SPX Update: Pre-Eating Some Crow in The Analytical Trap

There's a trap that's easy for analysts to fall into.  Let's imagine you've been bearish for a while and anticipating a top.  Let's also imagine that the market has continued going up anyway, and yet continues to give signs of a top... but it hasn't actually topped (read: a bit of self-flagellation).  The longer this goes on, the more you are becoming increasingly trapped by your own prior analysis.  The signs are all there for a top, and are actually increasing, but the market's kept rallying anyway.  What do you do?

Do you shift your stance to bullish?  Well, you can't really just jump in and randomly start buying, because the rally is long in the tooth, the indicators are overbought, and every objective piece of evidence says the rally is due for a pause at the minimum.  Do you continue looking for a top?  That's challenging, because the market is blowing up the bear view and busting through resistance levels like they weren't there -- plus you're starting to feel like the boy who cried wolf. 

And then the real psychological trap comes: what if you shift to a bullish stance right before the market tops?  Oh, the humiliation! If only you'd held onto your views for a couple more days.  I think this is a trap that a number of analysts have fallen into, which locks them into being on the perpetual lookout for a top.  In particular, I'm referring to a popular Elliott Wave subscription service, whom I won't mention by name (hint: a large international Elliott Wave service whose initials rhyme with "See W. cry.").  They continue to be bearish because it's something of a tradition ("Bearish Since 1988 and Still Going Strong!") -- and they've been bearish for so incredibly long that if they suddenly give it up now, the market is almost certain to drop 4000 points the very next day, and they will have missed calling it.  As a result, they are effectively trapped on the wrong side of the market for as long as the market wants.

I believe this problem can present a potentially huge psychological trap for analysts.

Well, be that as it may, I'm not going to play the Perpetual Top Hunting Game for the rest of eternity, and I don't want my readers to either.  People who have only recently started following my work may mistakenly think I'm a perma-bear.  If you weren't following previously: I nailed the October bottom to the day and rode that first rally leg up to 1265 before turning bearish again south of the 1292 high.  Recently, I switched my stance to short-term bullish yet again after the 1300-1310 zone was successfully back-tested, and stayed bullish up to 1342. 

I do realize I've been top-hunting for a while and have failed to pin it down here.  I've been early at best, or completely wrong at worst -- to be determined.  But practically speaking, since the October bottom, I've only missed about 50 points of upside (3.7%) on the S&P 500 as of Tuesday's close (1265 to 1310 = 45 points; 1342 to 1347 = 5 points), while capturing nearly 200 points of the rally on the long side.

Now, all that said, here's the relevant conundrum.  On one hand, it is objectively difficult to give up the bear case here.  When top indicators are firing off daily and historic highs are being reached in overbought indicators, the odds suggest there's some kind of top nearby.  If it looks like a duck and quacks like a duck, then it's probably a top (or possibly a duck, but duck hunting is considerably easier).  On the other hand, and I've said this before: the only time I've seen indicators fail this consistently is in a bull market (or a nested third wave: more on this later).  This contradiction makes it a tough call.

So what's a trader to do?  The simple solution is to be aware of the indicators, but give precedence to the trend.  The indicators serve as a warning that when the trend finally does break, it might be a meaningful break, so caution is warranted.  When the market becomes as complacent as it is now, it's ripe for an "event."  To paraphrase the famous proverb: pride goeth before a great fall.  Bulls have been openly gloating for some time, attacking and mocking bears, and talking about how "smart" they (the bulls) are.  The market rarely respects a "smart" investor, especially one who's become complacent enough to gloat (more commonly called a "smart ass" investor).

But as I've been suggesting for a couple weeks, until the trend breaks, it must continue to be given precedence.  The key now is to avoid the temptation to chase and/or front-run.  If one wants to go long, then reasonable entries where one can mitigate risk must be found.  The same applies to shorts.

