us over the next few sessions to help eliminate some of these short-term possibilities, and to confirm or deny the potential that the top is already in.  Either way, longer-term, I currently see little hope for an extended rally which reaches much beyond the 1310 area.  Trade safe.

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

SPX and XLE Update: Light Volume Breakout is Highly Suspect

There's been no material change in the counts since yesterday.  The expectation remains that a top will form sometime over the next week or two.  Bear market bottoms tend to be V-shaped, but bear market tops are affairs that generally last several sessions as a balance is reached between buyers and sellers.  They sometimes take the form of a drop followed by a retest of the high, but very rarely form as immediate reversals. 

The volume on Tuesday was even lower than Friday, which creates a bit of a problem for bulls.  The SPX has made a technical breakout above a significant trendline and its 200 dma, but true technical breakouts are supposed to occur on increasing volume, not diminishing volume.  This bearish volume divergence adds corroborating evidence to my preferred Elliott Wave count which suggests the breakout is merely a head-fake.

On Tuesday, the market reached the target zone for the current count.  Despite this, while an immediate reversal is always possible, probabilities argue for fresh highs for the move -- and the corresponding, more typical, price action which usually forms a top.  The implication of the short-term counts is that the market is due a bit of sideways/down action before moving back up to make another new high. 

Along those lines, the first chart I'd like to share is the one-minute SPX chart (below).  This chart shows a potential trendchannel projected from two different lows, and the knockout level for the bulls.

The next chart is a daily chart of the SPX, and shows several resistance and support lines which are in the vicinity of current prices.  It also notes the low volume of the breakout.

On the chart above, I have also shown my expectations for the market when Minor Wave (2) finally completes.   Apparently some readers were confused on this point:  I'm not expecting a huge drop immediately.  I have on occasion referred to the next wave (Minor Wave (3)) as "the crash wave," which is probably what created the confusion -- but I have never expected an immediate crash off the Minor (2) top.  I would expect the next move to start as a persistent march lower, possibly in the form of a waterfall (my first target is SPX 1000-1050), then a decent bounce, then the crash.  This entire process would unfold over the span of several months.  All of this, of course, is predicated on the idea that the market is indeed forming the Minor (2) top.

The next chart is presented in support of that theory.  Some bears are beginning to undergo an identity crisis, given the persistent hovering of the market, and the recent technical breakout.  The chart I'd like to highlight is the SPDR Energy Sector ETF (XLE), which consists of holdings such as Exxon, Chevron, ConocoPhillips, and similar companies.  One reason I like to track this index is that it's often used as an inflation hedge and thus could give leading indications if the market had impending inflation expectations.  Since money printing is one of the fears bears are expressing, this seems an ideal time to share this chart.

On the chart below, what strikes me as important is the fact that the October rally is virtually impossible to count as an impulse wave.  Due to the numerous cases of overlap, it can only be counted as a corrective structure... and this implies that the October lows will be revisited and eventually broken.  This chart is a particularly good example of a triple-zigzag, because it conveys not one, but three meaningful Fibonacci relationships in each wave a and c pair of the triple-zigzag off the October lows.  These are highlighted in the callout boxes.

It also bears mention that this ETF is currently lagging the Dow and SPX in performance, as it has not yet bested its December highs.  This isn't what I'd expect to see if there was a lot of money flowing through the inflation pipes.

Although the recent structure is a bit less clear-cut than October, the expectation is that the XLE either topped in early December, or is very close to doing so.

In conclusion, I'm still a bear.  I'm not a permabear, though, and if the market gives me some reason to change my stance, you'll be the first to know about it.  But so far, it's given me no reason to do so.  The bullishness which is now in the air is to be expected if the market is topping -- in fact, it's a prerequisite that traders are bullish near tops.  Usually, the market gets the majority to flip at just the wrong time.  Trade safe.

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

SPX, Euro, and Dollar Update: Are the Bulls for Real?

On the exceptionally light volume of Friday's session, the SPX staged a breakout over its 200 dma and a major resistance line.  The Dow Jones Industrial Average also knocked out my preferred count, which had held its ground since October.  The SPX did not KO its count, however the assumption now should be that it will.  This has shifted preference to the short-term bullish alternate count, which sees everything since August as an ongoing correction to the first leg of a major bear market.

