SPX Update: Apple's Intraday Reversal May Be a Signal for the Broad Market

The charts are a mess tonight.  While the big picture view has shifted somewhat over the past month, my daily short-term preferred counts have been on an exceptional win streak since the end of January -- catching the lion's share of the rally since 1307, and a good number of the turns.  But tonight I've looked at the wave structures across markets, and really feel like the market's quite undecided, and could go either way right here.

I'm leaning toward the idea that there will be more downside in store for this market over the short term, but my confidence is only marginal.  However, I've found a pattern in the New York Composite Index (NYA) which has nice clearly-defined breakdown or breakout levels -- so we can simply wait for the market to tell us what it wants to do next.

The first chart I'm going to share is the bigger view of the NYA, annotated with the interpretation I'm leaning toward.  The second chart is short-term, and annotated with the clear breakout/breakdown levels.

This next chart shows the clear levels to watch.  But before the chart, this next little bit of discussion is geared toward novice traders: a breakout or breakdown through a key level by no means guarantees that the market will follow through.  The key levels do, however, generally give you better odds of follow-through in the direction of the break -- and, more importantly, they give you levels to work from to determine stops and entries. 

Usually when the market breaks a key level, it will return to that zone to back-test it.  That back-test is usually considered the "safer" entry point.  If the market is unable to penetrate back through the key level, the trade is usually good.  However, it's always important to be on guard for whipsaws; so if the market breaks-out/breaks-down but then returns to that point and penetrates significantly back through the break point, it's likely you're in the process of getting whipsawed -- and it's usually advisable to close out and wait for another trade, or stop and reverse to the opposite trade.  Otherwise you risk turning a minor loss into something more substantial, because whipsaws are often followed by strong moves in the new direction.

Anyway, the chart below isn't as detailed as the first chart, but indicates the levels to watch.  Aggressive traders could play off the trendlines, and then use the key levels noted as further confirmation of direction.

The next chart is the S&P 500.  The fifth wave up may have completed yesterday, though I'm not crazy about the structure.  Also, the labeling on this chart doesn't match the NYA preferred count.  After studying the NYA, I'm more inclined to think that no matter what happens today, there's still another leg up coming after any correction.  I will solidify, or adjust, this chart after the market gives a bit more info.  In a more normal market, I would be convinced a decline was due right now -- but this market has certainly fooled us all a number of times already.

If 1335 doesn't hold as support, there's a bit of an air pocket down to 1321.

Yesterday, Apple had its first bad day in a while.  It gapped up and then reversed strongly on heavy volume, thus at least temporarily thwarting investors' plans to drive Apple's valuation so high that it becomes worth more than everything else on the planet combined.

There've been 3 other times in the past 15 years that Apple has rallied at least 2% to a new 52-week high, then reversed intraday to close down at least 2%.  Each time, the SPX declined at least -6.8% at some point during the following month.  Two of the dates were 7/9/98 and 8/19/98 -- the third was 10/11/07, and is shown on the chart below.  (Statistical data courtesy of SentimenTrader.com)

So that's about all the news that's fit to print.  In conclusion, the short-term charts appear a bit hazy, so  it's best to let the market dictate what it wants to do next, by paying attention to the key levels outlined.  The uptrend is still technically intact, though the market is now showing some signs that it may be getting ready for a more significant correction, and the historical data shows that Apple's behavior yesterday is yet another warning sign that this rally may finally be getting tired.  Trade safe.

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

SPX Update: Here We Go Again... Another First from this Rally

Yesterday was primarily a market "noise" day, as it traded within a range inside the key levels.  It does appear from yesterday's action that blue wave 5 is subdividing.  If that's indeed the case, there are two primary routes for this wave to take.  The first is that of a traditional impulse wave, which has been drawn into the chart below:

If the S&P 500 (SPX) takes the five-wave impulse route, it's likely that it will reach the original target zone of 1376-1378.  There is another possibility here, though: that of an ending diagonal, hypothetically shown below.