Yesterday, the Dow Jones Industrial Average knocked out its Minor Wave (2) count by exceeding the 2011 highs.  A few people have taken this as if it's some monstrous failing of Elliott Wave Theory, which is just plain silly.  If one takes the approach that a system must be 100% perfect for it to be considered valuable, then no trading or investing system on the planet is valuable.  In fact, if perfection is the standard, then pretty much nothing on the planet is valuable.  Fundamental investing fails at times, value investing fails at times, moving average trading fails at times, classical technical analysis fails at times, candlestick patterns fail at times, et cetera, ad infinitum. 

At the end of the year, nothing and nobody has a track record of 100% success.  Obviously.  We'd all be beating down the door to get in if there was.

I've said it many times, but the key to trading success is as much about an individual trader's ability to manage his money and his own psychology as it is about the system.  To draw an example I've used previously:  if one has a system that is merely 50% accurate (random) -- but one only suffers 3% loss on each losing trade and makes 10% on each winning trade, then that system will make money in the long run.

Some of the keys are discipline, careful choices of entries/exits, limiting losses, not taking overly-aggressive risks (such as overusing leverage via options, futures, etc.), and protecting profits.  Figure that stuff out first and you're on your way to making money.  There are entire books dedicated purely to the money management aspects of trading -- it's that important. 

Striding into the market arrogantly thinking one can "beat the house" is a fool's errand.  The edge one has is their money management system and personal discipline combined with their trading system.  Believe me; I learned this stuff the hard way too.

Back to the market.  Over the short term, the possibilities are myriad.  So for the moment, I'm going to limit my focus on the big picture counts.  I'll still present them, but looking beyond the next five minutes, it's going to be difficult to narrow things down until the market provides more info.  This is another challenge Elliott Wave sometimes presents for newer traders:  there is a temptation to get too focused on anticipation of the next move, which can throw one into bad trade decisions.  To turn an old saying on its head:  it can be easy to miss the trees for the forest.

What we do not want to become is the "see W. cry" type traders... i.e - looking for a top the entire way up from the 2010 bottom to the 2011 top.  Granted, bears can make money in bull markets, but they have to be quick, disciplined, and not the slightest bit greedy.  Slower swing trader bears get slaughtered during bull runs.

Once the trend begins to shift, and I see where that happens and how that happens, that information will allow me to narrow down some of the big-picture potentials.  Until then, for the big picture we're going to spend some time focused on good old fashioned support and resistance, overbought/oversold indicators, and pattern recognition.  When conditions allow, I will also present Elliott Wave price projections (I have done so today).  Ideally, this picture will clarify soon. 

I'm going to present my new preferred count, but I continue to believe that at this stage it remains more important to watch the trend.

Even though the S&P 500 (SPX) did not invalidate its Minor (2) count yet, I'm going to make the assumption that it will.  No guarantees of course, but generally, this assumption has served me well over the years, as the Dow generally leads the SPX. 

Below is my preferred count, which (still) depicts the SPX in the process of forming the y wave of a double zigzag.  This count is interesting because it revises the big picture count but keeps the double zigzag in the intermediate-term counts.  However, without the Minor (2) hard cap, this count could see the market tack on another 100 plus points from here, and puts the target for (c) of y from 1376 to as high as 1500. 

I'll break down the short term view in more detail after this chart.

What I like about this count is the fact that it explains the five-wave nature of the 2011 decline.  I have worked that decline eight ways from Sunday, and I continue to come up with a five-wave structure.  This decline is what convinced me, and many Elliotticians, that the bear market was just getting warmed up.  There are very few positions in which we find a five-wave decline that doesn't match up with at least one more five-wave decline, but one such position is in a 3-3-5 flat (so named because the a and b waves break down into 3-wave structures, and the c-wave breaks down into a 5-wave move -- as they all do on the chart above).  In this case, it is an expanded flat with an unusually large c-wave.

This count also reconciles the 2010-2011 (c) wave rally into a much cleaner 5-wave structure, which many technicians have boggled over.

