SPX and BKX Update: The "Wear-Ya-Out" Market

The last time I felt the charts were this challenging was on September 29, 2011.  That was the market getting geared up to reverse and turn into the October rally.  I ended up nailing the turn to the day, but a few days before it happened, the charts got really messy.  The market often gets most confusing near major turns as it tries to grind everyone up, and right now it feels like the market just doesn't want anyone to know exactly what's coming next.  Many of the other technical analysts I periodically check in on seem to be expressing similar angst -- at least the ones who don't just shoot for the easy answers.

Yesterday was another one of those "do nothing" days that doesn't aid much in analysis.  The possibilities put forth on Wednesday and reiterated yesterday still stand.  The top may be in, or another lunge higher may be in the cards.  Let's start with the preferred count, and then I'd like to share a couple alternates.  The first chart is the preferred ending diagonal count, and suggests that one more lunge higher may be needed to complete the rally -- though it's not required.

Now let's discuss some alternate possibilities.  I uncovered a potential in the Philadelphia Bank Index (BKX) which will probably not thrill bears -- there is still the potential of a bit more melt-up from these levels.  Here's the BKX chart, so you can see what I'm referring to; I'll discuss this further beneath the chart. The blue count agrees with the ending diagonal preferred count; the black count does not.

The chart annotations explain some of the positives each count has going for it, however there is one additional mention that the black count has in its favor: the target of roughly 45 equates to both the Fibonnacci 1.618 extension of wave a, and the target given by the equation where wave 5 becomes equal in length to wave 1.  When two forms of targeting both agree on the same number, it calls for caution. 

That said, the issue I have with the black count is discussed on the chart: momentum should have increased during the third wave, not decreased.  So I am somewhat torn, and unable to give an edge to one count or the other at this moment.  Hopefully Friday and/or Monday's action will help.

The next chart shows how the S&P 500 (SPX) could track the BKX if the "more melt-up" scenario unfolds.  The other thought regarding this scenario is that a move like this could break the last of the bears into capitulating.  Surprisingly, despite the AAII sentiment numbers of 17% bears, there are still a reasonable number of us who haven't yet been shot or had to gnaw off our paws to escape traps.  A final push that sustains trade over 1300 for a few days would probably get most of the remaining bears to cover their shorts. I like to say those are the levels where the big players sell their shorts -- which are then bought by all the retail bears who are covering theirs.

Anyway, this SPX chart shows how to count this potential in line with the information revealed on the BKX chart.  The blue 5th wave would target the 1310-1330 zone under this count.  Again, hopefully the next couple sessions will reveal if these alternate counts have any legs.

The ongoing observation I have is that the SPX has not performed at all in line with expectations for a "normal" c-wave rally.  The third wave in particular was weak thus far, and had a very deep fourth wave retracement.  This suggests several possibilities, such as those discussed, but we're still left with unanswered questions. 

There are now many divergences beginning to crop up on the indices and on individual stocks, and this too suggests that the rally is not much longer for this world.  The patterns being formed are suggestive of a distribution top.  I remain of the belief that this is the last rally before an extended decline -- but the market isn't making it easy on technical analysts to pinpoint the top.  I'm sticking to my call for a reversal in the 1269-1310 zone.  In a perfect world, today's market would run higher to complete the ending diagonal in the 1292-1310 zone, then reverse and call it a day.  Keep in mind that non-farm payroll days often line up with major reversals.  Trade safe.

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

SPX Update: Bears Have Left the Building -- Look Out Below

I think being long this market right now is exceptionally risky.

Yesterday, I suggested that the sentiment survey due out today from the American Association of Individual Investors would indicate that sentiment levels were reaching bullish extremes.  The survey actually exceeded my expectations: not from the bulls so much, but from the lack of bears.  The percentage of bearish investors is approaching the lowest levels of the past decade, and this type of sentiment is generally bad for bulls. If most of the buyers have already bought, and most of the short-sellers have already covered, the market is going to have a hard time putting together a meaningful rally.