With only one wave complete so far, it's just not possible to know which option the market will choose, but I wanted to make readers alert to the possibility, since diagonals are nasty trading environments, loaded with choppy action and whipsaws.

If the diagonal plays out, the market will probably only reach the 1358-1365 area.  With the diagonal, watch for a marginal new high next and then rapidly dying momentum and a reversal back into the territory of wave (i).  If the rally off yesterday's lows forms what looks to be a 3-wave move and reverses, then we will begin anticipating that the diagonal is forming.

Now, both of the above counts are assuming that my preferred count of last week is in fact correct, and that the market is going to make a new high here.  As I mentioned some time ago, 1350-1360 was expected to be solid resistance, and so far it has been, with the market now working on its 6th attempt to try and penetrate this zone.

For this reason, I would again like to present the Dow Jones Industrials (INDU), because I believe this chart is a little cleaner -- and on the Dow, the key levels close-by.  There are two trade triggers cited on the chart, one above the market and one below the market.  Again, this could act as a guideline to help anticipate the moves of the SPX, in the event that my preferred count turns out to be wrong.

The final chart is the "here we go again" chart.  It's the Nasdaq to NYSE volume ratio.  For new readers, when investors are betting heavily on the riskier Nasdaq over the more conservative NYSE, it's indicative of extremely frothy bullish sentiment and often marks the blow-off phase of a rally.

And when investors get too bullish, it can indicate that there will soon be a shortage of buyers in the market.  Bullish investors have already bought in, on anticipation of higher prices -- so once everyone's bullish, there's nobody left to buy stocks, and the supply begins to exceed the demand; thus prices fall. 

This indicator triggered just a few days ago, on February 9, and has now triggered again for a second time.  Two triggers have never happened this close together.  So (as if we didn't already know this) sentiment is exceedingly bullish.  There is more record bullish sentiment info below the chart.

Small trader sentiment can also be garnered by examining Rydex funds, which are geared toward the ma and pop investors -- who are, of course, the least informed players in the market.  Typically ma and pop get their stock tips from the mainstream media, from "know it all" guys at work, from an annoying brother-in-law, and/or from a Ouija board. 

So the majority of the time, when very small investors get ultra-bullish or ultra-bearish, the move is almost over.  Your annoying brother-in-law (yeah, I've met him) doesn't tell you to buy something until it's already gone up $140, because then he can say he bought it "way back when." 

Anyway, to get an idea of just how rabidly bullish small investors are: a look at Rydex Nasdaq non-leveraged funds reveals that there is now $80 invested in the bull funds for every $1 invested in the bear funds (!).  This is a record extreme, and it illustrates that a ridiculous number of investors are betting on the bullish side of the trade.  In a normal market, this would be punished in a fashion that was -- to quote Dr. Detroit -- "most swift and horrible, I assure you."  But in this Happy Fun Land market that's being driven almost entirely by trillions of dollars left under brokers' pillows by the Central Bank Liquidity Fairy, it's hard to say how long these imbalances can continue. 

In conclusion, the expectation is that there are still higher prices to come.  At some point, the rally will have to turn, and the market is again near a zone where that turn has an above-average chance of happening.  If my wave counts are correct, and these indicators still mean anything, this should be the final leg before a meaningful correction.  But again, I don't suggest front-running this unprecedented Happy Fun Land Rally. 

In the meantime, the key levels outlined on the Dow chart should give some clues as to what's likely to happen next, and that chart provides some short term targets for both bulls and bears.  For those only inclined to be bears, a break of the lower trend line boundaries, followed by some hourly closes outside the boundaries, remain the key indicators to watch for a turn.  These trend lines are now extremely well established, so it's more likely that the next break will mean something.  Trade safe.

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

SPX Update: Why this Rally is One for the History Books

This is a historic rally, and it's accomplished something the market hasn't accomplished very often -- but I'll return to that later.  Monday the market performed as anticipated by the preferred count shown on Thursday and Friday -- strongly reversing back to the upside out of the wave 4 target zone.