Many Elliotticians are looking at that decline as wave a and this rally as wave b, with the next five-wave structure to come in wave c.  I have considered that count, and I don't like it as much because I have a harder time seeing how it fits into the larger structure without really stretching the imagination and using all sorts of x's and y's and failed waves.  In either case, over the intermediate term, it's something of a moot point, since both that count and my count should behave somewhat similarly for a while. 

The challenge now is going to be nailing down where (c) of y ends and trying to find good entries for shorts or longs.  Assuming the rally breaks through 1350 +/-, then the next target is 1376-1378, where wave (iii) equals a 1.618 extension of wave (i) and wave (c) equals wave (a).  This makes 1376-1378 a double Fibonacci target, which gives it an above-average probability of both being hit, and of marking some type of reversal.

In the chart above, you can see that my preferred view has shifted to the idea that this current rally is part of the third wave of a third wave (wave iii of wave c).  Third waves are known for blowing up indicators, so this fits well with the recent action.  The most likely count appears to be that the 1378 area will merely prove to be the zone from which a correction starts -- possibly a decent-sized correction, which could retrace down to the low 1300's or even the high 1200's.  The critical point here is that if this view is correct, the ensuing bottom to this (assumed) correction could then launch the market up into the 1400's.

If the alternate count is correct, then it will amount to much more of a decline.  As I said earlier, my focus is more on the near term right now, so we'll have to see what form the next decline takes (assuming we ever get one), and how well the market holds its trend channel, before I'm able to have more confidence in whether it will mark or not mark the end of the rally. 

One thought regarding liquidity and perhaps another reason to favor the new preferred count, which currently expects that the next decline will only be a correction, is that the ECB launches their next big financing operation on February 29.  It seems that operation could easily fuel another leg up in this rally.

In conclusion, the Dow invalidating its Minor (2) count has forced me to objectively favor the view that the SPX will do so as well.  The projections above are what results from accepting that presupposition -- however, all of this is completely predicated on the idea that the 1350 zone will be broken.  I continue to believe this zone represents formidable resistance, and so far it has at least caused the rally a two-day pause.  If this zone isn't broken, then all my hard work tonight will have been for naught, and we can go back to cheering on the Minor Wave (2) count, since the SPX hasn't technically invalidated it yet.  Wouldn't that be a hoot!  Welcome to The Analytical Trap.  Trade safe.

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

SPX Update: Indecision 2012

No material change in the counts since yesterday.  The S&P 500 (SPX) daily chart shows another indecision candlestick: in this case a dragonfly doji. This candlestick foretells of a reversal roughly half the time -- in other words, it's pretty random.  However, it does indicate an undecided market.

On the daily chart below, I've annotated some of the nearby support and resistance zones, both long and short term.  There is significant resistance directly overhead right now, so a consolidation or reversal may be in order.  Conversely, a breakout through this zone would target 1370-1380 next.

The market is also at something of a crossroads between the pink channel and the green channel.  A breakout through the top line of the pink channel could indicate there's still a fair amount of momentum left in this move. 

The 10 minute chart is unchanged from yesterday.  If a top is going to form here, it may take a few sessions.  As I've said before, tops are usually a process; whereas bottoms are usually an event.

Again, until the trend channels are broken, there is no objective indication of a trend change.

The chart below shows the Nasdaq (COMPQ) daily and notes that the rally has again reached the underside of the old upsloping trendline off the March '09 lows.  It also notes how overbought the market has become (in technical terms: "just a tad").  If the Nasdaq breaks though this level, the next meaningful resistance doesn't come in until around 3040 or so.

There is simply not much to add after yesterday's action, which was essentially just a sideways/up grind.  The market has a lot of options for its next move, so until it either breaks out or breaks down, there's no real way to project what happens next.  The market's as overbought as it gets, and has been for some time -- but an overbought market can always get more overbought.  If the Minor (2) count is still valid, then now's the time for the rally to end -- but the market did nothing yesterday to add or subtract confidence from that count.  So at this point, we'll simply have to watch overhead resistance and the lower support zones for clues to the market's next move.  Trade safe.