This is when it's most challenging to be a bear -- when virtually no one else is (the same applies to being bullish, like I was at the beginning of October)... but this is also when it's most profitable. 

Sentiment data is not to be construed as a guarantee of an immediate top (or bottom) -- in fact, the last time the bearish percentage was this low was December 2010, and the SPX went on to rally another 100 points before putting in the 2011 top and crashing over the summer.  Prior to that, one has to go all the way back to July of 2005 to find bearish investors this non-existent (the market fell through the rest of July); one can also find readings this low near the 2002 top (in February/March of '02 -- market lost over 30% afterwards), and near some of the major tops of the 2001 bear market.  But one can't trade on sentiment alone, because extreme readings can last a long time; however, this is a strong confirming indicator to the wave structure of the Minor (2) top.

It also suggests an ongoing state of suspended disbelief in the fundamental problems facing the world governments and economies.  Just as a few examples of the differences between now and the last time we saw readings this extreme:  back in December 2010, the TED spread was less than half its current level of 0.57, Italy's bonds were yielding around 4.5%, and QE2 was alive and well and feeding the stock market with liquidity. 

The market action yesterday finally took some of the short-term options off the table, and the call I made yesterday now appears to be the correct read:  either the top is in already, or there's one last spike high coming (ideally, just above the October highs, but not required).  

The Minor (3) decline should be just around the corner.  To reiterate a bit, I expect the first leg of Minor (3) to take out the October low of 1074.  My ideal target for the S&P 500 (SPX) is 1000-1050, however, wave extensions are always possible, and the 800's would not be out of the question.  It's been a frustrating market for swing-trader bears since the October top, with the bullish alternate counts seeming to win at every turn (although, a lot of points should have been picked up by the more nimble traders who took profits in the target zones).  The days of bear frustration should finally be drawing to a close.

Below is the intermediate term chart, which is unchanged of late:

The second chart I'd like to share is a very short-term chart, and presents a slightly altered take on yesterday's ending diagonal.  I'm genuinely not sure yet which diagonal could prove correct (assuming the top isn't in already), but the overall feel of an ending diagonal is certainly present, and the three-wave rallies seem to confirm that.  For those not well-versed in Elliott Wave, an ending diagonal consists of five 3-wave moves, and generally indicates buying exhaustion, as a balance is being reached between buyers and sellers.

My solid expectation now is that the top is either in, or will be after one more spike high.  I would take a very cautious stance with long positions at these levels (i.e.- I wouldn't hold longs here, personally, at least not for more than a short trade).  The temptation is always to go long after the meat of the rally is over, and your linear-projecting brain thinks it's "safe."  That's essentially what fifth waves are: the stragglers who missed the turn trying to jump on a bandwagon they already missed.  Another term for these traders would be "the bag holders" because they're the ones buying at the top (or selling at the bottom).  Successful trading often involves doing the exact opposite of what your emotions want you to do.

The last chart is the ending diagonal speculative count shown yesterday.  As I said, I'm genuinely not sure exactly how the end will shake out here -- the chart above and the one below are both completely viable, as is the view that the top is in.  We're really picking nits when we're talking about a couple percentage points of upside verses 20% or more downside.  The larger point I'm trying to drive home is that I don't believe this is a zone where swing-traders want to establish long positions -- exactly the opposite; I think swing traders should continue establishing shorts.  Nimble day traders are another matter, of course. 

What I like about the chart below is the "shake-out" factor it presents, both to weak longs (who dump when this heads lower) and to weak shorts (who dump when it heads higher).  It would simply be the path of greatest confusion.  An interesting factor to keep in mind is that Friday is a non-farm payroll day.  I've mentioned this before, but it bears repeating: on non-farm payroll days, the market often reverses from the direction of the open.  So if the open is down, it often reverses up and vice-versa.  Again, like everything else, this is just another odds-on favored historical fact; it doesn't guarantee a reversal.