There are now three distinct possibilities over the short term.  Each leg of this rally has subdivided into smaller and smaller waves, which has continually caused it to overshoot target zones.  The market reserves the right for the current wave up to either mark 5 small waves to complete ALL OF blue wave 5 -- or 5 small waves to mark only wave i of 5, which would then lead to a small correction before reaching higher, into the original target zone.  

Trade beneath 1337.35 would rule out the wave i of 5 possibility. Since there are five waves in place (see 5 minute chart), it could be a complete wave (possibly still unfolding).  However, it's not until 1321 is violated that we can rule out the potential that this is merely all part of blue wave 4.  The Dow chart should be helpful in this regard. 

Sometimes, this is just how it works.  The market gives us new price data, and we do our best to interpret it accordingly.  It's not a fixed mechanism, and targets can rise or fall as the market shifts its position.  It's a real-time mechanism -- and some days are harder than others. 

There is simply no way to know for sure at this stage which of the three is playing out.  But we do have some hints and key levels to watch. 

On the upside, the classical technical analysis pattern now on the S&P 500 (SPX) implies a move to 1370-1371 if the 1354 highs are broken.  1354 would therefore be an area to watch for whipsaw action.  A head-fake above and back below would suggest that the higher targets will fail.  Conversely, a break above followed by a successful back-test of the breakout point would imply that the original 1376-1378 zone mentioned last week could actually be reached.

1321.41 is the big key pivot to the downside, and that would indicate that blue wave 5 is over.

The first chart I'm going to share is the Dow Jones Industrials, because its levels are clearer, and, more importantly, closer than SPX.  I've highlighted some trade trigger levels and the projected targets if those levels are broken.  I suggest watching the Dow during the day to act as a canary in the coal mine for SPX.  The levels and targets are mentioned in the call-out boxes.

The next chart is the 10-minute SPX and shows that the rally has completed enough squiggles to potentially mark a complete wave at higher degree, and highlights some of the support zones.

The next chart is the very short-term SPX chart, which shows that the rally has potentially completed 5 small waves at micro degree.  As I mentioned earlier, there are enough squiggles now in place to count five waves complete at the large and small degrees of trend.  The big question now is whether that wave is only a smaller portion of wave 5, or the whole thing. 

The final chart is my big picture preferred count, to help center everything.  This shows the rally as the (y) wave of a larger double zigzag to wave B.  Though it seem likely that wave B still has a few months left in it, the implications of this count are that the 2008 lows will be revisited after wave B completes.  That probably sounds impossible to everyone right now, but keep in mind that this current rally sounded impossible to a lot of people back in October.

As I mentioned previously, I'm leaning toward the view that the next peak will mark wave (iii) of (c).  If that's correct, it will be followed by a nice trade-able correction in wave (iv), and then another wave up to complete wave (c).  It's also possible that the next turn will mark ALL OF wave (c).  The next decline will help determine which view is correct.

At the beginning of the article, I promised some historic data.  So far in 2012, the market has stayed above its January opening price.  Going back to 1928, the market has stayed above its January opening level for this long in only 13 prior years.  The other years were 1931, 1942, 1943, 1951, 1958, 1964, 1967, 1975, 1976, 1979, 1987, 2006, and 2011.  In 8 of those years, the market stayed above its opening yearly price for the remainder of the entire year.  The remaining 5 years, the market lasted an average of 92 trading days above its opening price.  In 1987 and 1931, of course, the market crashed later on during the year.

In conclusion, for at least a month I've been warning bears to wait until the trend channels break before getting too excited about the potential of a decline, and that continues to hold true.  Not exactly esoteric stuff -- trend lines are Basic Charting 101 -- but I mention this to illustrate to less experienced traders why front-running a trend change can be dangerous if one isn't careful.  The market has reached another potential reversal zone -- but whether it will actually reverse or not is yet to be determined.  Trends can run a lot longer than seems reasonable, and that has certainly been the case for this rally.  Watch the trendlines and the key levels for clues.  Trade safe.