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

SPX Update: Do-or-Die Week for the Big Picture Wave Counts

On Friday, the Dow Jones Industrial Average (INDU) came within 6 points of its 2011 high.  If this high is broken, this would be an extremely significant event for the counts, since second waves cannot exceed the beginning of first waves.  Monday is a critical day for the Minor Wave (2) count, and if the market doesn't reverse lower pretty much immediately, it will be time to rule that count out and consider some alternates. 

I continue to favor the Minor (2) top here, but there is now no room for error.  Since I've been wrong before, and Monday may be the bears' last chance for the Minor (2) count, I've looked at a number of alternate possibilities this weekend, and have now decided on my main alternate long-term count.

The Minor (2) count isn't dead yet, and it's still my preferred count.  But in the event that it's way off-base and Monday opens higher, I'm going to present my main alternate count below for reference.  This count considers the possibility that the 2011 decline was an (a) wave, and the current rally as part of a (b) wave. 

On Friday, the S&P 500 (SPX) closed just below a significant overhead resistance zone, as did the INDU.  The bears need this resistance zone to hold.  If this zone can't turn back the rally, then it puts the 1370's, and even the 1400's in play. 

This appears to be a critical pivot point for the market.  My preferred view is that the market heads lower right from Monday's open and doesn't look back.  However, if that doesn't happen, my main alternate count is shown below.  This count will move into the preferred role if the INDU trades above 12876.

If there's no pause at this resistance level, bears may want to stand aside and wait for the market to break its uptrend before taking further actions.  I've said it many, many times before: cash is a position too.

There is really no need to fear "missing out," as I've also said before.  If a big decline is still in the cards, it's not all going to all take place in one day.  Certain posters on my blog have suggested a "flash crash" is around the corner.  I've never been of this opinion.  While anomalies are always possible, I see no signs of such an event in the current charts.  Even the flash crash came after the market broke its uptrend line and started trending down -- not while it was still trending up.  Sudden crashes almost never start from this type of market position.  Patience is a virtue in trading.

In any case, as I mentioned at the beginning of this article, the Minor Wave (2) count isn't dead yet... it's just on severe life support.  Below is the short-term SPX chart, which shows my preferred Minor (2) count. I will continue to favor this count unless the Dow makes new highs above 12876. 

Friday's preferred targets were all hit nicely on the chart below -- in fact, the targets were originally suggested on Jan. 24 as an if/then equation, which is often how the market functions.  Those targets are still shown in the call-out box, which has remained on the chart since the 24th.

The move can be cleanly counted as a complete five-wave rally, to complete c of (y) of Minor (2).  Whether this is indeed the case will be revealed by the market directly.

If we combine the two charts above, we can see there are three major upsloping trendlines that the bears need to break before we can have any confidence in a significant trend change.  The first warning shot to bulls will be a break of the short term channel shown above; the second and third will be breaks of the larger channels in the first chart.  No trend line break equals no trend change.  As I've also said previously, until such time as the market breaks down, the benefit of the doubt should go to the established trend. 

My job, as I see it, is to project the potentials as best I can (including targets when possible), warn about the possibilities of a trend change when I see them, and suggest potential pivot zones so readers can be prepared.  Potential trend change zones are areas to consider taking profits.  If no reversal materializes, one can consider adding to positions if the market breaks through a resistance zone.  Actively betting against a trend is tricky business, and traders must realize that. 

Personally, I attempt quick stabs at counter-trend positions and either make a few bucks, lose a few bucks, or get lucky with my best educated guess and nail the exact top or bottom.  Less nimble intermediate-term swing traders should generally either wait for confirmation of a trend change, or be able to close positions without hesitation if they front-run a reversal that doesn't materialize, and critical support or resistance levels are violated. 

For example, in my opinion, this is another very good zone to attempt some counter-trend shorts, since the market is just below overhead resistance, and the risk/reward potential is good.  But in order for the risk/reward equation to work, one has to be prepared to close positions if resistance is broken and the market doesn't reverse.  If one is going to hold and hope forever, then the risk becomes astronomical, as the market could just keep right on rallying.  Trading is all about managing risk; and betting against a trend is always risky. 