Now we find out if the dip buyers are serious about driving this market higher.  From the standpoint of the global economy, it seems that China and Europe are in worse condition than they were back in July of 2011.  However, any trader worth his salt will tell you that the stock market sometimes has little in common with the real economy.  So the question now is: are the bulls for real?

The first thing I'd like to address is the shift in preference from the preferred count to the first alternate.  While this rally was anticipated by the alternate count, I can't claim victory in that regard; clearly I was in error selecting the more bearish count ahead of the alternate.  My analysis was based in part on the fact that several markets (such as the dollar and Euro) seemed to be indicating that equities were due for lower prices.  This is one challenge with market correlations: sometimes they work, and other times they don't.  Clearly, this is one case where they didn't work -- since August, the dollar is up more than 8% while the Euro is down more than 10%.  In the past, these situations which have often led to lower equity prices, but despite that, the SPX is up 15% from its August lows.  My analysis on the Dollar and Euro has been spot-on, but perhaps I gave the currencies too much weight in my equities analysis.  Or perhaps it's just the market's nature to keep everyone guessing sometimes.

One reason equities and the dollar have correlated fairly well in the recent past is that equities were being purchased as an inflation hedge against the QE printing.  Whether equities can sustain an uptrend in a deflationary environment remains to be seen. 

Along those lines, the first chart I'd like to share is the US Dollar, which has performed according to my projections since early September.  The chart below is an update to an article posted on October 29, and so far it has tracked perfectly.  If it continues to do so, the current equity breakouts are likely to prove to be nothing more than light-volume hope and hot air.

  The Euro has also tracked well, hitting and exceeding my most recent published target.  The current move in the Euro appears corrective and is suggestive of new lows to come.  I have not listed the target on the chart, because it is still possible for this to be the b-wave of an a-b-c correction.  However, if the preferred count on the Euro is correct, it suggests prices will ultimately fall toward the 1.10-1.15 range, and potentially even lower.

Moving on to equities, I want to focus on the Dow chart first, since the Dow has now made a new high above October 27.  The Dow chart shows a possible target, if it follows a similar path as it did in October.  There is no requirement that it does so.  The dashed red line indicates the knockout level which needs to be held by the bulls over the short term.  A trip back through that price territory in the near future could be devastating to the bull case.

The next chart is a one minute chart of the SPX, and is an attempt to gain a handle on the micro structure of the waves.  This chart suggests the rally is nearing completion.

If the micro-labeling above is correct, it implies a cap of 1295.42 for the rally.  If it's not, the larger structure suggests a target of 1269-1310, as shown on the intermediate term chart below.  The next two weeks are seasonally bullish, and the week between Christmas and New Year's is another low-volume week.  That could allow the market to drift higher into the target zone before the Big Boyz come back from vacation.  Note how light the volume was on Friday's breakout (below).

In conclusion, I remain bearish.  If the current count is correct, the market is trying to lure the last of the buyers on board before turning south in a big way.  My current view is that the technical breakout being staged is likely a head-fake, paving the way for a nasty reversal.  Trade safe.

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

SPX Update: 'Twas the Top Before Christmas?

There's been no material change in the counts since yesterday.  The primary occurrence of note on Thursday was the SPX reached the 1254.50 target. 

If this is a corrective second wave, as the bearish count sees it, then a top is forming.  Currently, the move off the December lows is a three-wave form, meaning it has not yet completed an impulsive pattern and could very well fit the bill.  Regarding the short-term counts shown on the chart below:  the bear count needs to stay below 1267.06 on the S&P 500 (SPX) to remain valid.  The bull count needs to stay above 1229.51.  That pretty much sums up the situation, and the key levels to watch now.

There are two other charts of interest to share.  The first is the NYSE Composite Index (NYA), which is a much larger index than the SPX, and therefore more representative of the broad market.  I mentioned a potential triangle in the NYA on December 18, and suggested that the lower boundary would be tested.  That boundary has been tested, and the NYA has now nearly hit the upper boundary of the triangle.  A breakout/breakdown from the triangle suggests a move of about 20% in the direction of the break.  As the larger Elliott counts suggest that the market has not yet bottomed, I would expect if the market did make an upside breakout, it would ultimately whipsaw.

The red line is another overhead resistance level for the market to contend with, if the upper triangle boundary is broken.