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

SPX and Dow Updates: Barron's Does Their Best to Reawaken the Bear Market

The media is giving mixed messages lately.  On one hand, we have Barron's weekend cover story, predicting Dow 15,000.  This suggests the bullish sentiment is getting more over-blown, and it's amazing how many times covers like this have marked intermediate market tops throughout history.  In this particular case, though, Dow 15,000 isn't really that far away, considering the Industrials closed at 12,801 on Friday.  So maybe the cover isn't that big a deal.

And on the other hand, we have the mainstream media acting like Friday's close of a whopping 10 points lower (for the S&P 500 (SPX)) was the beginning of the end, and that we'd all be better off investing in Pokemon cards.  Actually, come to think of it, that's not a bad idea.  My daughter already has a huge collection, so I've got an insider edge; plus I wouldn't have to worry about Bernanke trying to queer the Pokemon market. 

Anyway, the media spent a lot of time harping on the fact that Friday was the worst day the market's had all year, etc..  So, it's hard to draw any kind of solid conclusions from this stuff: is the media overly bullish or overly bearish?  And besides, it's not like we're going to base our trading decisions on the headlines.

Anyway, the fact that the media jumped all over this little decline like it was the end of the world should be troubling to bears.  Really, the way sentiment works in general is a bit hilarious.  On Friday, suddenly Greece was an issue again -- even though it's been a problem that we've known about for at least a couple of years.  But Friday, it was a problem again.  It's a problem, then it's not, then it is, then it's not again -- seemingly forever.  This is why we don't trade on news -- and I believe news is noise.

Media fluff not withstanding, the challenge I was facing on Thursday hasn't really changed.  The indicators have all reached extreme levels that have been concurrent with market tops in the past -- but the wave counts still lead me to believe the market has a little more upside left in it yet.  However, the wave counts aren't necessarily pointing to a lot of upside -- in fact, Friday's decline pulled the low end of the SPX target zone down to 1358, which is only a few points above the prior high.

So, whether the exact top is in or not, the preponderance of evidence suggests a top of some kind is very close.  Let's review some of the indicators, as well as some new evidence, and then look at the wave counts.

The first piece of new evidence that the rally might be running out of steam is the Dow Transportation Average (TRAN).  The Trannies have now broken the up-sloping trend line from the October lows, and have also formed a negative divergence with the Dow Jones Industrials (INDU).  The Industrials made a new high, while the Trannies didn't.  Under Dow Theory, the two averages must confirm each other -- if they don't, it suggests a trend change is coming.  The last non-confirmation was in July 2011, but it was reversed (Trannies made a new high, INDU didn't).  Chart below.

Regarding other indicators, I'm not going to post every chart again, since I've posted all of them in previous columns -- but here's a quick review of some heavy-hitter indicators that have triggered recently, which are all typical at market tops:

1)  The Nasdaq total volume ratio has reached extreme levels.
2)  That Nasdaq article also contains my weekly top study, which suggests a top in sight.
3)  The Bullish Percent Index hit historic highs at the beginning of the month. 
4)  My proprietary top and bottom indicator fired a sell signal on Wednesday.

And of course, there are other problems for the market, such as the 4 unfilled gaps well beneath current prices, and the persistent overly-bullish sentiment.

So, those are the arguments in favor of the rally ending soon.  The question, of course, is whether it has ended already, or has a little more upside left -- or whether it will continue to blow through these indicators after a brief pause.  I think it's unlikely that the rally can keep stretching everything to further extremes without at least a modest correction first.  The shape of that decline should give us some clues as to whether that decline will turn into a rout, or if it will just be a correction with more rally to come.

In any case, we're getting ahead of ourselves.  It continues to bother me that bears are as excited as they are, since it seems almost too easy.  Of course, this is coming on the back of a brutal rally, but still -- top picking usually isn't so obvious that everyone and their mother can do it.