As another example, due to a number of indicators, I was looking for a top back when the market was below 1300-1310.  It's fine if you want to try and play that possible top, but once 1300-1310 was broken, and especially when it was back-tested and held as support, then it was time to look up, not down -- and the daily preferred count this week pointed to higher prices and targets the entire way up from that zone.

There are certainly lessons here for those traders who have front-run a top without using stops.

Anyway, back to the market.  There are signs that momentum actually increased on Friday.  For the short term, the bears primary hope is that Friday was an exhaustion gap similar to October 27 -- and this is indeed a possibility.  As is so often the case in the market, we simply won't have an answer to that question until the next session.

Something small the bears have in their favor is that on Friday, the VIX touched its lower Bollinger band for the first time in several sessions.  This first Bollinger band touch generates at least a short-term pull-back in the SPX more than 77% of the time -- although it isn't necessarily a trend changer, it just means lower prices from where the signal occurred in 77% of prior cases.  However, over the past several weeks, the market has not worked out according to most of the historical odds.  It has blown up indicator after indicator, despite past averages.  In fact, VIX touched its lower Bollinger band in a similar fashion twice already in this rally, and the market kept right on rallying anyway.

Below is a short-term version of the VIX chart to illustrate some examples.  The occurrences on this chart do not equate to the 77% figure -- that figure is based on a much broader market sample.

The market's last chance for Minor Wave (2) is at hand.  If that count still holds any water, the market needs to decline more or less immediately at Monday's open.  The SPX and Dow are both facing significant resistance levels, so the bears have a potential opportunity here -- and even if Minor (2) gets knocked out on the Dow, this is still a significant resistance level and represents the market's next hurdle, with or without Minor (2).

The final chart was originally presented last week, and this study is still valid and something to consider; as is the fact that the Bullish Percent Index is at all-time highs (see Wednesday's article). In the study below, in 2007, the SPX continued higher for two more weeks after the signal triggered.  It has now been one week since the recent trigger.

In conclusion, back on Jan 24 I warned that if the market held the 1300-1310 zone as support, then it was likely on its way to 1330 as the next test... and if it got through that, it would head to 1345-1350.  Those things have come to pass.  The market is now facing its next big test.  If the bears can't put something together here and now, and stop the rally from breaking through 1350-1360 SPX, then it's likely that the rally will continue for at least another week. 

I continue to favor the Minor (2) top -- however, ultimately that's just my best analysis; it's not a guarantee.  The market poses the questions, and the price action provides the answers.  If my preferred Minor (2) top is valid, then the market should reverse almost immediately on Monday, and the current highs should hold for a long time to come.  With only 6 points of upside left before the Dow knocks out its count, we shall have our answer shortly.  Trade safe. 

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

SPX Update: Slight Shift in View After Thursday's Action

There is very little to add to the overall picture after yesterday's action.  The market came within 16 cents of adding confidence to the bear count, but did not.  The action yesterday now forces me to give a slight edge to the more bullish count.  The objective reason I feel this way is because in a diagonal, the peaks of waves 2 and 4 "should" be on the same trendline.  Yesterday's action will make that difficult for the bearish short term count. 

So below is the slightly more bullish count, which has moved into the preferred role, and which anticipates that the market is now forming the fifth wave of the fifth and final wave up to complete the rally.  The preferred target for this count would be 1342-1343 for the S&P 500 (SPX), though any print above 1333.47 would suffice.

The hypothetical leading diagonal bear count is shown below.  This count hasn't been completely eliminated, but with the diagonal sketched into the chart, one can see how the action yesterday creates difficulty for the trendline connecting the second and fourth waves of that diagonal.

Today is a non-farm payroll day, which means that bears should actually hope for a higher open.  The majority of the time when the market opens higher on NFP days, it reverses and closes lower.  A fair number of NFP days have also marked major and minor turns/pivots in the market.