On the other side of the coin, what I like about the count which suggests that the top is in already is that I don't think anyone's expecting that at all.  Major tops and bottoms should always leave the majority expecting the trend to continue, even if it's "just a little farther."

In conclusion (if you haven't already figured this out from the body of the article), my expectation is unchanged from yesterday: either the top is in already, or it will be after one more lunge higher.  Trade safe.

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

SPX and RUT Update: Market Has Reached the Topping Target Zone

I was watching CNBC last night, and it seemed like every other guest was predicting Dow 36,000 for 2012.  Correct me if I'm wrong here, but don't bull markets start when everyone is bearish?  In March of '09, AAII sentiment was over 70% bears.  The new AAII numbers come out tomorrow, and I'm reasonably certain the bullish percentage is going to be well above the historic average; the numbers were slightly above average last week, and the rally since is sure to get more on board the bull bus. 

Anyway, I changed channels a couple times to see if I could find any bears out there, and finally I did.  I came to a channel where a fellow was talking about how he expected the Dow to hit 10,000 soon.  He was even wearing a Dow 10,000 hat; and I thought, "Now here's a guy who might have a clue!"  Then I realized the show was a re-run from March of '99. 

Part of the job of the second wave retrace during the early legs of a bear market is to fool the majority into thinking that the first wave down was just a correction in an ongoing bull.  Bear markets need buyers early on -- that way there's somebody selling later to keep prices heading lower.  That current sentiment fits that pattern.

The other factor which fits the pattern is the extreme difficulty in nailing the exact top.  This top needs to leave confusion in its wake, and that can only happen when the majority are still looking for higher prices.  There should be buyers all the way down for the first half of wave Minor (3); so those buyers can turn into sellers all the way down for the second half of Minor (3). 

Now, all that said, if prices break above the 2011 highs at any point, it's back to the drawing board on the whole kit and kaboodle.  I'm not a perma-bear with some type of agenda -- so if the market proves me wrong, then so be it.  However, my expectation that the market is in the process of forming a significant top has thus far been unchanged by the price action -- and this top seems to be confirmed by sentiment.

The market action yesterday was in line with larger expectations.  I'm going to present the long-term chart first.  It shows some resistance lines from the old head and shoulders pattern of 2011; yesterday the market broke above, but closed beneath, that resistance area.  The blue target zone has now been solidly reached, but still remains active for the moment. 

  

The next chart is the Russell 2000 (RUT), and I'm sharing this one because it shows an ugly, but clear, 5-wave structure off the December lows.  The count shown on this chart would seem to indicate that time's about up for the rally -- but prices are still living within the nicely-defined red trendchannel, and until that breaks, there's no solid signal of a trendchange.

The last chart I want to share is a speculative possible ending for this move.  I've been kicking this around for awhile, and the market has performed close enough to my expectations under this potential that I feel it's worth sharing.  This count would create even greater confusion over the short-term, and I think that's what I find most appealing about the possibility.

This labeling takes a little creative license with the waves, but I don't feel it's forcing the count excessively.  Keep in mind that the lower red line is just for illustration, as opposed to being an actual support zone.  Also keep in mind that this is pure speculation; there's nothing yet to indicate this will unfold.

The short-term waves yesterday left me with the expectation that prices during Wednesday's session will reach beneath Tuesday's low, but whether that was "the" top remains to be seen.  This is going to be a hard top to nail to the penny, so the larger waves in the first chart will have to be our guide.  The target zone's been hit, so my stance now is that the rally could end at any time.

Worth mentioning, the Euro is sporting a complete wave structure which allows for the possibility that it may have already completed all of its 4th wave rally, as anticipated and mentioned yesterday.  The rally fell slightly short of the target zone, so if that was the whole of wave 4, it indicates extreme weakness in that currency.  This would bode ill for equities as well. Trade safe.