So onto the wave counts, which suggest to me that there's a little more upside left in this thing -- probably not much, mind you, but maybe enough to add some confusion to the picture here.  The first chart is the SPX 10-minute, which is starting to get a bit cluttered.  Quite frankly, you have only yourselves to blame for the clutter. I already know this stuff, so it's not like I spend all night cluttering up these charts to avoid helping out with the dishes. 

Anyway, the alternate count in black goes with the idea that wave 5 is over and some sort of top is in -- but the preferred count believes there's still a little more upside left.

It's a pretty tough call.  As I mentioned, Friday's move pulled down the projection for wave 5, so the minimum target would be 1358.  The maximum target could also exceed the 1365 level -- depending on the structure of any forthcoming rally, it could point that projection higher.  If the alternate count is correct, then the first target on the downside is 1300-1310. 

Trade above the recent highs would rule out the alternate count; trade beneath 1321 would rule out the preferred count.

Next is the SPX 5-minute chart.  Friday's market traded right into the wave iv target box and began reversing.  This chart shows the count in a bit more detail.

The final chart is the Dow Jones Industrials (INDU).  This count is slightly different than the SPX, and I want to share this chart to illustrate the fact that, assuming the count is correct, fourth waves can be tricky and no one can really predict whether the market will head straight up to wave 5 or meander sideways first.  I've annotated the sideways possibility in gray. 

I'm not crazy about the ending diagonal for wave 3 shown on this chart.  It's an ugly and overly-complex diagonal -- but it's hard to envision that wave as anything else other than perhaps the double zigzag b-wave of an expanded or running flat.  I'll let you do your own annotations for that one.  ;)

In conclusion, despite the bear euphoria -- in fact, partially because of the bear euphoria -- I suspect there may be at least one last surprise left in this rally.  My first target is 1358-1365, however that could stretch higher depending on the form taken by any rally.  In either case, the preponderance of evidence strongly suggests a top of some kind may be very close at hand -- and if the wave count is right, it should be sooner rather than later.  However, once again, until the trendlines are broken, the rally should continue to be given the benefit of the doubt .  Trade safe.

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

SPX and RUT Updates: Red Alert Indicators in Conflict with Short-Term Wave Counts

I've been pulling my hair out all night trying to nail down the exact short term count, and have compared the NYA, INDU, SPX, RUT, TRAN, BKX, WLSH and several others -- partially because, due to the indicators, I'm having trouble believing what I'm seeing in the counts. 

The short-term wave counts are suggesting the rally is due a minor correction, then more upside --  however, the indicators seem to be contradicting that, and are now reaching full-blown red alert stage.  While it's possible that a meaningful decline is due, it remains dangerous to front-run against a rally that has shown this level of resiliency. 

Let me present a few of the arguments I'm wrestling with, along with the charts.

First, let's start with the wave counts, which appear to need a minor correction, followed by further upside, to reconcile.  My preferred count is shown in blue and red below, on the 10-minute S&P 500 (SPX) chart, followed by a zoomed-in view on the 5-minute SPX chart. 

I have highlighted some of the key price levels on the charts.  For the SPX, trade beneath 1321 would invalidate the blue count, and cause me to shift preference to the idea that a more meaningful top might be in place.  For anyone wishing to enter long on the idea of a fourth wave correction that leads to a bounce, there are plenty of support zones shown on the chart which could serve as stop loss levels.

The Russell 2000 (RUT) appears to be a similar position (below), and also suggests that a minor correction will be followed by another leg up.

Logically, one of the problems I'm running into with these wave counts is that 1350-1360 is a substantial resistance level, as I mentioned in numerous articles well before the market got here.  So this seems like a logical spot to turn back the rally -- but then again, head fakes are common in fifth waves.  Think of October 4, when the market broke down in an attempt to get everyone on the wrong side of the trade, and then whipsawed.  A head-fake breakout over 1350-1360 could serve the same purpose in reverse. 

Let's move onto some of the indicators, which are warning that the rally is getting substantially over-extended.  (This is more stuff that makes me want to doubt my short-term counts.)