In conclusion, based on the price action on Thursday, I'm now inclined to favor the slightly more bullish count.  Trade above 1333.47 would add confidence to that count, while trade below 1321.41 would add confidence to the bearish view.  If the longer term bear counts still hold any water, this should literally be the last and final leg of this rally, and an intraday reversal today becomes likely.  Trade safe.

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

SPX Update: Market Now Historically Overbought

No material change in the counts since yesterday.  The SPX hit yesterday's targets, and actually exceeded my exact 1328 target by a couple points before reversing.  A small moment of truth for the short term preferred count is now upon us.  Trade above 1333 would eliminate it, while trade below 1321 would add confidence to it.

Below is the very short term chart, which highlights the key levels.

If this decline is to continue as a leading diagonal, it will be very difficult predicting targets until the smaller sub-waves start to unfold.  There are few Fibonacci relationships within leading diagonals, so I'll have to see the form taken by the next wave before being able to take a stab at a target -- much as I did yesterday.  The only concrete rule at this stage is that the next wave (presumed to be a small third wave) must exceed the low of wave 1 (1300.49).  Wherever the next wave bottoms, it is currently expected that after it bottoms, it will then retrace back above 1300.49.  Cautious traders please take note.

Again, if this is indeed a leading diagonal, then the market is expected to have a choppy downward bias over the coming sessions.  "Choppy" is a key word here.

Below is the hypothetical example of how the leading diagonal could unfold, as shown previously.  Please note this is not intended to be an exact price projection at this stage -- as I said, there are few Fib wave relationships in this type of move.  It's merely intended to illustrate the concept; price projections will have to come later.

Yet another signal that a top is likely to be much closer than the bottom now is the Bullish Percent Index for the Dow Jones Industrials (and others).  The Bullish Percent Index (BPI) is a breadth indicator based on the number of stocks on Point & Figure buy signals within an index; readings over 70% are considered overbought, while readings under 30% are considered oversold.  The current reading is 96.67%, a virtual tie with the highest readings ever recorded.

All 3 readings at this level have occurred post-2006.  The chart below lines up the readings with the SPX price chart in the bottom panel.

And finally, the bullish alternate count.  Again, the count below is not my preferred count, and is presented in the event that the market exceeds the 1333 highs, so readers will have one idea of what may be unfolding.  I feel that in the event that my previous call that Thursday was the top proves to be a tad early, then the top is still very nearby.  However, that's only my opinion, based on the supporting evidence -- so conservative bears may want to trade accordingly and keep tight stops on their trades until the trend actually changes.  Until proven otherwise, the trend is still up.

In conclusion, several days ago, I put forth my preferred view regarding what's unfolding -- and now it's up to the market to either disprove my theory or add confidence to it.  The key levels for the short term are both nearby, so the first question should be answered soon.  For the intermediate term, I continue to believe the market is very close to a meaningful trend change, but there is still no confirmation of that view.   Trade safe.

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

SPX Update: Market Ripe for at Least a One-Day Rally

Much as I'd like to give the bears something to be really excited about, yesterday's action wasn't terribly encouraging, and has left some questions about the decline from 1333-1300.  Yesterday's morning spike exceeded the 1320.06 high, and this price action effectively "locked in" the three-wave structure on the S&P 500's (SPX) decline which only leaves two options:

1) The decline from 1333 is all, or part of, a corrective wave, which means the 1333 high will eventually be exceeded.
2) The decline from 1333 to 1300 is the first wave of a leading diagonal.

In either case, I am expecting further upside for today and/or tomorrow, with a price target between 1321-1330.  The rally off 1300 was a pretty clear five-wave move, and that suggests at least one more five-wave rally is due.  My ideal target would be 1328, where wave c reaches equality with wave a (see short term chart below):

The chart above is labeled with the bear count in blue and the alternate more bullish count in black.  Due to the long-term structures and the dozen top indicators we've looked at recently, I remain in preference of the bear count, shown at length on the 10 minute chart below.  The structure of the decline really leaves the bears only one option over the short term, though, which is the leading diagonal discussed above.  If this decline is part of a leading diagonal (hypothetically sketched in below), then the market is going to be very choppy, but with a downward bias, over the next week or so.