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

Some Thoughts on Trading Strategy; and How to Paper Trade for "Real"

Over the past few weeks, we've had a number of discussions on trading strategy.  In this article, I'd like to reiterate, and add, some key points:

1)  Know your exit before you enter a trade. 

Once you're in the trade, your emotions take over and you will tend to compound mistakes.  Awhile ago I wrote an article which discussed Prospect Theory.  For those who missed it, Prospect Theory found that people become risk-averse when it comes to gains, and risk-seeking when it comes to losses.  In other words, the natural instinct of people is the exact opposite of what it takes to be successful:  most close their winners too early, and hang onto their losers way too long.  For the record, it should be:  Cut your losses, and let your winners run.  To a point, anyway.  That brings us to:

2)  Don't be a pig. 

Everyone's heard the expression, "Bulls make money, bears make money; pigs get slaughtered."  This refers to the greed factor.  Have you ever watched a winning trade turn into a loser?  If you haven't, you've never traded.  This happens because, the majority of the time, the market covers the same price territory repeatedly.  If you get too greedy (piggy!), you'll watch many of your winners die, along with your account.  That brings us to:

3)  Develop a system to protect profits. 

Once your trade is in profit, how are you protecting that?  Do you move your stop-losses?  At what point do you close your trades and take profits?  Are you being a piggy! and just hoping for more and more?  You should design a system that allows you to take at least partial profits at certain times.  As an example, years ago when I traded options frequently (which I don't anymore), I used to close half my position whenever the value doubled no matter what.  That allowed me to guarantee I got all of my capital back (50% of 200% = 100% of the original investment).  After that, I was in the remainder of the position for "free," which allowed me to manage it much less emotionally.  To use casino terms, I was playing with the house's money.  I'm not suggesting this works for everyone, but it worked well for me.  The larger point is you need some type of strategy that you can stick to with discipline.  That brings us to:

4)  Protect your capital.

As a trader, your capital is your life's blood.  It's everything.  If you have no capital, you have no income.  There is no worse feeling than blowing up your trading account, and I speak from first-hand experience.  Back in 2001, when I was less experienced at trading bear markets, I over-leveraged myself into short-dated puts at exactly the wrong time, and blew up my account to the tune of six figures.  I had decided to try and "knock one out of the park" -- and I did it at just the wrong time.  As a result of this experience, I am now much more careful trading leveraged instruments, especially options.  If you're taking excessive risks with your capital, you might consider that living to fight another day is irreplaceable for a trader.  That brings us to:

5)  Discipline must trump conviction. 

Another tendency we all have is to "marry" our beliefs in life.  This can be death for a trader.  Maybe we believe the market is due to fall because jobless claims came in showing that unemployment just hit 50%, and the ECB just announced that they're going to start holding public executions of Prime Ministers, and Ben Bernanke just gave CNBC the finger.  The market doesn't care what you think should happen, even when what you think makes complete sense.  The market is often completely irrational, because there are factors at play that have absolutely nothing to do with fundamentals.  So one has to respect the price signals, and one has to be willing to exit a trade with discipline, even when one's conviction says otherwise.  That brings us to:

6) It's rarely smart to "bet the farm" on one play.

Unless you're the World's Greatest Market Timer (hint: you're not), it's usually a good idea to also scale your way into trades. If you bet it all on one entry, you leave yourself no room to be wrong and average down. You are also putting a ton of psychological pressure on yourself if your position doesn't perform immediately.  And as I've said many times: your first opponent as a trader, and the hardest opponent to beat, is yourself.  That brings us to:

7)  There's no such thing as "missing" a move. 

How often have you missed a limit entry by some miniscule amount, and then kicked yourself as you watched the trade you're not in move in the direction you thought it would?  Or missed an exit by a small amount, and then watched your profits start to vanish?  It happens to all of us.  Both of these situations have the potential to turbo-charge your emotions, which makes you prone to mistakes. 