The latest signal is a sell indicator that has proven to be very reliable over the years, which compares the total volume on the Nasdaq as a ratio to total volume on the NYSE. The idea behind this indicator is that extreme amounts of volume flowing through the higher-risk Nasdaq in relation to the "safer" NYSE indicate that investors are feeling exceptionally bullish. And we all know what happens when bullish sentiment reaches extremes and investors are feeling invincible -- the market usually whaps 'em upside the head.

This indicator serves as further warning to bulls that a correction, or worse, is probably close by.

Next is a top study I first presented a couple weeks ago.  When this signal triggered in 2007, the rally lasted another two weeks before ending.  It has now been two weeks since the latest signal.  The similarities in behavior during the two weeks subsequent to the signal trigger are quite noticable in the current markets compared to the 2007 markets.  I have highlighted both time periods in blue.

Another warning sign yesterday was the Volatility Index (VIX), which was up for the second day in a row while the SPX was also up.  In about a third of the prior cases where both indices were up for two consecutive days, the market launched into a decent size correction.  The most recent time this happened was right at the December top.

So... on one hand, the short term wave counts suggest to me that, at the minimum, there should be another leg up left in this rally.  On the other hand, there are numerous sell signals arguing against that.  I suppose the two aren't necessarily contradictory, since indicators frequently lead prices.

In a "normal" market, I would say the preponderance of evidence suggests a meaningful correction is due.  But this market has proven to be unusually resilient, and as a result, I'm slightly favoring the wave counts over the indicators -- so I suspect we'll see a sharp correction into the 1335-1342 zone, and then another leg up before a more meaningful decline.  

It's a very tough call, though -- I'm sure now you can see why.

In conclusion, where the wave counts and indicators agree is that the rally is now getting quite stretched to the upside, and the risk for long positions continues to increase substantially.  However, just in case I haven't driven this next point home enough over the past few weeks: until the market starts printing some closes beneath its major trendlines, there is no confirmation of any significant trend change.  There are more hints and allegations, but in the end, sometimes the market just doesn't care.  Trade safe.

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

SPX Update: Proprietary Indicator Suggests Long-Term Caution for Bulls

A contributor on my website called my attention to the fact that some readers "hear what they want to hear" when they read my articles.  I do tend to be verbose sometimes when I get going, so maybe some of the key concepts are getting lost in the shuffle.  As a result, I'm going to try to keep this article as succinct as possible... right after this detailed discussion regarding the reproductive cycle of the Western honeybee.

Sorry!  Just a little off-beat humor there, designed to lighten the mood and elicit outrage from entomologists.

To keep it really simple: I have not capitulated the entire bear case.  I'm not going to be on CNBC next week talking about how stocks are "undervalued" and how the market always goes up in the long run.  Those statements will be reserved for my appearances on talk radio. 

Of course I'm kidding again!  See how fun this column is?  Seriously, here's the simplest way to understand it:  I am short-term bullish and intermediate-term neutral.

As I attempted to outline yesterday, the shape of the next decline should help answer many of my questions as to whether that decline will turn out to be a buying opportunity or not -- hence my present neutral stance. 

The point I was trying to drive home, and have been trying to drive home for some time is "the trend is your friend." And until proven otherwise, the trend is still up. This isn't an opinion or a projection: it's simply a fact.  Hopefully that clears it up.

The market is still facing a fairly critical test at the 1350-1360 overhead resistance level.  So far, it's been unable to break through.  If it can't and 1321 is violated first, then all short-term bullish bets are off.

Yesterday I showed a more bullish big picture count, but at the same time, I tried my best to explain that the market still has myriad options.  Once the price action takes some options off the table, the big picture counts will come into better focus.  When we get to that chart, I'll try to better clarify what I believe the two main options currently are.  These two options are by no means the only options, though, and more info is simply needed from the market at this stage.