Any print above the recent 1333.47 highs would immediately shift preference to the alternate count shown below.  If the bullish short term count is playing out, the market should form a five wave rally to a new high.  Wave iii of this count would reach 1.618 times the length of wave i at 1340.  The ultimate target for the entire wave would probably be near 1350, but that would need to be calculated after wave iii and iv complete.

In conclusion, as mentioned in yesterday's update, the rally is showing signs of weakening.  However, until we see some hourly closes outside the boundaries of the lower black trendline -- and then some daily closes outside the boundaries of the trendline connecting the November and December lows -- there is as yet no objective confirmation of a trend change.  I remain in preference of the bearish counts over the intermediate and long term, but over the very short term, I'm expecting a rally. 

I was positioned long briefly last night, but dumped the position early for a few points of profit.  Assuming we get a rally, and it reaches the vicinity of the 1328 area, I plan on shorting ES (E-mini S&P futures) with a stop above the recent 1333 highs.  This is, of course, not trading advice.  Trade safe.

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

SPX and Dow Updates: Bears Fire a Shot Across the Bow

The bears finally showed a little bit of strength yesterday, although the decline was almost entirely retraced by day's end.  Before I get to the short-term bear counts, I'm going to present the slightly more bullish alternate, then wrap up the discussion with the bear view.

The recent decline is currently a three-wave form, and played out almost perfectly for the alternate count -- this is causing me to again present the alternate count's chart (not published yesterday; chart last published in Friday's article).  It was brought to my attention that the very short term count I showed yesterday with the black "Alt.: A" and "Alt: B" labels wasn't understood by many readers.  Those labels represented the blue a and b labels on the chart below.

There's an interesting potential at play across markets right now.  Last Thursday, the Dow Jones Industrial Average (INDU) came within 35 points of invalidating its entire Minor Wave (2) count.  The current structure on the INDU appears slightly different than the SPX.  While the SPX looks like a 3-wave decline, the INDU may have formed a five-wave decline.  The INDU also pierced intermediate support, though rallied back above it.  Is it possible that the INDU has topped, while the SPX could still make another run, slightly above the 1333 high?  Today's action should help answer this question.

Below is the INDU chart, which mainly focusses on the support and resistance lines.  For the first time since the rally began, INDU pierced the rising blue trendline connecting the November and December bottoms.  It still maintained the red channel, but each decline has been getting progressively stronger, as each time the channel line is forced lower.  I expect the next decline will finally break the rally's back for good.  In the meantime, until there is a solid close beneath the blue trendline, there is still no confirmation of trend change.

The next chart is the short-term bearish count for the S&P 500 (SPX).  Trade above 1320.06 would rule out the 1-2 portion of the count shown below, and cast suspicion on the blue 5 label, since that would force the entire decline to be viewed as a single first wave, which is difficult.  Trade above the recent 1333 highs would rule out this count entirely, and shift preference to the alternate SPX chart. 

The final chart is simply a big picture view of support and resistance lines for the SPX.  The bears still have their work cut out for them, though they do seem to be getting progressively stronger.  Breaking the black channel in the short-term chart (shown above) is the first step, breaking the 1300-1310 zone is the second, breaking the rising black trendline in the long-term chart (shown below) is the third, and breaking the rising blue trendline below would be final confirmation. 

It is noteworthy that the daily MACD has finally crossed over.  It has also formed a negative divergence with price, and barring a big renewal in the rally's strength, this is often indicitave of a pending decline.

In conclusion, whether I nailed the top yesterday remains to be seen.  I'm not backing off that call yet, but there was nothing yesterday to add any confidence to it.  However, even if the market moves slightly above the 1333 price point, the rally is now showing signs of weakness.  Each decline has gotten stronger, and each time it's knocked out the next lower channel support.  MACD has finally crossed, and I suspect that any upside potential is now quite limited.  Trade safe.

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