It's human nature to hate feeling "left out" and like we missed an opportunity.  I believe this somewhat immature emotion is a vestige of childhood.  One of my first experiences of the fallacy of "missed opportunity" came when I was eleven-years-old: my friend was going to Disney World, and I was invited to go with him... but my parents refused to pony up the cash.  I remember getting quite upset about it and telling my father that I had missed a "once in a lifetime opportunity to go to Disney World."  That's actually how I felt, at eleven.  My father, to his credit, burst out laughing.  Needless to say, a few years later I went to Disney World -- a second chance at that "once in a lifetime" opportunity.  I've been to Disney World three times since.  As an adult, I realize that considering Disney World to be a "once in a lifetime" opportunity is completely silly.  The same goes for that trade you just missed.

Obviously, the market will still be there tomorrow.  So why all the frustration over "missed opportunity"?  I believe the majority of it boils down to the desire for instant gratification.  We start kicking ourselves over the money we "could've" had right now if we'd made the trade.  A trader can't afford to give any quarter to this type of thinking.  Trading is like everything else in life that's worth doing:  it's not a sprint; it's a marathon.  Patience is key.  The very human desire for instant gratification must be controlled with discipline; and the self-indulgent poor-me emotion of "missing out" must also be controlled with discipline.  If you can't control the emotions, walk away from your computer and come back when you can, because otherwise you're going to make bad decisions for your next trade. 

In the long run, if you lack discipline, you may make some winning trades and win the battle of market direction at times, but you will ultimately lose the war.  That brings us to:

8)  Trading is war. 

Make no mistake: trading is a fight to the death -- not only against your own emotions, but against the other market players. The Japanese have a saying, "business is war" -- I believe this absolutely applies to trading as well.  You are the general, and your positions are your troops.  Are you deploying your troops at random, in a haphazard fashion?  Are you "hoping" they can win, when they are outnumbered by superior, better-equipped forces?  Your enemy has done extensive recconaissance, developed a solid strategy, and deployed his troops accordingly.  What's your strategy to beat him?  What's your plan for retreat if the battle is being lost?  If you don't take it that seriously, how can you hope to win against those who do?  That brings us to:

9)  Refine your strategies by paper trading.  Save your money until after you have a plan.

Don't send your troops off to get slaughtered while you try to figure out what you're doing.  Paper trading is a great way to help develop and test trading strategies without it costing an arm and a leg to do so -- and without needing to sit by your computer armed with several bottles of Mylanta.  In the past, a number of readers have expressed an interest in paper trading.  The problem for most people is that writing everything down can be somewhat tedious and lacking in the "fun factor."  Well, I may have found a solution for that. 

Zecco Forex offers a free 30-day practice account that comes loaded with $50,000 in fun money.  After download, you gain full access to all the real-time charts, quotes, and tools you'd have, just as if you had a real account -- and it tracks all your paper trades like they were real.

If you instead sign up for a real account (not a practice account) through the links on this page, then you're also helping to support the blog, since I receive compensation for the advertising.  If you wish to do that, then use the link below and select "Open a Forex Account" when their link page comes up.  I went and opened one myself (took me about 3 minutes), because I'm curious to test their platform, and their commissions are extremely low.

If you want to sign up for a real account, please use the link below (it's not required that you fund the account when you open it -- when you get to the funding page, you can select "add funds later" at the bottom right):

SpeedTrader is another new sponsor who offers free practice accounts -- this one comes with $100,000 in fun money.  Same rules apply: if you sign up for a real account then your're helping support the blog, since I then receive compensation for the advertising.  No compensation for the free practice accounts, though.  :)

Of course, there's always more that could be said about trading strategy -- but I was attempting to write an article, as opposed to a book.  ;)  As always, trade safe!


Disclaimer:  The information and opinions in this review are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency and/or opening of an account with Zecco Forex or SpeedTrader.

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