The first chart I'd like to share is missing a lot of data, since I'm only going to share the price portion of the chart.  This chart represents a conglomeration of several of my proprietary signal indicators; it took years to develop, and it's simply too darn good to put out on the internet for free.  It's exceptionally reliable at picking bottoms (only 2 buy signals all decade: March '09 and October '02), and it's reasonably good at picking tops as well, though it tends to be a little early.  I could tell you what all the different signal indicators consist of, but then I'd have to kill you.  And I simply don't have that kind of time. 

Yesterday, these combined indicators fired off the first topping signal in a year.

The chart below shows the S&P 500 (SPX).  The vertical red signal lines indicate top signal trigger points, the green lines indicate bottom signals.  One can see how exceptionally accurate this indicator has been over the years.  While it doesn't necessarily mean the market is going to top tomorrow (though it can), it does indicate that, at best, over the next 6 months the upside should be limited.

This indicator is a big red flag to those Elliotticians expecting an immediate massive new bull market (of which I have never been one).  This top indicator can trigger during bull markets, but even in 2004 and 2010, it indicated a large correction was forthcoming before further advances.  In 2007 and 2011, it was early, but did indicate that a major topping process had begun.

In all prior cases, the market made new lows within 2-3 months of the signal trigger.  So theoretically (assuming this indicator is still working, of which there is no guarantee) one could sell short tomorrow and cover in 2-3 months for a profit.  This is a powerful signal, and I believe it suggests extreme caution for folks considering a long term buy and hold approach at this juncture.  It would seem that, even in the event that a new bull has started, there may be a better entry point further down the road.

The next chart is the intermediate count for the SPX, and I have tried to add more clarity to the chart.  Neither I, nor anyone else, can predict for certain whether the next peak will mark all of wave (c) or only wave (iii) of (c).  At this moment, I am slightly favoring the view that it will mark (iii) of (c), with a correction to come, and another leg up still to come.  This view is largely based on the pending liquidity flood from the European Central Bank, which is due to be unleashed into the world on February 29.  If the coming peak marks wave (iii), then that would allow for a correction heading into the ECB date, and then another thrust upwards when the liquidity hits. 

The old saying regarding central banks is, "don't fight the Fed."  This saying was immortalized for bears in the 1959 Crickets song, "I fought the Fed and the... Fed won."  The same saying can also apply to the ECB, even though they don't have their own song yet.  The way things are going over there, they probably won't be in existence long enough to warrant a song.

Anyway, a trip below the red wave (i) peak would rule out further upside for that count.  I do expect a significant decline when wave (c) completes.

The next chart is the short-term SPX count, which suggests that the rally is still underway, with new highs in store.  There are reasonably good odds now that the coming peak will at least lead to a trade-able correction, if not the start of something more bearish.

I find the market's behavior around the upsloping red trend line fascinating.  I first called attention to that line over a week ago, and you can see that the market has continued to behave as if it's an important line.  Can't tell ya' why, but it is what it is.

The last chart is the short-term count for the Dow Jones Industrial Average (INDU).  It's slightly different than SPX, but similar.

In conclusion, there are five key points:

1)  The market is still below an important resistance level.  Going long before it's broken would be front-running, and the equivalent of going short back in December near 1200.  If that resistance level is broken, then the 2011 highs mark the next key resistance.

2)  The trend is your friend.  Once we see an hourly bar print beneath the short-term trend channel, and then some daily closes outside of the larger trend channels, we can have confidence in a meaningful trend change.  Until then, the trend is still up.

3)  I trust my work.  The fact that my proprietary indicator just fired off the first top signal in a year gives me high confidence that there will be no monstrous new bull market starting from these levels.  This doesn't rule out further upside over the near term, even into the 1400's, but this indicator hasn't failed yet.  Near term, the bulls could still run with the ball, but this indicator very strongly suggests that the bulls will run into trouble reasonably soon.   However, see point #2.

4)  I expect a significant decline when wave (c) completes. However, see point #2.

5)  Cash is a position too.

Trade safe.

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

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