Next is Wilshire 5000 chart I first published on December 4.  It continues to track well, so it's worth updating at this point.  (Thanks to Arnie for reminding me to update it.)  :)

The last trading day before Christmas is generally a light volume holiday session, which typically favors the bulls, since the large funds realize they can't do too much selling into light volume without cracking the market.  The same was true of the Thanksgiving holiday, though, so light volume doesn't automatically guarantee higher prices.

In any case, since it's my favorite time of year, here's a little Christmas poem to close out the holiday week:

'Twas the last trading day before Christmas, and all through the land,
Everyone was still hoping Europe didn’t get out of hand.
The loans had been readied by the old ECB,
and nations lined up to get money for free.

The bulls were all nestled, all smug in their beds,
while visions of QE3 danced in their heads.
With ma in her kerchief and I in my cap,
we’d had about all we could take of this crap.

Then on CNBC there arose such a clatter,
I sprang from the couch to see what was the matter,
Ben Benanke was talking, he was building more bubbles! 
He just didn’t care about any debt troubles.

He said he could print; that the Fed had more tools,
He said, “We’re not breaking, just bending the rules.”
“When there’s crisis,” he said, “The Fed is your man.”
“No it’s not,” I replied, “You’re just kicking the can!”

But he couldn’t hear me, there on the TV,
Even so, I still added, “Ain’t nothing for free.”
When what to my wondering eyes should appear,
But the eight-hundredth bailout we’ve seen in four years,

Ben sprang to his press, to his team gave a whistle,
And the money flew out like the down of a thistle.
Then I heard him exclaim, as oil started to spike,
“Merry Christmas to all! And to all a good night!”

Here's to hoping everyone -- bulls and bears alike -- has a wonderful holiday with their loved ones.  There are much more important things in this world than markets.  Trade safe. 

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

SPX and VIX Update: Indications this Rally Won't Last

This market is a mixed bag of messy charts right now.  But many of the indicators I'm looking at are now suggesting the market is within 2% of a top -- potentially an extremely major top. 

From an Elliott Wave perspective, it remains difficult to nail this count down, largely because the October rally leaves itself open to a lot of interpretation, as does the December decline.  I first suggested that October 27 was a major top back on October 28, and so far, that's been a winning stance for almost two months.  The lingering doubts of alternate counts have never resolved, however, and here we sit in short term limbo. 

Let's see what we can find to help resolve that.

We're going to look at a couple indicators before we get to the counts.  The first one I'd like to share is the Volatility Index (VIX) to VXV ratio.  VXV is the three-month implied volatility index and tends to be more stable than VIX.  Comparing the two can yield insights... however it's worth mentioning that the VXV has only existed since November of 2007, and thus allows limited back-testing.  The chart below is self-explanatory and shows the S&P 500 (SPX) in the top panel, the VIX:VXV in the middle, and the VIX in the bottom.  There's a red dashed horizontal signal line toward the bottom of the VIX:VXV panel.

This chart suggests the SPX may be approaching a top, and strongly suggests the VIX is approaching a bottom.

The next chart is a very simple chart of the SPX and Nasdaq 100 (NDX).  Yesterday, the NDX was down more than 1%, while the SPX closed in the positive.  This is a pretty rare occurrence, and since 2008 has only happened one other time... at the end of September 2011.  Prior to 2008, one has to go all the way back to 2004 to find another example.  The chart shows what happened most recently.

The three times this happened in 2008, it was early on in the bear market; two of those times led to lower prices almost immediately; one of those times the market hit lower prices about a week later, then rallied for another couple weeks... and then it started crashing.  It would seem this indicator is not only confirmation of lower prices soon, but almost a confirmation of the bear market itself.

The last chart is the preferred count, which suggests a major top is coming quite soon.  The perfect world target is 1254.50, but it's not a requirement that the market hit that level and reverse.  Anywhere between here and 1267.06 would do.  Also note that the count has already hit its blue target box. 

Above 1267.06, and the alternate count is playing out.  There's no solid evidence of the alternate count yet -- currently it can neither be confirmed nor denied, much like an Elvis sighting.  I'm favoring the preferred count over the alternate by a margin of 65%.

[Editorial note: yesterday, there was a clerical error in this chart's labeling.  It's been corrected.]

In conclusion, I remain long-term bearish.  The short term is a mixed bag -- but due to the preponderance of evidence, I favor a bearish resolution.  Trade safe.

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